Market Role of the State and Possibilities to Control This Role at Public Enterprises

 Studies 

Ákos Milicz Market Role of the State and Possibilities to Control this Role at Public Enterprises

Summary: This paper is intended to explore the role of the state in the economy, the controllability of this role and the ex-post control of the activities involved. The article focuses on the measurability of the efficiency of the state’s participation and the Hungarian characteristics and current trends of the state’s role; issues that are closely intertwined with the notion of transparent fiscal management and the requirement of accountability. The study presents the place and various forms of state participation from a theoretical perspective before it proceeds to discuss theoretical proposals, valuable methodologies and options regarding the performance measurement, controllability and control of the state’s role. The paper sums up the relationship between theory and Hungarian practice, and confronts the findings of a survey1 conducted among companies in majority state ownership with the theories. Finally, it draws practical conclusions from the findings of the author’s survey and offers a number of critical remarks.

Keywords: state tasks, state role, control of community expenditures, internal audit, internal control, performance measurement

JEL code: H83

Re-interpretation of the state’s role, investigation perless public administration and new public of its functions and, at the same time, criticism service models; we search for efficient ways to of its load-bearing capability and its excessive utilise tax money, investigate and reveal cor- role or excessive standoffishness with regard to ruption and compare Hungary to the public the distribution systems is an ever increasing administration and public service systems of trend in public administration and public servi- other countries based on various indicators. Rce. This dispute has exacerbated since the 2008 In this article, I set out to investigate how crisis and the state’s entry to the competitive the modern, 21st century public service role of market, in particular, has become a subject of the state can be harmonised with the econom- intense scrutiny. ic challenges and problems of the use of public Who is responsible for executing a given funds and to examine the direction taken by task, who should finance, regulate and control contemporary Hungary in this context. I seek its implementation and who should actually to find an answer to the following question: perform the task – these questions are often what should be measured, examined, analysed raised in the current Hungarian legislative pro- and controlled with respect to the role of the cess. Meanwhile, we talk about a strong coun- state and how? try, the ideal of a cheap state, efficient and pa- The study discusses three topics: utheoretical issues regarding the market E-mail address: [email protected] role of the state;

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vperformance assessment of the state’s role discussed in the international literature from and possibilities to control this role; and numerous additional angles, using a dozen wpresentation of the findings of a question- different approaches. In her publication naire-based survey regarding certain specifici- (Voszka, 2005) Éva Voszka collects and ties of Hungarian state-owned companies. presents in detail the vast array of thoughts Since it is the state’s objective in market and trends produced by international experts participation that defines the performance on the subject that are not analysed in this criteria to be controlled, the article describes article due to space limitations. the criteria pertaining to the market presence On the other hand, the large theoretical of the state in detail, and proceeds to align categories that comprise the various forms of the complex tasks of performance control to state presence are, for the most part, uniform. the criteria, including compliance regarding For the purposes of this paper, the term “state” economy, regularity, effectiveness, efficiency, is used as a collective term that includes cen- control, etc. In the second part of the article, tral administration, the social security system, the findings of a specific survey are present- dedicated state funds, local governments, pub- ed, comparing theoretical assumptions and lic foundations, business associations owned ideal-typical models to actual practice; i.e. by budgetary institutions, public bodies – in the responses provided in the self-completion other words, all bodies, organisations and of- questionnaires of companies in majority state fices that manage and use budgetary funds ownership are summarised and presented in (“tax forints”) EU funds, contributions, du- the light of theoretical models and require- ties, etc. for the benefit and interests of their ments. own citizens, the members of the community. Regarding the market role of these organisations, I present – as concepts, trends and The place and role of the state models – a number of large collective catego- in modern economy – ries; however, certain additional trends, such theoretical models as the concept of the developmental state or the social market economy model, are not dis- Basic models in relevant literature cussed in this paper. This paper focuses on the following main Hungarian professional literature − (Var- types: ga, 2011); (Verebélyi, 2009); (Muraközi,  night-watch state: the state takes on a 2009); (Fekete & Szigeti, 2005); (Sárközy, very limited role in the economy and in the 2006); (Báger & Kovács, 2007); (Bara & regulation of society’s life. It guarantees the Szabó, 2000); (Hoós, 2002); (Bod Péter, legal framework, regulates the economy, and 2002); (Veress, 2001); (Jenei, 2008); (Voszka, ensures purely public goods; i.e. the goods 2011); (Voszka, 2013); (Csaba, 2010); that cannot be privatised. It is intended to (Huff, 2011) − addresses in great detail the maintain the rule of law (legislature, and legis- place and role of the state in the economy, lation), to perform the tasks of defence (home examines the relevant historical and political defence, law enforcement, civil protection, aspects, analyses the methods, models and disaster prevention, etc.), to maintain macro- implementation of the state’s role by count- economic functioning (banking system, issu- ry or, on occasion, by means of comparative- ance of money, governance of economic pol- analytical methods. The same issues are icy, fiscal measures, etc.) and to perform the

200 Public Finance Quarterly  2016/2  studies  duty of institutional protection for the pro- performed by the state by virtue of its pow- tection of fundamental rights (including the ers rather than provided by it as services. In judiciary, the operation of public prosecutors, this sense, this category primarily includes etc.). the tasks of public authorities and activities  welfare state: the state’s role in alloca- connected to legislature, legislation, defence, tion and redistribution is significant; in other diplomacy and state representation. The state words, the purpose of the economic policy may not delegate these tasks to private agents is to improve citizens’ sense of comfort con- and likewise, the tasks concerned cannot be tinuously while imposing relatively high taxes. outsourced, offered for concession or imple- Under this scenario, the state strives to achieve mented in the context of PPP projects. In equality and full employment, to expand the principle, all other services may be delegated; social delivery system, to encourage solidarity, they may be entrusted to business associa- to implement an extensive and comprehensive tions, to a group of private individuals or to education system, to facilitate citizens’ access non-governmental organisations (NGOs are to housing in such a way that these activities understood as the associations, foundations are organised and governed by the state and and grassroots organisations defined in Act financed from the tax revenues and other con- CLXXV of 2011). tributions collected from citizens. In this regard, it should be noted that the  service provider state: under this arrange- delegation of tasks does not exempt the state ment, the state adjusts to the needs and the from the responsibility to ensure that the tasks culture of the nation, and provides certain ser- concerned are executed professionally, cost-ef- vices focused on citizens but ensuring broad ficiently and effectively. Even though the ser- access in such a manner that the relevant bur- vice is provided by a third party, it is ordered dens (costs) are shared – along the lines of cer- by the state and as such, it is the responsibility tain principles – between the population, the of the state to control the subsidies granted economy and the central budget (e.g. opera- from public funds, and to control the quality, tion of e-administration system, government legality, efficiency, etc. of the services provided portals, etc.). on its behalf (Kovács, 2011). Each state defines the principles, decisions Below we list a number of practical Hun- and directions it wishes to follow in its own garian examples from recent years. economic policy, the structure of power and Warrants of payment were handled by the interpretation of public policy. Defining courts until 31 May 2010 and are processed the weight, scope and extent of its regulatory, by notaries public from 1 June 2010. The no- welfare and service provision roles is also a tary public is a chamber member running its part of this process (Hoós, 2002.), (Veress, own office and paying taxes independently. 2001). While the state delegated the tasks involved In defining the desired weight of the state’s in warrant of payment cases, it retained its participation, the state must identify its inher- right to regulate the legal institution itself. ent roles; i.e. those that cannot be delegated Consequently, the state continues to define to anyone else (the term “inherent” is of Latin the applicable rates and the manner in which origin, and it literally means inseparable, may the notary public handles warrant of payment not be deprived of something, existing as an cases. integral part of something) (Kovács, 2009). Auditors are responsible for auditing the Inherent state tasks are activities that are annual reports of business associations exceed-

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ing the thresholds specified in the Account- responsible for the execution of all tasks re- ing Act, and they attach audit opinions to the lated to electronic payments. Meanwhile, sev- reports. Audits are not performed by govern- eral companies that had previously provided ment bodies (such as the National Tax and similar services (EME Zrt, Mastercard Mobil, Customs Administration [NAV], the State Cellum, telecommunications service provid- Audit Office of Hungary [SAO] or the Gov- ers) were crowded out of the market. In this ernment Audit Office [GAO], but by private case, the state designed the regulations in such individuals or legal entities which are mem- a format that the task of collection is under- bers of the Chamber of Hungarian Auditors. taken exclusively by a state-owned company, The Chamber of Hungarian Auditors and the while service providers (parking companies) Hungarian Auditors’ Public Oversight Com- and users of the service (motorists using park- mittee are in charge of the coordination, qual- ing services) are typically non-governmental ity assurance and supervision of their activi- players; in other words, the state inserted itself ties, as well as their training. However, by way between market participants. of legislation, the state defines the detailed For the first time, in 2010 the state made rules and procedures of auditing, the opera- a decision to enter the mobile phone market tion of the Chamber, the public control over as a fourth operator. In the communications the activities of Chamber members, etc. Thus, market, the consortium controlled by Hun- the state retains its regulatory tasks while del- garian Electricity Ltd. (MVB) won the license egating a part of its administrative duties to for using the required frequency band and the the Chamber of Hungarian Auditors as a pub- right to provide services to customers (Kis, lic body. 2014). The state has abandoned its ambition In the area of higher education, by 2012 to enter the mobile phone market as a fourth nearly 55 projects were implemented in the operator. The First National Public Utility context of PPP projects which were not lim- Holding – owned by the state-owned Hun- ited to simple infrastructural development garian Development Bank – started its opera- activities but involved the transfer of some tions as a similar public utility company. From operational and operating services to a private May 2015, the company provides, under mar- entrepreneur operator. Thus, the state del- ket conditions, universal natural gas, district egates the construction and subsequent op- heating and electricity services to households, erational tasks of dormitories, research sites, and envisages to subsequently extend its activ- training facilities, etc., while it continues to ities to public waste removal services. In this render the services, and the university/college context, the state enters the market not only continues to establish the legal relationship as a regulator and as principal, but provides with students. The state remains in charge of services to households with its own – state- the quality, criteria and rules of service provi- owned – organisation. sion. Meanwhile, students pay, for example, a The role of the state and market interven- fee for the dormitory, thereby contributing to tion can take many forms. It is evident that the bearing of public burdens. regulation, i.e. the performance of legislative Since 1 July 2014, the collection of public and regulatory tasks, is the responsibility of area parking fees paid via mobile phone has the state. In practice, this means the drawing been a task of the state, performed exclusively up of acts and decrees, in other words, legal by National Mobile Payment Plc., a fully state- regulations. Through domestic regulation, the owned joint stock company. The company is state defines the possibilities of market play-

202 Public Finance Quarterly  2016/2  studies  ers; it prescribes provisions with regard to a given economy; namely, the foundation of their room for manoeuvre, conduct and legal direct companies backed by state ownership. transactions, and imposes sanctions (tax pen- Although the state seldom operates a business alty, supervisory fine, withdrawal of licences, association for the purpose of gaining prof- suspension of tax number and, in more severe its, several such for-profit, state-owned busi- cases, launching criminal procedure) when ness associations exist in Hungary. This tool, the provisions are violated. however, must comply with international law, At the same time, legislation is not the only including European Union legislation. It is in form of state intervention and participation. conflict with community legislation to grant The state can influence private sector par- prohibited state aid, to support employment, ticipants through fiscal and monetary policy transportation, the movie industry, etc. by measures as well. It can influence them to way of direct subsidies restricting competition change their original intentions, modify the or violating the principles of the open market, value, scope and duration of legal deals, etc. It or to provide subsidies disguised as low-value, can do so, for instance, in the form of subsidies “de minimis” aid (Hargita, 2003). granted from the central budget (subvention, The public corporations operating in the transfer), which could be a certain amount of pre-transition period were simultaneously the money to subsidise an investment, a donation symbols and executors of the socialist planned intended to support a local heritage associa- economy. However, it is not alien from the nation, a subsidy to cover farmers’ losses ex-post, ture of market economy that the state enters or tender funds granted to the operator of a the market with its own business association hostel for young tourists, etc. (Jenei, 2008). and operates it in accordance with market Economic policy instruments also include the rules, taking risks and even specifying a profit reform of the taxation system, the operation target. In this arrangement, the state performs of the mandatory social security system, the a dual role: interest policy and direct FX market interven- Investor: it establishes a company from tions. The common feature of all these forms public funds (typically from tax revenues or is that the state’s decision or measure (or a lack state property overtaken by the company as thereof) benefits one or some of the economic contribution in kind) and, by withholding agents by allowing them to save costs or gain any profit after tax in the form dividends, it additional profits in comparison to their origi- collects surplus revenues over the long run nal situation (see, for example, the situation of (which can be used to finance other, loss-gen- MALÉV and the state’s continuous efforts to erating state tasks through the central budg- keep it viable since the regime change through et). Essentially, this is an investment activity capital injections, loan guarantees and repur- or, carrying it one step further, it may be the chase transactions), while the situation or po- cross-financing of certain services provided by sition of others deteriorates; for example, their the state or a long-term guarantee for debt ser- product becomes too expensive, they lose a vice, etc. The state can stabilise this position part of their income or they get crowded out for a sustained period and over the long term from a certain market segment, etc. (Major & if it manipulates the business environment by Szilágyi, 2007). other means – typically via legislation – to en- Besides legislation and shaping the eco- sure that the company concerned achieves a nomic policy, the state has additional tools at monopolistic position in the market, and its its disposal to intervene into the circulation of surplus profits generate dividends.

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Operator: from its own annual budget the main objective and strategy regarding the state provides a pre-determined amount to the companies owned and the tasks performed. company to cover operating costs (as a kind uThe state intends to execute a task with- of posterior capital injection or additional in its own competence and through its own payment when the state replenishes its capi- budgetary institution over the long run and, tal – existent at the time of foundation but by definition, transfers and assigns assets serv- depleted in the meantime – to the minimum ing these purposes (buildings, equipment, ve- statutory level of the ratio of registered capital hicles, budgetary subsidies). Besides managing to own funds, otherwise the company would the assets, the state’s objective is to ensure the have to be restructured or, in the worst case, provision of high quality services to citizens and terminated). Another option is to conclude a users. These objectives are classically related to public service agreement with the company inherent state tasks and are fulfilled with the and order services from it, and the revenues participation of budgetary institutions. They from the services are sufficient to cover the include public and higher education (school company’s operating costs. In this case, in- or university buildings, machinery and equip- stead of delegating ongoing operational tasks ment, budgetary normative reimbursement), to a budgetary institution, the state assigns the and also such fields as healthcare, national tasks to its own business association and exer- defence or public education services. This cises control, supervisory and propriety rights category also comprises state-owned organisa- over the company itself. The foundation and tions (albeit not budgetary institutions) oper- operation of the KINCSINFO Governmental ating from non-negotiable shares, such as the Information-Technology Development Agen- National Bank of Hungary, the Government cy is a good example for this: KINCSINFO Debt Management Agency or the Hungarian takes orders solely from, and provides IT de- National Asset Management Inc (HNAM). velopment services exclusively to, the Hungar- vThe state wishes to solve the tasks of ian State Treasury. maintaining public areas, managing the electricity system, public roads, passenger transport, public warehousing, water supply, etc. Objectives of state ownership in Hungary for purposes similar to those described above, and its current situation although not in the form of budgetary institutions, but through business associations. For The objectives of state ownership are driven by these purposes and tasks, companies owned the models and trends described above, and 100% by the state have been set up or, as an this is true for Hungary as well. Obviously, alternative, local governments often acquire these aspects may coexist or, from time to ownership in locally operating companies. time, they may be in conflict with each other The operation of these companies, however, (for instance, the tax return burden applied involves business-like activities, and their for regulatory reasons and control purposes is expenses are not exclusively covered from in conflict with the ideal of a streamlined and government subsidies but also from the ser- limited state apparatus). vice fees paid by consumers and users of the The purposes of state ownership are defined respective services (waste management fee, in this paper along the lines of the driving transmission fee, road toll, transport ticket forces described below, and are classified into price, public warehousing fee, water con- four main categories depending on the state’s sumption fee, etc.). These companies consti-

204 Public Finance Quarterly  2016/2  studies  tute a part of the state’s stable assets, and are Agency. To add another example: the Hungar- listed in Schedule 2 to Act CXCVI of 2011 ian State purchased, likewise for a transitional on National Assets. Depending on the govern- period of 1 to 3 years, 99.9 per cent of the ment policy, companies are removed or added shares of MKB Bank. Thus, the state has no back to the list from time to time, as was the intention to own these companies and assets case with regional Waterworks Companies or over the long term; after the required restruc- Volán (transportation) Companies. turing has been completed and once the eco- wThe state wishes to keep – temporarily or nomic environment becomes more favourable, on a long-term basis – certain resources, tangi- it will sell (return) the business shares and the ble assets, items representing national advan- assets to the previous owner or a new owner. tages or organisations holding such items un- In this case, the sole purpose of asset manage- der its own supervision. By doing so, the state ment is the preservation of real assets and the gains ownership over strategic resources that organisation of their reasonable utilisation in might be of key importance for the national order to cover the costs of ownership (report- economy in consideration of public debt, the ing system, auditing, remuneration of Board stability of the financial system, etc. It was for members, operation of the Supervisory Board, such considerations that the Hungarian State etc.) and in order to prevent the deterioration acquired a majority stake in RÁBA Plc. in of the assets and preserve their condition. 2011, and that it previously became a major- The reason why the state wishes to acquire ity shareholder in MOL Plc, MALÉV, Welt ownership in an organisation is of decisive 2000 Ltd. and the former Postabank. It is a importance in terms of the objective of state specific feature of these cases that outsiders are ownership and in terms of its strategy, and generally not familiar with the actual reasons therefore, it should be controlled and clarified. for the acquisition decision; the underlying This issue is particularly important in evaluat- motivations do not become public and hence, ing the performance of the state-owned com- justified, or explicitly suggest secret purposes pany. Consequently, it is important to clarify or national defence considerations. Although which category the specific legal transaction media broadcasts, the interpellations of MPs falls into, what is the specific purpose of state and various investigation committees tend to ownership, is there a return on the investment, dwell on ongoing transactions, the diplomatic what are the expectations of the state and how agreements behind the scenes and national se- does the specific asset benefit a segment of the curity interests usually remain hidden. community or the community as a whole. The xFinally, the state purchases, with the in- basis of the evaluation and control of perfor- tention to provide temporary assistance and mance, in turn, is the objective that prompted without considerable intervention (in every- the state’s acquisition or foundation decision. day terminology: rescues) companies by taking their business shares into state ownership. Similar to business shares, land can be taken Performance assessment of state into state ownership as well and the state (community) ownership and analysis of its may also take over the properties of vulner- effectiveness, efficiency and economy able foreign-currency debtors. These assets are managed, admittedly on a temporary basis, by Community property has numerous owners Hungarian National Asset Management Inc. in contemporary Hungary. While so far this (HNAM) and the National Asset Management paper concentrated solely on the simplified

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category of the state, it should be seen that puts and objectives of an organisation (Antho- community properties are also managed by the ny – Govindarajan, 2009.); i.e. the relation- state’s central budgetary institutional system ship between the intended and actual impact itself (ministries and background institutions of an activity. The term “efficiency” means along with their economic associations), the that valuable (new, fast, useful, etc.) services institutional system of local governments are rendered by the state through the use of (local and county-level authorities and their the utilised assets. According to its classical associations), the social security sub-sector definition, efficiency can be expressed as the (National Health Insurance Fund, National ratio of output to inputs, i.e. output per unit Pension Insurance) and extra-budgetary funds of input (Anthony – Govindarajan, 2009). It (Labour Market Fund, National Cultural should be noted that the budgetary sector also Fund, etc.). uses references to the “third E” – “economy”, In the case of these organisations – regard- in addition to the categories of efficiency and less of which sub-sector of public finances they effectiveness – in the following sense: achiev- belong to – the purpose of asset management ing the objective of minimising one unit of is manifold. Their task is not purely the pro- input while maintaining the adequate quality fessional management of assets, but also the of the services provided. In the private sector, provision of community services associated there is no notable difference between econ- with the utilisation of the assets for the benefit omy and efficiency. By definition, efficiency of citizens (or, as the case may be, migrants, goes hand in hand with economy. Therefore, refugees, etc.). It is not enough to ascertain it is not enough for an organisation to oper- that the property is still available in terms of ate effectively and efficiently: it must be also assets and value relative to the status at the last examined whether the quality of the service investigation; i.e. to identify any property loss provided by the state reaches the minimum (or increase) and restructuring between the expected level (standard, legislation, require- assets constituting the property, such as prop- ment, etc.). It is by no coincidence that, in ad- erty sale/acquisition, sale/purchase of machin- dition to the principle of the 3Es, some other ery, sale or leaseback thereof. It should be also criteria are also considered in the performance examined whether the state, local government measurement and assessment of public admin- or social security fund offered and rendered istration (irrespective of authors and schools), adequate community services (education, such as fairness, productivity, organisational healthcare, passenger transport, funeral ser- “flatness”, a high degree of ethical sensitivity, vices, public lighting, corporate procedures, a service provider attitude, integration into etc.) through the use of the assets. In other national traditions. As opposed to the math- words, not only the effectiveness, but also the ematics-oriented approach of the 3Es, these efficiency of state asset management should be factors tend to place emphasis on the high- inspected continuously (Kovács, 2011). quality of the work, performance features and We can state that asset management was ef- characteristics of the public organisation, of- fective if the real value of the assets remain the fice or institution. same after a certain review period has elapsed; Consequently, an organisation managing namely, the assets retained – or, as the case state property and performing state tasks can be: may be, even increased – their value. Accord- • more effective, achieving the objectives ing to its classical definition, effectiveness is faster (i.e. completion of a building defined as the relationship between the out- construction) than envisaged; i.e. it is

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put at the disposal of taxpayers ahead of services. An example for this is the local time. Similarly, a school is more efficient government which, receiving less state when more students are accepted by the assistance compared to the previous year, university from that school than from faces a shrinking budget but manages to another (while in terms of all other provide local government services (school, characteristics, such as level of services, kindergarten, cemetery, public lighting, number of teachers, methods applied, general practitioner services, etc.) under etc., the two institutions are the same). the same conditions at the same level of • more efficient if the organisation can offer quality as in the previous year. more services by utilising the same amount When enforcing the principle of 3Es, or- of assets than before or relative to another ganisations should strive to achieve equilibri- organisation with similar assets. A good um. Indeed, it may happen that the efforts to example is the motorway toll, which costs increase economy and efficiency are in conflict the same amount of money for users of the with each other, and one of them is achieved service in two consecutive years; however, at the expense of the other. For example, in the length of the motorway is longer in the case of state investment, deadline, costs the second year (due to the completion of and technical substance are in a closely relat- new sections) than in the previous year. ed, but mutually exclusive and destructive re- Consequently, motorists may use a longer lationship with each other; therefore, manage- section of the motorway for the same ment must maintain an equilibrium between price. Likewise, the motorway manage- these three requirements in order to keep the ment company works more efficiently spending of public funds in equilibrium as if it can maintain a longer section of well (see Figure 1). the motorway than its foreign peers in During the final – performance – audit comparison to the domestic price of the of asset management/utilisation activities, motorway toll. we seek an answer to the question whether • more economic if the organisation’s a given task or process achieved the intended expenditures during the review period impact and result, in consideration of the were lower (fewer people, smaller space, “value for money” expectation, which can be smaller budgetary expenditures, etc.); best expressed by the following formula (PM, in other words, it received or collected 2009): less subsidies, tax revenues or servi- The three categories may be analysed both ce fees while ensuring the same level of together and separately. During performance

Figure 1 Formula of the 3Es criteria

Input Output Outcome Outcome   = € Input Output €

3E: economy  efficiency  effectiveness = „value for money”

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audits, only the auditors can define, based on of state ownership – who pays the costs and the information obtained during the prepara- whether there is any competition in the given tion phase, which performance category offers market segment in the first place. As shown the highest value added and can be best inter- above, in the case of inherent state tasks, there preted within the context of the given perfor- is no possibility or justification for outsourc- mance audit. ing the task and/or for ordering it under mar- There are few areas in the public sector or ket conditions. At the same time, a part of the in the use of public funds where performance public goods are not produced by the state it- audits and the enforcement of the “value for self; they are ordered from the private sector, money” principle have directly measurable even though it is possible that another state- quantitative criteria; therefore, these evalu- owned organisation would be equally suitable ation criteria should be always defined in for performing the given task (Voszka, 2005.). consideration of the given topic. One of the In general, the buyers of state services are characteristics of budgetary systems in general the citizens as private individuals, or compa- is that no adequate criteria and indicators are nies of the private sector, while it may also assigned to the objectives to be achieved. For happen that the state provides internal ser- this reason, in audits aimed at the inspection vices to other state agencies as well. Typically, of effectiveness it will only be possible to gauge the citizens and actors of the business sphere whether the situation explored is consistent take recourse to these services in exchange with the predefined objectives if the audit ap- for a service fee or procedural duty, a kind of plies analytical, fact-finding and factual pro- monetary compensation or contribution. Ex- cedures adapted to the specific features of the amples include public transportation tickets, issue at hand (PM, 2009). procedural duty at the land registry, court of registration duty, court fee, etc. The trend of new public management (NPM) (OECD, Auditing aspects and issues of state role 2010.) strongly emphasises that in exchange and asset management for service fees, the state as a service provider, must bear in mind the interests of its cus- Analysing and examining the six criteria tomers and provide state services fast and in presented below are essential during the per- adequate quality; in other words, effectively, formance audit of a company in order to efficiently and economically. Although the determine whether the company’s objectives trend of NPM has already been surpassed by a and strategy have been achieved. Obviously, number of new models, the new public man- there are considerably more factors and agement programme was a pioneer in inter- operating elements that may be examined preting state tasks on a market basis, from the during a performance audit; the list below angle of transparency and economy. highlights only the six criteria that are closely On the supplier side, the cooperation of related to the topic discussed above. business organisations becomes necessary to These issues and criteria are the following: perform the state tasks when the coopera- Market analysis. With regard to the role of tion is not needed permanently and requires the state, a number of questions should be special skills (not available on the side of the clarified and examined: who are the buyers state), or when it is less expensive to purchase of the given service, who are the suppliers in the complex service than having it organised the given market segment, and – in the case and performed by the state. Typically, suppli-

208 Public Finance Quarterly  2016/2  studies  er privileges can be obtained through public the service level provided by its partners (Ko- procurement procedures, for a fixed period vács, 2011). of time, and under the terms and conditions Consequently, the fees paid by the custom- specified in the tender notice. The essence of ers/buyers, the selection process of suppliers public procurement is that the state, as a safe and the reasonability of obtaining coopera- buyer, wishes to receive the products/services tion, products or services from external or- in large quantities within the context of the ganisations should be inspected at the organi- procedure set forth by law. Regrettably, as sations delivering and/or ordering state tasks. frequently pointed out in critical comments, Business planning and reporting. In a well- public procurement procedures take an un- organised company, business planning and reasonably long time, and instead of making reporting form part of the internal controlling the desired goods cheaper, they in fact render system (Anthony – Govindarajan, 2009.). them more expensive. The procedure lacks What and how is planned at the beginning of transparency and represents a hotbed of cor- a period, how actual revenues and expendi- ruption in Hungary (Pollitt & Bouckaert, tures develop in comparison to the plans, how 2011). costs and income change in the balance sheets The state seldom considers whether, under and what is the trend of the changes, and the new conditions, it is worthwhile to out- what kind of intervention is needed by the source a service or to order it from private en- supervisory organ, owner, or asset manager, terprises, or whether it should deliver the ser- if at all – these issues are of vital importance vice itself. If the outsourced state tasks are still for state-owned or state-operated companies provided by a single external economic agent and budgetary organisations as well. For this – and as a result the service provider may be- reason, the quality, structure and breakdown come lazy, offering low-quality services to the of the financial plan (budget, operative mas- buyers –, since the buyers cannot turn to an- ter plan, etc.), as well as the reasonability, other service provider, the advantages of out- economy, efficiency and effectiveness of the sourcing cannot be taken advantage of; more- plans prepared by state-controlled asset man- over, the outsourced service may ultimately agers managing state property are of crucial cost more than it would if rendered by the importance. It is another important criterion state directly through its own organisation. It to have, in addition to annual, operative-level is therefore the state’s responsibility to create plans, a business development plan pertaining and maintain competitive conditions (if justi- to a longer time-horizon, as well as a plan re- fied and reasonable) in the market of the given flecting strategic objectives. service when the state task is outsourced, as The implementation and realisation of an- it is not necessarily possible to involve more nual, operative plans, the various develop- service providers and have them compete for ment, investment and project plans and the providing a given service for reasons of econo- multi-annual business plans is demonstrated mies of scale (i.e. a limited number of users), for the owners and executive managers in in- substantial investment needs (e.g. hospital), terim reports, and standard reports. As these or due to the small size of the geographical reports are capable of capturing any devia- area (a small local government). Moreover, the tions and trends, the key actors should pay a state needs to stipulate adequate guarantees in great deal of attention to the internal reports the service contracts and to control compli- of the state-owned companies managed by ance with them on a regular basis, along with them. With that in mind, the following issues

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should be examined: is there a controlling It can be said, overall, that senior execu- system in place at the subordinated, managed tives should be entitled to a certain amount companies; does the controlling organisation of extra payment or benefits in case of suc- function properly; what is the quality, type cessful property management or service provi- and breakdown of the interim reports; who sion, provided that the previously presented are the recipients of interim reports; what was 3Es have been met. In this regard, however, the recipients’ reaction to the contents of the the amount of the bonus, the objective cri- reports; and what kind of decisions did they teria for payment and the party responsible take based on such reports with regard to cer- for measuring performance (i.e. the person tain issues. ascertaining the justifiability of payment) and Remuneration of management and perfor- approving the relevant decisions should be mance indicators. The objectives and the re- clarified. On the other hand, it should be also sults will be found consistent if the operation examined whether the predefined objectives complies with the criterion of effectiveness as and expected results fall into the competence described above; it is economically rational of the executive in question, whether he/she and uses tax funds efficiently. In such cases, can influence them, whether the objectives set senior executives may receive bonuses. In ad- for the given period are sufficiently challeng- dition to regulations and Government Deci- ing and realistic (e.g. they are not too easy to sion No. 1660/2015 (IX. 15.), the conditions meet) and whether they are, indirectly, con- and legal titles of payment may also be defined sistent with those of the organisation. by detailed local agreements, bonus objectives Internal audit. While the external au- specified with senior executives, annually dit of business associations is performed by changing ad hoc agreements, the resolution of state agencies, authorities and offices (e.g. the owners/shareholders, or by an internal remu- Hungarian Authority for Consumer Protec- neration policy. However, the relevant infor- tion, the National Tax and Customs Admin- mation must be recorded in advance and in istration, the National Bank of Hungary, the writing in order to ensure that the content is National Food Chain Safety Office, the Ac- clear and interpreted consistently by all parties countability Commissioner, the Hungarian (Voszka, 2005). Competition Authority, the Hungarian Equal While the media and the prevailing opposi- Treatment Authority, the SAO and the GAO, tion parties often call into question the legality just to name a few), internal audits and the of premiums and bonuses paid to senior exec- operation of internal control systems have utives, this is a customary and regular form of gained increasing importance and recogni- incentive in management science (including tion. The functioning of an efficient internal public management and theories addressing audit system can make an important contri- organisations rendering public services). Lit- bution to the successful operation of an or- erature on human resources discusses in de- ganisation. By definition, internal audit is an tail the methods, elements and criteria of the independent, objective assurance and consult- remuneration of senior executives. Business ing activity designed to add value and improve associations operating from public funds are an organisation’s operations (IIA, 1998.) Ac- required to post, update and make available cording to the definition of the Institute of information about the relevant legal titles and Internal Auditors (IIA), the internal auditor amounts on their homepage, which ensures evaluates and improves the efficiency of risk clarity and comparability. management, control and management pro-

210 Public Finance Quarterly  2016/2  studies  cesses by means of a systematic and regulated their internal operations should be examined procedure, thereby facilitating the implemen- along with the manner in which they are man- tation of the organisation’s objectives. aged by the organisation. This is particularly Internal audit promotes the maintenance important in view of the fact that, as opposed of the organisation’s efficient, effective and to private enterprises that make decisions economic operation through the performance at their own risk, state-owned companies – audits, regularity, financial, system and IT se- which rely on tax revenues and the fees and curity audits conducted by internal auditors, contributions collected from the participants and by exploring the most critical points in of the national economy – put public funds at the operation of the organisation by way of risk during their operation and upon making risk assessment. their decisions. It is precisely for this reason While the Act on Public Finances and its that Hungarian National Asset Management implementing regulation prescribes the man- Inc. has prepared a risk management manual datory operation of internal audit for budg- and case study for improving the governance etary institutions – save for a few exceptions practices of companies in majority state own- (e.g. pursuant to Section 69/A of Act CXCV ership in its portfolio, and published them on of 2011 on Public Finances, the internal audit its homepage in the form of a recommenda- systems of other organisations classified into tion (MNV, 2013). the government sector must also be imple- Risk is generally understood as the com- mented in accordance with the provisions of bination of the probability of an undesired the Act on Public Finances. The itemised list event and the (positive and) negative conse- published in Volume 2013, No. 60 of the Of- quences of the event. Therefore, risk manage- ficial Journal includes 120 such organisations) ment should be a permanent activity aimed at –, this is only a recommendation for business identifying and analysing potentially harmful associations (MNV, 2013). The Institute of events and their consequences to the organi- Internal Auditors (IIA) has prepared detailed sation, making decisions that are designed to documentation and standards on how a busi- thwart the risk and taking responsive steps. ness association should be audited internally. Based on the COSO model, INTOSAI has The chief executive in office is responsible for published detailed guidelines regarding the and tasked with the organisation of this activ- business-oriented identification of risks with- ity and the utilisation of the reports. It is pre- in the organisation, their analysis, as well as cisely for this reason that – in the case of or- potential ways to ward them off (INTOSAI, ganisations performing public functions and 2004). operating from public funds – there should be Even in the case of state-owned companies an inspection regarding the quality and sys- or business associations performing state tasks, tematic operation of internal audit, the utili- there are operational, strategic, financial, mar- sation of internal audit reports, the responses ket, management, regulatory, contractual, etc. provided to the findings and proposals con- risks with potential negative consequences, tained in these reports, and the implementa- which may generate significant damages, ad- tion of the resultant management decisions. ditional burdens or payment obligations for Risk management. The risks posed by the op- the company. It is for this reason that the State eration of the organisation is an important is- Audit Office of Hungary inspects, as a prior- sue for companies executing state tasks as well. ity, the exercise of propriety rights over state The risks characterising the organisations and property at state-owned economic organisa-

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tions and, in this context, the operation of ing anonymous reports from employees – a internal risk management and the internal process known as a whistleblowing procedure control system. For more detail, see the docu- in Anglo-Saxon legislation. In Hungary, the ment entitled “REPORT 14236: Audit on the procedures set forth in Articles 13–16 of Act exercise of propriety rights over state assets” of CLXV of 2013 and in Act CLXIII of 2009 and the SAO’s previous audit reports listed on serve as legal basis for conducting the relevant pages 2–3 of the Report (ÁSZ, 2014). inspections, in compliance with requests for A new element of the internal control sys- data of public interest [see Constitutional tem is an integrity management system that is Court Resolution No. 21/2013 (VII. 19) on intended to eliminate the risks of corruption. the subject]). At the same time, they also com- The system was implemented at the beginning ply with the mandatory rules of publication of 2014 at Hungarian public administration and the provisions of the legislation on trans- bodies in order to detect abuses of power, parency regarding the use of public funds (Act bribery and irregularities and to prescribe eth- XXIV of 2003; Annex No. 1 to Act CXII of ical and moral requirements for government 2011; Decree 18/2005 (XII. 27.) of the Min- officials for their prevention. For more detail, istry of Information Technology and Com- see Government Decree No. 50/2013 (II. 25.) munications). on this topic and the findings of the SAO’s Civil control means promoting access to 2014 integrity survey. public data for the relevant parties and local Publicity and civil control. Access to data communities. Moreover, civil control is an op- and information of public interest, the ex- portunity available to the local public to par- istence and publicity of up-to-date informa- ticipate in decision-making via local NGOs tion about the budget, and NGOs ability to and raising the awareness of citizens regard- exercise control improve the assessment and ing the available legal and non-legal means judgement of public services and the state’s through which they may utilise the basic in- role (Báger & Kovács, 2007), (Jenei, 2008), stitutions of democracy directly and, above as local communities, associations and their all, to request information from – and make alliances are independent stakeholders that accountable – decision-makers with respect to perform their own analysis and control in the the investments, development plans, actions given professional area from a different an- and programmes directly affecting them. gle, from the aspect of different interests and At present, there are about 62,000 reg- based on their own mission and professional istered NGOs in Hungary, but few of them commitment, presumably (as there are also admit and undertake consciously and openly negative examples), for the public good. the need and intention to exercise civil control On the one hand, ensuring publicity re- over local powers and the state. Despite the garding the operation of the companies may financial support, professional documentation guarantee transparent, regular and efficient and experts provided by a number of nation- operation for state-owned business associa- wide domestic organisations and previously, tions as well. Guaranteeing publicity includes the National Civil Fund itself, exercising civil notices and information posted on the web- control is only in its infancy in Hungary. site of the companies, but also involves re- For this reason, with respect to the state’s sponses to ad hoc questions from the media role it should always be examined whether the and reporters, and the internal investigation decision-makers in charge involve NGOs or of announcements of public interest (includ- representatives of local social organisations in

212 Public Finance Quarterly  2016/2  studies  the decision-making process, including the services. With that in mind, it is a pressing decision-preparation phase and requests for matter to examine in practice the relationship their opinion, as well as the presentation of the between theory and Hungarian practice. decision’s causes and consequences. Moreover, In defining the underlying hypotheses, the it should also be inspected whether the state starting point was the logic of the study itself. body or organisation publishes information The study presented the goals of state partici- on its website about the use of public funds, pation, followed by a general description of whether it provides information to the general the controllability of the state’s role and the public (including the media), and/or answers measurement and assessment of its perfor- the questions raised (Jenei & Kuti, 2010). mance. Along these lines, 6 aspects were high- It should be noted that Hungarian civil lighted that should be specifically examined at society – as the third pillar – undertakes sig- state-owned companies. The hypotheses are nificant state tasks, for the performance of based on and related to these 6 points. which it uses a substantial amount of private, Based on the theoretical models described corporate and foreign funding, while also re- and the Hungarian examples cited in this pa- lying on an extensive network of volunteers per, the following hypotheses were established. (Hoós, 2002). This study was not intended H1 At least 50 per cent of Hungarian to address audit issues regarding the tasks as- public corporations operate in a competitive signed to or undertaken by civil organisations environment. For the purposes of this hypoth- (NGOs), but it referred to the contribution of esis, competitive environment means that the associations and foundations to the state’s role company has at least one competitor in the through public benefit activities, and to the market or it has a market share exceeding at fact that, for this reason, their activities should least 25 per cent in the market where it pur- be both supported and controlled. sues its core activity. H2 Most Hungarian public corporations have a long-term business concept and stra- Research questions and findings tegic objectives for at least a five-year time – presentation of the Hungarian horizon. In defining this hypothesis, the start- practice ing point was the fact that the owners controlling the companies concerned (HNAM, Research objectives and hypotheses sectoral ministries) provide long-term guidance to state-owned companies; in other The fundamental goal of this research was cases, shareholders’ decisions or, potentially, to juxtapose domestic practical trends with a government decree provide a framework for the theoretical models of state role and the objectives and tools of long-term market to examine the actual direction taken by participation. Hungarian public corporations compared H3 In the case of at least half of Hungar- to the theoretical assumptions. Indeed, the ian public corporations, there is a direct link – models presented in the previous two chapters a positive correlation – between the remuner- and specific Hungarian examples underpin ation of the company’s senior executive and that the Hungarian state and the busi- the implementation of the company’s business ness associations in its ownership are active plan/annual plan or its activities/projects. This participants in certain markets, providing – means that achieving certain pre-defined indi- similarly to their competitors – products and cators is at the core of performance measure-

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ment, and when the company’s indicators are The circular was transmitted to state-owned met, the highest-ranking executive and his/ companies over which ownership control is her deputy/deputies are entitled to bonuses or exercised either by Hungarian National Asset premiums. Management Inc. (HNAM) or its subsidiary, H4 More than two thirds of Hungar- or directly by the NFM. As a result, the sam- ian state-owned companies have a perma- ple included 280 state-owned companies. The nent internal control function in place. This questionnaire was completed by 92 business hypothesis was determined in consideration associations, of which 86 companies provided of statutory requirements, the shareholder responses suitable for analysis. Thus, with this recommendation issued by HNAM, and the correction considered, the response rate was requirements of accountability and answer- 29 per cent. Although the sampling cannot be ability. considered representative for several reasons H5 At least half of state-owned Hungar- (voluntary basis, exclusion of randomness, ian companies comply with the minimum targeting a limited section of the population), disclosure obligation prescribed by law and it is still possible to draw conclusions regard- exceed requirements in informing the general ing the operation of a segment of Hungarian public of their operations and results. They state-owned companies based on the nearly 30 link the assumption of the hypothesis with the per cent completion rate and in view of the two statements and require the simultaneous NFM’s portfolio. fulfilment both conditions. 71 per cent of the respondents are com- H6 More than half of state-owned Hun- panies in HNAM’s portfolio, 20 per cent are garian companies have a consciously designed controlled by the Ministry for National Econ- risk management system in place. A con- omy (Hungarian acronym: NGM), and 9 per sciously designed risk management system cent are subsidiaries of business associations means that, over and above the usual risk es- controlled by the state through other chan- timation and risk analysis level, the company nels. 67 per cent of the respondents are owned applies a unique, company-specific risk analy- 100% by the state; state ownership exceeds 75 sis and risk management methodology during per cent in 26 per cent of the respondents, its risk management activities. while the share of the state is between 50 per cent and 75 per cent in the case of 6 per cent of the respondents. Thus, 99 per cent of the Sampling method and principles respondents are companies where the ownership of the state exceeds 50 per cent, i.e. the Data analysed in the research were accumulated state has majority control. as a result of a questionnaire survey. Upon 52 per cent of the respondents have regis- request, the Asset Management Department tered seats in Central Hungary, while the rest of the Ministry of National Development of the companies are located in the remaining (Hungarian acronym: NFM) issued a circular Hungarian regions except for Southern Trans- to business associations in majority state danubia; no responses have been received to ownership on 30 April 2015, requesting the the questionnaire from this region. Based companies to complete, with identification on the categories defined in consideration of attached, the online questionnaire compiled in revenue, balance sheet total and number of the subject by the predefined deadline, thereby employees, respondent companies comprise contributing to the success of the survey. micro enterprises (11%), small enterprises

214 Public Finance Quarterly  2016/2  studies 

(27%), medium-size enterprises (24%) and introduction. Table 1 shows the distribution large corporations (30%). In the case of 8 per of respondents according to competitors cent of the respondents, the classification was and customer base. Based on point a) below, ambiguous. As a result, large corporations are we found that nearly two thirds (62.8%) clearly overrepresented in the sample; howev- of the respondent companies operate in a er, it should be borne in mind that, compared competitive environment, with at least one to market percentages, the percentage of large competitor in the market. This demonstrates corporations within the group of state-owned that hypothesis H1 is true: more than a half companies is higher in any case. In terms of of state-owned companies pursue their main main revenue-generating activity, 52 per cent activity in a competitive market environment. of the respondent companies are clearly ser- Regarding customer base, two thirds vice providers, 19 per cent perform produc- (67.4%) of the respondents provide services tion activities, 1 per cent pursue agricultural to corporations and households, while only and trading activities, respectively, while re- around a quarter (23.3%) of the respondents garding 27 per cent of the respondents, core indicated that their main customer base com- activity and industry cannot be determined prised other state bodies and state organisa- clearly. tions. Below we present the specific findings with Several conclusions can be drawn from the respect to each hypothesis. figures shown in the table below: a) 62.8 per cent of state-owned companies clearly operate under market conditions, sur- H1 – Market role rounded by competitors, with a real corporate or household consumer customer base. They The market position of state-owned companies require further analyses regarding the state’s and the various aspects of their analysis place and role, its market share and price-set- were described in detail in the theoretical ting methods, and in order to explore why the

Table 1 distribution of respondents according to customer base and competitors

Do you have any competitors?

Yes We cannot say, we No Total do not know

Companies, businesses, private 27 1 8 36 sector Households, individual consumers 13 1 8 22 Please specify the most Public, local government, 12 1 7 20 important customer base administrative bodies of your company! Public enterprises, companies, 1 0 0 1 households No response 1 2 4 7 Total 54 5 27 86 Source: own calculation

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state should be a player in these markets in the to be performed in the form of a business as- first place. Only these analyses could confirm sociation – as a quasi-outsourced company –, or refute the good stewardship of the state in or it would be more effective and/or efficient to the specific cases and pinpoint whether it pro- have these tasks performed within a budgetary tects community property and whether it sat- institution at actual prime cost. isfies a broad range of social needs. b) the number of state-owned companies operating in a non-competitive environment H2 – Planning, forward-looking approach is relatively high (31.4%). It should be subject to in-depth analysis whether this market The conscious forward-looking approach situation resulted from an artificial measure presented above is a cardinal issue in the (e.g. legal provision, concession agreement) or operation of public enterprises; it also constitutes from a natural market process, and what per- the basis for subsequent accountability. Indeed, formance and efficiency level has been dem- planning, a written budget, budget plans, etc. onstrated by the state in this environment. provide a long-term framework and direction Such an analysis can determine whether there for a company’s operation. Table 2 reveals the is a case of overpricing, or whether the state- following correlations. owned company performing the activity has a) Nearly all respondents (94%) had an ap- become lackadaisical due to its monopoly. proved annual business plan, which is a posi- c) 23.3 per cent of the respondents provide tive and commendable feature in itself, and it services to and perform activities for other is also in line with the requirements presented agents of public administration, administra- on a theoretical basis (obviously, this positive tive authorities and authorities as state-owned picture may have to be revised in the light of companies. In this sense, the state appoints one the plans’ quality and the level of compliance). of its organisations to perform tasks for an- b) At the same time, more than a half of other state organisation. In their case, a more the companies (55.8%) do not have a multi- thorough examination is needed to determine annual business development plan, and con- whether the service or the activity indeed needs sidering that an additional 31.4 per cent pre-

Table 2 Existence of approved business development and annual business plans at respondent companies broken down by time horizon

Did your company have an approved annual business plan for 2014?

Yes No Total

Yes, for a period of 1 to 3 years 27 0 27 Does your company have Yes, for a period of 3 to 5 years 6 0 6 a business development Yes, for a period of 5 to 10 years 3 1 4 plan approved by your main We cannot say, we do not know 0 1 1 body? No 45 3 48 Total 81 5 86 Source: own calculation

216 Public Finance Quarterly  2016/2  studies  pare development plans only for a 1–3 year key role in the implementation of the various horizon, we may conclude that state-owned plans and the development strategy of the companies are unable to predict their activi- company, along with the importance attached ties even for a medium-term horizon. This to the implementation of plans and objectives undermines the implementation of develop- in remuneration decisions. Respondent ments, investment projects and longer-term organisations show a mixed picture in this projects, as well as the companies’ openness to regard. This is demonstrated by Table 3 (in such endeavours, and renders future-oriented, view of the fact that a company can set more responsible operational attitudes impossible. than one requirement, yet the incidences do c) Only a negligible percentage (4.7%) of not even cover the sample size of 86 elements). the respondents are capable of planning their a) More than a half (51.2%) of the respond- operations over a strategic horizon with the ent companies indicated that they do not de- owner determining forward-looking require- fine any notable requirements in relation to ments for management and senior executives. the assessment and evaluation of the highest- Unfortunately, based on points b) and c), ranking executive’s work or professional per- hypothesis H2 has to be rejected as it is cer- formance and his/her remuneration. In other tainly not characteristic of most state-owned words, despite the – presumed – existence companies that they have a business plan or of annual plans, other business development strategic objectives covering at least a five-year documents or project plans (see H2), these horizon. companies do not link the implementation of the plans to the assessment and remuneration of the senior executive’s performance. H3. – Key corporate performance b) In the case of nearly one fifth (19.8%) indicators and the remuneration of of the respondents, the pre-defined require- management ments were limited to the achievement of the result envisaged in the business plan, with no The professional tasks and key performance further indicators inspected. This despite the indicators to be met by management and the easy availability of a whole series of additional company’s highest-ranking executive play a indicators, such as customer satisfaction, bal-

Table 3 Correlation between various plans, performance indicators and remuneration

Nature and types of remuneration criteria Number of affected Share (n=86 pcs) companies %

Achievement of the result specified in the company’s business plan 17 19.8 Implementation of a project or achievement of a project milestone 9 10.5 Achievement of another objective performance indicator 7 8.1 Achievement of desired market share 1 1.1 Criteria are in place but they do not influence remuneration 1 1.1 There are no such criteria 44 51.2 Source: own calculation

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ance sheet total, various liquidity indicators, function. Consequently, given that more than project indicators, relative market share or two thirds of state-owned companies meet the other professional and financial indicators (in criterion of having an internal audit function fact, the organisations concerned routinely in place, hypothesis H4 is accepted. calculate most of these indicators). Indeed, if Essentially, organisations perform the inter- the companies took advantage of such indica- nal audit activity in three possible structures: tors, they could develop complex and objec- it can be performed by internal employees tive remuneration systems. (33.7%) or less frequently, by external agents c) On the basis of both point a) and point (17.4%), while audits performed by the share- b), the expectations defined in hypothesis H3 holder or a superior body proved to be the can be clearly refuted and the hypothesis is least likely practice (16.3%). therefore rejected. We found that instead of Although it is not possible to draw conclu- the desirable minimum 50 per cent, only 19.8 sions from the responses regarding the quality per cent of the respondents indicated that the and effectiveness of the internal audit activ- implementation of the business plan was a cri- ity, provided that the companies comply with terion considered in the remuneration of the the IIA standards, we may presume the exist- highest-ranking executive. ence of an effective and efficient internal audit function, which is deemed to be a rewarding and useful activity for the highest-ranking ex- H4 – Internal audit ecutive, for the shareholder and, indirectly, for the taxpayers. However, the picture is some- The advantages and objectives of the what less positive in view of the fact that only application of the independent internal audit 36 of the 58 companies concerned discuss function have been presented in detail above, internal audit reports at Supervisory Board in the section dedicated to the theoretical meetings. approaches. Table 4 shows practice as compared to statutory requirements and the pros associated with the function. Evidently, H5 – Publicity and civil control there is no internal audit function in place at nearly a third (32.6%) of the companies, Publication of data and reports regarding the while two thirds (67.4%) reported to have this operation of the companies and ensuring the

Table 4 Existence of an internal audit function and the method of its performance

Does your company have an independent internal audit function?

Frequency %

Yes, our owner, parent company, superior body performs these tasks 14 16.3 Yes, our internal organisational unit, employee(s) perform(s) these tasks 29 33.7 Yes, an external organisation, external agent performs these tasks 15 17.4 No, we do not have an internal audit organisation or position for this function 28 32.6 Total 86 100.0 Source: own calculation

218 Public Finance Quarterly  2016/2  studies  publicity of operation promote transparency information about the frequency of data up- and accountability, as discussed in the theoretical dates, the quality and comprehensiveness of approach above. Below, the practice of disclosures and their level of clarity for out- Hungarian state-owned companies is presented siders. as follows: 15 companies indicated that they inform The data and information published on of their work – or include in their decision- the websites of public enterprises for informa- making – local civil organisations, advocacy tion purposes vary, showing a mixed picture: groups and professional associations. This a) 15 companies (17.4%) have no website is nearly a fifth of the respondents (17.4%); at all; 17 companies (19.8%) only post the in- therefore, only one fifth of the respondent formation prescribed in the Transparency Act state-owned companies encourage civil con- and their contact details. 8 companies (9.3%) trol and engage in broad-based social consul- post only one of the two: either their contact tation on a regular basis. details or the disclosure obligation prescribed by law. These companies, taken together, account for nearly a half of the sample size (40– H6 – Risk management 46.5%), and they either do not comply at all, or comply with only the minimum disclosure The importance and necessity of identifying requirement. and managing corporate risks efficiently b) More than half of respondents (53.5%) were demonstrated above in the section share additional information about their op- dedicated to the relevant theories. Below is eration with the general public over and be- a presentation of the responses regarding the yond the minimum requirement. 5 compa- general methodology of risk management and nies (5.8%) publish the long-term strategy the conclusions drawn based on the replies. and objectives of the company. Another 10 The distribution of replies regarding the companies (11.6%) also post on their website recognition of risks is the following: the company’s procurement tenders, the selec- • 30 respondents (34.9%) thought that tion criteria of suppliers, its tender notices, their activities were typically surrounded standard contract terms and conditions and by general operational, financial and mar- contract templates. Yet another 6 companies ket risks, and there were no other factors (6.97%) also post conflict of interest informa- that implied any special risks in excess of tion regarding their senior executives. The re- those expected. maining 25 companies (29.0%) post on their • 12 companies (13.9%) of the respondents websites some or all of the details listed above. provide public services and as such, These figures suggest that more than a half they bear special risks arising from the of state-owned companies go over and be- organisation and provision of the supply, yond the minimum disclosure requirements and these risks affect a wide range of and share additional, useful information on consumers. their websites with the general public. Based • In the case of 8 companies (9.3%), the on point b), hypothesis H5 is accepted and its technical nature of the activity represents content is considered verified. the main risk factor (high risk materials, It would be important to achieve that as equipment, technology, etc.), which the many companies as possible take advantage affected companies attempt to ward off by of this possibility. The survey did not include special measures.

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• 9 business associations (10.5%) could not apply a form of fraud detection (e.g. assess the level, type and nature of the risk whistleblowing procedure, dedicated associated with their companies’ activity. fraud managers, etc.) as a special risk ma- • The remaining 27 companies (31.4%) are nagement method. characterised by complicated, manifold No other risk management tools or meth- and hence, complex risk portfolios. The odologies were reported by participants of the risk factors include – beyond those listed survey. The replies indicate that the responses above – the management of high-risk to recognised risks were rather limited and customers and the handling and storage covered less than a handful of elements. State- of special data. owned companies certainly have room for im- All this suggests that, overall, a sensitivity provement in this regard before they can take to risks may reflect a level of consciousness appropriate steps in response to their complex on the part of the participants of the survey. environmental risk exposure. In this context, More than half of these companies (54.6%) as at 31 December 2014, the following sta- have a deeper risk recognition attitude com- tistical data are available for the respondents: pared to the average, and the companies take • At 34 companies, beyond financial steps to explore, recognise, classify and man- risks, risk management principles and age the risks, in line with their operation. On procedures cover management, investment the whole, based on the above, hypothesis H6 and employee risks. can be considered verified and accepted, as • 19 companies reported to have a Risk Ma- more than a half of the respondent companies nagement Manual or Policy in force. apply a systematic risk management system • 17 respondents reported to have a risk tailored to the unique features of their respec- map and/or a list of risky activities. tive companies. • In 2014, the risk procedures of only 12 As regards the specific handling and man- companies were inspected by internal au- agement of risks, the respondents’ replies dit. point to a less positive and more complicated risk management practice. • 27 business associations (31.4%) failed to Summary, closing thoughts and reply altogether to the question about the critical comments methods applied to manage or mitigate risks. This question elicited the highest In the first half of the paper we presented the number of non-replies in the entire macro-political role of the state, and provided questionnaire among the respondents. a detailed description of the state’s role in • 46 companies (53.5%) reported to the state economy and the methods and apply unique, customised risk manage- objectives of state intervention. We pointed ment methods, manifested in a special out that the state may influence the economy operational system component (e.g. ISO in various ways, depending on the objectives 9001, COSO framework system, risk and ideals driving its actions. This role of the management systems based on special state is fundamentally determined by politics; standards, etc.). however, the decision defines the operational • 17 business associations (19.8%) apply direction of state-owned companies – that special data mining and analysis tools. constitute the national wealth of a country – • Only 3 companies (3.5%) reported to for many years to come.

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This statement provides the key to the inter- their operation. Both cases appear to justify pretation of the second chapter of the paper, the need for questioning the decision-makers which presents an analysis of the performance of state property management about efficiency criteria for the public services provided by and necessity. public corporations and businesses from the Hungarian public enterprises do not have aspects of economy, efficiency and effective- a long-term vision and their operational and ness. In this part of the paper, we described a development perspective is limited to a short number of fundamental control elements and horizon. They can only determine the direc- activities through which companies operat- tions and frameworks of their operation over ing from public funds can contribute to the the short term, looking ahead to one year or to efficient and effective operation described in a few years at best. Regrettably, this becomes the first chapter. Moreover, we presented some an obstacle to the company’s long-term devel- theoretical proposals regarding the control opment goals. of the companies concerned. Such tools and The state-owned companies concerned methods include comparative market analy- need improvement in several areas with respect sis, internal audit, the operation of a planning to objective, measurement and assurance- and reporting system, risk management and based audits and their findings. Performance the promotion of publicity and civil control measurement is incidental, risk management with respect to the operation of the organisa- is limited, and internal audit and the involve- tion. ment of the general public are seldom applied In the third part of the study, we present- tools in the operation of the companies. Step- ed our own research findings about the way ping up the application of each of these tools the topics at hand were addressed in day-to- could contribute to a stronger and more con- day practice. The research included a sample scious control of state-owned companies. of 86 state-owned companies interviewed in These factors have hopefully assisted in pro- the form of a questionnaire survey. A total viding an insight into the driving forces behind of 6 hypotheses were defined in advance, of the market role of the state, the phenomena which 4 were verified and 2 were rejected. that led to the elimination of the ideal of a ser- Based on the hypotheses and the results re- vice providing, streamlined, effective, welfare- ceived, we offered the following main criti- promoting state, the modern conditions and cal remarks: enforcement of compliant asset management The market role of state-owned compa- and the notion of accountability, based on nies shows a mixed picture in terms of their processing the results of a questionnaire-based market participation and competitive posi- survey conducted in a segment of business as- tion. Numerous firms operate under competi- sociations owned by the Hungarian State. The tive conditions, while several companies are in paper also included various examples and own a monopolistic position due to the nature of survey findings to support the proposed ideas.

Note

1 The author wishes to thank the staff members of the State Secretariat in Charge of Property Policy of the Min- istry of National Development for organising the questionnaire survey and for their valuable assistance and support, in particular, Deputy State Secretary Dr. Anita Boros and Rapporteur Dr. Ernő Tóth.

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