ReportNo. 3585-HU Hungary: Investment Issues and Options
(In Two Volumes) Volume If: Sectoral Annexes Public Disclosure Authorized
August25,1986 Europe,Middle East and North Africa Region FOR OFFICIAL USE ONLY Public Disclosure Authorized Public Disclosure Authorized
Public Disclosure Authorized Document of the World Bank
Thisreport hasa restricteddistribution and may be usedby recipients only in the performanceof their officialduties. Its contentsmay not otherwise be disdosedwithout World Bankauthorization. CURRENCY EQUIVALENTS
Currency Unit : Forint (Ft)
October 1981: Ft 35.0 = US$ 1.00 Ft 1 billion = US$ 28.57 million
June 1984: Ft 49.05 = US$ 1.00 Ft I b. = US$ 20.39 m.
March 1985: Ft 50.88 = US$ 1.00 Ft I b. US$ 19.54 m.
March 1986: Ft 46.71 = US$ 1.00 Ft I b. = US$ 21.41 m.
Hungary Fiscal Year: January 1 to December 31
Weight and Measures: Metric System FOR OMCILL USE ONLY
TABLE OF CONTENTS
VOLUME TWO
ANNEXESON SECTORALINVESTMENTS: POLICIES AND PROGRAMS
ANNIEX Page No.
I. MANUFACTURING ...... 1
A. Recent Performance ...... 1
B. Technological Development ...... 4
C. Investment Plans for 1986-90 ...... 6
D. Projects under Consideration for 1986-90 ...... 7
a. Metallurgical Industries ...... 7
(i) Iron and Steel ...... 7 (ii) Aluminium ...... 8 (iii) Other Non-Ferrous Metal Industries ...... 8
b. Engineering ...... 9
(i) Vehicles and Transport Equipment ...... 9 (ii) Telecommunications...... 0..... (iii) Other Engineering Industries ...... 10
c. Chemical Industries ...... 10 d. Light Industry ...... 11 e. Food Industries ...... 13
II. ENERGY ...... 14
Introduction ...... 14
A. Lessons of Recent Experierice...... 15
a Effectiveness of Energy Demand Management ...... 15 b. Constrained Domestic Energy Production ...... 15 c. Flexibility in Planning ...... 15
B. Sector Issues ...... 17
a. Energy Pricinr ...... 17 b. Future of Cncrgy RationalizationCredit Facility ...... 22 c. Energy Demand Projections ...... 24 d. Labor Constraints on Coal Production ...... 29
This document has a restricted distribution and may be used by recipients only in the performance | of their officialduties. Its contents may not otherwise be disclosedwithout World Bank authorization. Page No.
C. Energy Investment Program...... 31
Overview ...... 31
a. Power Subsector ...... 34 b. Coal Subsector ...... 40 c. Petroleum Subsector ...... 43 d. Energy Sector Financing ...... 45
III. AGRICUTTUR...47
Introduction ...... 47
A. Brief Overview of Hungarian Agriculture ...... 47
B. Growth and Profitability in Agriculture ...... 48
C. Agriculture in the Seventh Plan ...... 50
a. Management Reform .51 b. Wages and Incentive Proposals. 51 c. Pricing Issues .52
(i) Outputs and Inputs .52 (ii) Land Pricing .55 (iii) Recommendations .55
D. Investment Policies and Plans ...... 58
a. The Volume of Investment .58 b. Sources of Finance .60
(i) Own Resources .60 (ii) Credit .61 (iii) Subsidies/Grants .61
c. The Technical Composition of Investments in Agriculture .62 d. Investment Priorities .62
(i) Land Reclamation and Irrigation .63 (ii) Small Scale Farming .64
E. Marketing Institutions .65 AMNEX Page No.
IV. RANSPORT, COMMUNICATIONS AND WATER ...... 66
A. Inter-Urban Transport ...... 66
Introduction ...... 66
a. Strategic Considerations in the Choice of Transport Investments ...... 70
(i) Railways ...... 70 (ii) Roads ...... 72 (iii) Energy Conservation ...... 73
b. Transport Investment in the Seventh Five-Year Plan 73
(i) The Railway (MAV) Investment Plan (1986-90) ..... 75 (ii) Highway Investment Plan (1986-90) ...... 79
c. Other Transport Investment (1986-90) ...... 82
(i) Road Transport ...... 82 (ii) River Port and Shipping ...... 82 (iii) Aviation ...... 83 (iv) Private Cars ...... 83
B. Urban Transport .. 86
Background .. 86
a. Investment Proposals for the Seventh Plan .88
(i) Trolley Buses vs. Conventional Buses .89 (ii) Extension of the Budapest Metro .89
b. Pricing Policy .. 90
C. Postal Services and Telecommunications .91
General Context ...... 91
a. Investment During Seventh Plan 95 b. Main Policy Issues .. 97 ANNEX Page No.
(i) Rate of Expansion of Telephone Services ...... 97 (ii) Expansion of Telex Service ...... 98 (iii) Digital Main Telephone Exchanges ...... 98 (iv) Distribution of New Telephone Capacity ...... 98 (v) Mechanization of Traditional Services ...... 98 (vi) New Project Idea: Postal Checking ...... 99
D. Water Management ...... 99
General Context ...... 99
a. Recent Investment ...... 99 b. Finance ...... 101 c. Pricing ...... 102 d. Investment Proposals for the Seventh Plan ...... 102 e. Major Policy Issues ...... 104
V. HOUSING, CONSTRUCTION AND BUILDING MATERIALS ...... 105
A. Eousing ...... 105
Introduction ...... 105
a. The Present Situation ...... 107 b. Recent Policy Changes ...... 114 c. Weekend Houses ...... 117 d. Investment Issues for the Seventh Plan ...... 119 e. Major Policy Issues ...... 122
B. Construction ...... 125
a. Investment in the Seventh Plan ...... 125 b. Major Policy Issues: Implementation Delays ...... 126
C. Building Materials ...... 127
a. Major Policy Issues ...... 128 b. Investment During the Seventh Plan ...... 128
VI. EDUCATION AND HEALTH ...... 130
A. Education .130
Introduction ...... 130 ANNEX Page No.
a. Major Policy Issues ...... 133
(i) Facing the Secondary Bulge ...... 133 (ii) Pricing and Priorities in Education ...... 135
b. Sixth Plan Investment ...... 137 c. InvestmentsDuring the Seventh Plan ...... 138
B. Health ...... 140
Introduction ...... 140
a. Major Policy Issues ...... 141 b. Investment During Seventh Plan ...... 144
VII. TOURISM AND CULTURE ...... 147
A. Tourism ...... 147
General Context ...... 147
a. Investment in the Seventh Plan ...... 151
B. Culture ...... 153
a. Pricing ...... 154 VOLUME II
TABLES
Table Page No.
1.1 Selected Indices of IndustrialPerformance ...... 1
1.2 Gross Fixed Investment in Manufacturing,Fifth, Sixth, and Seventh Plans.. 3
1.3 Manufactuxing- Projected Investmentsby Subsector, 1985-90 ...... 6
1.4 Chemical Industry - Estimated Investment Programs, 1981-84 and 1985-90.12
2.1 Energy Producer Prices ...... 19
2.2 Consumer Energy Prices .20
2.3 ResidentialEnergy Consumption per Square Meter of Dwelling Area .21
2.4 Per Capita Energy Expenditure as a Percentage of per Capita Total Expenditure, 1982 .22
2.5 Energy RationalizationProgram Credits approved up to December 31, 1984 ...... 24
2.6 Value of Energy Savings Credits Approved up to December 31, 1984 ...... 25
2.7 Growth Rates of Final Energy Consumption by Sectors .28
2.8 Changes in Energy Intensity and GDP Elasticities .29
2.9 ElectricityConsumption Forecast.30
2.10 Structureof the Household Electricity Consumption.31
2.11 Age Distribution of Men Employed in the Energy Sector, 1981 ... 33
2.12 Distributionof Energy Investment by Subsector. 34 Table Page No.
2.13 Suumnary Energy Balance ...... 35
2.14 Power Subsector Investment Program, 1981-85 ...... 37
2.15 Power Station Refurbishment Program ...... 39
2.16 Coal Subsector Projects under Construction ...... 41
2.17 Energy Sector Investment Financing ...... 45
3.1 Real Growth Rate of Exports of Foods ...... 50
3.2 Farmgate Prices and Nominal Protection Coefficients for Some Major Commodities ...... 53
3.3 Milk Subsidy ...... 54
3.4 Agricultural Investment as a Percentage of 1974 ...... 59
3.5 Percentage of Investments by Source ...... 60
3.6 Agricultural Investments by Type of Investment, 1974-1983 ..... 61
4.1 Freight Traffic by Mode of Transport, 1960-83 ...... 67
4.2 Public Passenger Transport, 1960-83 ...... 68
4.3 An International Comparison of Motor Vehicles per capita, 1980 ...... 69
4.4 Transport of Goods by Types of Traffic ...... 71
4.5 Projected Modal Split, Freight and Passenger Transport, 1980-90 ...... 74
4.6 Transport Investments, Sixth, and Seventh Plan ...... 76
4.7 Railway Investment Plan, 1986-80 ...... 77
4.8 Projected Road Investments ...... 80
4.9 National Road Investment Plan (1986-90) by Major Work Categories ...... 81 Table Page No.
4.10 Hungarocamion - Actual and Planned Investments ...... 84
4.11 Planned Investment in River Ports and Shipping ...... 85
4.12 Budapest Transportation Authority: Public Transport Revenues from Passes, Pass Prices and No. Sold Passes ...... 87
4.13 Proposed Urban Transport Program, Seventh Plan ...... 88
4.14 Budapest Transport Authority: Relative Costs of Urban Passenger Transport, by Mode ...... 90
4.15 Hungarian Post, Revenues and Assets, 1983 ...... 93
4.16 Hungarian Post, Profit Rates per Activity, 1983 ...... 93
4.17 International Comparison Telephones ...... 94
4.18 Hungarian Post, Sixth and Seventh Plan Investment Programs ... 96
4.19 Public Utilities Connected to the Housing Stock ...... 100
4.20 Investments in Water Management During Seventh Plan ...... 103
5.1 Housing Construction, Demolitions and Stock ...... 106
5.2 Characteristics of the Dwelling Stock ...... 108
5.3 Household Expenditures on Housing ...... 110
5.4 Household Expenditures of Working Class Households by Income Groups ...... 111
5.5 Occupied Dwellings by Number of Rooms, Equipment, and Comfort ...... 112
5.6 Housing Ownership and Characteristics Based on the 1983 Household Survey ...... 113
5.7 Occupied Dwellings by Year of Construction and by Surface Area ...... 114
5.8 Weekend Houses, 1983 .118 Table Page No.
5.9 Socialist and Private Housing Construction, 1975-83 ...... 120
5.10 Dwelling Construction by Type of Construction Enterprise ..... 121
5.11 Number, Surface, Cost and Construction Time of Flats Built by State Owned Construction Companies ...... 127
5.12 Building Materials: Tentative Project List ...... 129
6.1 Secondary Students by Type of School .131
6.2 Students of High-Level Education Institutions by Educational Branches, 1983 . 133
6.3 Projections for 1983-1990 of Primary and Secondary School Age Population.134
6.4 Investment in Education and Cultural Affairs, Sixth and Seventh Plans .135
6.5 Educational Consequences of Alternative Seventh Plan Scenarios.139
6.6 Age-SpecificDeath Rates, 1969-70 and 1982 .142
6.7 Male Death Rate, Ages 50-54 and 55-59, Various Countries 142
6.8 Leading Causes of Death, Hungary 1982 and Austria 1981 .143
6.9 Investmentsin Public Health Sector During the Sixth and Seventh Plans .45
7.1 Tourism - Visits by Foreigners ts,Hungary .148
7.2 InternationalTourism by Countries in 1983 Visits by Foreigners to Hungary .149
7.3 Tourism - InternationalComparison .151 VOLUME II
FIGURES Page No.
Fig. 2.1 Energy Consumption & Production ...... 16
Fig. 2.2 Industrial Energy Price Indexes ...... 18
Fig. 2.3 Consumer Energy Prices ...... 21
Fig. 2.4 Energy Intensity ...... 28
Fig. 2.5 Electricity Intensity ...... 33
APPENDICES
Appendix 1 The Cost of Capital to an Enterprise ...... 156
Appendix 2 The Implicit Premium on Export Promotion Credit ...... 161
Appendix 3.1 Major Investment Projects Completed, 1983-84 ...... 163
3.2 Major Investment Projects Started before 1983, and as yet Uncompleted ...... 165
3.3 Major Investment Projects started in 1983 or 1984 .... 169
Appendix 4.1 GDP by Source in Real Terms ...... 170
4.2 GDP by Expenditure in Real Terms ...... 171
4.3 Gross Fixed Investment ...... 172
4.5 External Trade ...... 173
Appendix 5 The Seventh Five-Year Plan of the Hungarian National Economy ...... 174
The Scope of the Act ...... 174 PART ONE
SECTION Page No.
I Main Objectives of the Plan ...... 175
II Scientific Research and Technological Development .... 181
III Industry and Construction ...... 182
IV Agriculture, Food Processing and Forestry ...... 188
V Production Infrastructure ...... 191
VI Domestic Trade and Tourism ...... 194
VII International Economic Cooperation and Foreign Trade . 195
VIII Employment .197
Ix The Standard of Living and Living Conditions of the Population ...... 198
X Regional and Community Development ...... 202
xI Environmental Protection and Nature Conservation Z.....03
XII The Principles of Finance and Price Policy ...... 205
PART TWO
XIII National Economic Planning and Direct State Decisions which Implement the Plan ...... 206
xIv The Economic Regulatory System ...... 208
xV Council Management and Regulation ...... 211
XVI Principles of the Development of the Decision-Haking and Organizational System ...... 212
XVII Concluding Regulations ...... 212
mAP ...... 213 ANNEXI
MANUFACTURINGI'
A. Recent Performance
1.01 Industrial performance in Hungary in recent years has been characterized by considerable buoyancy under relatively adverse circum- stances. 1979 was a peak year for investments and imports; after that, and particularly since 1982, all foreign exchange expenditures have been restricted,especially for capital goods which were cut back quite severely. Raw materialsand semi-finished products, however, were imported fairly freely in order to maintain utilization of installed capacity, particularly for exports. The volume and value of industrial output were thus able to grow each year after 1980 and so did industrial exports as well as the productivity of labor. The table below provides some illustrative indices. The year 1980 witnessed significant declines in all measures except labor productivity; but thereafterthe industrial sector has recovered ground steadily in spite of the continuing investment constraint. In cumulative terms the increases in output, export sales and productivity are quite substantial, at about 7, 24 and 28%, respectively.
Table 1.1: SELECTED INDICES OF INDUSTRIAL PERFORMANCE (Base: 1979 = 100)
1984 Year 1980 1981 1982 1983 (Estimated)
IndustrialInvestment 88.6 81.7 81.8 80.2 76.9 Volume of Production 97.9 100.6 103.0 103.9 107.0 Value of Sales 97.0 98.8 100.7 101.0 104.2 Exports 99.5 99.3 104.7 112.2 123.8 Productivity/man-hours 100.6 105.8 115.6 120.5 128.6
i' In Hungary, mining and electrical power generation are classed as "industrial." Energy investment is discussed in the next chapter, but general statements about industry follow Hungarian usage, unless otherwise stated or clear from the context. 1.02 The investment profile has also undergone quite substantial changes during these past five years. Major State investments in the industrial sector which had been started in earlier years have mostly been completed; only one now remains to be completed in 1987, i.e., the Danube Metal Works' Coking Plant. The Government intends that industrial enterprises should take fuller financial responsibilityfor their future investments,without State budget support by way of grants or subsidized loans. They will be expected to rely on their own retained earnings to a much greater extent. They will, of course, need and be eligible for loans, but these will come increasingly from the National Bank of Hungary on commercial terms rather than from the State DevelopmentBank on subsidized terms.
1.03 Table 1.2 shows how the pattern of subsectoral investment has been changing since the Fifth Plan. Energy and mining industry investments rose slightly,while cuts were imposed on all manufacturing subsectors, 1983 and 1984 witnessed a cut of about lOS each year in manufacturing industry investments. Most large projects which were in hand at the start of the Plan period have been completed. Some projects were stretched out over longer periodsof time, wherever this could be done without adversely affecting principaloutputs and financial performance;and a few were deferred or abandonedin view of changed economic circumstances. There has so far been relativelylittle change in the relative subsectoral shares within manufacturing.
1.04 The program for compression of investmentsin the manufacturing sector has been managed with impressive efficiency. As noted earlier there have been significantgains in labor productivity during the same period and export sales have grown rapidly. The record of profits earned is not as buoyant. In nominal terms the profits of manufacturing enterprises have grown from an average of about Ft 71 billion for the three years 1978-81 to over Ft 75 billion for the three years 1981-83 and Ft 82 billion in 1983. However, the financial results of industrial enterprises would have to be interpreted in the context of price regulations and subsidies before they can be treated as significantindications of economic efficiency.
1.05 The average completion time for manufacturing industry projects has generallybeen less than 3 years, with smaller projects being implemented in less than 2 years. The Mission was told that the pattern of implementation of manufacturing industry projects has not changed to any significant extent in the past three years; the time taken for completion of civil works has been reduced to some extent because of reduced pressure on the construction industry,and speedier deliveries of capital goods from abroad (because of the recessionin many developed countries) have enabled earlier completion in some cases.
1.06 The decrease in real value of industrial investments through four out of the five previous years has had an adverse impact on the relationship between the Gross and Net value of Fixed Assets of enterprises. The latter has declined from 68X of Gross Value in 1980 to 65S in 1984. The composition of net value has also changed, on account of the more rapid depreciation of capital goods than of buildings and structures. The technologicalcapability of Hungarianindustrial enterprises,which is generally recognized as inferior to that of comparable West European enterprises, has probably slipped further Table 1.2: GROSS FIXED INVESTMENT IN MANUFACTURING, FIFIH, SIXTH AND SEVENTH PIANS (Ft. b. 1981)
Av. Av. Av. 1981- 1986- 1976-80 1981 1982 1983 1984 1985(a) 1985 1990(b)
Mining 8.7 9.4 9.4 10.7 11.9 10.6 10.4 9.6 Elec. Energy 11.8 12.9 13.0 13.9 13.2 13.0 13.2 12.4 Manufacturing Netallurgy 6.8 7.3 5.3 5.3 4.9 3.5 5.3 3.4 Engineering 13.8 10.6 10.6 10.3 9.3 9.6 10.1 13.6 Bldg. Materials 4.8 2.5 2.2 2.4 2.2 2.6 2.4 2.8 Chemical Ind. 11.7 8.9 10.5 9.9 8.8 9.1 9.4 10.0 Light Ind. 7.0 5.1 6.7 4.9 4.4 4.1 5.0 4.0 Misc. Ind. 0.7 1.0 0.8 0.5 0.4 0.4 0.6 0.6 Food Ind. 10.7 8.2 7.5 6.5 6.8 5.7 6.9 7.0
Total, Mfg. 55.5 43.6 43.6 39.8 36.8 35.0 39.8 41.4
Total, Ind. 76.0 65.9 66.0 64.4 61.9 58.6 63.4 63.4
Mfg. as S Ind. 73.0 66.2 66.1 61.8 59.5 59.7 62.8 65.3
Percent, Total Manufacturing
Metallurgy 12.3 16.7 12.2 13.3 13.3 10.0 13.2 8.2 Engineering 24.9 24.3 24.3 25.9 25.3 27.4 25.4 32.9 Bldg. Materials 8.6 5.7 5.0 6.0 6.0 7.4 6.0 6.8 Chemical Ind. 21.1 20.4 24.1 24.9 23.9 26.0 23.7 24.2 Light Ind. 12.6 11.7 15.4 12.3 12.0 11.7 12.7 9.7 Misc. Ind. 1.3 2.3 1.8 1.3 1.1 1.1 1.6 1.4 Food Ind. 19.3 18.8 17.2 16.3 18.5 16.3 17.5 16.9
Total, Mfg. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
(a) Planned.
(b) Indicative forecast only (middle plan scenario). in consequence. Hungarian manufactured exports have, in the past, been directed largely to CMEA and developing countries; they could not easily compete in the more demanding and competitive developed western countries. Now there is widespread recognition of the need to gain greater shares in developed country markets, at least for some selected manufactured products. In this context, the gap in technological capability has to be narrowed. In 1983 the Hungarians identified some fine chemical and pharmaceutical industries for modernization and export-oriented development. Depending on the success of these efforts and the availability of resources in the next four years, other enterprises which hold similar promise for increased exports to Western markets will also be developed. (We discuss export prospects in Chapter II, paras. 2.28-2.38, Vol. I, and export promotion efforts in Chapter IV, paras. 4.27-4.45, Vol. I.)
B. Technological Development
1.07 A number of issues which are vital to the future growth of industries in Sungary all come together under the umbrella issue generally labeled "technologicaldevelopment". For example, there is the question of quality improvement now considered vital for a number of metallurgical and engineering industries. In the 1950s, Hungary was identified (among Socialist countries) as specially suited for development of these industries because of existing capacity;and during the 1960s and 1970s it developed substantial further capability,with creditable export performance. Enterprises tended to develop along lines of comparativeadvantage, installing technically efficient capacitieson a selective basis and importing intermediatesand components as necessary to produce complete products economically for domestic as well as export markets. Their exports were largely directed to other CMEA countries, however,often under multi-year agreements. This facilitated high levels of capacityutilization and economic production,but also led to lack of pressure or incentives for exploratory development and experimentation. Over time Rungarianoutput began to lose comparative advantage and many products comparedunfavorably with those of market economies. The enterprises most affected or threatened by this trend are naturally anxious to gain access to modern Western technology to update their product lines as well as expand. They wish to import Western technology and equipment as well as to export output to Western markets, to keep their trading account in reasonable balance. Modernization is important not only for future expansion but even for maintaining their position in their traditionalCMEA markets, for if they fall too far behind Western products in technical features and quality, competitionmay cause them to lose their CMEA market shares.
1.08 Some Hungarian enterprises have a successful track record of use of licensed technology from USA and West European firms; but they have not apparentlysucceeded in developing arrangements for continuing cooperation and exchange of information on process technology and know-how, such as are found among U.S., West European and some Japanese enterprises. To promote such continuingrelationships, it would be necessary to develop arrangements for mutual advantage, through some form of profit or market sharing. The Mission is of the opinion that the issue of product patents deserves further considerationby the Hungarian authorities. 1.09 Some parts of the chemical industries, especially pharmaceuticals, face a somewhat different situation. They have a very substantial scale of research and development activities;and the effectivenessof R&D work is also impressive,as reflected in the large number of patents filed each year, new products introduced to markets and the sustained sales growth related to innovation. Nevertheless, there is a felt need for improvements in testing capabilities,standards of control of purity and uniformity, which can only be achieved through use of highly sensitiveand sophisticatedequipment available in Western Europe and the U.S.A. In pharmaceuticals these needs are being met under the recently signed World Bank loan (2511-HU). Export sales would also be helped by intensified participationin testing activities in highly developedcountries leading to the certificationof products to internationallyrecognized standards. The industry is actively seeking collaborationwith leading internationalfirms and institutionsin its drive for modernizationand expansion.
1.10 Improvement in energy efficiency is motivated primarily by the increasedcost of energy which is a worldwide phenomenon. The pressure for efficiencybuilt up slowly because under CMEA pricing arrangementsHungary had access to relatively cheap Russian petroleum crude and products for several years after the worldwide price increases in 1979. Now the benefits of those pricing arrangementsare declining and it is foreseen that in future years Hungary may actually suffer some disadvantagein comparison with West European countries in the pricing of imported energy. High priority is attached to energy saving investments in the allocation of domestic credit; and the first World Bank project for support of energy conservation investments (2317-HU) has met with considerable success, and it is expected that there will be further similar collaboration. But only limited gains can be achieved without substantial investments in fairly basic technologicalmodernization, especially in metallurgical, mechanical engineering and machinery industries. In these industries the energy efficiency issue is closely related to technological modernization, changes in product specifications and quality improvement. During the past several years resource constraints have compelleddeferment of ambitious modernization projects; but several enterprisesnow feel that further postponement may entail far reaching loss of export market shares. As the foreign exchange constraint is real and is expected to continue for sometime, imaginative solutions will have to be found, perhaps involving collaborationwith foreign firms for import and export of selected components and sub-assembliesso that markets and profits may be maintained as best as possible until necessary modernization of plant and equipmentfor full-line improvementcan be undertaken.
1.11 The World Bank is currently collaborating with the NPO and Ministry of Industryin an enterprise-levelstudy of issues involved in further technological development in selected branches of engineeringand light industries,and also in plastics manufacturing. This work is expected to provide insights into industry-wide technology issues, review the infrastructure and resources supporting technological innovation, identify gaps in the framework and constraints,and propose measures for strengthening capabilitiesfor future technologicaldevelopment which will be part of a program of industrial restructuring to be supported by the Bank. C. Investment Plans for 1986-90
1.12 The Government intends to have fev, if any, Major Central Investments in the manufacturingsector, although the issue is still under discussion. This would mean that the pattern of industrial investment would be determined by market opportunities, as perceived by directors of autonomous enterprises, and that any projections of likely investment in the Plan period vill be merely indicative. Analyses of relative competitiveness in a variety of industrialsubsectors being undertaken jointly by the National Planning Office and the World Bank, however, should shortly provide a better assessment of the likely areas of industrial expansion than can be attempted in this report.
1.13 The subsectoral projections of Table 1.2 above are therefore extremely tentative. However, the NPO has taken note of the proposals submittedby enterprises to the NBH for credit during the next Plan period, and a sub-sectoralsuimmation of these which corresponds to the medium growth scenario,is presented in Table 1.3.
Table 1.3: MANUFACTURING- PROJECTEDINVESTMENTS BY SUB-SECTOR, 1985-90 (Ft. b. current prices)
1984 1985 1986-90
1. Metallurgy 5.5 4.3 20 2. Machinery 1.7 1.8 15 3. Vehicles 3.5 3.7 32 4. Electrical Engineering 1.0 1.1 9 5. Telecomm. 2.6 2.8 24 6. Precision Engineering 1.1 1.2 10 7. Metal Fabrication 1.1 1.1 10 (Engineering - 2-7) (11.0) (11.8) (83-88)'' 8. Building Materials 2.5 3.2 21-24 9. Chemical Industry 10.0 11.2 85 10. Wood Processing 0.6 0.6 5 11. Paper and Printing 1.6 0.8 8 12. Leather, Fur, Shoes 0.6 0.6 3 13. Textiles 1.5 1.4 9 14. Clothing 0.5 0.5 3 (Light - 10-14) (4.8) (3.9) (29-31) 15. Miscellaneous 0.5 1.7 3-5 16. Food industries 6.9 7.0 46-48
Total Manufacturing 41.2 43.1 290-300'
A' The fact that the individual components do not add to the totals is a reflectionof the absence of an agreed program, and the fact that all the intentionsof enterprises will not be feasible in the light of resource constraints. 1.14 More detailed projections for 1986-90 will not be available until the end of 1985. The informadtionsupplied by enterpriseshas not yet been adequatelyevaluated and opinions of the Ministry of Industry apd other concernedorganizations have not yet been received. The only clear reaction was that the total magnitude of credit that was likely to be made available in 1985 would be of the same order as in 1984, i.e., about Ft 23 billion for the whole economy; and that for 1986-90, the annual provisions were likely to increaseonly by the average percentage growth to be allowed for credit expansion,allowing for annual GDP growth and inflation. In real terms, very little expansion of credit for industry is envisaged. Ministry of Industry ataff indicated that on the basis of data received by them from enterprises, the indicative plan figures were likely to represent minimum needs rather than economically desirable levels.
1.15 Ministry staff also expressed the view that if enterprises were to be expected to finance growth out of retained earnings plus Bank credit, then, taking account of NBH projections for c-ed-it to industrial enterprises, availableresources would be-insufficienteven for the NPO's projected level of investment. This belief is founded on (a) the past profitability record of enterprises;(b) changes in gross earnings reflecting growth in domestic and export sales; and (c) projections of changes in retained earnings in response to changes in the taxation system. Ministry staff therefore felt that there will be need for expanded access to credit for enterprises which have economicallysound and financially profitable projects ready for implementation,as well as a free equity base for additional borrowing.
1.16 It is significant that the most frequently mentioned measure of the creditworthinessof projects for substantial expansion or diversificationin the enterprisesvisited by the Mission was a payback period of 3 or 4 years. A 15S financial rate of return has in the past been conventionallyconsidered as adequate for NBH approval; but the Mission was told that for 1985 and future years the NBH would expect to apply a significantly higher figure as the cut-off level. In these circumstances,if the ex ante rates of return projectedfor new investments by enterprises are reasonably realistic representationsof what would be achieved ex post, there may indeed be a good case for a more liberal credit policy for industrial sector investments.
1.17 The Government is expecting that new tax incentives will stimulate interenterprisetransfers of surplus funds, thus meeting some of the demand for investmentfinance on the part of firms which can promise higher than average returns. Although new financial instrumentssuch as enterprise bond issues may eventually provide a significant share of investment funds, it is not certain that their importance will grow sufficiently rapidly to make up for a shortfall of bank credit during the next Plan period.
D. Projects Under Considerationfor 1986-90 a. Metallurgical Industries
1.18 (i) Iron and Steel. The iran and steel enterprises have large plans involvingmajor modernization of plant and processes; but there is a realistic recognitionthat funds will not be available for all projects during the next - 8 - several years. It is intended to reduce material and energy consumption, keeping current production either at its oresent level or even reducing it (in view of world wide over-capacity in the industry) while increasing the productionof items with a higher value-added. The largest project of this subsectorin the plan period is the coking plant at Dunaujvaros which was started during the current plan period (1982) and is scheduled for completion in 1987. About Ft 2.2 billion will had been spent on it by the end of 1983; a further Ft 1.6 billion will have been spent in 1984 and about Ft 5.2 billion remains to be incurred during 1985-87.
1.19 There are several small projects envisaged for the Lenin and OZD Steel works at a total cost of about Ft 6-7 billion which will have to be individuallyevaluated for investment decisions. Several of these will probablymerit implementationas they are essentially of a cost-saving nature and are likely to be very profitable; but Industry Ministry staff could not provide any detailed financial data for them to the mission. The Ministry of Iadustryhas recently prepared three studies, financed by the World Bank, to make recommendationson the strategy for the development of iron and steel. road vehicles, foundry and forge industries.
1.20 (ii) Aluminum. The Hungarian Aluminum Trust is a large vertically integratedenterprise with its own bauxite mines, alumina production, and facilitiesfor smelting, and the production of semi- and final products in several separate locations. Limited smelting capacity is viewed as a bottleneck,as Hungary currently produces only about a third of its aluminium metal domesticallyand obtains the other two-thirds from the Soviet Union, in exchange for alumina, under a tolling contract (which will continue in the Seventh Plan). There is, however, clear recognition that installationof new smelting capacity is not a priority for the Seventh Plan Period, as the profitabilityof a new smelting facility at current costs of plant and prices of metal would be marginal if not negative; and the electricity required would also be too expensive if the investment in electricity production is allowed a reasonablereturn. Enterprise management stressed the need for investment of about Ft 2 billion in development of bauxite reserves during the Plan Pe_iod. It also has a long list of relatively small projects, the cost of which would add up to another Ft 10 billion. There would be some increase in output of semi- and finished products, but the bulk of investments would be for cost reduction,materials and energy saving, environmental improvement, computerizationof control and management systems, etc. Enterprise profits and a limited amount of Bank loans, in line with the enterprises' past record of bank credit, are expected to provide sufficient finance for these projects. The Ministry of Industry is generally supportive of the investment strategy of the Trust; but it is not yet clear whether this strategy reflects a hard-headedmaximization of profits on available resources or a nmore traditionalabsorption of retained earnings within the enterprise for a reasonableeconomic return. If the enterprise had a truly free hand for the reinvestmentof its retained earnings in pursuit of higher profit, either within the enterprise or elsewhere, a different strategy might well emerge. Such a possibilityneeds to be investigated.
1.21 (iii) Other Non-Ferrous Metal Industries. Orly a few small project proposals,which would require between Ft 0.4 and 1.0 billion during the Plan Period for implementation,have been received by the Ministry from the - 9 - concernedenterprises; and the lower figure is likely to be the one to be approved finally.
1.22 The total cost of projects for metallurgical industries, not counting the possibilityof a new aluminum smelter, is thus likely to be in the range of Ft 27-32 billion at current prices. The cost of a new aluminum smelting facility is estimated at 15.0 billion in 1985 prices. These figures are higher than those in Table 1.3, and significantly larger than indicated for metallurgy in Table 2.20 (Vol. I). Investment choice in this sector will have to be carefully evaluated, both as to direction and timing. b. Engineering
1.23 (i) Vehicles and Transport Equipment. Investment plans for this subsectorare dominated by the RABA works, which manufacture: front and rear axles for trucks and buses; diesel engines; heavy-duty commercial vehicles, agriculturaltractors and implements;poultry farming equipment; and some special purpose machines, chiefly for own requirements. The RABA complex has developedquite rapidly since the late sixties, with significant participation in the CMEA integration program, which enabled it to install an economic scale of production for a number of products. For example, it manufactures heavy rear axles, which are used in Hungarian IKARUS buses as well as exported to the Soviet Union; front axles for IKARUS buses as well as other Hungarian commercialvehicles are imported from the Soviet Union. The investment programof RABA works for the Seventh Plan Period envisages expenditure of Ft 12.7 billion. The IKARUS Bus works have separate proposals for about Ft 7 billion; the CSEPEL works and other manufacturers of components and spare parts have proposed investments that add up to about Ft 10 billion more. The total cost of proposals under consideration- 29.2 billion - is within the indicativefigure of Ft 32 billion in the Plan scenario for "moderate" growth.
1.24 Some major issues apparently need to be resolved for rational further developmentof this subsector. Since the late 1960s, Hungary has made very substantialinvestments in it, and has achieved quite significant technologicalprogress. However, in the past five years the industry has not been able to keep up with modern developments in Western Europe and faces real problems in its efforts to develop exports in convertible currency markets. CMEA integrationprograms have provided a stable demand for some products; but even in these markets there is now growing pressure for modernization. The industryneeds substantial new investments to maintain its share in the CMEA as well as to develop exports in convertible currency markets, which have accepted some products on a tentative basis, but in the constrained resources position for the Seventh Plan Period there is severe competition from other subsectorswhich may be less capital-intensiveand also more profitable in the short-to-mediumterm. In the circumstancesthere will be need for a highly selectiveapproach to further development. The scope for foreign investments to develop some plants which can cater to convertible currency export markets advantageouslyshould be investigatedparticularly. Hungary already has a track record of use of West European and American licenses for a variety of heavy engineering processes and products; and it has also exported some products on a limited scale to Western Europe and the USA. If it can now expand these as well as CMEA exports by attracting foreign investments in key areas, it may be able to develop a sounder economic base for the industry in a relativelyshort time. - 10 -
1.25 (ii) Telecommunications. After many years of serious under-investmentin telecommunicationservices and products, an ambitious long-termdevelopment program (to the year 2000) was prepared in 1983 for projected investments in the order of Ft 250 billion. This is probably too ambitiousa goal, in view of the total resources available for investment. For purposes of the Seventh Five-Year Plan the NPO Las indicated a tentative provisionof Ft 24 billion for telecommunicationindastries (not including services). The main components of this investment program would be: (a) new electronictelephone exchanges; (b) instruments,cables, wires, etc., for telephonesystem expansion; (c) computer technology and related products development;(d) consumer electronic equipment; and (e) television equipment. There are some complicated issues, however, regarding access to modern Western technologyin these fields, which have yet to be resolved before firm decisionscan be made for investments to be implemented during 1986-90.
1.26 The Hungarian telecommunicationsindustry has a long tradition and producesabout 85%-90Z of the value of presently used equipment. Computer technologyhas also made substantial progress in recent years. Prima facie, there appears to be reasonable likelihoodof successful implementationof projects that may be undertaken for implementationduring 1986-90; but before any major investments are approved and financed they would have to undergo appropriatescrutiny and evaluation, and be expected to yield commensurate economic returns.
1.27 (iii) Other Engineering Industries. Non-electrical and electrical machinery, precision engineering,metal fabrication and other miscellaneous engineeringindustries have an indicative provision of about Ft 44 billion in the NPO's indicative plan for 1986-90. This is a very substantial share of the total sectoral provision; and some of the investments may also have a bearing on the developments envisaged for the transport and telecommunication industries. The National Planning Office, The Ministry of Industry, the State office for Technical Development and the National Bank of Hungary are currentlyengaged in an exercise, in close collaborationwith World Bank staff in the Industry Department, for detailed examination of selected product groups and enterprises, with a view to identifying the products which should receive priority attention in a restructuring program, determining the requirementsfor physical restructuring, identifying teehnological constraints and potential areas for improvementand assessing the possible impact of economic incentives (current and intended) on concerned industrial enterprises. The findings of this exercise are likely to be available for consideration(by the Government and the World Bank) by mid-1985 or shortly thereafter, and are expected to provide a basis for designing a Five-Year restructuring program to enhance productivity and competitiveness in selected branches and which would then constitute priority elements of the investment program as a whole. c. Chemical Industries
1.28 Since 1960, when chemical industries were identified by the Governmentfor rapid development, this subsector has made very substantial progress, to become the second largest in terms of value of production, value added and productive fixed assets. It also accounts for about 16% of Hungarianexports and 26% of imports. Since 1978-79 the rate of growth has - 11 -
had to slow down significantly as a result of world overcapacity for some products (fertilizers,petrochemicals) and domestic stabilization policies. Neverthelesschemical industries account for about one-sixth of current annual industrialinvestment.
1.29 For the Seventh Five Year Plan the NPO has projected investment of Ft 85 billion in current prices for chemical industries. A World Bank (IndustryDepartment) mission reviewed development plans for this subsector in 1984 and prepared a draft report (No. 5330-HU dated November 9, 1984) which concludedthat beyond the plant capacities required to meet domestic demand, Hungary holds no medium or long-term advantage in further developing its "coimodity chemicals" industry; but that efforts should be intensified to diversify the industry towards (a) higher value-added fine and specialty chemicals; (b) the processing of presently exported petrochemical materials (olefinsand aromatics) into fine chemicals with good export prospects, intermediatesand some standard chemicals for domestic use; and (c) restructuringof the plastics processing industry. There would also be a case for restructuringthe fertilizer industry to conserve materials and energy and reduce production costs.
1.30 Investment proposals of the major chemical sector enterprises for the period 1985-90 (regardlessof whether they had been cleared for inclusion in the Seventh Plan or not) were reviewed by the Bank mission; these involve a total cost of about Ft 56 billion compared with about Ft 42 billion actually investedin 1981-84. (See Report No. 5330-HU for details.) They suggest a significantshift away from refineries and major petrochemicals (see Table 1.4). Additional investment proposals, e.g., for petro-chemical products, are understood to be under consideration in several enterprises, but detailshave not yet been made available. d. Light Industry
1.31 Light industries - i.e. wood and furniture products, paper and printing,textiles and clothing, footwear and leather goods etc. - account for about 13% of Hungarian industrial production (including mining and electrical energy),but being relatively labor-intensive,provide about 20% of industrial employment. The share of light industry in industrial investment (in the socialistsector) has been much lower - it averaged 9.21 during the Fifth Plan period and 7.9% during the Sixth. As a proportion of manufacturing investment, it has fluctuated with no clear trend - it averaged 12.6% in the Fifth Plan and 12.7% in the Sixth. For these industries, individual investmentsare often small, so prior warning of them several years in advance is less likely than in heavy industry. Preliminary estimates of likely enterpriseinvestment during the Seventh Plan have, however, been made by the NBI; they project that investment in light industry will fall slightly in real terms and will be only about 10% of total manufacturing investment, a reflectionof relatively low profitabilityin this sector. Most of the investmentanticipated by NBH is of a modernizing nature rather than concerned with capacity expansion, although substantial expansion is expected in paper packaging,and also in higher quality furniture for CMEA markets. Some capacityexpansion is expected in leather manufacturing, where Hungarian export performance has been relatively good. - 12 -
Table 1.4: CHEMICALINDUSTRY - ESTIMATEDINVESTMENT PROGRAMS,1981-84 AND 1985-90 (Ft m.)
Actual Planned b/ 1981-84 a/ 1985-90 Value Value Z
Refineries 10,951 25 1,575 3 Fertilizers 9,140 16 Plant Protection 4,929 11 520 1 Inorganics.' 1,780 3 Basic Petrochemicals Plastics/Syn.fibres 14,138 37 6,462 12 Intermediates 5,288 d/ 9 Pharmaceuticals 8,026 18 9,670 17 Plastic Processing 1,979 4 8,880 16 Rubber Processing 1,684 4 710 1 Fine/SpecialtyChemicals 503 1 11,894 22
Total 42,210 100 55,919 100
Actual spending during the period 1981-84, plus cost estimates for the LLDPE plant (US$140 million). Excluding investments in R&D equipment and town gas manufacturing.
' -Excludingincremental working capital and interest during construction.
C* rEssentially- chlorine, caustic soda, industrial gasses.
d/ InacludingMDI.
Source: Actual - NBH Planned - Enterprises
1.32 The mission was not able to study either opportunities or obstacles to greater trade success in these industries. Obviously there will be many lines of production for which Hungarian wages are too high to enable her to compete successfullywith Asian producers in third markets. On the other hand, it might have been expected a priori that it would be in light industry that a country with much lower wages than neighbouring ones, and no obvious comparativeadvantage in energy-intensiveor natural-resourcebased industries,might compete effectively. The reasons for Hungary's disappointmentsin these industries,and the issue of whether they can be remedied,deserve more attention before accepting too readily the apparent judgment of the market that these activities are only marginally profitable in Hungary. - 13 - e. Food Industries
1.33 The Hungarian food industry produces around 131 of the gross value of industrialoutput (including mining and electrical energy) and employs about 132 of both the industrial labor force and of the value of fixed assets. Investmentaveraged about 19.3Z of manufacturing investment in the Seventh Plan and about 17.52 in the Sixth, which represented a fall of about one-third. The National Planning Office expects only a slight increase in investmentin real terms by the industry during the Seventh Plan, and a slight furtherfall in its share. In contrast, the Ministry of Agriculture and the Food Industry forecasts an increase in 28Z over the Sixth Plan - from Ft 34.1 billion to Ft 43.7 billion (in 1981 prices). This would still be less than its Sixth Plan investment (Ft 53.9 billion). Under these forecasts investment in the meat industry would be Ft 7.7 billion, an increase of 54% over Sixth Plan levels; investments in milling would be Ft 8.2 billion, an increase of 611 over the Sixth Plan, and investments in the preserving industry would be Ft 5.5 billion, an increase of 311. These are industries which have a considerableactual or potential export role. Since it is unlikely that investmentsin any part of the food industry will be large enough to be treatedas Central investment, this wide difference in projected investment is not of immediateoperational significance,and the mission has not been able to investigateits causes. Nevertheless insofar as they represent significantlydifferent perceptions of prospects, and especially external prospects,for what is an important Hungarian export industry - and one whose future is greatly influenced by such policies as agricultural pricing - it is of great importance to examine more thoroughly the issues at stake, and the potentialimpact of alternative policies. - 14 -
ANNEX II
ENEBGY
Introduction
2.01 Energy policy in Hungary evolved during the 1970's from supplying the needs of a capital intensive (and energy intensive) industrial investment program, mainly through importing oil and natural gas, to implementing energy demand management measures to reduce energy sector investment and energy imports. During 1970-78 , abundant supplies of cheap oil and gas from the Soviet Union encouraged the substitution of these fuels for domestically produced coal, so that the share of coal and solid fuels in gross domestic consumption of energy fell from 53Z in 1970 to 31Z in 1978. Energy prices c'mmnged little from the levels of the mid-1960's. Gross consumption of energy -nd energy imports grew during this period at 4.1S p.a. and 6.6S p.a. respectively. By contrast, domestic production of primary energy increased sluggishly at only 1.3S p.a. The power and district heating subsectors became increasingly depecdent on imported oil and gas as major dual-fired power stations were implemented (e.g. Dunamenti 6x215 MW, Tiszai 4x215 MW) and district heating systems were increasingly supplied from oil/gas fired boilers with no associated electricity production.
2.02 In 1976, the Bucharest formula which set prices of energy (and other commodities) traded within CMEA countries was changed so that prices were set equal to a 5-year moving average of prices in the convertible area. The hope of Hungarian planners that Hungary could be insulated from the increases in world energy prices that had taken place was shattered. A consensus began to grow that structural adjustment was required in the energy sector.
2.03 The 1979-80 crisis affecting the external balance of the economy and limits to the supply of Soviet oil and gas precipitated a major shift in energy pj-Liey. It became obvious to the Government that the economy could sust;.inne-ber the level of investment needed to meet the rapidly growing dem.nd for energy (e.g. in electricity generation), nor the associated increase in energy imports.
2.04 The first element of the new policy was to cut energy investment and imports by reducing the rate of increase in energy demand. This was achieved primarily iy increases in the prices of energy to consumers other than households and public services, supported by a line of credit for energy rationalization investments, a system of permits for energy consumption, improved inspection of c'asumers' facilities and an awareness campaign. The second policy element was to increase, or at least maintain, the production of domestic energy, especially coal, oil, gas and nuclear energy. - 15 -
A. Lessr s of Recent Experience a. Effectiveness of Energy Demand Management
2.05 The first lesson of recent experience is that energy demand manage- ment is an effective means of cutting energy sector investment. Gross consumption of commercial energy, which increased at an average ratrv 4.1X p.a. during the period 1970-78, increased by only 2.5X in total betw'-=n1978 and 1984, and is projected by the Government to increase at an average rate of 1.5% p.a. during the remainder of this century (Figure 2.1). However, some of the reduction in the growth in energy consumption has been caused by the slowdown in economic activity and changes in economic structure.1' b. Constrained Domestic Energy Production
2.06 The second major lesson is the difficulty of increasing domestic energy production. Despite the priority given to increasing domestic energy production, coal production actually decreased by 7.1X during the period 1978-84, from 7.0 million toe in 1978 to about 6.5 million toe in 1984, (though this was a slower rate than the decrease of 10.7X during 1373-78). This continued decline in production is due to technical and environmental constraints to switching back to coal (at least in the short term), the difficult tectonic conditions encountered in underground mining in Hungary and decreasing coal quality, caused in part by increased mine mechanization. However, coal production should increase between 1985 and 1990 as projects being implemented are completed. Similarly, during the period 1978-84 production of crude oil and natural gas liquids increased by only 1.5Z to 2.66 million toe and natural gas production de-reased by 12.6% to 5.15 million toe compared to increases of 22X for oil and 49X for gas during the previous five years. This is partly due to the very small to medium sized reserves by international standards, their complex geology, shortages of convertible foreign exchange to acquire modern technology (e.g. deep drilling, enhanced oil recovery, advanced seismic data interpretation)and the boycott of the export of some western technologies. Finally, considering nuclear energy production, progress in constructing the Paks nuclear power station has been slow and the first unit was delayed by about three years. c. Flexibility in Planning
2.07 The third lesson of recent experience is the need for flexib:lity in investment decision making. A number of investments proceeded during the 1970's when it was becoming clear that they would no longer be economic, or that they should be delayed. It might have been economic to cancel some of the last units at the Dunamenti and Tisza oil fired power stations, although the Government did cancel the Bicske coal fired power station and delayed the associated mine. The Paks nuclear power units might have been better started later and constructed more quickly so as to achieve cost savings, although any present value investment savings would have ts ve offset against foregone fuel savings. Although the Hungarian civil works were able to be delayed, there
I'Z For a discussion of these trends, see Hungary: Country Economic Memorandum, Stabilization,Growth and Structural Adjustment (Report No. 5006-HU), July 18, 1984. - 16 -
Figure 2.1
ENERGY CONSUMPTION & PRODUCTION
'1.7 -
S 1.2-
0H_ 11A
0- 0.8 O 09 0 0.5
cr 0.7 . z W0-6
1970 1 974 1 978 1 982 1 986 1 990 1 994 1 998 (Year) a FINAL CONS * GROSS CONS o PRODUCTION was probably a good case for cancelling, or drastically re-designing the Na-gymaros-Gabcikovomultipurpose hydro scheme (para. 2.43).1'
2.08 The lengthy process of consultationand analysis to arrive at investment decisions achieves consensus through broad participation within sector institutions. However, there would appear limits to the degree of consensus that can be achieved and one might question whether the process promotes good economic decisions or impedes them. The recent steps towards basing investment decisions on least-cost long-term investment programs in the power and coal subsectors should enable better analysis of the interactions among projects and their relation to the market to be established, but.such investmentprograms will need to be regularly updated and alternative strategies and their associated risks analyzed. Finally, it is apparent that planned trading agreements which aim to reduce uncertainty, can also delay adjustment to changed circumstances. This is demonstrated by the Nagymaros-Gabcikovo scheme and the rate of implementation of the Paks station.
An agreement signed with Austria in May 1986 eased Hungary's financial commitment to this project. A large part is to be financed on a turnkey basis by an Austrian consortium with repayment in power deliveries over 20 years beginning in 1996. Austrian firms will undertake most of the construction. Protest from ecologists in both countries is unlikely to stop Austrian parliamentaryapproval. - 17 -
B. Sector Issues a. Energy Pricing
2.09 Energy prices are relevant to an investment review since, first, they influencethe level of demand which in turn affects investment requirements, and, second, they determine the amount of resources mobilized by the energy supply industries to finance their investment programs.
2.10 After being allowed to fall in real terms, the prices of energy sold to industry and other producers were raised substantially in the mid-1970's and 1980's and relative prices of fuels were changed (Figure 2.2). The industrialprices of petroleum products and electricity are about 90% of economic cost, although gasoline is priced at 168% of the border price and heavy residual fuel oil at 78S. Natural gas and coal prices are lower at 63? to 79? of their economic cost (Table 2.1). Despite the decline in petroleum product prices in dollar terms during the past few years, the depreciation of the Ft/US$ exchange rate has tended to widen the gap between domestic and internationalprices, especially for heavy products. The Government has increasedprices annually to compensate but small disparities remain. Given the high priority for conserving energy and reducing imports, there are strong grounds for eliminating these differentials between price and the opportunity cost of fuel imported at the margin, and to change prices flexibly in response to exchange rate variations and movements in international prices.
2.11 Natural gas prices appear to be only 63S-79S of their economic cost. This economic cost is based on mission estimates of the price of gas in new contracts for importation to Western Europe, since further import of gas by Hungary from the Soviet Union appears a possibility. However, the marginal costs of gas transmissionand distributionwithin Hungary would need to be added to the border price to arrive at the economic cost of incremental gas supply. Current gas prices would therefore be even more below economic cost than the figures in Table 2.1 suggest. In order to minimize the costs of gas importation,transmission and distribution, there is a need to estimate the LRMC of supplying gas to each consumer group and to raise tariffs to these levels.
2.12 Electricity tariffs to industry are abGut 90? of LRMC and brown coal prices about 74% of LRMC. Phasing out these distortions would not only reduce demand and investment,but also would ease the financial problems of the coal mining companies and MVMT. With a -0.3 ong run price elasticity, raising the electricityprice of the medium voltage tariff to parity with LRMC would reduce the consumption of these consumers by 3X, or about 1.7% of total consumption. If the elasticity is higher at -1.0%, a figure not uncommon in western countries, an overall saving of about 5? would result, which would lead to the saving of more than one year's demand growth and associated investmentin generation and transmission.
2.13 Consumer energy prices, with the exception of gasoline, have long been substantiallybelow their economic costs. In January 1985, the Governmenttook a bold and commendable step and increased consumer energy prices by 30? for petroleum products; 25% for natural gas, coal and coal productsand 16% to 33% for electricity. As a consequence, the prices of - 18 -
Figure 2.2 INDUSTRIAL ENERGY PRICE INDEXES CONSTANT 1970 PRICES 500 -…
84350 --
400- - -
350 ------
300-… 0 250 x LUI V in 200 ---
1 970 1 972 1 974 1 976 1 978 1 980 1 982 (Yea r) o FOIL + GOIL o 13COAL a GAS x ELECT natural gas and petroleum prices are now 70% to 168X of the border prices (excludingdistribution costs). Coal prices and electricity tariffs for most consumers remain substantiallybelow economic cost despite the recent rise. A consequence of distortions in the absolute and relative prices of fuels has been a switch from petroleum fuels to electricity,natural gas and sclid fuels and the continued growth of consumption per household.
2.14 There appears significant potential for energy saving in the household sector. Although residential energy consumption is determined by a number of factors, including building size and architecture, number of inhabitants,heating system, appliance ownership, economically active inhabitants etc., the energy consumption per m2 is a crude indicator of relative energy use. On this basis, energy consumption per mz of dwelling area is no lower than in Western Europe (Table 2.3). The specific household heat consumption in Hungary is relatively high considering: (a) the difference in household incomes between Hungary and the other countries shown in Table 2.6; and (b) the high proportion of apartments in the Hungarian housing stock, which have lower heat requirements. Econometric analysis of Hungarian data has shown price elasticities for household energy ranging from -0.4 to -1.1, depending on the income category, which indicate that the - 19 -
Table 2.1: ENERGYPRODUCER PRICES (June 1985)
Price Price(a) Economic(b) Price As X of (Ft) (US$) Cost (US$) Economic Cost
Petroleum Products (tons)
Gasoline (92 octane) 25,709 504 300 168 Gas Oil 10,938 214 240 89 Fuel Oil (3X sulphur) 6,660 131 150 87 Residual Fuel Oil 5,740 113 145 78
Natural Gas (toe)
Power 4,100 80 121 66 Chemicals 3,850 76 121 63 Other Industry 4,830 95 121 79
Brown Coal (toe) 3,015 59 79 75 Electricity (MV)(MWh) 1,923 38 42 90
Sources: Petroleum I Project SAR, Power & Coal Subsector Review, Mining Association, Petroleum Economist.
(a) Domestic price converted to US$ at an exchange rate of US$1 = Ft 50.
(b) Economic costs: petroleum products: October 1984 average Rotterdam spot prices, plus US$15/t transport, except for fuel oils, which are exported at the margin where US$15/t transport was deducted; natural gas: estimted price for new contracts for supply to Western Europe; coal and electricity: long run marginal cost.
response to energy price reforms would be significant.-' Furthermore, experience elsewhere confirms that households respond to price signals and reduce energy waste. In Denmark, specific energy consumption by households was reduced by 30% between 1972 and 1980, mainly by increases in the price of heating oil and district heat (Table 2.3).-'
2.15 The Government has justified its energy pricing policy for households through considerations of equity, ability of households to pay for basic
CGy. Szakolczai et al. "Classical Models of Consumption Analysis in the Service of Pricing Consumers' Goods in Hungary" Acta Oeconomica, Vol. 22 (1-2). pp. 87-112 (1979).
Z' L. Schipper, "Residential Energy Use and Conservation in Denmark 1965-1980", Energy Policy, Vol. II (4), pp. 313-323 (December 1983). - 20 -
Table 2.2: CONSUMER ENERGY PRICES (June 1985)
Price Price(a) Economic(b) Price As % of (Ft) (US$) Cost (US$) Economic Cost
PetroleumProducts (tons) LPG 8,600 169 212 80
Heating Oil 8,000 157 225 70 Gasoline (92 octane) 25,709 504 300 168
Natural Gas (toe) 4,569 90 121 74
Solid Fuels (tons) Brown Coal (Borsod) 293 5.7 59 10 Briquettes (Varpalota) 813 16 49 33
Electricity(kWh) Unrestricted 1.00-2.20 0.020-0.043 0.058 34 - 74 Night Rate 0.70 0.014 0.036 39
Sources: Petroleum I SAR, Power and Coal Subsector Review, MVMT, NBH, Petroleum Economist.
(a) Domestic prices converted to US$ at exchange rate of US$l = Ft 50.
(b) Economic costs are border prices of imports, except for electricity and brown coal where LRMC's were used and locally produced briquettes where the producer price was used. No distribution costs within Hungary are included in the economic costs, except for electricity. heating needs and macroeconomic policy. However, since the cost of energy to the national economy is ultimately borne by the population, the fact that energy prices are below economic cost does not mean that the overall cost of energy to households is low. Households might pay for their energy indirectly,say, through incomes being lower than they would be if household energy prices were set at their economic cost. In the view of the mission, this ultimate cost of energy to households relative to incomes would be lower if prices were set at economic cost and a more economically efficient consumptioneventuated, resulting in a lower cost of supplying a unit of useful energy, such as through the elimination of energy waste.
2.16 As Table 2.4 shows, the proportion of income spent by different occupationalgroups on energy in 1983 ranged from only 3.9% to 6.8Z and for electricityfrom 1.3Z to 1.8Z, with the higher percentages being for economicallyinactive households whose main source of income is from the state in the form of pensions and allowances. Moreover, the proportion of household income spent on energy in Hungary is not high compared to the 6Z-10S spent in - 21 -
Figure 2.3 CONSUMER ENERGY PRICES INDEX. CONSTANT 1970 PRICES 270 260- 250- 240- 230- 220- 210- 200 - 0 o 190
a 170 -
150 x La 140 130 120 110 100 - 90
70- 60
1 970 1 972 1 974 1 976 1 978 1 980 1 982 1 984 CYear) :COL + BRIQ o GAS a OIL x ELEC v GSLNE
Table 2.3: RESIDENTIAL ENERGY CONSUMPTION PER SQUARE MRTER OF DWELLING AREA
Resi- dential Specific No. of Av. No. Energy Energy Pop. Dwell- People Av. Consump- Consump- (Mln.) ings per Size tion tion 1981 (Mln.) Dwelling (m2 ) (Mtoe) (kgoe/mz)
Hungary (80) 10.7 3.544 3.0 59 5.17 24.7 Austria (80) 7.6 3.038 2.5 76.5 5.94 25.6 Belgium (80) 9.9 3.811 2.6 104.7 9.80 24.6 France (78) 54.4 18.641 2.9 77.1 37.38 26.0 Germany (FRG)(81) 61.6 25.748 2.4 82 47.55 22.5 Denmark (72) - 1.860 - 101 5.41 28.8 Denmark (80) 5.1 2.106 2.4 107 4.52 20.1
Source: National Statistics, OECD/IEA, UN Economic Commission for Europe, Schipper, 2n. cit.
Note: Consumption of gasoline is excluded. - 22 -
Table 2.4: PER CAPITA ENERGY EXPENDITURE AS A PERCENTAGE OF PER CAPITA TOTAL EXPENDITURE, 1983
Household Type Electricity (P) Total Energy (Z)
Blue Collar Workers 1.4 4.4 CooperativeFarmers & Peasants 1.4 3.9 Two-IncomeHouseholds 1.3 4.0 White Collar Workers 1.3 4.0 EconomicallyInactive 1.8 6.8
Source: KSH "HAztartasstatisztika1983" (Household Statistics 1983).
West European countries. However, the energy price increases of 1985 (see Figure 2.3) have probably increased the percentage of income spent on energy above the amourts shown in Table 2.4.
2.17 The impact on inflation of the removal of household energy price distortionswould be small in relation to the size of the distortions. Since energy accounts for about only 4.5Z of total expenditure,a 2502 increase in energy prices would result in an increase of only 250 x 0.045 = 11%, and such an increasewould probably have to be spread over several years to minimize acute problems of adjustment. Such a two and a halffold increase would not increase energy expenditure to 11X of total expenditure, since consumers would conserve energy and restructure their energy use. If the amount of energy saved by households were 30S of their present consumption, similar to the Danish experience, energy expenditure would be 7.7X of total expenditure, within the European range. In the mission's view, the potential gains in energy efficiency would justify phasing out the economic subsidies to consumer energy prices, but a program of adjustment would need to be prepared which would assist low income families (e.g. the economically inactive) and enable consumersto change their means of space and water heating and improve its efficiency,particularly in State housing where the ability to make fundamentalchanges in energy consumption may be limited. b. Future of Energy RationalizationCredit Facility
2.18 Energy consumption in Hungary is very high in relation to GDP, compared to other middle income and industrialized countries.-I There is a clear need to reduce Hungary's high level of energy intensity through the rationalizationof energy use.-Z Policy issues which arise after the
I' See Power and Coal Subsector Review, October 1984 (4946b-HU), Table 4.2.
2/ Energy intensity is the ratio of energy consumption per unit of GDP. - 23 - implementationof the first phase of the program of energy rationalization concern: (a) whether such investments should continue to be given preferentialaccess to finance; (b) the criteria and terms for any credits aimed specificallyat energy rationalization;and (c) the types of energy rationalizationinvestment that should be given priority.
2.19 The mission was unable to obtain evidence of either an unsatisfied demand for credits for energy rationalization,or that all the feasible economic opportunities had been exploited. From the overall viewpoint of the energy sector there remains considerable scope for reducing energy intensity. However, some enterprises might prefer to invest in other projects, e.g. in the modernizationof a complete process, rather than in saving energy in an existing process. Indeed, a complete restructuring of a plant might produce larger energy savings than modifications to existing plant and lead to non-energy increases in productivity. There is apparently some pressure to make the financing terms easier, e.g. by lowering the amount of own resources an enterprisehas to commit. Since energy rationalization is fundamental to Hungary'sstructural adjustment - through lower energy imports and investment in energy supply - there is a good case to be made for continuing the NBH credit window, especially as the program has already proved a success. However, lowering the investor's self finance could lead to energy rationalizationinvestment in uneconomic activities, when greater savings would be obtained from restructuring them. The mission recommends that the credit window be continued, and that the terms should not be relaxed, except in exceptionalcases where energy rationalizationwould transform the viabilityof an activity. Consideration should also be given to financing industrialrestructuring projects with a high energy saving potential, say, if non-energy benefits, e.g. the vrozuction of higher value added products, were up to half the total benefits, particularly if insufficientprojects were proposed to exhaust the finance available.
2.20 Past investment through the NBH credit window has been orientated toward the production of import substituting fuels, e.g. coal mining, briquette manufacturing and light petroleum products, and the production of energy saving products, e.g. thermal insulation. Together, these categories of inv!stmentaccounted for 66Z of funds committed and approved up until the end of 1984 (Table 2.5). Energy conservation projects accounted for 502 of the number of credits approved during this period, but only 23Z of the funds committed. Fuel substitution projects accounted for 41% of the number of credits and 111 of the funds. It is arguable whether energy production projects and product development projects are a priority use of the credit window. Such projects should be worth undertaking in their own right without the extra inducement of the line of credit, since they are conventional industrialand energy supply projects. The small number of such projects would make them suitable for direct financing.
2.21 The contributionof energy corservationprojects to energy saving has been much greater than that of fuel substitution projects (Table 2.6). Analysis of data on credits approved up to the end of 1982 suggest that energy conservationprojects also have a much higher return. The present value, at 12X discount rate for 15 years, for the fuel savings of the conservation - 24 -
Table 2.5: ENERGY RATIONALIZATION PROGRAM CREDITS APPROVED UP TO DECEMBER 31, 1984 (Ft. m. current prices)
No. of Investment Credit Energy Distr. of Type Projects Cost Amount Saving (TJ) Credit (Z)
Energy Saving 199 4,530 3,353 10,155 23 Energy Substitution 163 2,157 1,621 1,216 1/ 11 Product & Tech. Dev. 20 3,775 2,710 26,326 2/ 18 Energy Production 11 8,429 7,197 48
Total 393 18,891 14,881 lOC
Source: NBH.
I/ Gross amount of energy substituted was 3,241 TJ.
Z/ Indirect saving arising from use of energy efficient products.
projects is about US$38.8 x 6.811 = US$264 million-' for an investment in 1985 prices of about US$93 million; a benefit/cost ratio of 2.8. For the substitutionprojects the present value of the fuel savings is about US$11.6 x 6.811 = US$79.0 million to an investment of about US$44 million, a benefit cost ratio of 1.8. However similar analysis for projects approved up to the end of 1982 showed benefits less than costs. This suggests that some of the fuel substitution projects may not have been economically justified at internationalfuel prices. These rough calculationssuggest that in the 1986-90 Five-Year Plan, priority should be given to energy conservation projects. Furthermore, in view of the disparities between energy prices and economic costs (Table 2.1), energy substitution projects should be evaluated at fuel prices which reflect opportunity costs to the economy, especially when projects involve the substitution of natural gas and electricity for fuel oil. c. Energy Demand Projections
2.22 The investment plans of the sector are critically dependent upon expectationsof future energy consumption. This is particularly so for the power subsector where a least cost investment program to meet future demand forms the basis for investment decision making a.d in turn influences investment in the coal subsector. It is thus relevant to review whether the energy demand forecasts are soundly based.
' The number 6.811 is the present value at 12Z discount rate for a flow of US$1.00 per annum for 15 years. - 25 -
2.23 Energy demand forecasts are prepared by the Ministry of Industry using a modified input-output model. The demand model is run iterativelywith separate supply models for the power, petroleum and coal subsectors so as to obtain projections that are consistent, feasible and take account of interfuel substitution. The demand model is similar to the models developed by the InternationalInstitute of Applied Systems Analysis (IIASA) and the InternationalAtomic Energy Agency (IAEA), and used widely throughout the world. These models allow considerable disaggregationby economic sector and energy end use and take account of the effect of expected development of the
Table 2.6. VALUE OF ENERGY SAVINGS CREDITS APPROVED UP TO DECEMBER 31, 1984
Energy Economic Value of Saved Price Fuel Saved (toe '000) (US$/toe) (US$ '000)
Energy Conservation
Fuel Oil 95.6 150 14,340 Gas Oil 21.1 240 5,064 Natural Gas 79.5 121 9,620 Electricity 11.8 498 5,876 Coal 17.2 79 1.359 Gasoline 4.0 300 1,200 District Beat 8.8 150 1,320
Total 238.0 38,779
Fuel Substitution
Fuel Oil 92.5 150 13,875 Gas Oil 76.7 240 18,408 Natural Gas -127.8 121 -15,464 Electricity -10.1 498 -5,028 Coal -2.4 79 -190
Total 28.9 11,601
Source: NBH, mission estimates.
economy on energy consumption. However, the approach is essentially one of simulationwith limited modeling of consumers' behavior. In particular, the impact of energy price changes is represented by exogenous modification of input-outputcoefficients. While the methodology basically is sound, the mission considers that it could be improved through the use of empirically determinedprice elasticities-I that would enable the impact of energy
Elasticity= log (consumptionin year t/consumption in year t-x) log (GDP for sector in year t/GDP for sector in year t-x) - 26 -
pricing policies on demand to be explicitly taken into account. The Government intends to gradually eliminate energy price distortions. Estimating the impact of price changes on demand would enable the Government to ascertain the effect of alternative price policies on demand, investment, energy imports and the overall development of the economy and quantify the tradeoffsof energy pricing options.
2.24 The Government projects that the gross domestic consumption of energy (which includes the net consumption of the energy conversion industries, e.g. power generation and oil refining) will increase at an average annual rate of 1.6X p.a. during the period 1985-90 and at 1.3% p.a. for the remainder of the century. These growth rates are much less than in the period 1970-78, when gross domestic consumption of commercial energy increased at 4.1Z p.a., but higher than during the recent period 1978-84, when consumption has been roughlyconstant with slight year to year fluctuations caused by weather variations.
2.25 These forecasts are of gross energy consumption, i.e. including the losses of the energy conversion industries (e.g. power generation, oil refiningand district heating). However, when these losses are removed the growth of final consumption - delivered energy actually used by consumers - would be much less at around 0.8X p.a. during the period 1985-2000 (Table 2.7). The difference between the growth rates of gross and final consumptionis a consequence of the increasing share of electricity in final energy consumption. These losses are largely notional since in the energy statisticsnuclear power is converted to equivalent energy that would have been produced in conventional thermal generation.
2.26 For most sectors the projections of energy consumption show a similar rate of decline in energy intensity (energy consumption per unit of GDP) to the period 1978-83 (Figure 2.4). These intensitieswere based upon mission projectionsof GDP growth of 1.4Z p.a. during 1982-85, 3.3% p.a. during 1985-90 and 3.6% p.a. for 1990-2000. Although the projected changes in intensityand elasticities are not outside the experience of other countries, the mechanism through which they would be brought about has policy implications. The energy credit window and alignment of energy prices with economic cost would be the main means for realizing the partial decoupling of energy consumption from economic growth implied in the Government'senergy projections. Although the forecasts would appear plausible, they depend on the necessary demand management policies being implemented,e.g. phasing out consumer energy price distortions, and assume that the consequencesof these policies would be a permanent decline in the rate of change of GDP intensity, rather than a once and for all reduction in the energy consumption per unit of GDP. As the figures in Table 2.8 suggest, there is some variability in the relationshipbetween energy consumption and economic growth as Hungary passes througha period of structural adjustment. Forecasts of energy consumption are therefore uncertain and allowance should be made for this in planning energy supply investments. After the forecasts of gross energy consumption have been adjusted for the energy cost in the energy transformation industries,the implied GDP elasticitieswould be low, which would mean that there is a possibility that actual consumption could be higher than projected. - 27 -
2.27 The Government'sprojections of electricity consumption imply a continuationGf the past trends for intensity (GWh per Ft million of GDP, 1981 prices), i.e. a decline for industry and increases for households, transport and services. The gross consumption of electricity is projected to grow at 3.9% p.a during the period 1985-90 and 3.4% p.a. during the period 1990-2000, compared to growth rates of less than 1% p.a. for overall energy (Tables 2.7 and 2.9). Most of this increase in consumption originates in the household and services sectors where consumption is projected to increase at an average annual rate of 4.9% during 1983-2000 in each sector, compared to 2.4% for industry.
2.28 Although there is scope for electricity savings in industry, particularlythrough general measures to save energy, the relatively high growth rates expected for the household and service sectors suggest that they should be a priority for reducing energy intensity. Moreover, it is in these sectors that electricity has been underpriced,or that little attention has been given so far to energy efficiency improvements. Raising electricity tariffs to LRMC and promoting energy and electricity savings in buildings would enable substantialsavings in energy investment. For example if the long run price elasticity for household electricity were -0.3, consumption by householdswould be about 4,200 GWh less in 2000, about 7% of total consumption,which would save roughly the investment needed to meet the increase in demand over two years. In view of the large investment requirementsof the power subsector, there is a need for rther measures to conserve electricity,particularly in the household and services sectors. This would require increases in electricity prices towards long run marginal cost, supported by measures to conserve electricity especially in apartment buildingsand to mitigate the effects of higher prices on low income groups.
2.29 Informationcollected by the Government on the end uses of electricityby households shows that the increase in consumption since 1980 has been for space and water heating (Table 2.10). It is doubtful whether electric space heating is economic from the national viewpoirt, given the high cost of electricity produced at the margin from oil and natural gas. Electric space and water heating are a consequence of a domestic off-peak tariff which was only 27% of the marginal cost of fuel until 1984, when it was increased to about 40%. The Government expects that the proportion of electricity used for space and water heating after 1990 will fall, but this is only likely to be achieved through substantial increases in consumer electricity prices. Furthermore,the consumption of "other" end uses has also bee-,growing rapidly and this growth is expected by the Government to continue. Although some increase in this category could be expected to continue as households spend their rising incomes on miscellaneous electrical goods, a substantial part of this consumption is reputedly (no firm figures exist) from second economy activitiesand is in reality part of the consumption of the productive sectors (e.g. industry). The economic subsidies te electricity prices are therefore not subsidies to support personal incomes directly but rather subsidies to economic activities in the private sector. To avoid waste of electricity, distortionsin the choice of second economy activity and to mob;isze resources to finance investment in energy supply from these profitable activities, a strong case can be made for quickly increasing the price of electricity at the margin, i.e. for large household consumers. - 28 -
FiRure 2.4
ENERGY INTENSITY
2.2 2.1- 2 -
1.9 1.8
1.6
jo 1.3 Z31.3 W 0
1S-2 1° La 0-9 z -
0.7 02.6
0-4
1 970 19~74 19~78 1982 1 986 19~90 199 1998 (Year)
0 IND 4 AGRIC * SERVICE TOTAL
Table 2.7: GROWTHRATES OF FINAL ENERGYCONSUMPTION BY SECTORS (a p.a.)
Actual Estim. Projected 1970-78 1978-83 1983-85 1985-90 1990-2000
Industry 4.03 -1.34 7.27 0.59 0.80 Construction 5.58 -6.49 52.09 -0.51 0.38 Agriculture,Forestry and Water 8.95 -2.20 5.11 0.35 0.84 Transp. & Conmmn. -0.40 -4.33 12.90 -0.17 0.10 Households 4.710 1.43 -0.57 1.59 1.07 Services 2.48 2.90 -0.69 1.56 1.07
Total Energy Uses 4.05 -0.64 5.44 0.82 0.84
Source: Mission estimates. - 29 -
Table 2.8: CHANGES IN ENERGY INTENSITY AND GDP ELASTICITIES
1970-78 1978-83 1 9 8 3 - 8 5A' 1985-90 1990-2000
Changes in Energy Intensit-y C p.a.)
Industry -2.5 -4.3 3.2 -3.4 -3.5 Agriculture 5.3 -5.5 -2.1 -2.7 -2.6 Households k' 0.8 1.4 -17.3 -1.8 -2.4 Transport & Services -4.4 -2.7 -4.3 -1.8 -2.1
Total Energy -1.6 -2.2 -1.7 -2.4 -2.7
GDP Elasticity
Industry 0.61 -0.45 1.83 0.15 0.18 Agriculture 2.49 -0.65 1.76 0.12 0.25 Households b' 1.22 0.23 -0.17 0.47 0.30 Transport& Services 0.17 0.37 1.85 0.29 0.23
Total Energy 0.70 -0.51 2.98 0.2-5 0.23
Sources: Annex 1. mission estimates.
a' Data for 1983-85 may not be comparable to other periods for some _ectors.
b" Household data calculated with respect to real personal income. d. Labor Constraints on Coal Production
2.30 In common with Western Europe, the coal mining industry in Hungary has experienced a decline due to the cheap oil of the 1960's and early 1970's. Parallel to this overall decline in the industry, old mines using labor intensive technology became depleted. The coal mining industry responded to the ensuing surplus of labor by diversifying into non-mining but mostly related activities - e.g. manufacture of underground mining equipment. Other measures, such as lowering the retirement age to 55 and maintaining high manning levels above ground, had the effect of preventing unemployment, but led to low overall productivity levels, even though productivity at the mining face is comparable to Western Europe. The consequence of these trends is that the coal mining industry has a higher proportion of older workers than the other energy subsectors, or industry in general. For example, in 1981 45S of coal subsector workers were aged between 40 and 54, compared to 33X for all industry;only 26S of the workforce was aged between 15 and 29, compared to 332 for all industry (Table 2.11).
2.31 The mining industry has had difficulty recruiting workers, despite offering the highest industrial wages. Labor shortages are more acute among the professionaland skilled workers necessary for improved mine mechanization. Table 2. 9: ELECTRICITYCONSUMPTION FORECAST
c------Ctual------Projected------Average Growth Rates (% pa)------121Q iulh iun0 101 1±uz i 1197 0nl7 1i7181 10I--" 1995-90 1990-200 Electricity Consur.ignfQ4h)
Industry 9,808 13,832 14,203 14.292 14.347 14,590 15,310 15,300 17,400 22,000 4.39 1.07 2.40 2.61 2.37 Construction 177 360 347 352 346 347 360 400 600 800 9.27 -0.75 7.37 8.45 2.92 Agriculture& water 922 2,164 2.183 2,280 2,406 2,509 2,700 2,640 3,200 4,200 11.26 3.00 1.80 4.24 2.76 TransportA Cormun. 794 1,441 1,480 I1,28 1,556 1,567 1,442 1,d00 2,300 3,200 7.74 1.69 7.18 5.02 3.36 Services 1,188 2,806 2,629 3,028 3,262 3,409 4,068 4,000 5,000 7,700 11.34 3.97 8.32 4.56 4.41 Households 1,817 4,574 5,020 5,392 5,899 6,394 7,050 6,900 9,000 14,500 12.23 6.93 3.88 6.46 4.88
Total 14,705 25,178 25,861 26,872 27,816 26,816 30,920 31,000 37,500 52,400 6.95 2.74 3.72 3.88 3.40 Gross Cons. (Gross Gen.# Imp.) 17,937 30,108 31,261 32,284 33,516 34,866 36,208 36,600 44,000 61,500 6.69 2.98 2.46 3.75 3.41
5ha.raJlk InduStry 66.7 54.9 54.9 53.2 51.6 50.6 49.5 51.0 47.1 44.5 Construction 1.2 1.4 1.3 1.3 1.2 1.2 1.2 1.4 1.6 1.6 Agriculture& water 6.3 8.6 8.4 8.5 8.6 8.7 8.7 8.4 8.3 8.2 w Transport& Commun. 5.4 5.7 5.7 5.7 5.6 5.4 4.7 5.6 5,5 5,5 0 Services 8.1 11.1 10.2 11.3 11.7 11.8 13.1 11.5 12.8 14.1 Households 12.4 18.2 19.4 20.1 21.2 22.2 22.8 22.1 24.8 26.1
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
IiLiltensitvMWh/MFt
Industry 68.65 57.63 56.97 54.61 52.34 52.29 53.29 50,80 47.24 38.47 -2.16 -1.93 -1.44 -1.44 -2.03 Construction 5.86 6.84 6.50 6.61 6.45 6.29 6.55 7.28 9.65 9.57 1.95 -1.66 8.35 5.50 -0.08 Agriculture A Water 9.44 16.84 16.60 16.77 15.85 16.44 17.01 16.10 17.01 15.83 7.50 -0.48 -1.05 1.11 -0.72 Trans. Comi. & Serv. 13.30 18.51 17.43 18.65 19.54 19.45 21.14 22.26 24.67 27.95 4.22 0.99 6.98 2.07 1.26
Households 9.65 17.94 20.15 21.14 23.14 24,97 26.08 18.65 20.59 23.36 8.06 6.84 -13.59 2.00 1.27
Total 3.l 34.06 34.44 "IJ 35 01 3.6 l 38.44 17.58 Ll L1 1-9 Q -0.13
October 1985 - 31 -
Table 2.10: STRUCTURE OF THE HOUSEHOLD ELECTRICITY CONSUMPTION (X)
Types 1980 1985 1990
Lighting 18 15 13 Cooking 10 8 8 Heating 6 10 9 Water Heating 28 31 30 Cooling 19 15 14 Other 19 21 26
Total 100 100 100
Source: AEEF
The shortages of younger, skilled workers are a constraint to expanding brown coal production. As a consequence, some mining companies have reportedly had to employ Polish miners at 1.5-2 times the cost of a Hungarian worker.'-' Part of the rationale for the coal mechanization program is to save labor and a high level of mechanization is being implemented in the new mines which will form the basis for the increase in coal output during the period 1985-90 (Table 2.13). Since the producer price of brown coal is about 72% of the LRMC, which is in turn about 77l of the border price of imported coal, and household coal is priced at only 412 of LRMC, there is ample scope for increasing the price of coal to enable higher salaries and other benefits to attract the categories of workers needed to modernize the industry. Such increasedbenefits should be applied selectively to encourage the appropriate age structure and mix of skills. As the older miners retire it would be possible to achieve productivity savings at low social cost, especially above ground. Savings from such productivitygains would enable the conditions of service to be improved for those who remain and would enable young skilled workers to be attracted to the industry.
C. Energy Investment Program
Overview
2.32 The energy sector investment program during the 1981-85 period has given priority to expanding coal production, nuclear power, energy conservationand to maintaining oil and gas production. The proportion of energy in the national investment increased steadily up to 1985 in both relative and absolute terms (Table 2.2 in Vol. I). The aggregate energy investment program has been dominated by major investments in coal mining,
"' See Financial Times (London) July 22, 1985. - 32 - nuclear power and energy conservation. Power and coal increased its share of sector investment from 59X in 1976-80 to 61S in 1981-85 and the share of energy conservation more than doubled from 41 to 101 (Table 2.12). The decliningshare of oil and gas investment is to some extent accounted for by increasingexploration expenditure, which is not classified as investment in Hungary.
2.33 The Government'senergy strategy for the 1986-90 Five-Year Plan is almost unchanged from the current Plan. Energy demand management will continue to be a high priority and the price mechanism and the priority credit allocation for energy rationalization will remain the main instruments for restraining the growth in energy consumption. Expansion of domestic energy production and nuclear power will remain priorities, but technical and other constraints,which are described below, will limit the increase in domestic productionto about 8 over the 5-year period.
2.34 During the 1986-90 Five-Year Plan, the Government expects the production of coal to increase by 25-30 PJ (0.6-0.7 Mtoe) and a further increase of 54 PJ (1.27 Mtoe) from the completion of the third and fourth units of the Paks nuclear station. Production of oil and natural gas liquids is projected to decline by 21 and natural gas production would fall by 61 or 14.4 PJ (0.34 Mtoe). These projections do not include production of non-comnercialenergy which is not marketed and which has increased at 41 p.a. between 1980 and 1982. The net increase in production of 76 PJ (1.78 Mtoe) means that in relation to gross domestic consumption, import demendence would decreasefrom around 481 in 1980 to 461 in 1985 and 441 in 1990-' (Table 2.13).
2.35 Because of the long lead times of energy &ector projects and the slow response of demand to price changes, the levels of domestic production, importsand consumption in the 1990 to 2000 period will be largely determined by decisions taken for 1986-90. Projections of energy supply given to the missionby the NPO show no increase in coal production after 1990 and the productionof nuclear energy increasing 3.3 times between 1990 and 2000 (Table 2.13). This results in a massive shift towards nuclear power to offset the projected decline in domestic energy production. Implied in this scenario is that no development of the lignite deposits at Biikkiibrinyand Torony would take place, despite their potentially low cost of production. Although the development of lignite has by no means been ruled out, this scenario would represent a potential change in energy policy which is discussed further in para. 2.45. Import dependence falls from 441 in 1990 to 401 in 2000 which the Governmentexpects to be entirely due to increased production of nuclear energy. However, with the higher level of gas production projected by the Bank of 214 PJ (5.01 Mtoe)(see para. 2.51), import dependency would fall to 391 by the end of the century.
Import dependence is defined as imports less exports divided by the gross domestic consumption of commercial energy. - 33 -
Table 2.11: AGE DISTRIBUTION OF MEN EMPLOYED IN THE ENERGY SECTOR, 1981
Subsector 14 15-19 20-39 40-54 55-59 60+ Total
Coal No. 1 17,940 16,285 30,980 3,088 142 68,436 X - 26.2 23.8 45.3 4.5 0.2 100.0
Oil & Gas Prod. No. - 3,392 3,308 4,226 1,031 32 11,989 2 28.3 27.6 35.2 8.6 0.3 100.0
Petroleum Refin. No. 1 1,372 1,347 1,308 382 22 4,432 2 - 31.0 30.4 29.5 8.6 0.5 100.0
Electric Power No. 2 ,735 6,613 8,927 2,045 154 25,476 S - 30.4 26.0 35.0 8.0 0.6 100.0
All Socialist Industry No. 349 203.037 161.353 204,797 41,673 2,415 613,624 2 0.1 33.1 26.3 33.4 6.8 0.4 100.0
Source: KSH. 'Iparstatisztikai Evkonyv. 1981'
Figure 2.5 ELECTRICITY INTENSITY
70 1
60
LL- * 550
z
Z 30
e 20 -
-5~~~~~~~~~~4 L&5
10
1 970 1 974 1 978 1 982 1 986 ¶ 990 i 994 1 998 CYear) 0 IND AGRIC o SERV a HSHOLD x TOT - 34 -
Table 2.12: DISTRIBUTION OF ENERGY INVESTMENT BY SUBSECTOR (2)
1971-75 1976-80 1981-85 1986-90
Coal 10.7 13.6 17.0 20.0 Oil and Gas 44.5 35.0 27.0 26.5 Town Gas (Budapest) 2.1 1.9 1.7 1.9 Electricity 40.7 45.3 44.1 43.0 Conservationand Other 2.0 4.2 10.2 8.6
Total 100.0 100.0 100.0 100.0
Source: NPO, mission estimates. a. Power Subsector
2.36 Investment in the power subsector has been dominated by the Paks nuclear power station. The current phase of this station consists of four 440 NW pressurized water reactor units of the Soviet VVER design, modified to meet Hungarian conditions. The first unit was put into service in 1983, the second in September 1984 and the third and fourth units are expected to be in com- mercial operation by end 1986 and end 1987. The total cost of the Paks pro- ject would be about Ft 97 billion (US$1.9 billion) at current prices, of which about Ft 61 billion would be spent by the end of 1984. In 1984, expenditure on this project alone will amount to about 4.6Z of total national investment.
2.37 The Paks project has suffered from construction delays. Construction began in 1973 with the intention of commissioning the first unit in 1980. This entered full operation in mid-1983, a delay of three years caused by late deliveries by sub-contractors not used to either multinational projects or the strict quality standards of the nuclear industry; and the prototype nature of the first Hungarian unit which led to design changes during construction. Completion of the remaining three units has also been delayed. IAEA data give the average construction time of the first Paks units as 113 months, significantlyabove the international average of 100 months which is biased upwards by the special problems of the U.K., U.S., Indian and Brazilian programs which have construction times in the range of 128-135 months. Delays to major projects such as Paks result in resources being tied up in plant that is not producing benefits. However, completion of Paks according to schedule would have resulted in excess capacity because electricity demand has turned out to be lower than foreseen when the project began. but this would have been partly offset by savings of oil and gas in power generation and possibly a lower level of power imports.
2.38 Other state investments carried out during the 1981-85 Plan are target group investments in power transmissionand distribution networks. At current prices these amount to about Ft 617 million for investment to reinforce the main high voltage transmissionnetwork and Ft 1,580 million for distributionnetworks. These projects appear to have been implemented according to schedule. - 35 -
Table 2.13: SUMMARYENERGY BALANCE (toe million)
1970 1978 198D 1981 1982 19623 194 1965 1990 2000
Production_ pjected - col 8.985 6.99% 6.808 6.819 6.914 6.564 6.502 6.440 6.792 7.939 Oil & Nhbirm Gm Liqmidu 2.072 2.622 2.645 2.676 2.674 2.675 2.702 2.717 2.660 1.475 1al CGm 2.904 5.890 4.991 4.844 5.273 5.078 5.319 5.747 5.610 4.309 1 & lbclaar Electricity 0.027 0.038 0.031 O.6 0.065 0.616 0.925 1.349 2.614 8.548 others 0.333 0.343 0.331 0.366 0.340 0.373 0.326 0.384 0.422 0.843
TOtal 14.321 15.886 14.806 14.751 15.246 15.306 15.774 16.637 17.897 23.115
coal & Solid aLesn 2.149 2.037 2.133 2.014 1.952 1.955 1.860 2.293 2.618 1.803 Czn.h Oil 3.972 Ll!59 7.218 6.775 6.710 5.927 6.323 6.466 6.246 7.424 Oil hWicts 0.857 1.732 1.710 1.433 1.421 1.384 1.495 1.752 1.342 1.605 Nstuza Cm 0.163 0.969 3.138 3.163 3.136 3.314 3.071 3.379 4.379 4.262 Electricity (Nt) 1.052 1.239 2.000 2.049 2.252 2.338 2.405 2.518 2.459 2.319
Total 8.493 14.134 16.199 15.434 15.471 14.918 15.153 16.607 17A44 17.213 le"s
Etort 0.752 0.595 1.041 0.735 0.888 1.315 1.432 1.956 1.218 2.037 Stock rncrese 0.590 -0.084 0.4b4 0.066 0.184 -0.276 -0.775 0.000 0.000 0.000
amn n.eic Ccmmaqytian 21.472 29.509 29.521 29.388 29.64,4 29.18% 29.496 31.089 33.724 38.290
Final cmmuqt2of lhugtry 7.937 10.888 10.856 10.68 10.284 10.179 10.423 11.712 12.061 13.061 Comstiuctios 0.289 0466 0.A13 0.378 0.363 0.319 0.299 0.738 0.719 0.747 Apicukure, Foretry & ibtec 0.936 1.857 1.800 1.810 1.792 1.662 1.784 11.36 1.F69 2.033 Trqsport 1.697 1.644 1.562 1.689 1.424 1.317 1.333 1.679 1.665 1.681 NbtsitDlid 3.961 5.726 5.854 5.962 6.188 6.149 6.533 6.080 6.578 7.314 Services 1.28B 1.561 1.719 1.82D 1.962 1.800 1.921 1.775 1.918 2.133 ota &Og us 16.104 22.122 22.184 21.927 22.013 21.427 22.291 23.820 24.810 26.970
NbM3aert 0.498 0.628 0.497 0.490 0.451 0.419 0.390 0.468 0.468 0.468
Total Fisal Cxu,option 16.601 22.751 22.680 22.416 22.464 21.845 22.685 24.288 25.279 27.638
T.paat Drnds^_ (Z) 36.05 45.88 51.35 5D.02 49.19 46.61 46.52 46.49 46.93 39.63
Sairce: AuA , Mi estates
Note: 1 ton oil eqpivswl (toe) is eqivaleat to /.7 GI - 36 -
2.39 The Hungarian Electric Power Board (MVMT) intended to invest Ft 4,753 million in its own projects during the 1981-85 Plan. Most of these projects were the refurbishmentof old power stations, particularlyboiler reconstruction. Most of the old power stations refurbished also supply steam to nearby industry or hot water to district heating networks. This investment program,which seems to have been implemented for the most part according to plan, is summarized in Table 2.14. Some of these projects -arry over into the 1986-90Five-Year Plan.
2.40 For the 1986-90 Five-Year Plan, firm decisions have been taken to extend the power station refurbishmentprogram and to proceed with the Nagymaros-Gabcikovomultipurpose hydro project. A decision in principle has also been taken to order another four 440 MW nuclear units at Paks, subject to suitableterms being agreed with the Soviet Union and other suppliers.L' The power stations reconstructioliprogram will result in a net increase of about 250 MW up to 1990. The Paks and hydro projects will not be completed until the 1991-1996 period. No increases in power imports are planned above the 1985 level of 10.5 TWh per annum (about 1,788 MW), since additional importswould probably cost about the same as nuclear power generation in Hungary, plus transmission costs.
2.41 The power station refurbishmentprogram consists of the rehabilitationof old power stations, viz. Ajka, Borsod, Dunamenti, Gagarin, November 7, Oroszlany and Pecs. These stations are fuelled by brown coal, with the exceptions of Gagarin (lignite)and Pecs (black coal residual after beneficiation). These stations are generally about 20-35 years old with major componentsneeding replacement. Refurbishment typically consists of replacing part of the boiler and converting it to the modern membrane type, replacement of turbirehigh pressure stages, generator rewinding, replacement of electrostaticprecipitators (to reduce emissions of ash to the atmosphere) and replacementand modernization of auxiliary equipment, controls and instrumentation. Project costs are shown in Table 2.15. To maintain system securityand to enable a feasible work program for the Hungarian manufacturers carryingout the work (who made much of the original equipment), the refurbishmentprogram is spread over about 7 years.
2.42 A thorough economic analysis of the refurbishment program would requirea separate evaluation of the costs and benefits of each project. Nevertheless,it seems clear that the program is economically justified. The plant rehabilitationprogram maintains 1,890 MW of plant in service and also increasesplant capacity by about 250 MW. If the extra life from this plant is assumed to be only 12 years, compared to a 25-year life for a new brown coal fired plant, the annual cost/kW of the refurbished capacity at 12S discount rate would be US$39.3/kW/a, compared to US$122/kW/a for a new plant. This calculationdoes not take account of the lower economic "interest during construction"of refurbishmentarising from shorter lead times than for new plant, or the district heating benefits that might not be able to be achieved with a large new power station.
-' The Chernobyl disaster has led to the cancellation of the second phase (reactors5-8) of the Paks nuclear station. - 37 -
Table 2.14: POWER SUBSECTOR INVESTMENT PROGRAM 1981-85 (Ft m. current prices)
- Project Cost Start Finish Non Con- Con- Proiect Year Year Local vertible vertible Total
State Investment
Paks nuclear 4x440 MW 1973 1989 73,647 21,178 2,034 96,859
Target Group Investment 12,237 94 50 12,381
Transmission 1981 1985 9,343 35 37 9,415 Distribution 1981 1985 2,894 59 13 2,966
Enterprise Investment
Ujpest boiler reconstr. 1979 1983 494 30 23 547 Kobinya boiler reconstr. 1979 1984 397 8 4 409 Kelenfold extension 1981 1983 260 20 32 312 Tatabdnya boiler & turbine 1982 1984 350 - - 350 Sopron extension 1980 1984 122 17 6 145 Szikesfehirvarext. 1976 1984 244 22 11 277 Debrecen boiler reconstruction 1983 1985 60 19 8 87 Debrecen expansion 1980 1987 560 39 42 641 Ajka boiler reconstr. 1981 1985 118 5 - 123 Borsod boiler reconstr. 1981 1985 24 - - 24 Nov. 7 boiler reconstr. 1979 1984 17 - - 17 Pecs boiler reconstr. 1983 1986 88 - 4 92 Ajka electrostatic precipitators 1982 1986 167 31 - 198 Borsod electrostatic precipitators 1978 1983 268 32 - 300
Source: MVMT, mission estimates.
2.43 The Nagymaros-Gabcikovoproject would be completed in stages after 1990. The original contract was signed in 1977 and re-affirmed in 1983 after civil works had been halted because of the need to scale down investment in both Hungary and Czechoslovakia.'' During the Spring flood season the project would produce about 880 MW which would be shared equally between the two countries and Hungary would receive 1,900 GWh annually. Hungary has regarded this project as a low priority in view of cheaper power sources being available and low flood control, irrigation and navigation benefits in relation to its cost. The project is discussed further in para 4.84 below.
-i- See footnote to para. 2.07. - 38 -
2.44 Since negotiations for the units 5-8 at the Paks nuclear station were at an early stage, the mission was unable to obtain reliable cost estimates of the project. However, the project would cost roughly US$2 billion at constant 1984 prices (excluding interest during construction and initial fuel), equivalent to US$1,100/kW installed. Economic analysis of this project is complicated by the need to value the countertradeand financing arrangementsunique to the nuclear option (see the discussion of project evaluation procedures in Chapter I, para. 1.74 of Vol. I). The Bank has evaluated the 1,000 MW nuclear option in the context of a least cost program analysis and found it economically inferior to lignite based options. Sensitivity studies showed that this conclusion was robust to a wide range of capital and fuel cost variations. In addition, reports in the Soviet press have indicated production problems with the VVER 1,000 MW technology,which is still a largely unproven design.-" When studies to define the power investment program for the 1990's were first started, the 440 MW design was included in early reports as an option by the Hungarian planners, but a decision had been taken .o standardize new nuclear power stations in the CMEA countries on the 1,000 MW VVER technology. However, it has emerged that installing 1000 MW units would create difficulties because a significant reserve capacity would have to be added. The decision to expand the Paks Nuclear Station by 4 400 MW units has recently been taken. In terms of the least cost program, the 440 MW design probably has some advantages, since the annual increase in system demand is in the order of 250 MW and these stations are capable of load factors of about 72%, compared to an estimated 59% for the larger unit. In addition, the Government has recently decided that new coal power stations commissioned after 1990 would require flue gas desulphurization to remove SOx emissions, which would add 15%-20Z to the capital cost of the lignite option. Although the 440 MW nuclear units are clearly preferred to the 1,000 MW nuclear option, it is less clear whether the 440 MW units are preferred to the lignite alternative. Analysis by the Government has shown the 440 MW nuclear alternative to be the best option, but differences in methodology,uncertainty about construction times and costs, and recent data on comparative operating performance suggest that a different conclusion is possible.a'.
2.45 One of the options being considered in long term energy projections to the year 2000 is an almost exclusively nuclear program after 1990, with a rise in capacity from 1,760 MW in 1990 (Paks units 1-4) to about 5,500 MW in year 2000. The mission has serious reservationsabout a nuclear program of this size. Firstly, the authorities are in the process of obtaining planning models to enable rigorous least cost programs to be prepared and the mission has no evidence that this investment program was based on such criteria. Second, the record of nuclear construction in Hungary to date has not been good and delays in constructioa would add substantially to the present value t' The Chernobyl disaster has raised serious questions about the design, which is likely to cause further delays.
2' See Power & Coal Subsector Review (Report No. 4746b-HU) for an analysis of the 1,000 MW nuclear option, and Hungary Power Project Staff Appraisal Report (Report no. 5927-HU) for further discussion of the power investment program. - 39 -
Table 2.15: POWER STATION REFURBISHMENT PROGRAM (Ft m. 1983 prices)
Completion Of Which Con- Station/Unit Start Date Date Total CostA' vertible Imports
Ajka 9 7/84 4/86 8 10/85 7/87 1,244 56
Binhida 312 12
Borsod 9 8/85 7/86 10 8/84 7/85 812 52
Dunauenti 1,240 188
Gagarin 1 6/85 12/85 2 1/86 6/86 6 7/86 2/88 5 1/88 8/89 3 7/89 2/91 7,256 788
November 7 3 10/82 4/86 592 52 oroszzlny 1 3/85 6/86 2 3/86 6/87 3 3/87 6/88 4 3/88 6/89 3,064 72
Pecs 5 7/85 12/86 3,508 392
Tiszapalkony 400 36
Total 18,428 1,648
Source: MVMT
'~ Costs are for all units shown for the station. Physical contingencies included. - 40 - cost. For example, with a 12% real discount rate, a 10-year corstruction period would result in the capital cost cokpounded to the year of comissioning being 17X higher than an 8-year period. Third, reliance on the VVER 1,000 MW technology,which in the mission's view is unproven and economicallyquestionable, would be implied in a timescale to 2000. Fourth, there is considerable uncertainty about long term electricity demand, particularlyif pricing reforms and load management policies were implemented. Allowing for a non-nuclear element in the investment program (e.g. lignite, combined cycle CHP, imported coal, combustion turbines) would allow greater fLexibility to respond to changes in demand. In view of the need to ensure flexibility in the power investment program it is recommended that 440 MW nuclear units be procured no more than two at a time, with options for delaying the implementationof the second, should demand increase slower than projected. The Government has agreed to carry out a full least cost analysis of all viable options to form the basis of futu_e power investment decisions.
2.46 Lignite based power generation was shown in the Power and Coal SubsectorReview to be an alternative option for the longer term. A full feasibilitystudy needs to be carried out for the Bukkabrany project to enable reliable cost and performance data to be available for comparison with nuclear in a least cost investment study. There are also a number of combined heat and power (CHP) projects e.g. Dunamenti, Nord Pest and Gydr that should be consideredin the long-term least cost program. These projects would lead to savings in oil and natural gas used to provide heat from conventional boilers supplyingdistrict heating systems. Combined cycle (combustion turbine with œaste heat recovery to a steam turbine) CHP would appear a high priority for evaluation,especially in view of experience elsewhere in using combustion turbines to supply waste heat to existing steam turbines, the possibility of additional supplies of natural gas becoming available at an economic cost below fuel oil parity, and their low investment costs. Combustion turbines were shown to be part of the least cost program in the Subsector Review and deserve consideration,particularly if demand grows faster than anticipated, and could ultimately be converted to combined cycle. There is a clear need for least cost power investment studies to be carried out to enable long term investmentto have a sound economic basis. In view of the uncertainties about demand, costs and plant performance, these studies should be updated annually. b. Coal Subsector
2.47 The coal investment program in the 1981-85 Plan was aimed at a small increase in the production of coal and coal processing to enable wider industrialand household use. Mining projects under implementationconsist of a number of underground mines to produce brown coal for power generation, industryand households (primarily the Nagyegyhaza, Markushegy, Lencsehegy and Miny I projects) and a Lias (black coal) program designed to substitute for importedcoking coal (Table 2.16). Despite investment of more than Ft 43 billion at 1983 prices (US$1.1 billion), the long lead times of these projects mean that coal production is forecast by the Government to decline from 291 PJ (6.8 Mtoe) in 1980 to 275 PJ (6.4 Mtoe) in 1985 and then increase by more than 5X to 290 PJ (6.8 Mtoe) in 1990 as the new projects come on stream. This increase in production will enable the incremental demand from the power station refurbishmentprogram to be met. - 41 -
rable 2.16: COAL SUBSECTOR PROJECTS UNDER CONSTRUCTION (Ft m. L983 prices)
Implementation Capacity mt/Year Full Capital Cost Project Description Total Replacement Start Production (Ft m. 1983 Prices)
A. Mining Projects
Lignite
Varpalota (Veszprem Co.) n.a. n.a. n.a. n.a. 460
Brown Coal
Balinka (Veszprem Co.) 0.6 0.5 1979 1984 700 Putnok (Borsod Co.) 1.5 0.5 1977 1985 1,200 Dudar (Veszprem Co.) 0.5 0.4 1982 1985 300 Nagyegyhaza (Tatabanya Co.) 2.1 Late 1987 6,700 Many I (Tatabanya Co.) 1.0 1.8 1970s 1988 4.370 Lencsehegy II (Dorog Co.) 1.0 0.5 1982 1988 3,200 Kanyas (Nograd Co.) 0.7 0.7 1982 n.a. 500
Subtotal Brown Coal 7.4 4.i 16,970
Black Coal
Lias Govt. Program mid- (Mecsek Co.) 3.4 3.0 1982 1980s 26,000
Subtotal Mining 43,430
B. Coal-Washing/Briguetting
Brown Coal
Borsod Coal Washing Plant 2.5 1981 1985 620 Oroszlany Air Separation 0.4 1983 1986 340 Veszprem Briquetting 0.5 1982 n.a. n.a. Tatabanya Fine Coal Washing 1.5 1983 1986 350 Nograd Coal Washing Plant 0.6 1983 1986-87 390
Black Coal
Mecoek Coking Coal Flotation, Phase I 0.2 1983 1986 1,390 Meciek Briquetting 0.3 1983 1986 290
Subtotal Wash. Briquetting 3,380
Total Under Construction 46,810
Source: Power & Coal Subsector Review (Report No. 4746b-HU). - 42 -
2.48 The Lias program accounts for over half of the current coal subsector investment program. It is designed to increase the production of hard coal by 1.67 Ntla (0.61 Mtoe) over the period 1982-1997, but the net increase is only 0.35 St/a due to the depletion of existing mines. Only 27Z of the run of mine output vill be recovered as coking coal in 1997 (compared to 17S in 1982), the remaininglow grade fraction being used mainly for power generation. Based on cash flows and output projections provided by the mining company, the mission estimates the long run average incrementalcost (LRAIC) of coal from the Lias program to be Ft 1,367/t in 1981 prices.-Z In energy terms. this is equivalent to US$2.05/GJ (US$56/tce)2'and compares favorably with the border price of imported steam coal of about US$2.2/GJ (US$60/tce). Since the border price of the coking coal fraction is higher than for steam coal, the Lias program appears econocically justified, based on the data presented to the mission. However, this assumes that the financial prices used in the analysis reflect economic costs. Furthermore, the figures show the incrementalcost of coal being equal to the average cost, which is unlikely. In the Power and Coal Subsector Review the Bank has questioned whether the Lias program represents the least cost means of producing -oking and steam coal and has recommended that the program be reviewed to establish whether cost savings are possible, especially since brown coal would appear to be a lower cost source of steam coal on an energy equivalent basis.
2.49 The Government projects that coal production will increase by 17Z between 1990 and the end of the century. Under this scenario new projects would need to be started during the 1986-90 period to compensate for the depletion of existing mines. Based on their proximity to markets and the potential cost of the coal Ajka II and Dubicanje projects are likely candidates. Some imports of coal for household use are also likely. In the mission's view there is a strong case to be made for expanding the production of lignite for power generation and an open pit mine at Bukkabr$ny with an ultimate capacity of around 22 Mt/a would be the first priority. There is a need to prepare a supply demand balance for coal that optimizes production from the least cost sources, particularlyfor brown coal. The coal industry has begun to do this, but its completion so as to provide a least cost investmentprogram to enable sound investment decisions to be taken in 1986-90 is an urgent priority.
2.50 The mining companies are investingabout Ft 3.4 billion in five coal washing/separationplants and two briquetting plants. The washing/separation plants will enable the quality of run of mine brown coal and black coal to be improved (higher heat value, lower ash and sulphur content) so as to facilitate its substitution for oil in industry. Brown coal and black coal briquettesare used by households outside the main urban areas, since their high sulphur content and bitumen binder result in unacceptable air pollution in cities. Increased production of briquettes will enable a modest increase in consumptionfrom 34 PJ in 1980 to 43 PJ in 1985 and 46 PJ in 1990. The coal processing projects were begun in the early 1980's and are planned to be completedduring the years 1985-87.
LRAIC is defined as the present value of incremental capital and operating costs divided by the present value of incremental output.
2' A ton of coal equivalent (tce) is equal to 27.2 GJ, or 6,500 Mcal. - 43 - c. Petroleum Subsectorl-
2.51 More than half of the petroleum subsector investment in the 1981-85 and 1986-90 Five-Year Plans is aimed at arresting the decline in oil and gas production;this share increases to two-thirds if the projected expenditures for exploration and field development (drilling),which are financed out of special Government funds designated for this purpose, are included in the subsector's investment figures. In the area of petroleum exploration, development and production, OKGT's priority projects are aimed at (a) continuinga constant and systematic exploratioa effort in conventional producingareas to maintain current production, while aggressively expanding explorationactivities into deeper, more complex geological horizons and new, unexploredgeological provinces where the ultimate rewards could be sizable; (b) developing, in an optimum sequence, marginal oil and gas pools and increasing the use of low-grade natural gases; (c) rehabilitating existing oil and gas fields in order to prevent too rapid a decline in their production rates; and (d) developing a rationalized enhanced oil recovery (EOR) strategy, and implementingit by means of initiating new EOR tests and extending the applicationof existing successful pilot EOR tests in order to increase the ultimate recovery of oil reserves.
2.52 The second, and justifiably smaller part of the petroleum subsector's investmentprogram, concerns downstream petroleum activities. As Hungary's petroleum-relatedinfrastructure is well developed, OKGT's primary objective is to rationalize these operations in light of the Government's national energy strategy through projects directed Loward (a) continuing to extend the natural gas pipeline and distribution network to connect additional towns, villages, households,businesses, etc.; (b) installing secondary processing units in its refineries to improve the balance of production and consumption; and (c) continuing to maintain and upgrade as appropriate its existing infrastructure. A portion of the ongoing Bank loan in industrial energy diversificationand conservation (Loan No. 2317-HU) pertains to several of OKGT's investments in this area.
2.53 Crude oil production should be able to be maintained at about 2 million tons yearly until 1990 with enhanced oil recovery and the development of new fields, but production will probably halve by the end of the century, even after allowing for the likely discovery and development of new fields. Natural gas production is expected to 3~~~~~~~~~~~~~~~~~~~~~~~decrease slightly from 1.44 billion m3 in 1985 to 7.00 billion m3 in 1990. With accelerated gas field rehabilitationand development, the decline in gas production would be slowed; production thereafter to 2000 is targetted at about 6.5 billion M3 yearly, assuming further gas discoveries in the late 1980s/1990s,although increased productionof lower calorie gases are expected to reduce somewhat the energy
' None of the discussion in this Report has been able to take into account Hungarian participation in a natural gas pipeline to connect various CMEA countries with natural gas reserves in the Soviet Union, which we understand to be under current consideration. This would be a major project that would require heavy investment during the Seventh Plan. - 44 - content of the gas. Production of natural gas liquids over the period to 2000 is expected to decline from about 0.7 million tons yearly to 1985 to 0.5 million tons in 2000."'
2.54 Given that additional supplies of natural gas are likely to be available from the Soviet Union after 1990, a key issue for the petroleum sector is to establish the potential demand for such gas. There are complex fuel substitutionquestions that need resolution e.g. the relative merits of natural gas, district heat, LPG, coal and electricity for space and water heating in different categories of buildings in particular regions, and the economic case for substituting natural gas for fuel oil in industry. These choicesare particularlysensitive to the price at which gas could be imported,which should be determined in terms of its cost to the national economy. Under the Petroleum Project (Loan No. 2398-HU) the Government has undertakento carry out a gas utilization study. The Bank and Government agreed in November 1984 the terms of reference for the study which entail evaluationof demand, supply and utilization of natural gas over the next 20-25 years including an assessment of the associated investment requirements; it has additionallybeen proposed that the Bank will follow-up with a gas strategy paper. Some concern has been expressed about carrying out the study, particularlythe supply aspects, while the Government is involved in negotiationsfor future gas supplies, but it is difficult to envisage how these negotiations could be conducted to enable a supply arrangement beneficial to Hungary without knowledge of the potential demand for gas at differentborder prices, particularly since international gas supply agreements typically specify a "take or pay" contract. It has therefore been recoinendedthat the gas utilization study be carried out in parallel with the supply contract negotiations and be finalized once the terms of the contract are agreed.
2.55 Consumption of refined products did not grow as rapidly as projected, a consequenceof higher domestic prices and the slowdown in the economy. In the early 1980's Hungary had four refineries with a distillation capacity of 13.5 Mt/a operating at about 651 of their capacity. OKGT has shut down the Komarom refinery and closed a distillation unit at the DKV refinery to bring the national capacity down to 10.5 Mt/a. At the beginning of the 1981-85 Five-YearPlan the refineries were technologicallysimple with little secondaryconversion. This resulted in considerablemismatch between productionand demand such that Hungary exported low value fuel oil and importedhigh value distillate products. A fluid catalytic cracker unit is being completed which will cost about Ft 6,147 million (about US$150 million) at current prices and would process up to I Mt/a of vacuum gas oil into mainly gasoline and light cycle oil. The feedstock for the fluid catalytic cracker would have been used for blending with high viscosity vacuum residue to produce fuel oil. The start up of the catalytic cracker would therefore result in an increase in vacuum residue which would normally be burnt in the nearby Dunamenti power station, but increasing nuclear generation has
' See Staff Appraisal Report, Petroleum Project (4896-HU), Annex 3.03, p. 60. - 45 -
Table 2.17: ENERGY SECTOR INVESTMENT FINANCING (Ft b. current)
Actual Estimate Projected 1971-1975 1976-1980 1981-1985 1986-199O_' Ft S Ft Z Ft Z Ft _Z
State Budget 23.6 32 45.2 35 21.4 13 86.3 42 State Loan 16.3 22 36.5 28 87.7 52 36.2 18 InvestmentLoan (NBH) 1.3 2 1.2 1 19.9 12 16.7 8 Own Resources 33.3 45 46.4 36 38.2 23 64.3 32
Total 74.5 100 129.3 100 167.2 100 203.5 100
'' These figures are substantially larger than the apparently more recent figures of Table 2.20 in Vol. I. The reason for the discrepancy is currently unclear.
Source: NPO. displaced the old Dunamenti units. OKGT is consequently installing a visbreakerunit costing about US$35 million which will convert about 700,000 t/a of vacuum residue into usable heavy fuel oil suitable to industrial boilers. During the 1986-90 Plan, OKGT plans a number of refinery projects to produce high value products and blending components. d. Energy Sector Financing
2.56 The financing of the current 1981-85 energy sector investment program shows the proportion financed by the state as being roughly constant at about 65Z, but with commercial bank loans taking a greatly increased share of the remainder. There was a corresponding fall in enterprise self-finance in absolute terms as well as in proportion, from 36Z in the 1976-80 Plan to 23Z in 1981-85 (Table 2.17). Despite increases in energy prices, the resource mobilizationof the sector declined, particularly in coal mining and electricitysupply. The energy rationalizationcredit window accounted for most of the increase in bank investment loans. Compared to 1976-80, the 1981-85 Plan shows investment in the forms of grants from the State Budget halving and a corresponding increase in loan finance from the State DevelopmentBank. - 46 -
2.57 For the 1986-90 Plan, it is proposed to increase the amount of enterprisefinanced investment to 32Z and presumably these resources would be mobilized through energy price increases without parallel tax increases. The contributions from the State Budget are planned to increase more than four times in current prices, from 13S of investment in 1981-85 to 42S in 1986-90. The greatest part of these contributions are for power subsector investment, particularlythe new nuclear program. In view of the disparities between electricitytariffs and LRHC, there is a need to raise tariffs to mobilize resources,as well as to restrain demand. Moreover, the increase in finance from the State Budget leads enterprises to undervalue capital, which does not promote efficient investment decisions. In our view there is considerable potentialfor mobilizing more resources from the sector and financing a higher proportionof the investment program from loans or bonds, which would allow State Budget resources to be used more to improve the social infrastructure rather than to subsidize energy industries that are capable of eventual financial autonomy. - 47 -
ANNEX III
AGRICTlLTURE
Introduction
3.01 The appropriate investment in agriculture for the forthcoming five year plan, and the appropriate prices and policies that will elicit those investments,should be determined partly by the short-term need to solve the severe balance of payments problem and partly by the longer term need to pursue efficiency. In agriculture, these two needs conflict to some extent. Products (e.g. livestock) which have a very high capacity for earning foreign exchange in the short term, use high levels of domestic resources. Products (e.g. crops) which have a somewhat lower absolute level of foreign excchange earning capacity are more efficiently produced, which is useful in the longer term. This issue is central to decisions about how much to invest in each of the many possible agricultural activities. This illustrates the general point made in Chapter I about the importance of correct (efficiency)pricing for investment decisions; it is important not to consider one objective as dominant over the other. This is the first major issue for agriculture in the Seventh-Five Year Plan. The second major issue is the perceived conflict between pricing which would encourage economic efficiency, such as raising the prices of dairy products, and what is felt to be the level of welfare of consumers. In so far as this does involve having to make a political choice between favoring farmers or consumers, this falls somewhat outside the competence of this report. Nevertheless, we return to this issue below because, as argued above in Chapter I, we do not think that food or other subsidies are an efficient way for Hungary to achieve its political and social objectives, and also because we believe that some of the reasons for concern about the consequencesof removing some of the more blatant sources of price distortion are exaggerated.
A. Brief Overview of Hungarian Agriculture
3.02 The agriculture sector in Hungary consists of:
(i) 1,279 cooperative farms averaging about 4,500 ha each;
(ii) 128 state farms averaging about 7,500 ha each; and
(iii) 1.5 million individual plots and small private farms averaging about 0.5 ha each.
Arable land accounts for 50S of the land area. As is normal with all mature economies, agriculture's share of national income and labor force has shown a gradual decline. Agricultural output from 1970 to 1980 grew at about 31 annually compared with national output growth of 5 per annum. Between 1960 - 48 - and 1981 the rural population declined from 6.0 million to 5.0 million. Currently the sector employs 21% of the work force, but only 16S are estimated to be engaged in basic agricultural activities. It accounts for 25Z of all exports, over 70X of which are sold for convertible currency. The country is self-sufficientin all the basic foodstuffs.
3.03 Many of the large farms are highly integrated and diversified operations including industrial activities that range from the processing of fruit to the manufacturing of printed circuits. They are highly mechanized and generally very efficient. Small farms, while technically less sophisticatedthan large farms, produce about 30% of gross agricultural productionsince they inevitably take that part of national production that most by its nature be labor-intensive. There is no Government operated extension service as such. Advice is provided by a number of impressive serviceand consultancy-orientedcorporations called Production Systems. These are generally independent off-shoots of state farms and provide the full range of farm management services.
B. Growth and Profitability in Agriculture
3.04 Looking first at aggregate indicators, the GDP generated in agriculturegrew at an average rate of about 2.5Z from the early 1950's to the present. After about 1970 the rate accelerated, partly as a result of a high level of subsidized capital investments and partly as a result of major technologicalimprovements. Recent agricultural sector growth (excluding farm-basedindustry and services) has seen sharp annual fluctuations with a record growth of 7.3Z in 1982, a fall of 2.7Z in 1983 as a result of drought and an anticipated recovery of 3X for 1984. The impressive growth in the last decade occurred in spite of a faster increase in input costs than in the value of output, putting a squeeze on agriculture comparable to that in many other countries. During the late 1970's and early 1980's, cooperative and state farm profit per unit of fixed assets appears to have risen somewhat, but this probably reflects a growth of relatively higher profit industrial or agro-industrialactivities and a falling share of the lower profit agriculturalproduction activities.
3.05 At a less agRregate level, crop yields have climbed steadily over the 1970-1983period at about 4.5X per annum for maize and about 5.5% per annum for wheat. Over the last 3 years Hungary's average maize yields have been about 951 o' those of the USA and wheat yields about 70% of those of the United Kingdom. Since the mid-70's, yield increases have occurred with only a modest increase of less than 1% per annum in the fertilizer consumption per bectareof arable land, implying increasing efficiency of conversion of plant nutrients into product. We have not, however, been able to assess the marginal economic returns from the expansion of different crops. Distortions in the prices of both output and factors of production make this a difficult exercise which requires separate study.
3.06 Milk production per cow has also increased over the 1970-1983 period at over 41 per annum. There has been somewhat inefficient use of concentrates, partly due to the poor quality of roughages. This inefficiency was made - 49 - possible by the ratio of 1.5:1, between farmgate price of milk per liter and concentratecost per kilogram (compared to about 1.0 in the European Common Market). Although price distortions make exact comparisons difficult, there is little doubt that livestock efficiency lags behind crop efficiency. Pork production has increased at a rate of about 5.9X per annum since 1970. But feeding efficiency in pork production, at 4.27 kg. per kg. of live weight gain, leaves room for improvement. Energy efficiency has improved. Energy use in agriculture has grown very little in recent years in spite of the considerableproduction increases.
3.07 Agriculturalgrowth does not appear to have been a consequence of substantialsubsidisation, although no comprehensive analyses have yet been done that estimate the full distortion-freecost of developing the agriculturalsector. The evidence suggests that the agriculture sector is, at present,very approximately,neutral with respect to net subsidization, although there are major distortions within agriculture that we discuss below. Flowing into agriculture, total subsidies for 1983 have been estimated at Ft 26.2 billions'; this was 10% of the value of Gross Agricultural Productionand was a little higher than the 1981 estimated Ft 23.8 billion Gross Profit of all state farms and cooperatives. Flowing out of agriculture have been substantial taxes, although these have been at lower percentage rates than for industry. Taxes paid in 1983 totalled Ft 26.2 billion (coincidentallyexactly the same as the estimated 1983 subsidy figure). However, this Ft 26.2 billion included Ft 9.1 billion for Social Security Contributionsand Ft 8.9 billion of Gross Income and Personal Income Tax so that "true agricultural taxes" were only Ft 8.2 billion. Wheat and corn crops face output prices considerably lower than world market prices (the 1978-1982 average Nominal Protection Coefficients (NPC's) have been estimated at 0.57 for wheat and 0.71 for maize) and also face positive tariffs on inputs, and it is estimated that this negative effective protection leads to an annual outflow of about Ft 11 billion.-Z In contrast, there is some degree of positive effective protection of livestock, although a net aggregate estimate is not yet available. While we have not attempted similar estimates for past years, there is no evidence that during the 1970's the net protection of agriculturewas, on average, substantiallydifferent from present levels. Investmentgrants and subsidies at that time were considerably higher, but on the other hand prices paid were frequently even further below world prices than at present (the NPC's for wheat and corn from 1973 onwards show a very strong negative protection dropping as low as 0.35 for wheat in 1974).
3.08 The impressive performance of agriculture during the 1970's and early 80's appears to have beel largely due to the rapid exploitation of available technologies,stimulated partly by investments in training, combined with an investmentsubsidy system that, on the one hand substantially reduced the cost of certain investments,and on the other hand signaled to enterprises that the Governmentwould ensure that the achievement of output targets would prove profitable. There are two major implicationsof this for future strategy.
World Bank, Hungary: Country Economic Memorandum (No. 5006-HU), 1984, Annex 1, p. 88. z' Hungary Research Institute for Agricultural Economics - Price and Trade Study on Wheat and Corn, July 1984. - 50 -
First, Hungarian agricultural enterprises have a high rate of adoption of new technology. They have demonstrated that the expertise exists not only to adopt but also to develop improved technologies. Even though the enormous jump in technological progress that occurred in the 1970's is probably not repeatable to quite the same extent since it involved an element of catching-up,yields worldwide are still rising and it is possible that in due course genetic engineering will give a new boost to the trends. Second, Hungarian agricultural enterprises are price responsive to a considerable degree. In the present freer investment environment, agricultural output may be even more price-elastic than it was a decade ago.
C. Agriculture in the Seventh Plan
3.09 A number of growth rate projections are being considered by the Government. Some project the growth of agricultural production at 1.5X; others put it higher at 2.5S. Levels as low as 1.5Z seem to imply doubts about markets since yield increases for the major crop and livestock activitieshave been well above this level in the past; indeed, mostly above 41. Is such pessimism about markets justified? The mission would be somewhat more optimistic than the Government on two grounds. First, within the CONECON group there remains a considerable demand for certain products, particularly grains. Second, although it is difficult to talk about specific products without further market studies, (such as are being undertaken soon in connectionwith the recent Integrated Livestock Industry Project (2510-HeU), there seems no reason why the rate of export growth should suddenly turn down quite so permanently as well as so sharply. Admittedly real growth of exports has recently turned down quite sharply (see Table 3.1, below). Growth rates for individual years have, however, been negative before and have bounced back to over 101. While such a recovery might now be optimistic, an export growth rate of 61 would not seem inconsistentwith the figures achieved to date, given the expected upturn in world trade combined with a major export drive. Since raw and processed food exports constitute about 35% of Gross Agricultural Production, a growth of exports of about 6.51 is needed to carry a growth in production of 2.51, allowing for a small 0.51 increase in domestic consumption. This does not seem an unreasonable projection.
Table 3.1: REAL GROWTH RATE OF EXPORTS OF FOODS
Year Food Exports
1975 -0.7 1976 -2.6 1977 12.4 1978 -2.4 1979 9.7 1980 7.0 1981 11.6 1982 9.0 1983 3.8 - 51 -
a. Management Reform
3.10 The proposed changes in the enterprise management system will affect agriculture. Most State Farms will be manAged by an elected enterprise assembly, but some are large enough to have the Council system. Some State Farms have already had elections for directors. The changes are being complementedwith some other reductions in state intervention in Agriculture. It is intended that State interventions to avoid bankruptcy will also be reduced so that in the event of poor financial performance farm operations will be closed down, or at least, the existing management replaced. However, land cannot be sold, and the mechanism that might be adopted for land take-overunder receivership is yet to be resolved.
b. Wages and Incentive Proposals
3.11 Regulations about individual earnings and their taxation in agriculturalenterprises are different from those for other enterprises described in Chapter III (paras. 3.24 and 3.27) of Vol. I. The move to a progressive tax on individual earnings, which was initiated in industry this year, was tried on an experimental basis in agriculture in 1984 (option 3. below). The main system in effect in 1984 was the first option below. In consequence,the changes to the system of %-,a taxation that were introduced in January 1985 involved a less radical change than in industry. The new system has three profit/wage distributionoptions. An agricultural enterprise may choose among them, but will have to stick with the choice for three years.
3.12 The first option relates tax-free average wage increases to per capita gross income (profits plus wages). The higher the gross income, the higher the permissible tax-free wage increase up to a maximum of 6S. Above this, wage increases are taxed on a sharply progressive basis - starting at 100Z and rising to 500S for increments over 22. Profit shares are similarly taxed, but above the tax free level the progressivity is slightly lower and the maximum rate is 400P. In addition, up to 181 (depending on per capita profit) of distributionspaid from the Interest Fund can be tax-free. Cooperativesare free to give individuals larger or smaller increments depending on cooperative decisions about the distribution of earnings within the enterprise.
3.13 The second option links wage taxation to Value Added. Each 1X increase in Value Added allows a tax-free increase in the wage bill of 0.41. Increases in wages and/or profit shares above the tax free level pay the same progressive taxes as under the first option. Every 11 decrease in value-added would reduce the base for wage calculation by 0.30X. This scheme, which is a 1985 innovation, therefore offers an incentive to reduce labor inputs.
3.14 The third option is based on wage taxation of individuals (wage plus profit shares). Ft 36,000 would be tax-free; above that, there would be a progressive tax rising to a maximum rate of 50X. This is considered the forerunner of a personal income tax system. - 52 -
3.15 Although the choices are complicated, there is competent accounting at the enterprise level and most farms seem fully capable of handling the system. Each of these alternatives has already been tested out on a sample of volunteer farms.
3.16 Alongside whatever wage and profit distribution system is selected there would continue to be the present payment to members of cooperatives for contributedland. When collective farms were first formed during the late 1950's and early ;960's. new members received payments for their contributed assets, including livestock, at a very low valuation, and also received a 'ifetime unadjustableannuity of up to Ft 600 per annum per hectare of the best quality land (which is termed 40 gold crown quality land). Some members therefore receive this annual payment in addition to wages and bonuses.
3.17 The income tax of private households and ancillary farms has four components:
- taxation per hectare, calculated on the basis of average earnings from land use,
- tax on income of over 150,000 Ft, derived f-om agricultural activities, (which is well above the average income of private plot holders),
- the tax calculated according to the number of horses, and
- tax calculated for machinery (tractors).
3.18 Although these reforms of the wages, taxation and profit use system are clearly in the right direction, it is not easy to predict their impact or the rate at which they will take effect, because knowledge of the financial state of the agriculturalcorporations is currently limited. In spite of their past good performance, several aspects of their financial status militate against good performance, including, in a number of cases, very high inventory levels, and excessive levels of accounts receivable. These issues warrant closer investigation,and the mission recommends that the Survey of CorporateAgriculture, which has been proposed to provide recommendationson how to improve the financial management of enterprises, should be undertaken. c. Pricing Issues
(i) Outputs and Inputs
3.19 Farmgate prices (which correspond to producer prices in industry) have typically not been set according to world prices, although trends in world market prices are increasinglybeing taken into account in price setting. Prices for grains are substantiallybelow world market prices; prices for livestock products are generally similar to world market prices. This picture is shown in the table below, which shows 1984 prices paid for a selection of the major commodities and also gives 1982 and 1978-1982 Nominal Protection Coefficients"' for those products (the livestock NPC's are preliminaryestimates).
Taken from the analyses undertaken by the Research Institute for Agricul- tural Economics for the 1984 Agricultural Price Policy and Trade Study. - 53 -
Table 3.2: FARMGATE PRICES AND NOMINAL PROTECTION COEFFICIENTS FOR SOME MAJOR COMMODITIES (Ft)
Nominal Protection Coefficient 1984 prices At Official Exchange Rate Outputs Unit Ft. per unit 1982 1978-82 Av.
Beef kg. L.W. 69.00 1.09 0.92 Pigs kg. L.W. 40.51 0.97 0.96 Lambs kg. L.W. 86.00 1.16 1.06 Milk it 9.0 0.67 '' 0.87 Wheat ton 3441 0.55 0.57 Corn ton 3477 0.85 0.71
'-' Our own calculations, however, based on reconstitutingnon-fat dry milk at $1,135 per mt (border price) and butter fat at $2,135 per mt and allowing for 5X taste premium for fresh milk, suggests a 1984 NPC of about 0.85.
3.20 Approximately 852 of agricultural product prices are administered and the remainder are completely free. The share of free prices has been rising in recent years. There are three levels of administered prices:
i) Completely fixed prices, which represent about 60X of all prices. These cover most of the major agricultural products - wheat, sugar beet, unhulled rice, beef, pork, milk and wool.
ii) Prices set within a range (termed orientation prices). These represent about 12-13S of prices. Products in this group change, but normally have a stong export component. Currently winter apples, corn, sunflower, rye, and tobacco are the major ones.
iii) Minimum prices. Products in this group cover domestic and export products where it is felt that a floor price is necessary to protect producers especially small farmers. Although minimum prices are set for up to 27% of products, in practice the price of many such products seldom drop to the listed minimum. Products include poultry products and piglets.
3.21 Fixed consumer prices are linked to both producer and consumer subsidies. These function somewhat differently for different products but a representativeexample is given below for milk, which shows that Government subsidy payments represent an additional 89S on top of the price consumers pay for milk (Table 3.3).
3.22 Administered prices are seen by the Government as serving a number of purposes including:
(a) to protect consumers; - 54 -
(b) to protect producers, and sometimes to give differential support to certain types of producer (e.g. small farmers);
(c) given the above two objectives, to limit the amount of budgetary subsidies, since the bulk of the subsidies represent cross-subsidies from one group to another;
Table 3.3: MILK SUBSIDY (Pasteurized)
Ft/Litre
Retail 6.20 Retail margin 0.68 Price to plant 5.52 Subsidy to plant 3.53 Subsidized price to plant 9.05 Distribution cost of other dairies 0.48 Income of plant for extra butter oil 0.60 Total Income of Plant 9.65 Costs for plant including profit 2.65 Price to farmer 7.00 Direct subsidy to farmer 2.00 Income to farmer (Grade A) 9.00
(d) to influence production by redirecting resources within agriculture particularly towards higher convertible currency earnings;
(e) to iron out world price fluctuations (as opposed to trends), which are seen to be damaging to production if allowed to fall directly on the producer;
(f) to control what are seen as excessive "windfall" profits; and
(g) to utilize fully the available land area, perhaps even to substitute partly for differential land values.
3.23 The principles of pricing are based on average costs of production, (demand forecasts), likely supply response and all of the other items in this list. The price setting procedure starts in May. The Ministry of Agriculture produces estimates of production cost and world market price trends. These are then submitted to the National Materials and Prices Board, to the National Planning Office and to the Ministry of Finance. After discussion among these three institutions,normally followed by agreement and a joint position, a submission is put to the Council of Ministers. Final decisions on both fixed consumer and producer subsidies is in the hands of the Council of Ministers, with the National Council of Cooperatives represented on the Council.
3.24 Although the Government's long-run intention is to have prices for both inputs and outputs reflect international prices, the immediate intention is to continue to allow domestic costs to be the main determinant of domestic prices. The scope and extent of subsidies are to be reviewed but the Government stresses the need to protect consumers from excessive price - 55 -
Increases. Export subsidies will not be removed during the Seventh Plan period, and operating subsidies will be maintained where poor quality land is being cultivated.
3.25 The number of products with free prices has been increased in recent years. By next year nearly all the minor products will have been freed. The Governmentwill then be faced with tackling the more difficult products. Major item for domestic consumption still remain controlled. On the other hand, the Government has increased consumer prices of meat products by 20-25X, which represents a degree of real price increase that will significantly reduce the budgetary contribution. So, the picture seems mixed; good intentions,some action, some hesitation.
3.26 It is just as important to bring the price of inputs closer to border prices as it is the price of outputs, and in input pricing there is more room to maneuver. The Government has taken action to remove or at least reduce a number of subsidies, but the overall picture is also mixed. Tractor, farm machinery subsidies and herbicide subsidies have been eliminated. Prices of fertilizerwere increased 162 in January 1984 and a further 8S in January 1985, but the fertilizer subsidy is still currently 322. However, some subsidiesare being increased. In 1985 the "management subsidy" for slaughter cattle is increasing from a flat rate payment of Ft 6 per kg. liveweight to Ft 7 per kg. liveweight and for milk from Ft 1.6 per liter to Ft 2.0 per liter.
(ii) Land Pricing
3.27 The possibility of increasing land taxes and more accurately reflectingdifferences in productivity is being seriously considered. Currently it is estimated that the land taxes, which are based on a relative scale developed in 1860 (Gold Crown value), tax away about 502 of the differencesin income between good and bad land. Production on poor land is then supported further by various subsidies, such as that for sheep production. The Government have not yet decided the amount or the timing of any increases,but probably a new points system to assess relative values will be introduced in 1988 or 1989.
(iii) Recommendations
3.28 There is a political element in any judgment about how fast consumer food prices should be allowed to rise, which the mission is obviously not in a position to make. Nevertheless the experience of most countries has been that the long-termsubsidisation of any product, even those thought to be in inelasticdemand and supply, is not an efficient way to meet welfare objectives. In a country with as equal an income distribution as Hungary, the benefits and costs of subsidies are spread widely across the population, resulting in little or not welfare gain. Most people will end up paying at least as much as their subsidy benefit in taxation or higher prices of other goods. Because of budgetary difficulties, governments are always tempted to hold down the price paid to producers who therefore bear much of the cost of the policy, and face a disincentive to production. It is usually better to identify the group the government wishes to assist, and to find ways of increasing the incomes of that group, or at least of subsidising only the consumptionof that group. For this reason, some countries have used targeted food supply programs, such as food stamps. rather than general food - 56 - subsidies. We therefore support the general policy of removing food subsidies, and of applying border price equivalents at the farmgate; we hope that it will be pursued as vigorously as feasible.
3.29 There are additional inefficiencieswhere the relative prices of different products at farmgate and at the border are different. This is the case in Hunga-y (as in many other countries). Farmgate prices for crops are substantiallybelow border price equivalents; prices for livestock and livestock products are at or above them. In spite of recent measures to increase somewhat the overall level of grain prices to farmers, and also to increase the price spread between wheat and corn, grain prices remain about 25X below border price levels. Five arguments are used in support of a cautious approach to increasing domestic grain prices. First, the objective is not to export grain, but to ensure the profitability of livestock production. If the grain produced off one hectare of land is exported it gives about US$900 of foreign exchange, but if that same grain is fed through livestockand exported in the form of meat it gives about US$1400. A second, related argument is that the Government wishes to avoid a significant fall in livestockproduction. Third, even with grain prices that have been generally well below border price equivalents, total maize plus wheat production increased between 1970 and 1983 at a high average rate of about 4.71 per annum. It is therefore questioned whether higher prices would have led to still faster growth. Fourth, the Hungarian authorities note that internationalprices of agricultural goods are strongly affected by subsidies in other countries, that they are subject to large fluctuations, that moving to border prices might cause disruptive adjustments in production in response to large changes in relative prices. Finally, the Government cautions that agriculturalprice reform must be considered. As part of a comprehensive price reform in all economic sectors to ensure that an imbalance between agriculturaland industrial prices does not develop. Price policy must be discussed and formulated in the context of income, taxation, earnings etc., and compromisesmay have to be reached, for example with the demands of anti-inflationary policy.
3.30 The mission's view, that prices should move more quickly towards border price equivalents are based, first, on disagreement with the four of the lines of reasoning presented above and, second, on three additional lines of reasoning.
3.31 First, there are reasons to doubt whether higher grain prices would result in significantly lower total earnings of foreign exchange. If grain prices increase, the net foreign exchange earning from grain would rise, since it would pay to farm more intensively - for example, by increasing the level of inputs, particularly fertilizer, and the timeliness of cultivation and by pursuing more vigorously some of the newer innovations such as hormone seed treatments. Thus the foreign exchange gap for the average hectare would be reduced from the US$500 suggested. Even if there were any diversion of resourcesout of livestock into crops, it weuld not be the average livestock producer, on whose activities the US$1400 figure used above is based, who would divert, but rather the marginal producer, whose foreign exchange earnings are lower and whose domestic resource cost per unit of foreign exchange earned is likely to be higher than the already quite high average. - 57 -
The loss of such producers would have only a small negative impact on foreign exchange earning capacity and a significant positive impact on aggregate efficiency. I
3.32 Second, because of the large capital investments in livestock there are considerablesunk costs and thus a dampened supply response is likely. Neither enterprises nor small plot holders are likely to rush out of less profitableoptions immediately,unless they see that these options are definitelyunprofitable in the longer term, in which case abandoning livestock productionwould be desirable from a national point of view. In response to the third point, we note that it is indeed possible that with higher prices, growth would have been fascer. A 4.7% rate of growth in production of a commodityis by no means the highest that has been experienced in the world under favorable pricing conditions.
3.33 Fourth, if domestic prices are excessively determined by the existing pattern of costs, the structure of output will not adjust in line with Hungary'schanging long-run comparative advantage in international trade.
3.34 In addition to these arguments respond g to Government's main concernsabout moving closer to border prices for grains there are three other points of relevance. First, there is an investmentprogram planned (to be partly funded by the World Bank) whose main objective is to improve the efficiencyof those livestock operations which are capable of improving efficiency. This should make them more profitable and thus more competitive with grains. Second, one of the major problems with livestock production in Hungary has been the poor feed-conversion ratios compared to competitors, noted above (para. 3.06). The relatively low feed costs have encouraged inefficienciesand discouraged innovations such as the use of caustic soda treatmentof straw, which has been a widespread commercial activity in Europe and America for some years but has only recently been tested in Hungary. A higher opportunity cost for grains would encourage enterprises to adopt such technologicalimprovements which are already available. Third, one of the weaker areas of agriculture in Hungary is in the production of pastures, which still supply about 25Z of dry matter. It has been estimated that intensificationof the two-thirds of the permanent pasture land considered fertile could result in freeing for crops about 240,000 ha. of arable land currently used for fodder. This area would represent 38% of the current area devoted to maize silage and alfalfa production. Such intensificationwill only occur when the price of feedstuff reaches levels that make it profitable.
3.35 Perhaps the most serious source of inefficiency in the Hungarian agriculturalpricing system arises from the fact that many subsidies work against each other. For example, grain producers get cheap fertilizer and subsidized land reclamation but are penalized on the price of their product in relation to world markets. Such anomalies not only partially offset each other, but also require a complex regulatory mechanism and an increasingly large bureaucracy to operate.
Note that there are substantial variations in levels of efficiency on farms. For example, there is evidence that the costs of alfalfa production are 601 higher on poorly managed compared to well managed operations. - 58 -
3.36 The agricultural price study now being undertaken by the Research Instituteof Agricultural Economics is including about 12 livestock and crop products in the analysis of domestic resource costs and protection coefficients. The major analytical challenge will come at the final stages (later in 1985) when some attempt at forecasting the likely farm enterprise responses to alternative pricing scenarios will be needed. To date, supply response projections have not been a major component of research activities in Hungary. and such forecasts will therefore require a great deal of informed judgement. In spite of the considerable level of freedom for farm enterprises to make decisions on the basis of profitability, there remain a number of dampening and distorting influences on price responsivenessthat will be difficult to represent analytically. These include the continuing de facto, if not de jure, couitment to full utilization of all land regardless of profitabilityand the tendency of cooperative members to vote for continued high levels of employment.
D. Investment Policies and Plans a. The Volume of Investment
3.37 The strategy of relying on profitabilityat world market prices, to determine both the pattern of production and investment, rather than on centralizeddirection, means that there is no agreed view on either expected output or investment in agriculture during the Seventh Plan. As in other sectors, however, the implicationsof alternative scenarios are being explored. The one considered most realistic envisages about a 2.0S annual growth in the value of output for the sector as a whole. This 2X includes a growth in crop and livestock production activities of about 1.5X and a growth in the industr-al and agro-industrialactivities of about 4X. Because it is felt that a surprisingly modest growth in industrial investment by agriculturalenterprises during 1984 may be the possible start of a falling trend in the rate of investment in this subsector, the Government is examining possible measures that might accelerate such activity.
3.38 This scenario is consistent with the following output changes, but it must be stressed that these are very preliminary estimates:
(a) dairy export - no significant expansion;
(b) beef cattle - a modest expansion from 330,000 tons to about 345,000 tons;
(c) sheep - a modest expansion from 55,000 tons to 70,000 tons;
(d) pigs - maintain production at present level of about 1.4 million tons;
(e) poultry - some increase from 550,000 tons to 600,000 tons if market allows;
(f) grain production - from 15.5 million tons up to about 17.0 million tons in 1990; maize would increase at a somewhat higher rate than wheat since maize market possibilitiesare considered somewhat better. - 59 -
The percentage of trade to the CMEA market (both quota and over-quota convertiblecurrency trade) is expected to rise.
3.39 Agricultural investment was heavy in the 1970s, but has fallen in recent years; in addition there has been a switch away from agricultural activities to industrial ones. By 1985 the level of investment in agriculture in constant prices will have fallen for three years to levels well below those of the 1970's (see Table 3.4, below).
3.40 Agriculture is usually a very resilient sector; tractors can always be kept going for a few more years, and, in any case, the high levels of investment in 1978 and 1979 partly consisted of unnecessarily costly livestock structures. (For example, investments per cow space, which in the 1970's were running at about Ft 70-80,000, are now down to about Ft 30-40,000). It may also be economicallydesirable to give other sectors investment priority. However, there is obviously a limit to how much and how long the agricultural
Table 3.4: AGRICULTURAL INVESTMENT AS A PERCENTAGE OF 1974 (At constant prices)
Year (%)
1974 100.0 1975 110.3 1976 104.3 1977 113.7 1978 124.7 1979 122.8 1980 108.1 1981 117.2 1982 118.3 1983 99.4 1984 86.5 1985 (expected to be lower than 1984)
sector can be squeezed. There is statistical evidence that machinery replacementsare not keeping up with machinery write-offs - the average age of tractors has been increasing steadily since 1979. This could be serious in a sophisticatedsector where replacement is invariably also the moment for incremental investment in a newer yield-increasing technology (e.g. tractors with equipment, combines). On the other hand, mission visits to a few cooperative enterprises did not suggest imuinent disaster, although poor performers who cannot easily borrow are apparently in considerable trouble. If the level of investment does not rise above that of the most recent past, it will be increasinglydifficult for agriculture to grow at rates of 2Z-3%. To achieve a growth of agricultural output of about 2.0Z, coupled with a significant contribution to an improvement in the external equilibrium, probably requires average Gross Fixed Investment levels to start the plan period at least as high as the 1982 level in real terms, and to enjoy some modest growth during it. There is no way of proving analytically that such a level is appropriate but there is some evidence that investment levels have been too low during the last two years to sustain output in the longer term. - 60 -
The current expectation that investment during the Seventh Plan will be about the same level as during the Sixth, suggests that it may be difficult to achieve the targeted growth rate. b. Sources of Finance
3.41 The mechanisms for achieving the necessary level of total investment in agriculture in the decentralised system consist first, of the overall pricing, taxation, and regulatory environment which affects the amount of profit available for investment and the willingness of enterprises to commit these resources; these more general factors have been discussed earlier in this Report. The capacity of Hungarian agriculture enterprises to finance investment with their own resources is considerable (Table 3.5). In addition, enterpriseswill have access to the increasingly competitive banking system.
3.42 In the Seventh Plan period, a few investment projects involving construction,new vines and orchards, land reclamation and irrigation will receive some state subsidy. Foreign exchange financing will come largely from three sources: first, Government's own foreign exchange resources - which to date have been fairly readily available for CMEA imports, but have been more tightly controlled for imports of equipment from convertible currency areas, generally considered technologicallymore advanced; second World Bank Projects, providing perhaps US$200 million over the Five-Year Plan Period; and, third, suppliers' credits.
Table 3.5: PERCENTAGEOF INVESTMENTSBY SOURCE (State and Cooperative Farms)
own Subsidies Year Equity Credit Grants Total
1974 41 24 35 100 1975 49 18 33 100 1976 47 19 34 100 1977 44 19 37 100 1978 48 15 37 100 1979 49 15 36 100 1980 58 17 25 100 1981 62 19 19 100 1982 68 18 14 100 1983 76 13 11 100 1984 71 20 9 100
Source: MA Stagek.
(i) Own Resources
3.43 It seems probable that own equity contributions to investment by enterpriseswill remain high at about 752, with the credit contribution runningat an average of, say, 20S. The Mission hopes that subsidies/grants will decline substantiallyby the end of the period. The future ability of agriculturalenterprises in Hungary to cover much of their investment needs from their own resources seems to be confirmed by the HAM models referred to above. During the initial period of the Seventh Five-Year Plan, the percentage of own equity contribution to investments is likely to be - 61 - particularly high because the main need for the economy as a whole is still going to be to contain investment at a moderate level and this is likely to be incompatible with very high levels of credit and grants. A higher level of investment is projected for the second half of the Plan period. If. as suggested on other grounds, grain prices are raised, profits should be larger and the incentives to invest them greater, though initially this may be offset by the increased freedom to channel higher proportions of profits towards wages and bonuses after a period of austerity.
(ii) Credit
3.44 We have argued earlier that agricultural growth may be affected if the relatively low levels of investment of the last three years continue. Since there is no evidence that investment out of enterprises' own resources is likely to rise rapidly (having fallen in real terms for the last 3 years) and since subsidies and grants are gradually being reduced, a modest substitution of credit for these other resources seems sensible. The mechanism of credit supply itself will probably benefit from increased competition because, although NBH appears to be a relatively efficient institution, competition could probably still reduce costs considerably. In particular, the number of staff working on agricultural lending for NBH appear excessive and although costs are quite low relative to other similar institutions, costs should be low because of the unique clientele consisting of a small number of very large, sophisticated farms.
(iii) Subsidies/Grants
3.45 Investment Subsidies and Grants have been used in the past as a means of influencing the level of investment in the agriculture sector. However, by 1983 they had been reduced to 11 of the total investment and at that level are less an influence on total investment in agriculture than they are on the relative balance of investments within different agriculture subsectors. These grants will therefore be discussed further under the next section. c. The Technical Composition of Investments in Agriculture
3.46 The table below shows the balance of investment in agriculture over Past years.
Table 3.6: AGRICULTURAL INVESTMENTS BY TYPE OF INVESTMENT 1974-1983 (Ft m. in current prices)
Year Construction Machinery Other Total
1974 7,659 10,203 1,920 19,782 1975 8,177 11,823 2,215 22,215 1976 7,867 12,345 2,175 22,387 1977 9,351 13,363 2,394 25,108 1978 10,797 14,629 2,893 28,319 1979 10,225 14,846 3,264 28,335 1980 9,494 12,840 3,525 25,859 1981 11,776 13,298 3,815 28,889 1982 11,930 14,649 3,723 30,302 1983 10,952 13,243 3,529 27,724
Source: Central Statistical Office. - 62 -
3.47 While there have been no very dramatic changes, the ratio of constructionto machinery investments has changed somewhat from an average of 0.69:1.00 in 1974-1976 to 0.84:1.00 in 1981-1983. There are several factors at work here. First, although constructioncost per unit of livestock has fallen, this has been more than offset by a steady increase in the relative importanceof livestock investment, which involves more construction. Alongside this trend, crop machinery investments have lagged somewhat. In addition, there has been a reduction of machinery investment, which in the 1970s was often used in over-elaboratemechanized buildings. The mission was unhappy to learn that a subsidy to dairy housing, which was removed in 1984, was restored in 1985. This appears to be a retrograde step.
d. InvestmentPriorities
3.48 For the next few years, the level of aggregate investment will be relatively low. This means that a high proportion of agricultural investment will have to go into replacement. There is still considerable debate both about the likely pattern of investment in agriculture, and also about priorities for non-enterprise investment. It is widely expected, however, that the proportion of investment by agricultural enterprises in industrial types of investment will probably be somewhat lower during the next plan than its past 8-9%, since many of the previously available opportunities for servicingand processing have been taken up. Under what is considered by the Government to be the most realistic of the Plan scenarios, it is expected that about 55S of the investment expected in agriculture will be in machinery and equipment (compared with 48Z in 1983), 30S in buildings (compared with 40% in 1983), and 151 in other expenditure, such as land reclamation, plantations etc. (which were 131 in 1983). It should be noted that these projections are very preliminary.
3.49 The mission was told that the following general order of priorities will be adopted in the choice of Seventh Plan investment:
i) upgrading of technology;
ii) investments to increase export commodities; includes livestock production and processing (partly covered by a World Bank funded project);
iii) protection of arable land and improvement of its productivity (land reclamation);
iv) modernisation of fixed assets; replacement of depreciated machine stock; procurement of new machinery;
v) development of food processing industry and other supplementary activities;
vi) irrigation (it is hoped to increase the irrigated percentage of crop area from 41 to 5-71 by the end of the 5-year period); and
vii) modernizationof fruit production and vineyards. - 63 -
3.50 Most of these investment priorities seem consistent with short term concernsabout the balance of payments and also with longer term development objectives. However, we express here concerns about two items in this list, land reclamation and irrigation,which seem of lower urgency than the others. We also would urge that small-scale farming be given somewhat greater priority than it appears to have at present.
(i) Land Reclamation and Irrigation
3.51 Preliminary indications are that some land reclamation and irrigation projects in Hungary may have very low economic rates of return and therefore may not score well with respect to the longer term growth objectives. Furthermore,since neither type of project seems to have high immediate foreign exchange earning capacity (both have unpredictable payoffs related to rainfallvariation), they also seem unlikely to score well with respect to the shorter term objective. There is a danger of oversimplifying this argument, since land reclamation means anything from a bag of gypsum to major earth works. There will no doubt be many individual enterprise situations that will deviate from the average and be profitable. It is hoped that farms will carry out only projects that are economically efficient. Nevertheless, overall policy - as reflected by incentives such as grants and purpose-specificlines of credit - are often, by necessity, relatively unselective, and therefore the "average"picture cannot be entirely dismissed.
3.52 Improving low returns to land reclamationby superimposing an intensivecrop investment package would only make economic sense if intensive crop production investments had already fully exploited the productive potentialof all the land in Hungary which did not need reclaiming. In present circumstances,when investment is tight and when there is evidence that the sector is not even keeping up with equipment replacements, this is not the situation. The need to hold down investment over the next few years implies a temporarily higher opportunity cost of capital, which would lower the priority of longer gestation projects such as the larger land reclamation and irrigation projects. As noted elsewhere in this Report, NBH is now expectingthat industrial projects to be financed during the Seventh Plan period will have internal rates of return significantly above the 15S that has been considered adequate in the past. In industry, as well as in agriculture, the cut-off line is going to need to be drawn higher up the priority list than in the past. Of course, to the extent that NBH can do individual sub-project economic analyses and can choose the best by ranking them alongside other investmentsin the sector (and, if possible, outside the sector), a portion of the individual land reclamation and irrigation proposals may well be justified. But they would not then need a supporting subsidy. While acknowledgingthat there is untapped production potential in existing land, even if rates of return do not seem very high, Hungarian officials are committed to land reclamation to counteract the decrease in fertile land. The large scale and high cost of such projects and their long-term objectives make central funding the only possibility. No judgment on this issue can be made until preparatory work has progressed to the stage where the economic analyses of models are more complete. But at that time the implications of these analyses need to be carefully studied in the light of the current situation. - 64 -
(ii) Small-Scale Farming
3.53 Small-scale farming seems to have much to commend it as an important investmentpriority. In particular, it offers a way of more fully utilizing domestic resources. Many Government staff are well aware of the potential for improvementin this subsector so we do not propose to reiterate the complete lisE of ideas being discussed within Government. There does not appear to be a major need for credit (still less for foreign exchange) since there seems to be an adequate level of liquidity in the rural areas for small farm investments. However, we do flag here three areas whose improvementsmight have a high return: first, permitting greater flexibility of size; second, pricing policy; and third, advisory services.
3.54 Flexibility of Size. Where there is not a free land market, the efficiencyof small-scale farming depends on whether the typical land/labor ratio arising from the size of plots and families, is suited to the available technologiesand is consistent with the best national pattern for applying labor and capital to land. Management and investment indivisibilities sometimesimply that a dualistic production pattern of large and small farms is, in fact, optimal. There is some evidence that, in Hungary, the rules allowing a maximum of 0.6 ha per person are not seriously sub-optimal because quite a few farm members do not take up the full land allowance to which they are entitled. Some prefer to put their land allowance in with the large farm and take their annual income share from that. Others find the full allowance of land to be beyond what they can handle. In these two cases the size restrictior.does not seem to be reducing efficiency.
3.55 Nevertheless, averages and general conclusions derived from them often disguise inefficienciesat the margin. It seems probable that there are a number of farming activities (e.g. specialized seed production, some vegetable crops, integrated crop/livestockactivities capable of efficiently carrying small feed milling or harvesting equipment etc.) that are more suited to land areas larger than the permitted maxmum. The mission understands that some cooperative fmxnis have developed land-lease arrangements to allow families larger land areas under certain circumstances and this should be encouraged and possibly extended. The same argument may, in fact, be also relevant to large farms. The lack of flexibility in size probably imposes handicaps in terms of management efficiency. We understand that recently the 0.6 ha. restrictionhas been relaxed to some degree. There are strong economic arguments for encouraging such flexibility in every way possible and for reducing other restrictions such as those that have, in the past, prevented small farmers from owning equipment of more than 35 h.p. Such flexibilityis an effective means of exploiting any slack in the system and getting substantial production increases at low opportunity cost.
3.56 Prices. The elimination of consumer subsidies would almost certainly have a positive impact on small farm production. Subsidized consumer prices often have been the most serious handicap to efficient small farm production worldwide. Low prices hit production and efficiency in three ways. First, they result in a large proportion of the farm's subsistence production, which is often a significant proportion of its total production, being sold off the farm and bought back. If the differential is large enough farmers are likely to buy commodities from retail outlets for resale at the farmgate. This is - 65 - serious inefficiency. Second, subsidized prices reduce efficient marketing of farm products to local consumers. Third, subsidized consumer prices have, through their pressure on farmgate prices, a similar overall depressing effect on productionas that on large farms.
3.57 Advisory Services. It is important also to ensure that the technical advice that reaches small farms, whether from parent farms, radio programs etc., is not excessively derived from research for large operations. We have not made any study of this, and our comment is a general one based on experienceelsewhere. Relative to large farms, small farms generally have quite high levels of output and profit per hectare yet rather poor technical achievementcoefficients. Within reasonable limits, this may be optimal, if it represents an attempt by the owner/manager to maximize returns to labor. Thus, there is often a need for different technical recommendations. Economic analysis of this technical advice is particularly important for small farms; large farms are more capable of doing it themselves.
E. Marketing Institutions
3.58 The Government has already dismantled several of the monopoly marketing trusts. This has been advisable to improve efficiency. Managers of farms seem generally to be in favor of greater marketing and price freedom in the sector. But, as with prices, the easier trusts have been dismantled first. Although it appears to be the intention to dismantle the Grain, Dairy and Meat Trusts in due course, and in the interim, to increase their financial autonomy, there do not appear to be any definite plans to do so during the next few years.
3.59 Breaking up these Trusts, or at least keeping them only as buying agents for fulfilling CMEA treaty agreements and perhaps holding buffer stocks and stabilizing price extremes, would be a major undertaking. It clearly needs careful study and design. But the view, which appears quite widely held in Hungary, that monopoly exporting in grain must remain because enterprises do not have the expertise in this field, does not seem consistent with the recent history of agricultural enterprises, which on the production side have moved into a whole range of totally unfamiliar activities from the manufacture of plastic bags to tourism. Indeed, in terms of imaginative enterprise, Hungarian agricultural cooperativeshave been very impressive. So, while one would expect teething problems (as is currently being experienced in wine exporting), it would be surprising if these lasted for long. Dismantling the larger trusts should be pursued. - 66 -
ANNEX IV
TRANSPORT, COMMUNICATIONSAND WATER
A. Inter-Urban Transport
Introduction
4.01 Hungary's transportationsystem comprises about 8,000 km of rail, 30,000 km of arterial roads, 1,300 km of regularly navigable rivers and canals, one internationalairport and a fairly large pipeline network. Railways and roads are the backbone of the transport system, carrying about 722 of total freight and more than 972 of passenger traffic, while water transport has retained an important and competitive place as a carrier of bulk materials over long distances (Tables 4.1 and 4.2). Budapest is the hub of all transport systems, a primary node on the major pipeline system and the busiest of the Danube river ports.
4.02 Trunk routes and internationalconnections are of special concern because of the importance of foreign trade to the economy and because, with borders with five countries, there is an important quantity of transit traffic. In 1983, total export/import trade required the transport of more than 30 million tons (excluding pipeline traffic) predominantly by rail (Table 4.2). Transit movements were more than 20 million tons. The Hungarian railways rank among the leading transit enterprises in Europe. This is a profitable activity for Hungary, since tariffs are 1.5 times domestic ones and little marshalling is required. Road transit traffic is sizeable too, about 170,000 foreign trucks annually. By internationalagreement within Europe, no tolls are levied on this traffic.
4.03 Between 1960 and 1980, total freight traffic grew almost in parallel with per capita income at about 5-62 per annum. Public passenger transport grew by about 2S per year and private transport by about 15-202. Growth slowed in the early 1980's, reflecting Hungary's slower growth of output and trade (Tables 4.1 and 4.2). The railway's share of total freight traffic (in ton-km) decreased from about 802 in 1960 to less than 501 in 1983, with a corresponding increase in the percentage carried by road, waterways and pipelines. For public passenger traffic, the railways' former dominance passed to roads in the early 1970s and the current rail/road share is about 281 and 691, respectively (Table 4.2).
4.04 The total number of passenger cars has increased rapidly in Hungary: from about 33,000 in 1960, to 240,000 in 1970, to nearly 1.3 million in 1983. They are used largely for leisure and for activities connected to private small-scale enterprises and to private plot farming rather than for commuting. The fact that only 111 of all commuters in the country (131 in Budapest) use private cars is at least in part because of the efficient and - 67 -
Table 4.1: FREIGHT TRAFFIC BY MODE OF TRANSPORT 1960-83 L' (a. ton-km)
Year Rail Road Water Air Pipelines Total
1960 13,346 1.890 1 1,353 1 97 16,687 (80.0js' (LI.3) (8.1) (0.0) (0.6) (lOO.O) 1970 19,821 5,820 2,879 11 1,043 29,574 (67.1) (L9.7) (9.7) (0.0) (3.5) (LOo.0) 1975 23,541 8,731 4,259 L2 3,092 39,635 (59.4) (22.1) (10.7) (0.0) (7.8) (lOo.o) 1976 23,156 9,441 4,462 19 3,595 40,672 (57.0) (23.2) (10.9) (0.0) (8.9) (100.0) 1977 24,181 10,439 6,187 22 3,737 44,566 (54.3) (23.4) (13.8) (0.1) (8.1') (100.0) 1978 24,500 11,462 6,807 27 3,886 46,b82 (52.5) (24.6) (14.5) (0.1) (8.3) (100.0) 1979 24,661 11,773 7,026 32 4,291 47,783 (51.6) (24.6) (14.7) (0.1) (9.0) (100.0) 1980 24,399 11,403 7,889 Z8 4,393 48,113 (50.5) (23.6) (16.3) (0.1) (9.5) (100.0) 1981 24,342 11,759 8,507 25 4,387 49.02O (49.6) (24.0) (17.4) (0.1) (8.9) (100.0) 1982 23,273 11,883 8,201 29 4,673 47,859 (48.6) (24.8) (17.1) (0.1) (9.4) (100.0) 1983 23,079 11,951 8,376 23 4.335 47,763 (48.3) (25.0) (17.5) (0.1) (9.1) (100.0)
Average Distance (km)
1960 137.6 14.0 237.8 750.0 73.1 69.8 L970 168.3 14.3 265.9 1674.1 113.1 54.3 1975 178.3 17.4 310.2 1838.5 167.2 59.6 L976 175.6 18.1 320.4 2279.4 173.4 59.1 1977 179.3 18.5 449.0 1935.9 191.6 61.0 L978 181.2 19.4 470.5 2150.1 186.7 61.3 1979 183.5 19.5 500.9 2076.4 193.3 61.7 t980 187.4 19.5 591.9 1976.5 187.0 64.1 1981 185.5 19.6 630.2 4/ 182.9 63.9 1982 183.1 20.6 622.0 4/ 173.2 64.3 1983 186.3 21.3 641.5 41 170.9 66.0
Tonnage (Millions)
1960 97.0 135.2 5.7 5/ 1.3 239.2 1970 117.8 407.0 10.8 5/ 9.2 544.8 1975 132.1 501.3 13.7 51 1S.5 665.6 1976 131.9 522.7 13.5 5/ 20.7 689.2 1977 134.8 563.5 13.8 S/ 19.5 731.6 1978 135.2 591.3 14.5 5/ 20.8 761.8 1979 134.4 604.4 14.0 5/ 22.2 775.0 1980 130.2 584.0 13.3 5/ 23.2 750.4 1981 131.2 598.3 13.5 51 24.0 766.9 1982 127.1 577.9 13.2 5/ 25.8 764.0 1983 124.0 561.8 13.1 5/ 25.4 124.2
1/ Both for public and private use 2I/ Figures within parenthesesdenote percentages. 3/ Estimted. 41 More than 2000 km. 5/ Less than twenty thousand tons.
Source: Hungary - StatisticalYear Book, 1980-1983.
December 1984 - 68 -
Table 4.2: PUBLIC PASSENGER TRANSPORT, 1960-83
A. By Type of Journey
Passengers Carried (Millions) Passenger-Kilometers (Millions) Long Local Long Local Year Distance Traffic Total Distance Traffic Total
1960 725.1 1,560.7 2,285.8 18,128.6 9,404.1 27,532.7 1970 1,003.3 2,142.3 3,145.6 24,029.7 10,043.4 34,073.1 1975 1,107.8 2,384.8 3,492.6 26,935.9 11,374.7 38,310.6 1976 1,127.6 2,429.9 3,557.5 27,197.7 11,646.0 38,843.7 1977 1,146.5 2,498.2 3,644.7 27,987.7 11,922.6 39,910.3 1978 1,165.7 2,546.1 3,711.8 28,583.2 12,145.7 40,728.9 1979 1,183.5 2,608.1 3,791.6 29,055.4 12,451.8 41,507.2 1980 1,187.1 2,656.2 3,843.3 29,361.3 12,648.1 42,009.4 1981 988.3 2,976.9 3,965.2 29,044.2 14,068.7 43,112.9 1982 980.0 3,013.9 3,993.9 28,522.6 14,222.1 42,744.7 1983 914.3 3,065.L 3,979.4 25,727.3 14,425.4 40,152.7
B. By Mode of Transport
Passenger-Km (Millions) Year Rail Road and Urban Water Air Total
1960 14,323.8 13,051.1 82.6 75.2 27,532.7 (52.0)1' (47.4) (0.3) (0.3) (100.0) 1970 16,339.1 17,250.7 59.1 424.2 34,073.1 (48.0) (50.6) (0.2) (1.2) (100.0) 1975 15,823.5 21,854.1 77.4 555.6 38;310.6 (41.3) (57.0) (0.2) (1.5) (100.0) 1976 15,569.9 22,649.4 71.7 552.7 38,843.7 (40.1) (58.3) (0.2) (1.4) (100.0) 1977 15,396.2 23,732.3 75.8 706.0 39,910.3 (38.6) (59.4) (0.2) (1.8) (100.0) 1978 14,928.7 24,907.2 83.2 809.8 40,728.9 (36.7) (61.1) (0.2) (2.0) (100.0) 1979 14,611.7 25,791.1 78.0 1,026.4 41,507.2 (35.2) (62.1) (0.2) (2.5) (100.0) 1980 14,655.8 26,200.9 76.3 1,076.4 42,009.4 (34.9) (62.4) (0.2) (2.5) (100.0) 1981 13,544.6 28,243.7 79.0 1,245.6 43,112.9 (31.4) (65.5) (0.2) (2.9) (100.0) 1982 13,070.5 28,321.1 86.5 1,266.6 42,744.7 (30.5) (66.3) (0.2) (3.0) (100.0) 1983 11,104.5 27,793.1 74.2 1,180.9 40,152.7 (27.7) (69.2) (0.2) (2.9) (100.0)
' Figures within parentheses denote percentages.
Source: Hungary - Statistical Yearbook, 1980-1983.
December 1984 Table 4.3: AN INTERNATIONALCOMPARISON OF MOTORVEHICLES PER CAPITA. 1980
Income Per Passenger Coamercial Passenger Comercial Commercial Capita Population Cars Vehicles Cars Per VehiclesPer Vehicles US Dollars Millions Thousands Thousands Thousand Thousands as Percentage 1982 1952 1980 1980 Population Population of Total Nuter ill Ill (2) 121_ 1280 ilim ofi Vehicles
Oenmark 12,470 5.1 1,397.9 267.5 274 i2 16 German Fed. Rep. 12,460 61.6 23,191.6 1,570.5 3276 25 6 Belgium 10,760 9.9 3,15.1 311.6 319 32 9 Austria 9.8S0 7.6 2,24720 S26:1 296 69 19 United Kingdom (3) 9,660 S5.8 14,209.0 1,798.0 256 32 11 Italy 6,840 56.2 17,686.2 1,68J.4 314 30 9 1 Spain 5,430 37.9 7,556.5 1,380.9 199 36 Is 0% Greece 4.290 9.8 163.4 420.0 O8 41 33 '0 Yugoslavia (2) 2.800 22.6 1,S57.1 256.9 32 11 12 1 Argentina 2.520 28.4 NA NA NA NA NA Portugal (3) 2,450 10.1 1,161.4 368.6 llS 36 24 Mexico 2,270 72.1 4,254.9 1,572.9 S8 22 27
Hungary 2,270 10.7 1,012.4 162.8 95 15 14
Korean Rep. 1,910 39.3 249.1 269.4 6 7 52 German Oem. Rep. (3) NA 16.7 2,392.3 600.7 143 36 20 Czechoslovakia NA 15.4 2,274.9 340.1 148 22 12
SgLrne5; (1) World Tables, IURO, 1983 (2) Statistical Yearbook 1981, United Nations, 1983 NoLts: (3) 1976 Data - 70 - very highly subsidized urban public transport systems discussed later in this chapter. Hungary does not produce passenger cars, all are imported. Imports grew rapidly between the early sixties and 1980, from 1,000 in 1964 to 104,000 in 1980, or an average annual growth rate of 161. In 1984 about 93,000 cars were imported, 4 percent more than 1983 but 15X less than in 1980. Of those 93,000 cars, 6,000 were imported by Hungarians working abroad, mostly from non-CHEA countries. The remainder, except for 2,700 Zastava cars obtained from Yugoslavia through barter trade, are obtained from CMEA countries. Most cars are imported from the Soviet Union, the German Democratic Republic and from Czechoslovakia, and their price is low by international standards - a car with a two stroke engine costs about Ft 80,000 and one with a four stroke engine about Ft 150,000 - but average delivery times are two tc)three years. Hungarian experts consider that appropriate car prices can only be determine-d in the context of other consumer good prices, consumer habits, life styles and living standards. Hungary's number of cars per 1000 population is higher than developing countries with similar per capita incomes but lower than in European, socialist and other countries with the same level of development. Hungary seems to have a very low level of commercial vehicles per 1000 population (see Table 4.3), but the numbers are reported to be increasing very quickly.
a. Strategic Considerations in the Choice of Transport Investments
4.05 The Government intends to continue a policy of encouraging free market competition,while fostering energy conservation. The main policy instrumentsare to be pricing measures. Its main investment priorities are to remove bottlenecks,especially where this would promote international and transit trade, and to improve efficiency in a number of important respects. The general intention is to see a modernization of freight transport, with appropriate cooperation among the producing, warehousing and forwarding units and the users. Consequently, transport technology for bulky goods, or othar gooOs suited for the formation of unit-loads, including palletization, pre-slingingor containerization,is being introduced and extended and is increasinglyaddressed in the investment plans. The Government also intends to strengthen the transport companies' self-financing capabilities. Mass public transport is to be further encouraged.
(i) Railways
4.06 Hungarian National Railways (MAV) are characterized by high volume operation on a limited part of the railway network. About 20-25Z of the network mileage carries about 70S of freight traffic volume while the rest, particularlybranch lines, is relatively underutilized and some lines are unremunerative. This has two important investment implications. First, it would imply that railway investments in Hungary should be focused primarily on main lines with particular potential for improved ser';ices,thus avoiding dispersion of effort over a large national network. Second, it implies that, followingappropriate studies, uneconomic services should be closed and measures taken over a reasonable period of time to resolve the resultant staff surplus.
4.07 Such measures have already started. In keeping with an aim of concentratingon services which railways can provide more efficiently and - 71 -
Table 4.4: TRANSPORT OF GOODS BY TYPES OF TRAFFIC ('000 ton)
1981 1982 1983
Rail Transport
Inland Traffic 80,936 79,807 76,285 Import Traffic 20,112 18,965 20,106 Export Traffic 11,271 10,908 10,799 Transit Traffic 18,107 16,796 16.201
Total 130,426 126,476 123,391
Road Transport
Inland Traffic 236,231 236,356 229,022 Import Traffic 351 399 515 Export Traffic 577 551 781 Transit Traffic 2.456 821 4,456
Total 239,615 238,127 234,774
Water Transport
Inland Traffic 1,860 1,936 1,694 Import Traffic 986 787 939 Export Traffic 982 892 900 Transit Traffic 514 626 559
Total 4,342 4,241 4,092
Source: Statistical Pocket Book of Hungary, 1983.
which are financially more profitable, while withdrawing from services which can be provided better by other modes, about 1,400 km of uneconomic railway lines were closed during the last decade and the handling of freight transportatabout 270 railway stations was redirected and concentrated at suitably equipped district rail stations during the same period. As this restructuring proceeded on a step-by-step basiF the number of railway personnel was reduced from about 150,000 in 1 ,0 to about 135,000 in the early 1980's.
4.08 The recent trend of modest traffic growth would indicate that the railways should concentrate primarily on cost-reducing (modernization of marshalling yard, track renewal and maintenance, electrification, etc.) and safety-oriented investments (e.g. signalling and telecommunications) rather than capacity expansions (e.g. new lines, track doubling, etc.). Investments for track improvementswith the introduction of modernized high capacity - 72 - multi-purposetrack maintenance machinery on lines with substantial traffic potentialwould yield the greatest benefits.
4.09 The railways are another activity where pricing policies diverge for products sold to other enterprises (i.e., freight), and those sold directly to consumers. Like other enterprises, MAV is expected to try to be profitable, but its freight rates and passenger fares are subject to approval by the Prices and Materials Board. Freight rates are maintained at levels which enable KAV to cover all appropriate costs, including interest charges, by tariff revenues. This will enable a high proportion of the proposed railway investmentduring the Seventh Five-Year Plan to be financed from MAV's own resources,although the amount is not yet determined. Separate tariffs for import and export traffic are higher than those for domestic freight, while tariffs for transit traffic are fixed by international conference and are generallyabout 50% higher than those for import/export. While total NTKm (net ton-kilometers)in 1984 divided approximately into domestic traffic, 45%; import/export,32%; and transit, 23%; revenues accruing from each were approximatelyequal.
4.10 Revenue from passenger fares covers only about 45% of costs of passengertraffic, with the Government paying a subsidy to the railways to cover the balance of costs. In 1980 and 1981, the subsidy accounted for about 70% of passenger revenue. Following an increase in fares of 100% at the beginningof 1982, the level of subsidy fell to 55% of passenger revenues or 14% of total railway revenues in that year. By MAV's calculations, fares for journeys of 80 kms and over cover their costs in full so that the subsidy relatesalmost entirely to suburban and commuter traffic, which forms the bulk of EAV's passenger traffic (about half of all journeys are less than 30 kms). Other modes of urban transport are also highly subsidized, as we discuss below.
(ii) Roads
4.11 The present share of road traffic in international trade (about 1 million tons per year) is conspicuously low (Table 4.4) compared with railways (more than 30 million tons per year), despite the fact that the country exports a considerable quantity of agricultural and animal husbandry products, textilesand leather goods, all of which in other countries generally favour road transport. Several factors contribute to this apparent inter-modal misallocation. Although the main international road freighting agency in Hungary, Hungarocamion (HC), is highly competitive and operationally efficient, the size of the fleet is insufficient, and there is a lack of modern fuel-efficientcompetitive commercial vehicles and support facilities are inadequate. In addition the 2,200 km of main roads, which radiate from Budapest and serve the country's major industrial and commercial activity, carry heavy traffic volumes. Six of the nine bridges across the Danube are within the city of Budapest, and have become increasingly congested. Bottleneckshave already developed on the principal trade routes in Hungary. Unless timely action is taken, these bottlenecks could prove a serious impediment to the country's foreign trade and also to its energy conservation programs. In consequence, the trunk road system is being gradually upgraded to proper design standards in keeping with regional transport needs. Agriculturaland farm roads are being given special attention, with an eye to the promotion of exports. - 73 -
4.12 Price ceilings have been established to protect customers in remote areas, but otherwise there is considerableprice flexibility. Trucking has been comparativelyprofitable. Trucking companies have had to pay a special tax based on an estimated 40X of depreciation. This did not apply, however, to trucks owned by other productive enterprises,which are now a majority of all trucks and which are also allowed to compete for the transport of goods of third parties. There is an intention to move to a uniform tax on road vehicles.
(iii) Energy Conservation
4.13 Transport, including privately owned vehicles, is responsible for roughly 9-10% of total energy consumption,and uses about 70X of the total gasoline supplies and 28X of diesel and fuel oil supplies. The energy costs of transportcome to about Ft 6.0 billion (about US$130 million) per annum. At present, rail accounts for only about 10X of the energy used in transport, having declined from about 25X during the last ten years. This partly reflects the modernization of the traction fleet which has been the main featureof recent railway development (though it also reflects the relative declineof railway transport). Road transport now accounts for about 80X. A reductionof energy use needs to focus especially on actions that will improve vehicle operation and maintenance, increase the payload of trucks, lead to more efficient utilization of vehicle fleets, improve urban traffic management,rationalize railway operations and facilitate a more efficient road traffic flow (e.g. by the constructionof Budapest by-pass). Since intermodaldecisions will reflect costs at market prices, fuel pricing decisionsare extremely important. In recent years, domestic prices of fuel (includingpetroleum products) have been increased and are now more aligned to internationalimport prices in convertible currency trade (Ft 18.5-21.5 per liter fir gasoline of varying octane and Ft 9.5 per liter for diesel oil). b. Transport Investment in the Seventh Five-Year Plan
4.14 Except for road vehicles and special purpose machinery, decisions about which are taken by enterprises, most transport investments are centrally determined. Large construction projects, such as a Danube bridge, fall into the planning category of "major central investments"; the others are usually in the category of "target-grouped investment" (discussed above paras. 5.09-5.19of Vol. I). In other words, since they deal with networks that need central coordination,decisions about them are made centrally. Transportaticn projects included in the plan originate at both local and central levels of governmentand from enterprises. Review and coordination of new investment proposals in the transport sector is the responsibility of the Ministry of Transport (MOT) which submits its program to NPO.
4.15 The Government expects recent trends in the pattern of transport use to continue during the Seventh Plan. It forecasts a moderate increase (about 5-10X by 1990) in goods transport during the Seventh Five-Year Plan (1986-90) with a decline in the share of the railways and a rise in that of road transport (Table 4.5). The pattern will be similar for passenger transport. Work-relatedtravel will increase little while personal, tourist and excursion travel will expand significantly. With the increasing number of private cars, - 74 -
Table 4.5: PROJECTED MODAL SPLIT, FREIGHT AND PASSENGERTRANSPORT, 1980-90
A. FreiRht Traffic
(Percentage) (Actual) (Estimated) Mode of Transport 1980 1985 1990
Rail 50.7 49.1 47.1 Road 23.7 27.2 29.1 Water 16.4 13.1 13.4 Air 0.1 0.2 0.1 Pipeline 9.1 10.4 10.3
100.0 100.0 100.0
B. Passenger Traffic
(Percentage) (Actual) (Estimated) Mode of Transport 1980 1985 1990
Rail 32.5 32.5 30.2 Road and Urban 64.7 64.6 66.5 Water 0.2 0.1 0.1 Air 2.6 2.8 3.2
100.0 100.0 100.0
Source: UN - Inland Transport Committee Document Trans/AClR9/Amend 1, February 16, 1981. Hungary - Statistical Yearbook, 1980 Mission Estimates - 75 - the proportion of private transport will continue to rise, but the priority of high occupancy public transport will be guaranteed both in development and in operation.
4.16 Table 4.6 presents transport sector investments (excluding urban transport)for the different modes for the years 1980-84 and a preliminary plan for investment during 1986-90. On the average, transport sector investmentduring 1980-84 came to Ft 19 billion per year. In real terms, the investment in the transport sector during 1986-90 will be slightly lower. The investmentsin two subsectors, namely, railways and roads including road transport,accounted for 85-90% of total investments in the transport sector during 1980-84. The same pattern will persist during the next Plan Period (1986-90). Investments in river port, shipping, aviation and pipelines all taken together would account for only 10% of the transport sector investments. Within the major subsectors (railways and highways), however, there will be a substantial shift in emphasis in the forthcoming Plan Period.
(i) The Railway (MAV) Investment Plan (1986-90)
4.17 In view of the modest traffic growth and the present conditions of financialstringency, MAV's Investment Plan (Table 4.7) is primarily a rehabilitationplan (80-85% of the total investments). It is also designed to modernize the railway network with the aim of reducing costs and improving safety. In the view of the mission it is well-designed, and there is little, if any, that could sensibly be postponed. Emphasis is initially being placed on early completion of ongoing projects (about 60% of total infrastructure costs), while only later in the plan period will new projects, mostly track renewals,signalling with telecommunications,and electrification of main lines with heavy traffic density be undertaken. The closure of uneconomic services will be an important element of the next plan, and ab'ut 600km. of relatively low density use has been singled out for detailed st*Ldy and probable closure. Compared to the Sixth Plan, infrastructureinvestments will rise from 52% to about 66%, and investments in traction and rolling stock will decrease from about 29% to 16% of the total railway investments.
4.18 Track rehabilitationand reconstructionof junctions and stations represent about 40% of the total railway investments. Of this, about 60% is for on-going projects. The length of track to be rehabilitated includes 10 high priority lines which have an average age of track superstructure of 22 years and which have carried a cumulative total gross-tonnage (since the last track overhaul) of 100 to 370 million gross tons (normal design-life load is 150 million tons). The increasing use of heavier rails (54 kg and 60 kg per meter) and reinforced concrete sleepers on the heavy density lines has also been planned. This work is essential for the efficient utilization of traction and rolling stock. Direct benefits are expected from (a) reduction in track maintenance expenditures, (b) reduction in repair and maintenance expendituresof traction and rolling stock, (c) improved utilization of rolling stock through higher average speeds, (d) increased train loads, (e) reduced staff costs, and (f) increased safety (fewer derailments).
4.19 Proposed investments for the modernization of signalling and telecommunicationsamount to Ft 3,883 million (US$83.5 million), which represents about 8% of the total Railway Investment Plan. These would be Table 4.6: TRANSPORT INVESTMENTS,SIXTH AND SEVENTH PLAN "
1984 1986-90 _/ 1980 12_L 1982 ----1983 LLL. I/ 1980-84 Planned Transport Mode ------(in Ft M.) ------_-_-_-__-_
1. Railways 9,644 7,451 6,672 6,495 5,867 36,129 50.000 (46.1)S/ (36.4) (34.8) (35.2) (35.3) (37.8) (42.6) 2. (a) Highways - National 6 State Roads 3,247 3,094 2,810 1,853 1,300 12.304 14,000 (15.5) (15.2) (14.7) (10.0) (7.8) (12.9) (11.9)
- Village, Community & County Roads 1,201 2,314 2,407 2,701 2,646 11,269 15,000 (5.7) (11.3) (12.6) (14.6) (15.9) (11.8) (12.8)
(b) Road Motor Vehicles 4,201 4,182 4,509 4,675 3,700 21.267 26,000 (20.1) (20.6) (23.5) (25.3) (22.3) (22.2) (22.1) 3. River Port 6 Shipping 526 186 249 196 160 , 1,317 3,000 (2.5) (0.9) (1.2) (1.1) (1.0) (1.4) (2.5) 4. Aviation (a) Aircraft 84 501 347 321 300 1,553 ) (0,4) (2.4) (1.8) (1.7) (1.8) (1.6) ) 5,000 (b) Airports 1,181 1,211 849 1,356 1.735 6,332 ) (4.2) (5.6) (5,9) (4.4) (7.4) (10.4) (6.6) )
5. Pipelines 836 1,507 1,329 850 910 5,432 4,500 (4.11 L7-31 - (Z.0) W4.7) (5-73 13.9)
TOTAL 20,920 20,446 19,172 18.447 16,618 95,603 117,500 (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0)
1/ At current prices. Excludes Urban Transport. 2/ O.E. indicates Budget Estimates. 1/ Figures rounded off. 4/ Figures within parentheses indicate percentage. Ldk.a&Ll: RAILWAY1NVESIlENT PLAM, 194-H '
A. lgas 199a Total A.INFRASu------(Ft Million) ------
1.0 Constructionof New Lines 39 km 300.0 322.1 334.7 397.7 434.0 1,785.5 (3.5) 2.0 Doublingof Lines 111 km 450.0 476.7 489.2 584.4 620.0 2,620.3 (5.2) 3.0 Electrificationof Lines 304km 275.0 283.4 321.8 393.7 511.5 1,785.4 (3.4) 4.0 TrackRehabilitation of Lines 1,039km 2,182.3 2,254.0 2,253.3 2,531.2 2,711.9 11.932.7 (23.6) 5.0 Bridges 336.0 363.7 381.4 447.7 525.5 2,054.3 (4.0) 6.0 IndustrialTracks and Sidings 102km 78.7 83.0 86.0 93.0 100.6 441.3 (0.9) 7.0 Substructure(Reconstruction) - 28.0 30.8 33.9 37.3 41.0 171.0 (0.3) 8.0 Reconstructionof Main MarshallingYards - 428.8 495.3 560.0 735.0 990.0 3,209.1 (6.3) 9.0 Junctionsand Stations - 618.7 760.9 856.0 1,128.2 1,536.5 4,940.3 (9.8) 10.0 Signalling 372km SOO.O 515.4 566.4 589.0 759.5 2,930.3 (5.8) 11.0 Telecommjnications ~~37stat. 11.0 Telecoi..nications 37 - 162.5 173.9 180.2 203.9 232.5 953.0 (2.0) 12.0 ComDuterFacilities - 12..0 12..a 141.6 19fi.9 232JL 22IL8 LL-i Subtotal(A) - 5,525.0 5,888.0 6,204.5 7,338.0 8,695.5 33,651.0 (66.4) B. TRACTION& ROLLINGSTOCK 13.0 EleetricLocomotives (Main Lines) 102 1,085.7 1,136.4 873.2 1,142.6 1,439.0 5,676.9 14.0 ElectricLocootives - Shunters 30 - 428.1 151.3 - 580.1 15.0 Coaches 120 115.0 - - - 698.9 813.9 16.0 Wagons 61-6 400.0 38Q.0 -- __i Subtotal(0 1,262.3 1,565.2 1,424.5 1,522.6 2,137.9 7,912.5 (15.6) C. OTHERFAC!LITIES
17.0 TrackMachinery - 250.0 170.0 170.0 110.0 100.0 800.0 15.6 TraCkWorkshops - 81.6 104.8 140.5 224.4 264.0 815.3 19.0 Loco- Depots - 250.0 271.0 283.3 323.4 372.0 1,499.7 (3.0) 20.0 Tractionand RollingStock Workshops - L00.Q 2D6.1 231, aidS auLl 1.17fi2LL1.J. Subtotal(C) - 781.6 751.9 825.6 1,009.3 1,123.5 4,491.9 (8.9) 0. Omi 21.0 ContainerHandling Equipamnt - 198.6 142.3 179.1 144.6 146.2 810.8 22.0 Miscellaneous - f26.1 670.5 8S. 1.01A,_ 61L-794. Subtotal(0) - 825.4 812.8 1,034.8 1,163.1 759.0 4,595.1 (9.1) GRANOTOTAL 8.LJ4-J 901L.!9 9.489.4 11.0l.0 1271.71.9 50.fiLU.J (lIo. Say (50,000)
1/ At currentprices including physical contingencies for all itemsexcept traction,rolling stock and machinery. J/ Figureswithin parentheses denote Portion of planin (%). Source: HAV and missionestimates. Deeember1984 - 78 -
installedalong 372 km of lines and at 37 stations. This investment is essentialbecause existing equipment is obsolete and inadequate for efficient operation.
4.20 Investments in railway electrificationamount to Ft 1,785 million or about 3Z of the total proposed investment program. This includes a significantportion of the main line section from Budapest to Gyekenes (near the Yugoslav border) where the traffic density at present is about 30 million gross tons per year with about 50 pairs of passenger trains per day during summer months. (This is well above Alston's normal threshold for electrification.) The other sections proposed for electrificationare relativelyshorter and are mainly necessary to maintain the integrity and continuityof the electrified network system, thus avoiding uneconomic changes of traction. These proposals are economically and operationally sound.
4.21 Investment that will increase capacity, such as line doubling (111 km) and new lines (39 km), amount to Ft 4,408 million, representing only 92 of the proposed total investments. The double-tracking involves short sections where bottleneckshave already been experienced, and are mainly to join two double-trackedlines now connected by a stretch of single track. These investmentsare essential; without them, relatively long stretches of the network would remain underutilized.
4.22 Less than 16% of the total investment costs are for traction and rolling stock, amounting to Ft 7,913 million. Because MAV does not expect traffic demand to increase significantlyduring the next period, the proposed program is concentrated primarily on replacement of obsolete capacity, rather than on direct capacity expansion. Steam traction will be phased out completelyby the end of 1985. This component includes the purchase of 102 electric main line and 30 electric shunting locomotives, 120 coaches and 1,100 freight wagons. The ratio of electric to diesel tract:on is expected to change from 51:45 in 1980 to about 65:35 by 1990.
4.23 Out of the various railway programs discussed above, there are very few large projects considered individually,except the modernization of Budapest marshalling yard and electrificationof Budapest - Gyekenes railway line. A recent Bank appraisal mission examined both these projects in greater depth and found them operationally sound and financially and economically attractive.
4.24 This mission stressed that high priority should be attached to the modernizationof low-efficiency, limited-capacitytrack equipment in the next plan period, particularly because the very high traffic density on main lines limits the time available for maintenance and track overhaul and shortage of heavy duty track maintenance equipment compounds the problem. Furthermore, MAV's capacity to meet container traffic demand is severely constrained by inadequate facilities and container handling equipment in its terminals. A recent World Bank project (Report No. 5447-HU) will, in part, finance the purchase of equipment necessary to overcome these problems. At the suggestion of the Bank, additional container terminals have been selected on a priority basis for a program of improvement during the next plan period to give quicker turnaround,reduced damage of goods and improved quality of service. - 79 -
(ii) Highway Investment Plan (1986-90)
4.25 For the highway network, increasing emphasis will be on developing rail/roadgrade separations, interchanges,bypasses in urban areas, transit and internationalroutes. Road widening and strengthening in keeping with the increasingtraffic volumes will continue to receive urgent attention. The Governmentalso plans to build the ring motorway skirting Budapest in progressivestages and in the very loiigterm envisages construction of roughly concentricroads, further from Budapest, which together with radial motorways (1,000 km) would require about 3,000 km of new roads.
4.26 Proposed development investments (excluding maintenance and reinforcements)on roads in Hungary during 1986-90 are given in Table 4.8. The average total investments for roads is slightly less than F;.6 billion (US$130million) per year during the 1986-90 period with about J0% going for National Roads (30,000 km) and the remaining 50Z for local council roads (58,000km), a proportion which appears reasonable. The proportion of funds allocated to flewconstruction and improvement of national roads, compared to road maintenance and pavement reinforcement (not included in the development plan figures in Table 4.8) will stand at about 30:70 during the next plan period and will provide for an adequate allowance of about Ft 186,000 (US$4000)per kilometer each year for the maintenance/reinforcementoperations.
4.27 Financial constraints during the Sixth Plan Period (1981-85) obliged the Government to sharply reduce the investment in new road construction, includingmotorways. In the 1986-90 period the Government is proposing to resume investment in the motorway system (Table 4.9) while still keeping other road improvementsat a rather low level until 1989-90 when one or two new bridges would be started and their approach roads upgraded. The motorway program will result in completion of the M-1 section between Budapest and Gyor in 1986; opening of one roadway (4-lane, half-motorway) of the M-5 as far as Orkeny (about 55 km from Budapest), by the end of 1985 with the next section to Kecskemet (km 75) completed to the same standard by 1987. By 1988, the 45 kilometersection closest to Budapest of the second roadway of the M-5 will be opened to traffic, followed in 1990 by the remaining 30 km to r'ecskemet. Meanwhile, construction of the first phase of the M-0 bypass, including the major bridges across the Danube river's two channels, which will be partially financed by the recent World Bank loan, is expected to be completed by 1990, with the full connection to the M-7 and M-1 programmed for construction during the subsequent Five-Year Plan Period (1991-1995).
4.28 Construction of the complete Budapest ringroad will take a long time. In the Seventh Plan, only the first 15 km. will be completed jut of a total length of 90 km. but this involves the M-1 to M-5 link, which is the section most important to east-west international traffic (Trans-European Motorway Route). The Danube river bridges, which are included in this first phase, are the most complex and costly works of the proposed system. They will relieve the most critical bottleneck in road transport in Hungary.
4.29 The road "modernization"program, which includes construction of bypasses around towns, improvement of at-grade (i.e., level) road junctions, constructionof grade separations at railway crossings as well as Improving road alignments and/or paving of both urban and rural secticus of the national - 80 -
Table 4.8: PROJECTED ROAD INVESTMENTS (Ft m. current)
Totals: VII VII. Five-Year Plan Period 5-Year Plan 1/ Description 1986 1987 1988 1989 1990 1986-1990
National Highways
Road Construction or Improvement 2,090 2,240 2,420 3,800 3,570 14,120
- Motorways - New construction 1,650 1,530 1,600 1,800 1,220 7,800
- Other Roads: 440 710 820 2.000 2.350 6,320
- New construction 5 40 45 50 60 200
- Modernization (betterments) 435 670 775 1,950 2,290 6,120
Local Roads
Construction/Improvements- 2,730 2,865 3,010 3,160 3,320 15,085 2/
Grand Total 4.820 5,105 5,430 6,960 6,890 29,205
Amounts shown for VII five-year plan period are not yet finally approved.
-' Planned budget for local road projected on NPO/MOT estimate of 5X-10X annual increase over present levels.
Source: NPO, MOT, and Mission.
February 1985 Table 4.9; NATIONALROAD INVESTHENT PLAN (1986-19901 - BY MAJORWORK CATEGORIES (Budget Amounts in Ft. m. current)
1986 _ 19_7 1988 1919 loan expected amount expected amount expected amount expected amount expected amount Descrlption comlut10n cfiLQn - 9n_&Jc Qn1o1na Priects Motorwa Construction ILkm 1I.9 - ZLJk22.5iIb 12.!;lb 600 M-1 - - 10 km 660 144 - - - - - H-S - 430 - 496 22.5 km 460 32.5 km 60o -
____r Roadworks 9 kmL2 Or UR _km00 - - - _ new byPasses 4 km 40 ------new bridges 2 Bridges 70 - - - modernization - - - - - (betterment) 5 km 140 3 km 60 - - - -o Sub total ongoingprojects 19 km/2 Or 1,340 3 km 720 22.5 km 460 32.5 km 600 - Ngw Proiects M 0 Motorway Construction - 5601 - Ug _ 1.140 -_I.zoo_14 km12 Br L1.2 Roadworks Other ZS2 km 190 _2. knI2lr UR. 263 kI.2 Br 300U .katL Br 1U0 300 km/3 new roads Or L2.5 2 km 5 8 km 40 S Br 45 S km SO 10km 60 - new bypasses - - 200 6 km 240 - 20 40 new bridges 20 2 Bridges 200 2 Bridges 380 3 Bridges 910 * modernization(betterments) 3 Bridges 1.200 - aS 3 km Ito 2 km 75 15 km 930 20 km 960 - widening 250 km sO 250 km s0 250 km 80 280 km 90 270 km 90 qattional Investment Road To4al 271 kmLBr L2090 2G4 km2 Or L2.2 265.5 kmL2Lr . ZM 332.5kL3 Br L I 314 kf5Hr L.57
$0WrCg: Ministryof Iransoort December 1984 - 82 - roadnet, also includes purchase of equipment for force account operations. This category of work, as well as the construction of roads other than motorways, was substantially cut back in 1984 and will continue at reduced levels until towards the end of the 1985/89 period (i.e. until work on M-5 motorway is terminated).
4.30 Pavement strengthening is a key element in Hungary's strategy for road and highway improvement. Funding for this work, which is generally performedby contractors, suffered the least reduction during the 1982-84 period and is projected to continue at much the same level during the 1986-90 period. The program of strengthening and widening pavements is a well thought-outpolicy, responsive to the needs of the national road network.
4.31 It has not been possible to assess the relative priority of all the different components of this program but the general strategy would appear sound. The motorway program is aimed at diverting long distance traffic from the most crowded main roads and will benefit the traffic which will not divert to the motorways as well as the diverting traffic. Construction of bypasses and grade separations will continue to be emphasized in the 1985-88 period, both further helping decongestion. Considerationsare also being ga.venfor provisionof substantial sums towards the end of the Plan Period which would provide adequately for reinforcing and improving access roads to the new M-0 motorway, which will generate substantial shifts in traffic flows in Budapest as successive sections are opened. As is discussed further in Annex VII, Hungary exhibits a commendable willingness to spend money to restore and maintain its urban cultural heritage, and this program will -ontribute to this objective in addition to providing more easily quantified e:onomic benefits. c. Other Transport Investment (1986-90)
(i) Road Transport
4.32 The expectation that investment in road transport will average about Ft 5.2 billion per year during the Seventh Plan Period primarily takes into account the rehabilitationneeds of the public transport companies (Volan and Hungarocamion)and the state-owned enterprises and cooperatives (public sector) which use their vehicles directly connected with their own production and distributionprocesses. To enhance international competitiveness of the internationalroad freighting agency (Hungarocamion),the forthcoming plan will seek to provide fuel efficient, light-bodied, higher capacity trucks to meet its special long haul needs. The actual and planned investments of HC during 1980-85 and 1986-90 are shown in Table 4.10. Investment policy of HC in recent times is primarily aimed at achieving two main objectives, namely, modernizationof the vehicle fleet and infrastructurefacilities.
(ii) River Port and Shipping
4.33 The partial reconstruction of the Csepel Port, which currently handles about 2m. tons of traffic, will be started during the next Plan period. Handling of the two major commodities, namely, phosphate and food grain, needs to be thoroughly overhauled. In our view, these should be considered as high priority for the forthcoming Plan. In view of the shortage of resources, the capacity of inland shipping will increase slightly while scrapped sea-goinigships will be only partially replaced (Table 4.11). - 83 -
(Uii) Aviation
4.34 At present there are no domestic air services in Hungary, because distances are too short for aviation to compete with rail in trips from Budapest. The internationalairport at Ferihegy is undergoing substantial improvement (runway and terminal) and the forthcoming Plan will mainly provide for the replacement of the equipment and the controlling system. Modest provisionwill also be made to modernize and increase aircraft capacity.
(iv) Private Cars
4.35 The objectives of the Government for the next Five-Year Plan are to slowly increase the number of cars, to speed up replacement of obsolete cars and to increase the proportion of imported cars which incorporate up-to-date technologies. To achieve these objectives, Hungary plans to import about 120,000 cars per year for the next five years, mostly from CMEA countries. This would represent an expenditure of about Ft 82 billion (in 1984 prices) over the Plan Period. Unfortunately, if Hungary continues to rely primarily on CMEA trade for car imports it may be difficult to improve the fuel efficiency and the pollution levels of passenger cars. Even most new cars currently imported, such as the Zhiguli, the Wartburg, and the Skoda, incorporatetechnologies from the 1960's; the Trabant and Moskvich use technologiesdating from early 1950's. Cars made in CMEA countries consume between 20 to 402 more gasoline than equivalent cars now sold in the West. Their reliance on leaded gasoline, the low compression ratios and combustion temperaturesof their engines and the absence of catalytic converters make them much more polluting. Cars with two-stroke engines (which accounted for about one-third of the stock of cars at the end of 1982) are especially polluting. An additional problem is that the cars available from CMEA countries are very limited in type, being predominantly sedans, which may not be ideal for the changing necds of households, of small enterprises and of workers associations.
4.36 A potentially important set of questions that we have not been able to consider fully concerns the future place that private car ownership and operationwill play in Hungary. Undoubtedly, the demand for private cars will continue to grow, especially if prices remain relatively low and if houses remain small and subsidized. If there is little opportunity to move from one's small crowded but inexpensive flat into a larger one. and there are few alternativeoutlets for saving, it is not surprising to find a high demand for private leisure travel. But, of course, in no country does one have to seek hard to find reasons for a high demand for private cars. Hungary has chosen to ration this demand by forcing individuals to wait some years for their cars. As far es we know, there are no plans to change this policy in the dir~e -n of greater imports, nor would we encourage it. We understand that the question of establishing car assembly operations in Hungary has from time to time been considered, but it was not raised with the mission. An alternative mode of restricting demand, which might be fairer to those with a very urgent need for a car, would be to have greater rationing by price, either at purchase or in the price of fuel or user taxation. Since cars are used so much for leisure purposes, another possibility would be to encourage much greater use of car rentals. Table 4LQ: HUNGAROCAHION- ACTUAL AND PLANNED INVESTMENTS
.1/ _____~______18-8 __ _ _ a_ QsrLLLL-elan _.._ __ -- Rnalement _kjaQDmonLt _ 1 L. A gmlnL DoxQ.QimL. _ _&alT (approx) (approx) (approx) (approx) (approx) (approx) No. of Costs No. of Costs No. of Costs No. of Costs No. of Costs No. of Costs ._ _ _ _ .2ians _ .. _ s s-im- Yehicles 700 62.5 430 30.5 1,130 93.0 750 41.0 550 38.5 1,300 79.5 of which:
Refrigerated 274 22.2 89 6.5 363 28.7 - - 190 16.2 190 16,2
Specialized 49 4.5 16 1.3 65 5.8 - - 85 6.6 85 6.6 NormalTilted 377 35.8 325 22.7 702 58.5 750 41.0 275 15.7 1,025 56.7
E.guiment - 5.5 - 4.4 - 9.9 - 2.9 - 0.9 - 3.8
Other3 s 15.3 - iii - 15 - 154
Subtotal 71.5 50.2 121.7 58.9 39.8 98.7 co 1/ Actuals1980-84; and estimatesfor 1985. Source: Hungarocamion December1984 - 85 -
Table 4.11: PLANNED INVESTMENTIN RIVER PORTS AND SHIPPING"o (Ft. m.J
Relnacement 1986 1987 1988 1989 1990 1986-1990 River-goingShips Pushboats pcs 3 2 1 1 1 8 kW 3.000 2.00;. T.500 1,500 1.500 9.500 MFt 240 160 110 110 110 730 Push-bargesand PCs 2 2 2 2 2 10 Tow-barges tons 3.280 3.Z40 3.280 3.280 3.280 16.400 MFt 34 34 34 34 34 170
Passenger Ships Pc - - 1 1 1 3 for Lake Shipping pass. capac. MFt - - 14 14 14 42
Seagoing Ships Pc - - 1 - 1 2 kU - - 2.400 - 1.800 4.200 OWT - - 6.400 - 3.000 9.000 HFt - - 400 - 300 700
Improvements of river ports are under considerationat the suggestionof the Bank mission and are likely to be included in the forthcomingplan as priority itens. October 1984
4.37 Issues concerning the appropriate role for the private car in Hungary affect many investment questions - the long run demand for public transport, the lay-out of cities, the need for highways, the locatio. of economic activities, household savings behavior, the industrial structure, the future pattern of international trade etc. Although the stock of private cars is fairly large, their impact on economic and social life is still much smaller than in Western developed countries. Most countries have tried to deal with the issues piecemeal as they have arisen - they have not attempted to make any systematic analysis of the many interrelated questions, or to develop any long-term framework within which the policy questions can be consistently answered as they arise - and many of the decisions imply significant changes to the physical environment and ways of life that are often irreversible. Issues concerning the pricing and taxation of cars, fuel, parking, etc can only be satisfactorily determined if there is a broader view of the role that car ownership is expected to play within Hungarian society. - 86 -
B. Urban Transport
Background
4.38 Since 1970 the number of passengers carried by public transport enterprisesand cooperatives in urban areas has increased by 35% to abou..3 million per day. There has also been a substantial restructuringof the pattern of public transport in Hungary. In 1970, 90% of passengers were carried by bus and tram car, distributed roughly equally between them. Since then the percentage of passengers carried by subway has increased six-fold to 12%. The total carried by bus and tram has decreased slightly, but as the number of passengers carried by bus increased to 64%, the number carried by tram and trolley bus decreased to only 16%. The number of buses increased two and half times to 25,000 but the number owned by public transportation companiesincreased by only 35%, the rest were purchased by firms who collect workers with their own buses. The number of tram cars has been reduced by nearly half, the number of trolley buses increased by 40% and the number of subway carriages has increased more than five-fold.
4.39 In spite of constraints on total investment levels during the Sixth Plan Period, and the fact that migration to urban areas slowed significantly during the 1970s, public transportwas given fairly high priority. The main objectivesof the Sixth Five-Year Plan were to continue the construction of the Budapest metro and to extend trolley bus lines. The first objective was met: the metro was extended by 5.5 km and five stations from Deak Ter to Arpad Hid at a cost of about Ft 8.5 billion. Twenty-seven kilometers of fast rail lines have now been completed in Budapest and provide 1.2 million trips per day. The emphasis on extending trolley bus lines in the Sixth Five Year Plan was thought to be justified on the grounds that trolley buses cause less noise and air pollution than buses and that they are cheap to operate. Although some extension of trolley lines was completed in the capital, most new lines were installed in secondary cities. The trolley bus lines in Szeged are almost complete but those to be installed in Debrecen have been delayed because less investment funds were available than predicted.
4.40 The results of 40 years of development in transport are remarkable. All settlements in Hungary, except two (total population: 41) are served by long distance transportationat least once a day. Some form of local public transportationexists in 200 settlements and of those, 37 have a transport network (several lines). In Budapest, where 5.3 million trips are made daily, 74% by public transportation,the system operates 19 to 20 hours a day; some major lines even operate around the clock. In other settlements,public transportationoperates 19 to 15 hours a day. In Budapest overall capacity utilizationis 30%; in other settlements it reaches nearly 50%.
4.41 It is not surprising that this comfortable and efficient system is very popular, especially since it has been virtually free. The cost of travel was doubled in January 1985. Until then, the cost of individual subway rides had been kept at Ft 1 since 1966; bus fares were Ft 1.5. In Budapest, 80% of public transportationriders use monthly passes. Before the recent increase, these varicd from Ft 20, for pensioners and school children, to Ft 110 for workers. The weighted average of monthly pass fees has been Ft 72 (Table4.12). Now, a monthly pass for workers costs Ft 75 for the streetcar, - 87 -
Table 4.12: BUDAPEST TRANSPORTATIONAUTHORITY: PUBLIC TRANSPORT REVENUES FROM PASSES PASS PRICES AND NUMBEROF SOLD PASSES
No. of 1983 Unit passes sold revenue zypesof Passes Price in 1983 from passes Average
Street car
Pupils & pensioners pass 20 1,498,084 29,961,680 20 Monthly pass with photo 40 1,881,511 84.667,995 45 Yearly pass with photo-'' 45 141,387 6,200.115 43.85 Yearly pass without photo 135 348 46,980 135
Gear-wheel train
Monthly pass with photo-' 30 18,067 5300,970 27.73 Pupils & pensioners pass 15 12.249 183,735 15
Street car & gear-wheel train Total 3,551,646 126,361,475 34.23
Autobus
Pupils & pensioners pass 50 5,011,240 250,062,000 50 Monthly pass with photo 110 5,589,394 614,833.340 110 Yearly pass with photo-" 110 197,228 19,767,805 100.23 Yearly pass without photo 330 969 319,770 330
Line pass 50 192,305 9.615.250 50
Autobus Total 10,991,136 894,598,165 81.44
Suburban train
Monthly pass 241,968 60,866,336 251.55 Pupils & pensioners pass 254,531 6,064,917 23.83
Suburban train, Total 496,499 66,931,253 134.81
TOTAL 15,039,281 1,087,890,893 72.05
'' Including passes for MP's. bz Including passes for blind people.
Source: TransportationAuthority. Budapest, November 9, 1984 - 88 -
Ft 170 for bus and streetcar, and Ft 50 for students and pensioners. In addition, the enforcement of fare paying has been very low, with control very infrequentand fines as low as Ft 50, so some free riding is probable. Itris officially claimed that revenues of the Budapest Transport Authority (BKU) cover 30.tof operating costs, but with Ft 7.3 billion operating costs in 1983, 80% of passengers only paid Ft 1 billion in pass fees and there is some doubt whether the other 20Z paid a rather larger amount. BKU receives yearly Ft 7 billion in subsidies from the Central Government, half to cover the operating deficit. a. Investment Proposals for the Seventh Plan
4.42 The proposed emphasis of the Seventh Plan is similar to that of the Sixth Plan: further development of the Budapest metro and further development of trolley bus networks (Table 4.13). The Metro blue line will be extended by four stations north of Arpad Hid station; work on this has just started, the extension to the north is needed to service a new estate of 20,000 flats. There is a proposal for a new "DBR" line to cross the blue line at Kalvin Ter and the red line at the eastern railway station going to Kelenfold railway station in south west Budapest. This new line would be started in 1989-90 (at the end of the Seventh Plan) with a first section from Petofi Hid to Moricz Zsigmond Circle; Ft 0.4-0.5 billion (1981 prices) would be spent on this section during the Seventh Plan. Trolley bus lines will be completed in Szeged and Debrecen and started in Pecs and Miskolc.
Table 4.13: PROPOSED URBAN TRAINSPORTPROGRAM, SEVENTH PLAN
The Projects Cost Ranges (Ft. b.)
- Extension of Budapest metro: four stations and approximately four kilometers and first section of the new "DBR" line 5.3 - 6.5
- iNon-metrotransport lines in Budapest, including three new trolley bus lines and 15 km of new bus lines 1.0 - l.l
- Completion of trolley bus lines in Szeged and Debrecen and new lines in Pecs and Miskolc 0.3 - 0.3
- Vehicle replacement in all public urban transport companies 2.9 - 3.0
- Other, including two new autobus depots and two new metro depots in Budapest 2.2 - 2.8
- Council roads in Budapest 4.4 - 5.9
- lCouncilroads in rest of the country 3.3 - 3.7
Total 19.4 -23.3 - 89 -
4.43 In the longer run, the Urban Development Plan for most Hun&arian cities will continue to give priority to public transportation. The Governmentwants to bring transport capacity utilization in secondary cities down to the level of Budapest to improve passenger comfort. By the year 2000, it is expected that 702 of all trips will be made or public transportationand of all financial resources spent on transportation,65X will be spent on public transportation,the remainder on roads. The long range plan envisages 100 km of fast transportationin Budapest, including the metro, fast suburban trains, a few tram lines and a few express bus lines.
4.44 Obviously, the costs that have been sunk into the existing networks can never be recovered, and it is politically unrealistic to think that operatingdeficits can be overcome any time soon. This makes it all the mL,re important to select future investments with caution and to try as far as possible not to add to the problem.
(i) Trolley Buses versus Conventional Buses
4.45 In 1970, it was decided not to develop trolley bus lines further and instead to extend services with conventional bus lines. Now this decision has been reversed and a decision has been taken to develop a few trolley bus lines to serve new areas and to replace old bus lines. The Hungarians consider the trolley bus line expansion plans to be modest, and justified by transport needs in particular settlements and areas. Although not a major investment issue, this decision seems to us to be unwise. Trolley bus lines are eight to ten times more expensive to establish. Even though it is estimated in Hungary that trolley buses last around ten years, roughly twice as long as buses, their longevity is offset by higher initial costs. Costs per passenger kilometerare higher with trolley buses than with buses, Ft 1 versus Ft 0.7 (see Table 4.14) mainly because of the extra cost of replacing overhead cables and expensive switches imported from the west.
4.46 The main argument for choosing trolley buses is that they generate less noise and air pollution than the Hungarian made buses currently operated by public transportationcompanies. The pollution argument seems implausible: the efficiency of generation, transmission, transformationand utilization are so low and most power stations so close to urban areas, that in the end trolley buses may produce more pollution than buses. It seems wiser to concentrateefforts on developing a quieter low pollution bus. Even if such buses would cost twice what they cost now, investment costs for bus lines would remain roughly four times lower than trolley bus lines. Even if operating costs of the new buses would be increased by possibly more frequent and more complicated maintenance, it is unlikely that these costs would exceed those for trolley buses. The development of a better bus system would not only benefit public transport company budgets, but would also allow Hungary to sell vehicles which would meet the higher emission standards existing or likely to be imposed soon in many export nmarkets.
(ii) Extension of the Budapest Metro
4.47 When the current phase of the North-South line of the metro is completedabout 1990, the line's 21 km is expected to have cost about Ft 33 billion, or about Ft 1.6 billion (US$32 million) per km. This is not a - 90 -
particularly high figure by international standards (the Singapore metro costs about US$70 million per km for example), but the total cost amounts to about Ft 15,000 per household in Budapest. This figure dces not reflect the interest cost of work-in-progress, implicit in the long gestation period of the project. Construction was slower than origina?ly planned during the Sixth Plan period because of limited financial resources; the same will hold during the Seventh Plan period. The Hungarian authorities stress that their decisions take into account long-term projections for urban development. This investment,however, will have no positive rate of return - on the contrary its operation will need to be continuously subsidized. Alternatives to further extensions to the metro, perhaps developing bus systems with priority
Table 4. 74: BUDAPESTTRANSPOkT AUTHORITY: RELATIVE COSTS OF URBAN PASSENGERTRANSPORT. BY MODE
-11 Basic data (million) Cost (Ft) Der Cap. No. pass- cost 1000 pass- pass./ Sectors km. pass. enger/ (Ft) cao.km encer km. km Ft. Ft. Ft.
Street-car 5971 385 1468 1873 313.72 4.86 1.28
Trolley-bus 1080 98Xx 347x(S 348 322.0 3.55 1.00
Autobus 12419 634 4302 2991 240.81 4.72 0.70
Suburban train 4324 1o0 924 819 189.50 8.19 0.89
Subway 5166 369 1745 1219 236.06 3.30 0.70
Ship 20 2 8 55 2661.46 27.5 6.88
Total/Average 28980 1588 8794 7305 252.24 4.60 0.83
Source: TransportationAuthority. BudaPest. November 1984
x = calculated figure.
rights of way, should be thoroughly explored. Whereas in the past the extensionsof the metro were rendered nearly inevitableby prior decisions on housing and urban development, for the future it would be better that new settlementsbe designed and located so as to minimize the need for commuting and to use as much as possible the existing transport networks. b. Pricing Policy
4.48 The recent doubling of fares is only a gesture in the direction of a pricing structure that would reflect economic costs. To cover operating costs on the metro would require a four-to-fivefold increase, even on the assumption of a zero price elasticity of demand. There seems no feasible way to contemplategetting any sort of reasonable return on capital. Budapest is in - 91 -
a situation faced by many cities - patterns of economic and social life have become built around the expectation of highly subsidized fares, and it becomes very difficult to disturb that expectation. In Budapest, as in most secondary cities in Hungary, places of work are located far from places of residence, forcing the population to commute over long distances.
4.49 While the recent fare increase reflects a laudable desire to reduce the operating deficit, there seems no way to eliminate the basic feature of the system whereby the inhabitants of other parts of the country pay an importantpart of the living costs of the residents of the capital, which seems to be inequitable. The Budapest Council fears that now that the population has taken cheap public transportation for granted any serious price increase may incite more trips taken in private cars, with unacceptablybad effects on pollution, congestion and on the city landscape. It is argued that this would increase the country's energy imports and that it would provoke demand for large investments such as street widening and car parking buildings. While these things are undoubtedly true, appropriate pricing of road use, parking, and gasoline may be an economically more efficient solution than massive subsidy. A study of road users' contribution to road expenditure is to be carried out under the recent World Bank transport project (Report No. 5477-HU).
C. Postal Services and Telecommunications
General Context
4.50 The Hungarian Post (HP) is an independent state organization headed by a president with the rank of State Secretary. The responsibilitiesof HP are:
the transmissionand delivery of letters and packages (as a monopoly);
- the transmissionand delivery of telegrams and telexes;
- the distribution of all newspapers and magazines to individual subscribers,and sale through HP operated outlets;
- the ownership and maintenance of all telephone sets, all exchanges, and all other telecommunicationinfrastructure;
- the provision of computer data links;
- broadcasting television and radio programs;
- the operation of National Savings Bank (NSB) savings book transactions;
- handling cash transactions between companies and banks and vice versa (99% of the national cash flow passes through HP); - 92 -
- the production of some spare parts for old, mainly manual, exchanges still used by HP but not produced by industry; HP does not produce other equipment; and
- participation in the constructionof underground and overhead cable networks, the installationof exchanges and other telecommunication infrastructure.
4.51 HP's 1983 gross revenues were Ft 16.1 billion and net assets were Ft 26.9 billion (see Table 4.15). In 1983 HP made a gross operating profit of 25X (see Table 4.16). The Government sets tariffs for items whose sale representabout 75Z of HP revenues. Tariffs have been adjusted on average only every ten years and not all at the same time; this has contributed to a high level of cross-subsidyamong HP's activities. In 1983, for instance, letters,packages and newspaper deliveries were loss-making activities, subsidizedby the substantial profits made in telephone and wires operation (see Table 4.16). Postal rates were, however, raised by an average of 47% in January 1985, which is expected to eliminate losses in the next 3-4 years. In referenceto the rates of profit on net assets shown in Table 4.16, one should realize that this profit rate would be much lower if assets were properly valued at replacement cost. Price adjustments are expected to be made more regularlyin the future.
4.52 The qualitative results achieved by HP in the traditional postal servicesare impressive - 957 of letters and packages are delivered next day, the rest reach their destination in two or three days. This level of service is maintained by labor intensiveness. Out of HP's 69,000 employees, 35,000 are employed in the traditional postal services, that include the delivery of lettersand packages, the delivery and sale of newspapers and magazines, the managementof postal savings and cash transfers. These services suffer from the obsolescenceof plant and equipment. Of the 3,000 post offices in Hungary, 650 need reconstruction,most mail sorting is manual (HP only has two automaticmail sorting machines), and while newspaper and magazines are labelledwith the help of computers, packaging and dispatching are still performed manually.
4.53 HP's main problem is the shortage of telephone lines. As data on housing in Annex V indicate, in 1983, only 127 of all households had a telephone(see Table 5.6). By the end of 1985, Hungary will have 14 sets per 100 people. In 1982, and probably still now, the level of telephone service was similar to that found in developing countries with similar levels of income per capita; it was, however, lower than in the German Democratic Republicand in Czechoslovakiaand less than half that found in other European countriesof similar levels of development (see Table 4.17).
4.54 At present, 507 of all telephone sets are connected to sub-exchanges, and only 705,000 are connected directly to main exchanges. During the Sixth Plan, about 220,000 new lines will be provided. Approximately 40,000 lines were added per year but only 22,000 of those connected directly to main exchanges. The rest are routed through branch exchanges. - 93 -
Table 4.15: HUNGARIAN POST, REVENUES AND ASSETS, 1983
Gross Revenue Net Assets (1) (Ft. b.) (Ft. b.)
Letters& Packages 1.8 2.0 Newspapers & Magazines (2) 4.4 0.7 Savingsand cash transactions 0.4 0.3 Telex,telegram, & data transmission 0.9 1.8 Telephone 7.3 19.7 Broadcasting 0.6 2.3 Others 0.7 0.2
Total 16.1 26.9
Source: Hungarian Post
Notes: (1) Gross assets: Ft 40 billion. (2) revenues include the sales price of newspapers and magazines, otherwise they would be reduced by 2/3.
Table 4.16: HUNGARIAN POST, PROFIT RATES PER ACTIVITY, 1983
Activity Name Before Taxes Profit Before Taxes Profit as Percentage of as Percentage of Gross Revenue (1) Net Assets (2)
Letters & Packages -11.3 -13.2 Newspapers & Magazines (3) -2.5 -17.0 Savings and cash transactions 0.4 0.5 Telex,telegram, & data transmission 39.0 20.7 Telephone 54.0 21.1 Broadcasting 29.0 8.6 Others NA NA
Total 25.0 15.9
Source: Hungarian Post
Notes: (1) Ft 16.1 billion. (2) Ft 26.9 billion. (Gross: 40 Billion Ft.) (3) rates are based on revenues which include the sales price of newspapers and magazines, without they would be much more negative. - 94 -
4.55 Currently out of 1.4 million telephones, only 33Z are owned by private individuals, 66Z are owned by companies, government and cooperatives and a bit more than 17 are public telephones. There are 460,000 applications outstanding for main lines. The telephone density varies much across the country; in some places it can be as low as 1 per 100. Budapest has more than half of all sets: 720,000. Of the rest 193,000 are located in the five main secondary cities: Gyor, Miskolc, Debrecen, Szeged and Pecs, and 520,000 are distributed in the rest of the country. The telephone density of 35 per 100 population in Budapest compares favorably with the average density in western countries but still lags behind the densities found in western capitals and among CMEA countries exceeds only Warsaw. The density in the five secondary cities at the end of 1984 varied between 16.5 per 100 in Debrecen and 24 per 100 in Miskolc. In some counties the telephone density is ver-'low; some of the lowest are 7.3 in Fej6r, 6.7 in Bekes, 6.2 in Szolnok, 4.9 in Pest (excluding Budapest) and 4.6 in Szabolcs.
Table 4.17: INTERNATIONALCOMPARISON IELEPHONES
IncomePer Popu- Total Total No. of No. of Main Capita lation Telephones Main Telephones Telephones uS $ Millions Thousands Telephones Per 100 Per 100 (1982) (1982) Thousands Population Population Name (1) (II 1982 (2) 1982 (2) 1982 1982
Denmark 12.470 5.1 3.483.3 2.313.4 68 45 German Fed. Rep. 12.460 61.6 30.122.0 22,089.5 49 36 Belgium 10.760 9.9 3,818.6 2,611.9 39 26 Austria 9.880 7.6 3,177.9 2.322.6 42 31 United Kingdom 9,660 55.8 28.376.0 19.088.5 51 34 Italy 6.840 56.3 20.444.0 13,854.8 36 25 Spain 53430 37.9 12.350.1 7.204.9 33 19 Greece 4,290 9.8 2,956.7 2.401.1 30 25 Yugoslavia 2,800 22.6 2.303.5 1.684.4 10 7 Argentina 2.520 28.4 3,041.5 2,139.4 11 8 Portugal 2,450 10.1 1,455.8 1.057.3 14 10 Mexico 2,270 73.1 5,411.1 2,870.6 7 4 Hungary 2.270 10.7 1,296.7 636.6 12 6 Korean Rep. 1.910 39.3 5.158.4 4,079.6 13 10 German Dem. Rep. NA 16.7 3,251.9 1,397.1 19 8 Czechoslovakia NA 15.4 3.226.0 1.684.0 21 11
Sources: (1) World Tables. IBRO, 1983 (2) The World's Telephones A StatisticalCompilation as of Jan. 1982, American Telephone and Telegraph Company
4.56 Telephones are unevenly distributed across socio-professional classes. Thirty-three percent of households whose main earner is a white collar worker have a telephone versus 87 of blue collar households and only 27 for cooperative peasant households. Inactive households do relatively better with a 127 telephone ownership (see Table 5.6). - 95 -
4.57 As indicated by some of the telephone densities in counties, the greatest shortfall in telephone service is found in rural areas and villages. There are still 2,100 manual exchanges which only operate 8-9 hours per day. This backwardnessof the telephone system means that companies are reluctant to locate there. The situation is only slightly better in towns where telephonesystems have been partly automated. All county headquarters, which include the five main cities (Gyor, Miskolc, Debrecen, Szeged and Pecs), have automaticexchanges. All are electro-mechanical,and the six which have rotary systems need to be replaced because they can neither be properly maintained nor extended. Such systems are not produced any more.
4.58 Budapest has a mixture of rotary and crossbar exchanges. Sixty percent of these exchanges need to be replaced: 9 main and 130 smaller exchanges. Budapest has only six exchanges which are considered modern. They were built since 1971 with 1950's vintage Ericsson cross bar technology. There are no digital main exchanges in Hungary because the export of such systems have been embargoed by COCOM (the Paris Coordinating Committee for MultilateralExport Control) until at least 1988. Therefore, although HP can obtain digital local exchanges of 400 lines now and of 2,000 lines by 1986 from Hungary's electronic industry, it will have to continue to rely on crossbar technology for its largest main exchanges until the embargo is lifted. To support the planned development of the telephone system, the Government is currently considering an integrated project for the production of eLectronic spare parts and components. This project would span the Seventh and Eighth Five-Year Plans.
4.59 Cost recovery for telephone services is relatively high compared with other public utilities. Connection charges are high and can be collected up to one month before installation. They are Ft 4,000 for party lines to private telephones,Ft 6,000 for individual lines to private telephones, and Ft 45,000 for individual connections for company telephones.-o Connection charges for telex are as high as Ft 100,000 and data communication connections cost between Ft 100,000 and 400,000. Monthly telephone charges start with a Ft 40-60 flat fee plus Ft 1.5 per impulse. (For local calls impulses are 3 minutes; for long distance calls they are shorter, depending on distance.) This is a very low figure by internationalstandards, and more revenue could have been raised to accelerate the expansion. HP's investments of Ft 17 billion during the Sixth Plan were funded 78% from own retained earnings, 20% from State grants, 1% from bonds sold to telephone applicants and only 1/2% from Hungarian National Bank loans. Sixty-five percent was devoted to the expansion of the telephone system (see Table 4.18) This was not enough, however, to keep HP on track to its long-term target of 30 telephones per 100 population by the year 2000. a. Investment During Seventh Plan
4.60 During the Seventh Plan, HP would like to catch up with its long term target for telephone service. It proposes to invest between Ft 21 and 32 billion during the next Five-Year Plan, depending on which of the three
Equipment installationcharges are around Ft 1,000. Table 4.18: HUNGARIAN POST, 6TH AND 7TH PLAN INVESTMENT PROGRAMS
7th Plan 7th Plan 6th Plan Version 1 Version 2 Version 3 6th Plan version 1 yersion2 Version 3 ------(1981 prices) Billion Ft.------percentage distribution------
Telephone, telex, telegram and data transmission 11.4 14.5 20.0 25.OLA 65.1 69.1 74.1 78.1
Radio and TV broadcasting 0.8 1.5 1.7 1.7 4.6 7.1 6.3 5.3
Letters and packages and newspapers and magazines and savings and cash transactions,internal infrastructure(garages, workshops, etc.) and social and cultural in- frastructure 5.3 5.0 5.3 5.3 30.3 23.8 19.6 16.6
Total 17.5 21.0 27.0 32.0 100.0 100.0 100.0 100.0
La HP proposes a figure of Ft 26.4 billion. - 97 - versionsof the Plan appears attainable. The main difference with investments during the Sixth Plan is that the share of telecomnuncationsin total HP investmentshas increased, and the proposed growth of investment in telecommunications(the middle version of the Seventh Plan is 68S over the Sixth Plan) is one of the fastest of all sectors. b. Main Policy Issues
(i) Rate of Expansion of Telephone Services
4.61 HP and NPO agree that it would make sense to invest as large an amount as possible in the telephone system, partly because it is a highly profitableoperation, partly because economies of scale can be realized in investmentand because investment-inducedincreases in demand for telephone servicesare anticipated. HP argues that choosing the high investment version would allow the cost per connection to be brought down from Ft 80,000 to Ft 60,000 simply because costs of replacing obsolete exchanges and installing additionalones and of the expansion of the cable network could be spread overmore customers. HP also predicts that a faster expansion of the telephone network would by itself provoke an increase in the number of impulses per subscriber from 5,500 to 5,800 per year.
4.62 There is a strong case for the heavy investment proposed by HP, given the importance telecommunicationsplay in the development of a modern economy and the cost and energy savings realized each time a trip can be replaced by a telex message or a telephone call. The import burden of the telephone system expansiondoes not seem excessive, since 80-85% of all investment goods are locallyproduced. In addition, an expanded investment program could readily be financed. Telephone operations have yielded an operating profit before taxes of 542 (see Table 4.16) and financed 78% of all HP investments. But they could yield far more revenue if tariffs were raised. In Hungary, telephonetariffs are one-half to a third of those in similar countries. There is a waiting list of 430,000 potential subscribers, or possibly more if one includes those now too discouraged by the queues to even apply. In view of the huge excess demand, Hungary could easily envisage a considerable increase in tariffs. The Mission notes that there are now more frequent changes in tariffs and welcomes the current intention to raise tariffs in order to finance future expansion. This is an important way to mobilize household resources to expand investment. In a few settlements, some investmenthas been financed directly using household funds by issuing bonds, which come with a promise of reduced waiting time. This is ideal where a basic network has been constructed, and where the marginal costs of reaching new settlements is significant but not very high. A potential subscriber might pay Ft 20-30,000 in bonds paying relatively low interest, and receive a telephonein 3-4 years instead of 12. It is estimated that such bonds might raise of the order of Ft 3 billion during the Seventh Plan. The Mission understandsthat bonds of Ft 25,000 each have now been offered and taken up in 5 housing estates in Budapest. - 98 -
(ii) Expansion of Telex Service
4.63 A special effort should be made to extend the telex network to as many businesses as possible. It will relieve the pressure on businesses' telephonesand provide cheap communications to businesses abroad. It can also be a valuable source of revenue.
(iii) Digital Main Telephone Exchanges
4.64 Digital main exchanges are cheaper to purchase and to operate than other technologies. Currently western manufacturers are eager to sell digital exchanges and are able, with the help of subsidies and concessionary finance from their own governments, to offer exceptionally attractive prices. It is not, unfortunately,within the competence of the Mission either to predict the length of the present embargo, or the wisdom of investing in cross-bar main exchanges,until digital main equipment can be imported or manufactured locally. It might be valuable to study this issue closely, using individuals who are familiar both with the technical questions and the international equipmentmarket. Investment projects cannot be further delayed. It seems prudent to concentrate investments over the next 5 years on components which will be compatible with digital systems, such as cables and wires. The rotary main exchanges currently in operation are obsolete and undermine the whole teleohone network. The Hungarians recognize that the present embargo has put digital main exchanges out of the question in the Seventh Plan Period, so where economicallyviable, small-scale electronic exchanges made in Hungary will be installed. These may well be adequate for the needs of smaller towns and villages. In large towns cross-bar main exchanges are the only option.
(iv) Distributionof New Telephone Capacity
4.65 A rapid expansion of the telephone system is also required to correct the distributionalinequities. Currently, two-thirds of telephones are in firms or Government agencies. In the Seventh Plan, the distribution of telephonesacross regions and across potential subscribers should be based on a careful survey of the distribution of revenue. Expansion of the telephone network first to the type of customer who generates most revenue - i.e. enterprises- is also expected to yield most benefits to the economy as a whole in terms of a reduction of transport costs and work time losses. ILowever,due considerationshould be given to residentialusers, especially where these would be expected to be used for small businesses.
4.66 Regional equity is important as well. As we have seen, the regional density varies greatly. In the Seventh Plan, relative preference could be given to the provision of telephone and automatic exchanges in the least equipped regions.
(v) Mechanization of Traditional Services
4.67 Letters, packages and newspapers are mostly sorted and dispatched manually. HP would like to invest in sorting equipment and in equipment to package and handle more newspape.s and magazines with less labor. Even though HP does not seem to have major problems in attracting and retaining sufficientlyqualified and disciplined labor, and even though HP's performance - 99 _
using manual methods is remarkable, in view of the scarcity of labor discussed elsewhere in the Report it would be advisable to study the relative costs of present practice and of mechanizing postal operations.
(vi) New Proiect Idea: Postal Checkirn
4.68 The Seventh Plan includes a rapid expansion of commercial banking to promote the use of savings, credit and checking accounts. Rapid progress could be made in this transformationif a postal checking system was developed by HP. HP has 3,000 branches distributed all over the country. Because it has handled savings transactions for NSB, HP has experience in financial transactionswith the public. The main investment required to get a postal checking system started would be a Central Check Clearing Center. This would be a small investment compared with the cost of establishing commercial bank branches all over the country, and could be completed in a short time.
D. Water Management
General Context
4.69 Hungary is a basin, surrounded on almost all sides by mountains, in which precipitation collects and which, combined with surface water coming into the basin from outside, produces disastrous floods such as those in 1956, 1965 and 1970. Ninety percent of surface waters originate abroad and are brought in by the rivers Duna, Drava and Tisza. 23,000 kmz out of the total area of 93,000 kmz of Hungary is subject to once-in-100-year flooding; 25% of the flood area is located in the Duna basin, 75% in the Tisza basin. Because the two basins get their water from precipitation in areas far from each other, the chances that both would flood at the same time are sma'll. Seven hundred settlements are located in the flood area, including Budapest, together with an important share of Hungary's assets. Only 65% of the 4,186 km of dikes built so far to protect against floods meet the requirementsof a 100-year flood.
4.70 In recent years, certain regions of Hungary have suffered from drought and water reserves were found to be insufficient. While aggregate water supplies are sufficient to meet total needs, distribution of water resources is a problem. In the West, water is supplied steadily by the Duna and its side rivers. In the East, the Tisza basin supplies are smaller and very variable. Dams were built on the Tisza, at Tiszalok and Kiskore to try to regulate its course and to produce hydro energy. A third dam is planned for sometime after 1990. From the two existing dams and from dams on the Kdros river, water is brought by canals to drier areas. a. Recent Investment
4.71 The Sixth Plan had three objectives in the area of water management - which remain those of the Seventh Plan. The first is to meet the water supply requirements of the population, of agriculture and of industry. In this respect, substantial progress was made during the Sixth Plan. In 1980, over 40% (see Table 4.19) of all dwellings were not connected to water mains. - 100 -
Table 4.19: PUBLIC UTILITIES CONNECTED TO THE HOUSING STOCK
Public Utilities 1970 1975 1980 1981 1982 1983 1984
Water Supply
Locations with water 32-8 41.0 49.7 S1.S 53-7 55.9 60 works as : of all locations
Owellings connected 1.081 1,479 1.981 2.123 2.236 2.284 to the water system (thousands)
Percentage of housing stock 35% NA 56% NA 61% 61:
Orainage
Loctns with closed drainage as % 12.7 13.5 14.4 14-5 14.9 15.2 of all locations
oof dwellings con nected to pub. drng 811 1.002 1.225 1.306 1.347 1.401 networks in '000
Percentage of housing stock 26% NA 35% NA 37% 38-
Gas Supply
S of H.H consumers, in thousands 525 707 919 961 1.000 1.047 - propane butane RH consumers.-000 1.291 1.622 2.174 2.259 2.333 2.387
Electric Energy
# H.H consumers.-000 2.846 3.2S1 3.675 3.747 3.821 3.897
Monthly avg. consum- 53.9 82.7 115.1 121Z 129.9 138.1 ption per NH. kwh
Percentage of housing stock 91% NA 104% NA 104% 105%
District Heating
Dwellings heated number 109.388 252.399 438.291 469.761 502.765 531.582
Percentage of housing stock 4% HA 12% NA 14% 14%
Source: Statistical Yearbook. 1983. Hungarian Central Statistical Office. Table 22.7 - 101 -
Eight hundred settlements still relied on individual wells and one half million relied on unsafe, mainly nitrate-pollutedwater supply. The achievementsof the Sixth Plan have exceeded original objectives. Water works capacity in the country will reach 5 million m3Jday in 1985 and 84% of the population,in 66% of the dwellings, will be connected to water mains. Problems of satisfying peak demand, especially in the summer and in the rapidly growing settlements, will remain. At present, 570 settlements have to rely on polluted water. It is planned to supply 400 of these with healthy drinking water before 1990. At the moment, as a stopgap measure, safe drinking water is delivered to households in all these settlements,mainly to protect babies and young children. It is hoped to provide safe drinking water to all remaining settlements before the end of the Eighth Plan period.
4.72 The second objective is to protect the quality of water resources by the increased protection of rivers and lakes from pollution, and the constructionof sewage and water treatment plants. During the Sixth Plan considerableprogress has been made. The dwellings of 600,000 people were connected to waterborne sewage systems bringing the total number served to 46% of the population. However, during the Sixth Plan the engineering shear, the difference between dwellings connected to water supply and those connected to the sewerage system, has increased. While 66% of all flats are served with piped water, only 39% are connected to a central sewage system. Only half of the sewage is treated. The problem of dumping untreated sewer in rivers is concentratedin the largest settlements and efforts are being made to remedy the problem. Two new treatment plants are being built in Budapest and others in Gyor, Komarom, etc.
4.73 The third objective is to protect people and property against flood damage and agricultural land and buildings from damage caused by a high water table. On this, progress has been rather slower. Protection against 100-year floods requires upgrading roughly 2000 km of existing dikes; only 100 km were completed in the Sixth Plan, 120 km are to be done under the Seventh Plan. Only 75% of investments needed to protect agricultural soils and to meet a 30 to 40 day drainage requirement are in place. In many cases drainage requirementsof agricultural lands is actually increasing due to the introductionof new crops more sensitive to water logging. b. Finance
4.74 During the Sixth Plan, half of all investment resources came from the State Budget and from Council development funds and half came from enterprise equity, assets of established joint stock companies and other sources. State subsidieswere used primarily for water supply projects. Most sewage treatment plants, especially the larger ones and those located in large settlements,are financed from State grants. In most communities, potable water treatment plants are not needed as 90% of water is taken from deep wells. For the 10% of water taken from the surface or pumped out of the banks of the Duna and the Tisza, treatment plants are financed with State grants. In smaller settlements, a large proportion of funds have come from non-State sources. Often Citizens' Associations obtain loans from the National Savings Bank (NSB) (for 10 to 15 years at 10% interest) and build water supply or sewerage networks through local contractors. - 102 - c. Pricing
4.75 Household water tariffs vary across the country but in general they only cover around 30% of operating costs. In apartments, water is metered for each building, not for each flat. Most individual dwellings are equipped with a meter. In Budapest, households living in State flats pay water and sewage charges as part of their rent. All other households pay a flat fee of Ft 1.2/m3 for water and Ft 0.6/m3 for sewage. Water consumption per capita is high: between 200 and 250 liter/day and in new housing estates pipe networks are designed assuming a consumption of 1000 liter/day/flat. Connection fees are high only for companies: they pay Ft 20-35,000 per m3 /day predicted water consumption and Ft 40-50,000 per m3/day predicted effluent generation.
4.76 In most areas local councils charge a Ft 4-6,000 connection fee. Connection fees charged by Citizen Associations to individual dwellings are Ft 30-35,000. Real costs are three or four times larger. Such connection fees are not charged in the centers of Budapest and other large towns on the grounds that networks already exist. The higher fees are only charged in the suburban areas of the larger towns and in all areas of small towns and villages. d. Investment Proposals for the Seventh Plan
4.77 In addition to continuing to fulfill the objectives of the long run water management plan, the Seventh Plan will emphasize the supply of safe water and the protection of water resources. This last objective will be achieved by the expansion of sewage collection and treatment. Total investments,excluding works on the Duna dam near Czechoslovakia, are planned to vary from Ft 49 billion in Version 1 of the overall investment plan to Ft 55 billion in Version 2 and Ft 56 billion in Version 3 (1981 prices) (see Table 4.20).
4.78 During the next Five-Year Plan, potable water supplies will increase by 560-620,000m 3/day to reach a total of around 5.5 million m3/day by the end of 1990. Of the increased capacity, 200-250,000 m3/day will serve new dwellings, 100,000 m3/day will go to existing dwellings and the rest will be delivered to industries. In addition, 250 additional villages which now have nitrate polluted water will have a safe water supply. This leaves 320 settlements to be dealt with during the Eighth Plan.
4.79 As regards sewage lines, in the Seventh Plan, 1,300 to 1,500 km will be added to the existing 9,000 km. This will permit 250-300,000 additional flats to be connected by 1990. During the Seventh Plan, the development of sewers will keep the engineering shear at more or less constant levels. Efforts to reduce it will be delayed because the Government experts believe that, in many cases, local conditions permit solutions such as septic and holding tanks which are cheaper than full-fledgedwater borne sewerage networks. Still, sewage treatment capacity will be increased from the 1.25 million m3/day capacity available in 1985 to 1.6 to 1.7 million m3/day by 1990. - 103 -
Table 4.20: INVESTMENTS IN WATER MANAGEMENT DURING 7TH PLAN (Ft b. 1981 prices)
Investment Description Version 1 Version 2 Version 3
Water supply, sewerage and baths 39.0 44.0 44.0 Flood & ground Water protection 8.0 8.5 9.5 Irrigation & other 2.0 2.5 2.5
Total 49.0 55.0 56.0
Source: NPO, June 1985.
4.80 During the Seventh Plan, 120 km of flood protection dikes will be raised to meet 100-year flood requirements. The location of these dikes will be determined in a survey that will establish priorities based on the ecounomic assets to be protected. During the Seventh Plan no new dam will be started but work will continue on the Dunakiliti dam on the Duna near Czechoslovakia.
4.81 Subsoil water drainage will be improved during the Seventh Plan by the construction or upgrading and equipment of 100 km of main drainage channels. Works are also planned on the Duna and Tisza to improve navigability and to prevent the formation of ice dams like the ones that provoked the disastrous 1956 floods. No new locks will be built but channels will be deepened, and weirs will be built to increase flows in appropriate places and to prevent ice accumulations.
4.82 During the Seventh Plan, investments will be made to provide an addition of 600 m3/sec of irrigation water which will serve 450,000 ha.
4.83 The special program for the protection of Lake Balaton will continue. This project, started in 1978, tackles many problems of water protection at the same time and involves numerous ministries, agencies and local councils. By 1987, soiled water produced in the immediate vicinity of the lake will be collected and channelled to a few treatment plants distributed around the lake. After 1987, the treated effluent of those plants will be pumped to other water sheds to prevent pollution of the lake. In areas where it is cheaper, effluent will be chemically treated to remove phosphor instead. Great efforts will also be made to stop chemicals now carried to the 3alaton Lake by runoff water from the surrounding areas. The use of chemical fertilizers and pesticides will be regulated and contour ploughing will be generalized. Decantation reservoirs of up to 6,000 ha will be built at the entrance of Balaton's main feeder river, the Zala, to settle pollutants before they reach the lake. Seven treatment plants will be built in the major towns and for the main industries along the Zala river, among others in Zalaegerszeg. - 104 -
4.84 The Gabcikovo-Nagymarosdam to be completed at Dunakiliti on the Danube in cooperation with Czechoslovakiawill cost a total of about Ft 32 billion in 1981 prices.- The dam complex consists of a concrete dam across the Danube in Hungary, one shipping lock and a hydro power station in Czechoslovakia (Gabcikovo) and a new water channel for diverting the water from the concrete dam to the power station. Another dam, whose cost is included in the Ft 32 billion is to be commissioned in Nagymaros on the Danube by 1993. The project will improve navigation possibilities on the Danube in periods of low water, and provide irrigation as well as flood control. During the Sixth Plan, Ft 3 billion were spent. Under a 1977 agreement with Czechoslovakia, Hungary is committed to the project; otherwise, in the present situation, it would undoubtedly have very low priority, since it will be an expensive supplier of largely seasonal power, and its flood control (which would benefit about 40,000 ha) and irrigation benefits to Hungary are relatively limited. The Hungarian authorities point out, however, that the relatively high investment cost is to some extent offset by the low recurrent costs and long life of the project, and by various other benefits. In addition, its potential environmental impact has raised widespread protest from ecologists. A study of the complex environmental issues by the Hungarian Academy of Sciences presented in September 1985 found that the project will not cause irreversibledamage, and outlined future tasks for environmental protection. e. Major Policy Issues
4.85 Prices: Recovery of water production costs are very low, especially in the larger centers where the population pays only for a small amount of capital costs of water supply and sewerage networks. On average, household water and sewage rates cover only about 20% of the cost of the services. Low charges and the fact that many households' consumption is not metered may go a long way in explaining fairly high per capita water consumption. A gradual increase in water charges and an extension of water metering may decrease consumption and may, for a while at least, reduce the need for investment in new capacity.
4.86 Reduction of Engineering Shear: In many areas of Hungary, proper treatment and disposal of sewage is essential for safeguarding the quality of underground and surface water. Instead of leaving the engineering shear constant and waiting until more investment resources are available in the future to equip certain areas with standard water borne sewerage networks and treatment plants, it may be useful to consider using cheaper intermediate solutions. Expensive treatment plants could, for instance, be replaced by oxidation ponds or other low cost solutions which clean effluent to temporarily acceptable levels.
" Under an agreement signed in May 1986, an Austrian consortium is to finance the project on a turnkey basis, with repayment in power over 20 years after 1996. This releases resources for investment in higher priority, higher return projects. - 105 -
ANNEX V
HOUSING. CONSTRUCTION AND BUILDING MATERIALS
A. Housing
Introduction
5.01 Since the end of the war housing has been a constant concern of the Hungarian Government. The war left Hungary with a partly destroyed, partly dilapidated stock of housing. Several towns had been very severely damaged. In the first years after the war few new dwellings were built, because most of the capacity in the building materials and construction industry was destroyed and because repair and reconstruction,and especially industrial development, took precedence. The number of dwellings built each year increased slowly from about 23,000 in 1951 to around 43,000 in 1955. Only in the cities and large villages was housing produced and managed in the socialist sector of the economy. In smaller villages and rural areas housing remained the responsibility of the private sector.
5.02 The slow progress of the housing program, in the face of substantial rural-urban migration, meant a growing excess demand for housing, exacerbated by increases in household disposable incomes and the fact that, where available, housing was provided virtually free. Those who failed to receive housing under the State's allocation procedures inevitably regarded them as unfair. By 1960, the situation was considered so critical that the Government pledged that the country would produce 1 million new dwellings by 1975 (Hungary's first example of a Fifteen-Year Plan). About 50,000 dwellings were built in excess of this target, though the net addition to the housing stock was less than 1 million because over the 15 year period 230,000 dwellings were demolished either to make place for the new ones or because they were considered insalubrious (see Table 5.1). The housing produced was very small, 55mz on average, and 801 of the dwellings built had two rooms or less.
5.03 Under this program, only about 361 of dwellings, with an average of 50m3, were built directly by the State. In 1962, the Government started allowing some private housing construction in urban areas. In the mid-1960's housing cooperatives were formed and the liationalSavings Bank started granting housing loans. In 1970, housing policy was changed to abolish free housing and to give greater weight to private participation. A whole system of State grants, subsidies, and loans at concessionary interest rates was set up to support it. Rents, which before were between Ft 60 and 80 per flat per month regardless of size, were on average doubled and became proportional to size and level of amenities.
5.04 Nonetheless, the system of State allocation of housing continued and policies were strictly enforced through incentives and direct allocation. For instance, the Government chose large industrializedhousing complexes, which Table 5.1; HOUSING CONSTRUCTION,DEMOLITIONS AND STOCK
Demolitions Calculated Official Difference 5-Year or diversion 5-Year Net 5-Year Housing Housing Year Construction Subtotal to other use Subtotal Additions Subtotal Stock Stock (1) ______(1) ______(2) ______2
1960 2,758,000 2,758,000 1961 67,527 9,575 57,952 2,815,952 1962 54,099 9,307 44,792 2,860,744 1963 52,728 12,125 40,603 2,901,347 1964 53,405 10,932 42,473 2,943,820 1965 54,597 282,356 12,482 54,421 42,115 227,935 2,985,935 1966 55,592 16,520 39,072 3,025,007 1967 62,633 16,744 45,889 3,070,896 1968 67,084 14,486 52,598 3,123,494 1969 61,845 13,108 48,737 3,172,231 1970 80,276 327,430 21,594 82,452 58,682 244,978 3,230,913 3,122,000 108,913 1971 75,302 21,648 53,654 3,284,567 1972 90,194 18,053 72,141 3,356,708 1973 85,211 19,267 65,944 3,422,652 1974 87,843 16,415 71,428 3,494,080 1975 99,588 438,138 20,132 95,515 79,456 342,623 3,573,536 1976 9',905 19,722 74,183 3,647,719 1977 93,396 19,999 73,397 3,721,116 1978 88,153 19,597 68,556 3,789,672 1979 88,196 21,890 66,306 3,855,978 1980 89,065 452,715 17,978 99,186 71,087 353,529 3,927,065 3,542,000 385,065 1981 76,975 18,014 58,961 3,986,026 1982 75,556 16,402 59,154 4,045,180 3,666,000 379,180 1983 74,214 15,449 58,765 4,103,945 3,725,000 378,945 1984 70,435 13,591 56,844 4,160,789 3,784,000 377,496 1985 75,507 372,687 12,501 75,957 63,006 296,730 4,223,804
Notest (1) Yearbook of Housing Statistics,1983 Hungarian Central StatisticalOffice, Table 1. (2) StatisticalYearbook 1982 & 1983, Hungarian Central StatisticalOffice, Table 22.1. - 107 - it considered the only means of increasing housing supply in a tight labor market, and gave a much higher level of subsidy for buying or renting in such estates than for buying individual houses. The national objective of industrializationwas reflected in higher supports for housing near industries,mainly in the large urban areas, than in the countryside. Manual workers were given more favorable treatment than white collar workers. It was still regarded as unacceptable that the level of income of a household should determinethe amount of housing it would consume. Housing continued to be considereda merit good that all households needed, in more or less fixed quantities,regardless of income or social status.
5.05 By the mid-1970's, the housing situation had become a little less critical and personal incomes higher, ard the population became more and more concernedabout the qualitative aspects of housing. With consumer durables more common, the tiny flats seemed increasinglycramped. In 1975 it was estimated that at least one million households did not have proper housing. A Second Fifteen-Year Housing Plan was approved by the Government with a target of 1.2 million new dwellings by 1990. In the first 10 years, about 750,000 new dwellings will have been built; but about 140,000 dwellings have been demolishedor diverted to other uses, so the net increase will have been only 605,000. a. The Present Situation
5.06 The current dwelling stock in Hungary is officially estimated at around 3.8 million dwellings (see Table 5.2). This figure does not, however, appear consistent with data on the constructionof new dwellings minus demolitions,which suggest that the housing stock should have been 4.2 million in 1984 instead of 3.8 million, the difference being equivalent to about five years construction (see Table 5.1). Either new construction has been overestimated - such double counting happens in many countries - or demolitionshave been underestimated. Data on new dwellings are collected by Local Authorities at the occasion of the issuance of building and occupancy permits and by NSB for the dwelling it helps finance. Some discrepancies between different measurements slip in. NSB considers a dwelling completed when its financing is complete, Local Authorities consider the dwelling completed when it complies with all building and technical codes and regulations,and Local Councils consider the dwelling complete when it becomes inhabited. Data from the different sources are used to make dwelling production estimates. Micro censuses every five years attempt to find measurementerrors, usually estimated at around 1,000 dwellings per year.
5.07 In the 1980 Census, 270,000 fewer flats were counted than one would have expected from adding new construction and deducting demolitions from the number of dwellings enumerated during the 1970 Census. The Government thought the discrepancy so large that it requested a formal investigation. In 1980, many premises not originally built as dwellings, such as shops, garages, etc., but used as, and counted as, dwellings in 1970 had been abandoned or had changed usage. Some demolition of flats had not been properly registered. Some dwellings had been converted to other uses (such as old farm houses into stables, villas into off:ces). In addition, the official explanation of the discrepancysuggests that a large number of dwellings were abandoned in - 108 -
Table 5Z: CHARACTERISTICSOF THE DWELLING STOCK
1948 1960 1970 1980 1982 1983 1984
Number of dwellings ('0001 In Budapest 462 536 626 727 752 n.a. 781 In other towns 919 1,164 1,225 n.a. 1279 In other villages 1.577 1.651 1.689 n.a. 1724
Total 2.467 2.758 3.122 3,542 3.666 3,725 3.784
Of which dwellings with 1 room 1.739 1.729 1.440 973 961 955 952 2 rooms 606 900 1.349 1,720 1.790 1.820 1845 3 rooms 122 129 333 849 915 950 987
Percentaae Distribution
Dwellings with I room 70 63 46 27 26 26 2S 2 rooms 25 33 43 49 49 49 49 3 rooms 5 5 11 24 25 26 26
Total 100 100 100 100 1OO 100 100
Inhabitantsper 100 dwellinas In Budapest 344 333 320 283 274 n.a. 264 In other towns 338 313 303 n.a. 295 In other villages 331 303 292 n.a. 81
Total 373 360 331 302 292 287 282
Total no of rooms.'000 3.480 4.067 5.120 7.065 7.398 7,561 7724 Av no rms/dwelling 1.4 1.5 1.6 2.0 2.0 2 2 Inhabitants/100nms. 265 245 194 152 145 142 138
Source: StatisticalYearbook 1983, Hungarian Central StatisticalOffice. peripheral areas. While one does see old dwellings and even new flats converted to non-housing uses, it is hard to find evidence supporting the hypothesis that such large numbers of dwellings have been abandoned. Part of the explanation for the mismatch between flow and stock measurements must be errors in the measurement of new construction.
5.08 Using the official estimate, there are about 2.9 inhabitants per dwelling. In 1980, the latest available year for detailed demographic data, there were about 3.7 million households; of these, 2.7 million were single family households, and about 700,000 were one person households. The official estimate of the housing stock was just over 3.5 million dwellings so while one would expect the number of households to approximate to the number of dwellings, there is some indication of an absolute shortage at that time. Another way to look at this is to note that, in 1980, there were about 3 million families which were either married couples (with or without children) or single parent families, and which might reasonably have aspirations to be one-family households; there were, however, only 2.7 million of these. But since 1980 the demographic structure has not changed significantly and the - 109 - size of the housing stock has grown, so in terms of numbers the situation appears to be more balanced. The low average size of household reflects Hungary's low level of fertility, and is similar in size to households in many other parts of Europe.
5.09 Compared with other European countries, however, Hungarian houses are still small. Direct international comparison of area per person is not readily available, and U.N. comparative statistics of rooms per dwelling count kitchens as rooms which Hungarian data do not.'l Adjusting for this point, the average Hungarian dwelling has about 3 rooms, whereas in most of the countries of Western Europe in the 1960s and 70s it was above four. Family size differences, however, bring the number of persons per room closer; there are approximately 0.9 persons per room in Hungary, which is not very different from many European countries in 1970-72. At that time the number of persons per room was 1.1 in Austria and Italy, 0.8 in Denmark, 0.7 in West Germany and 0.6 in Britain; Chile, another middle-income country with relatively low fertility, had 1. 4 . '
5.10 Housing expenditures are low in Hungary: home owners devote on average less than 10% of all expenditures and renters about 3-5% (excluding utilities). (See Table 5.3). With both working class and white collar households, expenditure on housing, whether owned or rented, increases with income (the income elasticities are respectively 0.98 and 1.02). The repaymentof housing loans is a slightly higher burden on the lower income working class and white collar households than on the higher income ones. (See Table 5.4).
5.11 The size of dwellings has increased over the years, although not dramatically. In 1960, only 38% of the stock of dwellings had more than one room (excluding the kitchen); by 1980, 73% did (see Table 5.5) and by 1983 nearly 80% did (see Table 5.6). Older houses are smaller (Table 5.7), but even those built in the 1970's averaged only 64 mi. In other respects, the quality of the stock has improved significantly over the years. In 1960, only 23% had piped water; by 1980, 65% did. In 1960, only 16% of dwellings had flush toilets; by 1980, 53% did and by 1983, 64% did (see Tables 5.5 and 5.6). In spite of these improvements, there remains a great deal of understandable popular dissatisfaction with the housing situation in Hungary. In 1980, 38% of dwellings were still considered "without comfort" - i.e. without cooking facilities, running hot water, or inside toilets - a marked improvement from the 80% of 1960, but still leaving many families with unfulfilled aspirations for better housing.
5.12 The major problems of the housing stock are concentrated in Budapest and other major cities. A 1980 survey of Budapest's housing concluded that it would cost Ft 68 billion to renew and modernize the housing stock. The problem of obsolete dwellings is most acute in old Budapest where 17,500 do not even have a bathroom. In the old buildings, ground floor flats are unhealthy - they are damp and do not get enough sunlight. Densities are a
See, however, Table 2.3 of Vol. II.
2/ United Nations Statistical Office, Compendium of -iousing Statistics, 1972-4. (U.N., 1976), Tables 6 and 10.) - 110 -
Table 5.3: HOUSEHOLD EXPENDITURESON HOUSING
Weighted Oouble White Average Working Aricultural Income Collar for all Class Population. eoEleAl Workers Inactin Classes
NuMber of Sa leHouseholds 2.960 800 487 1.338 2.303 7.888 Actual Expenditures in Forint HOUSING(Capital expenses) New construction 996 1.884 1.839 1,430 356 1.025 Modernisation.expansion, reconstr. 932 1.146 1.071 927 870 943 Flat entry fee 62 125 94 105 52 75 Repayment of construction loans 874 719 861 1.287 243 743 Purchase of land 752 1,632 562 1.225 253 764
Subtotal Housing (Capitalexp.) 3.616 5,506 4,427 4,974 1,774 3.550
HOUSING (Recurrent expenses) Rent 334 114 103 638 SO1 398 House tax 24 24 28 39 97 48 Condominiumfees 114 25 11 253 58 106 Flat renewal expenses 85 83 73 124 243 137 Renewal supplies 234 196 230 345 269 259 Other 155 155 141 275 365 236 Subtotal recurrent housing exp. 946 597 586 1,674 1,533 1,183
Total Expenditures 42.182 46.745 44,250 54,969 41.175 44.647
Percentaae of Total Expenditures
HOUSING (Capital expenses) New construction 2.36X 4.03X 4.16a 2.60% 0.862 2.30X Modernisation.expansion. reconstr 2.21S 2.45X 2.42Z 1.69X 2.11X 2.11X Flat entry fee 0.1S 0.272 0.211 0.19% 0.132 0.17X Repayment of construction loans 2.07X 1.542 1.952 2.34% 0.592 1.662 Purchase of land 1.782 3.492 1.27X 2.23% 0.611 1.71X
Subtotal Housing (Capitalexp.) 8.57x 11.78X 10.00% 9.052 4.311 7.952 HOUSING (Recurrent expenses) Rent 0.79X 0.242 0.232 1.16% 1.22% 0.89X House tax 0.062 0.052 0.06S 0.07% 0.24% 0.112 Condomininumfees 0.27S 0.05S 0.022 0.462 0.14X 0.242 Flat renewal expenses 0.20X 0.182 0.16X 0.23X 0.59a 0.31X Renewal supplies 0.552 0.42X 0.52% 0.632 0.65X 0.582 Other 0.37X 0.332 0.322 0.50X 0.892 0.532
Subtotal recurrent housing exp. 2.24X 1.28X 1.322 3.052 3.72% 2.652 Total Expenditures 100.002 100.002 100.002 100.002 100.002 100.002
Note A, Individualswith both agriculturaland non-agriculturalincomes. Source: Household Statistics 1983. Kozponti StatisztikaiHivatal, Budapest. 1984. Table 5.4: HOUSEHOLD EXPENDITURESOF WORKING CLASS HOUSEHOLDS BY INCOMEGROUPS
Less than 26,401- 31,200- 36.001- 40,801- 50,401- 60,000- More than 26.400 Ft 31.200 Ft 36.000 Ft 40.800 Ft 50.400 Ft 60.000 Ft 69.600 Ft 69.601 Ft
NiHmberof Sample Households 437 408 465 426 594 343 149 138 Actual Expendituresin Forint
HOUSING (Capital expenses) New construction 592 985 344 950 1,205 1,560 1,199 4,221 Modernisation,expansion,reconstr.530 726 874 1,030 1,023 1.462 1,685 1,171 Flat entryfee 19 65 6 15 22 57 815 178 Repaymentof constructionloans 519 847 950 939 939 961 1,103 1,479 Purchaseof land 384 1,279 367 377 859 1,933 546 102 SubtotalHousing (Capital exp.) 2,044 3,902 2,541 3,311 4,048 5,973 5,348 7,151 HOUSING(Recurrent expenses) Rent 238 256 305 316 403 474 437 628 House tax 12 18 18 23 25 31 68 78 Condominiumfees 34 123 96 118 156 170 119 194 Flat renewalexpenses 16 61 69 88 67 173 259 313 Other 111 111 159 154 135 289 206 286 - Subtotalrecurrent housing exp. 411 S69 647 699 786 1,137 1,089 1,499 Total Expenditures 29,676 36,889 40,313 43,207 52,213 62,014 66,726 85,467 Percentaaeof Total Exoenditures HOUSING(Capital expenses) New construction 1.99 2.67 0.85 2.20 2.31 2.52 1.80 4.94 Modernisation,expansion,reconstr. 1.79 1.97 2.17 2.38 1.96 2.36 2.53 1.37 Flat entry fee 0.06 0.18 0.01 0.03 0.04 0.09 1.22 0.21 Repaymentof constructionloans 1.75 2.30 2.36 2.17 1.80 1.55 1.65 1.73 Purchaseof land 1.29 3.47 0.91 0.87 1.65 3.12 0.82 0.12 SubtotalHousing (Capital exp.) 6.89 10.58 6.30 7.66 7.75 9.63 8.01 8.37 HOUSING(Recurrent expenses) Rent 0.80 0.69 0.76 0.73 0.77 0.76 0.65 0.73 House tax 0.04 0.05 0.04 0.05 0.05 0.05 0.10 0.09 Condominiumfees 0.11 0.33 0.24 0.27 0.30 0.27 0.18 0.23 Flat renewalexpenses 0.05 0.17 0.17 0.20 0.13 0.28 0.39 0.37 Other 0.37 0.30 0.39 0.36 0.26 0.47 0.31 0.33 Subtotalrecurrent housing exp 1.38 1.54 1.60 1.62 1.51 1.83 1.63 1.75 TOTAL EXPENDITURES 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00
Source:Household Statistics 1983, Kozponti Statisztikai Hivatal, Budapest, 1984. - 112 -
Tables5.: OcCUPIEDDWELLINGS By NUmBER OF ROOMS.EQUIPMENT. & COMFORT
Absplutp NLMflbl PPreentaam D1stribution 1960 1970 1980 1960 1970 1980 Siz
Owellings with 1 room 1.693.853 1,385.034 912,526 62 46 27 2 rooms 889.403 1.322.686 1.674,413 33 44 49 3 roomS Or more 127.570 326.687 829.626 5 11 24 Total 2.710.826 3.034.407 3.416.565 100 100 100
Dwellings supplied with water Conduit 615.Z14 1.095.814 2.221.929 23 36 65 flush toilet 435.522 825.328 1.821.935 16 27 53 electricity 2.021.101 2.781.949 3.348.602 7S 92 98 gas-tubing 286.096 490.896 871.539 11 16 26 bottled gas 84.688 1.068.464 1.779.440 3 35 52 CWnort Dwellings with all Comfort 360.540 747.411 1.751.006 13 25 51 with Some comfort 187.047 286.739 377.151 7 9 11 without Comfort 2.163.239 2.000.257 1.288.408 8s 66 38
Total 2.710.826 3.034.407 3.416.565S 100 100 100
Source: Statistical YearbooK 1982. Hungarian Central StatisticalOffice. Table 22.3.
problem as weLl - in the Seventh District of Budapest densities reach 44,000 people per km . Bad housing conditions are concentrated in 5 of the 22 districts of Budapest. There one finds the highest proportion of state-owned flats and also the highest concentration of dilapidated buildings. The Budapest Council spent Ft 16 billion during the Fifth Plan and will have spent about Ft 26 billion by the end of the Sixth Plan for renewal and modernization of State flats. Still, a great proportion of the stock is unsatisfactory, even dangerous in places. 80,OOOm1 of housing is supported by scaffolding to keep it from collapsing. In many of the old court style apartments, the cantileverbeams supportxng the external walkways are dangerously rusted. Because maintenance costs are so high in Budapest, rents, even at their full new level (describedbelow, para 5.23), would only cover one-half of maintenance costs. The present program of the Budapest Council calls for the rehabilitationof about 125,000 flats and the demolition of 22-25,000.
5.13 In smaller towns and villages, the housing stock is in better shape. Even the old houses seem better maintained than in Budapest. In one of the best run towns, Szekesfehervar, the local maintenance company appears to be able to maintain and operate 11,000 flats and to cover all recurrent costs from rent revenues. This company is also responsible for the district heating system which serves 11,000 State flats, 1,000 NSB-commissionedprivately-owned flats and 340 companies, schools, etc. It also operates an 8 program cable TV - 113 -
Table 5.6: HOUSING OWNERSHIP AND CHARACTERISTICS BASED ON THE 1983 HOUSEHOLDSURVEY
Double White Average Working Cooperative Incoec Collar for all Class Peasants PeoDle Workers Inp!;tive C'asses
NHumber of Samole Households 2.960 800 4a7 1.338 2.303 7.888
DWELLING OWNERSHIP Owner occupied 71.5 89.3 89.9 59-9 71.1 72.4 Rented 23.8 5.3 5.5 36.8 25.3 23.4 Rented part of dwelling 0.2 0.3 0.0 0.2 0.6 0.3 Relative of owner 3.1 4.0 3.3 2.1 2.4 2.8 Relative of renter 0.2 0.4 0.7 0.3 0.1 0.2
Sublet 0.8 0.2 0.6 0.4 D.. 0.5 Other 0.4 0.5 0.0 0.3 0.2 0.3
Total 100.0 100.0 100.0 100.0 100.0 100.0
Ownership of Second Home 5.0 1.3 1.6 16.8 4.7 6.3
DWELLING CHARACTERISTICS Only one room 16.8 16.6 9.8 9.0 37.7 21.1 Two rooms 49.4 43.8 41.2 44.3 48.1 47.1 Tree rooms or more 33.5 39.5 48.8 46.6 '4.0 -1.6 Average flat floor area 67 77 80 70 59 67 Average room floor area 17 18 17 17 18 17 Rooms Per 100 households 222 231 246 250 179 217 Persons Per 100 rooms 151 147 160 124 90 129 Bathroom & WC 68.0 47.3 52.8 91.6 44.1 62.0 Bathroom only 6.3 13.8 14.7 2.1 5.3 6.6 UC only 1.7 0.a 0.1 0.8 3.3 1.8 Running water 80.0 6i.3 70.1 96.6 62.6 75.4 Gas (piped or bottled) 85.7 87.7 90.7 89.' 75.3 83.8 Telephone 8.1 2.1 1.0 32.8 11.8 12.3 District or central heating 19.8 3.2 3.3 32.6 9.3 16.2 Other central 11.9 14.0 12.9 15.7 3.7 10.4 Modern local heating 26.3 16.5 22.1 34.8 25.2 26.2 Traditional central heating 36.5 59.6 51.6 13.7 57.1 41.9 Both S.S 6.7 10.1 3.2 4.7 S.3
Source: Household Statistics 1983. Kozponti Statisztikai Hivatal. Budapest. 1984. - 114 -
Table 5.7: OCCUPIED DWELLINGS BY YEAR OF CONSTRUCTIONAND BY SURFACE AREA
1990- 1920- 1945- 1960- 1970- 1899 1919 1944 1959 1969 1979 Total
Distribution of Dwellings (X)
Budapest 17.3 14.8 24.2 7.6 13.9 22.2 100 Other Towns 12.8 8.6 13.6 10.7 20.6 33.7 100 Villages 13.4 10.8 20.5 18.1 17.2 20.0 100 Total 14.0 10.9 19.0 13.5 17.7 24.9 100
Average Surface Area of Dwellings (sq.-r)
I room 37 38 39 39 38 35 38 2 rooms 61 62 61 60 60 57 60 3 rooms 87 87 84 79 78 76 79 4 rooms and more 121 117 110 101 101 96 104
Average 54 56 57 58 62 64 59
Source: (2) Statistical Yearbook 1982 & 1983, Hungarian Central Statistical Office, Table 22.4. network. Maintenance costs are around Ft 60 per mz per year and cover normal repair of lifts, communal rooms, gate telephones,etc. Additional operation costs, such as wages for the caretaker, electricity,garbage collection, etc.. amount to about Ft 3,600 per flat per year.
5.14 District heating in Szikesfeh6rvar, as in the rest of the country, is highly subsidized; out of an average cost of Ft 80/m3 heated space per year, consumers paid only Ft 21 in 1984. (The Hungarian average is Ft g0/M3, of which consumers will pay Ft 29/m3 after the 1985 price increase. There is great local variation; in some places the cost is as high as Ft 180/rm3.) Because heating charges are so low it has been nearly impossible to induce the population to save energy. Instead, in many flats, better windows and doors were installed and wall insulation was added at State expense. Special State subsidies also exist to improve insulation of new State and NSB commissioned flats. b. Recent Policy Changes
5.15 Widespread dissatisfactionwith the housing situation led to a major review of housing policies in 1982, and to a number of new measures which came into effect in 1983. It was found that the incentives to private housing - 115 -
constructionwere insufficient to maintain a desirable level of housing investment. The subsidy and credit support system was not tailored to the situationof many households, since it favored certain housing forms, especiallyindustrialized high rise complexes. Young people, especially married couples, were poorly treated by the housing distributionsystem, since older couples with more children always had priority. Fifty two percent of young married people in Budapest were living with their parents, and only 11% could receive a local council apartment (compared with 42% of an earlier generation). Local council housing was available only to those with incomes below a certain level. Some of the older, poorly equipped apartments stayed temporarilyempty. Rents had been increased in 1970 but had since decreased in real terms. This had reduced the efficiency of use of the housing stock. People could afford leaving apartments empty or underutilized and were not interestedin swapping. Mobility of households was discouraged. Owners were discouragedfrom buying and selling properties to adjust their house to their requirementsby high transfer taxes. As a consequence, new housing demand could only be met through new housing investment.
5.16 Even when renters bought a house or flat they usually did not return their rented flat to the local council. Instead they tended to swap their rented flat privately to collect key money. As a consequence, the State did not collect the down payment from the new renters and was not able to increase rents. The credit system favored the more affluent population. People with low incomes were forced to make an initial payment of Ft 20,000 to gain access to a local council rental flat. Middle income people generally obtained flats throughcooperatives and would get a credit of Ft 80-100,000 from the National Savings Bank (NSB) or from their local council. Those with higher incomes built for themselves and obtained loans of about Ft 300,000 from NSB.
5.17 To try to remedy the situation, three principles were adopted. The first was to take special measures to provide young people, both married and single, with decent accommodation. They would either be assigned to older small apartments vacated by families with several children newly assigned to larger apartments, or in specially built, low-cost apartments with one room plus a shower and a kitchen shared with other tenants. Even where the normal income limits for local council housing were exceeded, the new regulations allowed some housing to be rented, irrespectiveof income, with higher rents and acceptance fees.
5.18 The second principle was to target social support for housing more sharply to households in need. Subsidies would be provided both by the central government and by local councils. Central subsidies would be given according to objective criteria such as the number of children in a household, the number of persons working and their wages. Local subsidies would be added to ensure that the total Government subsidy fit closely the needs of each household.
5.19 There are two types of central subsidies. The first is a lump sum subsidy based on the number of children in a household, or on a committment to have up to two children within the next six years. (The rate has been Ft 40,000 per child but is to be increased in 1986). This subsidy is given only as down payment on a couple's first house, and only if the house will be newly built by the household, or newly produced by the public sector, not if it is purchased from the private sector. - 116 -
5.20 The second central subsidy consists of a loan from the National Savings Bank at the subsidized interest rate of 3% for 35 years. The maximum loan amount increases with the number of household members. Currently it is set at Ft 320,000 for 1 or 2 persons households, Ft 360,000 for 3 to 4, Ft 400,000 for 5 to 6 and Ft 440,000 for more than 6. Because NSB would only grant a Ft 360,000 loan to a household earning at least Ft 10,000 per month, only families with two or more persons working would normally be eligible. In addition, the private down payment is substantial in relation to most incomes. From 1986 the upper limit on loans is to be raised by Ft 20,000 - 60,000, depending on family size. There is also a preferential loan linked to youth savings which is also to be inc.eased.
5.21 Local support comes generally from two sources. Many companies grant their employees loans for their first house, on average Ft 70-80,000, usually without interest, but with a 1% management charge. Local councils usually support only the very low income households with grants but they provide most families with subsidized land. Support from councils and employers is to increase from 1986, and bridging loans are to be introduced. In addition to these subsidies, the prices of basic building materials, such as cement, are kept at prices below the costs of productior..
5.22 A typical finance plan for a family of two adults and two children purchasing a 55m- publicly produced flat might be: Ft Cost of flat 700,000 Subsidy for children 80,000
Subtotal 620,000
NSB loan (3-4 members) 360,000 Employer loans 70,000 Down payment by household 190,000
Typical monthly charges for such a flat would be: Ft Debt repayment 1,400 Other housing expenses: maintenance, utilities 1,800-2,300
Total 3,200-3,700
5.23 The third principle was tc increase rents of publicly owned apartments. Rents of the best quality apartments are now Ft 15/sq. m/month, for average quality, Ft 12; for "semi-convenient,"Ft 7.5; and for those .without any convenience," Ft 4.5. Rents for flats in most highly desirable zones are increased by 25%, those near noisy or polluting facilities such as railway stations are lowered by 10%. These rents, a maximum of Ft 1,030 per month for a well located top quality flat, are obviously low in comparison with the costs of purchasing a similar flat even with highly subsidized interest rates. Nevertheless, because rents nearly doubled at a time when salaries remained constant, two kinds of compensation were granted. First, rents will be increased by steps to reach the new level only in 1988. Second, all people with low pensions or families with 3 children or more benefit from a rent reduction of Ft 150 per month. In most cases rents remain too low to - 117 - cover the cost of maintaining the outside of the buildings and the public spaces and amenities such as elevators. Maintenance inside the flats is the responsibilityof tenants.
5.24 The increase in rents has caused the housing stock to be used a bit more efficiently. Swapping of fiats has increased. Councils have also given very attractive incentives to households who return their flats and do not need another council flat in the same council area. They are paid between 3 and 5 times the rental current down payment on the flat, currently a sum between Ft 150 and 300,000. Understandably, this program has been very successful. In 1983 alone 10,000 flats were returned as a consequence of the financial incentives. Even though the cost of the program is high, it creates more housing at around 20% of the cost of building new housing estates.
5.25 The independence granted to local councils in the use of their resourceshas provided more flexibility in the delivery of housing to the population. Councils have alternatives - instead of providing one family with a rental flat which costs Ft 700,000 they can, for instance, provide 5 families each with land worth Ft 70,000 and still afford to give each a subsidyof Ft 70,000.
5.26 Councils have also taken the initiative in selling rental flats to tenants. If two thirds of tenants accept, all flats are sold to them at 30% of the value assessed by the Council, or to outsiders at 40%. Councils can also be forced to sell apartments if three-fourthsof tenants demand it. Not only do tenants pay only a fraction of the assessed value but they are allowed to only pay a 10% down payment and pay the rest in installments without interest charge.
5.27 In spite of these efforts to encourage privatization of the dwelling stock in the urban areas, the State still owns roughly 25% of all dwellings, 60% of the stock in Budapest and 30% in other towns. Budapest Council would like to sell many of its flats but the financial incentives have only attracted a few hundred buyers so far. This lack of enthusiasm is mainly caused by the low physical quality of apartment buildings. Other town councils have had more success, however, both in providing land for private building and in selling their existing stock of flats. c. Weekend houses
5.28 The stock of weekend houses is estimated by NPO to be around 130,000 units. Approximately 40% are located in the lake Balaton area, 10% near lake Velence, 15% near tne Duna knee, 5% in the Matrat and Biikkmountains and the remaining30% spread over the rest of the country. (For environmental reasons,around Lake Balaton all construction of second homes has been temporarilystopped.) However, the 1983 household survey indicates that 6.3% of all households own a weekend house; this leads to an estimate of around 235,000such houses, a figure more consistent with casual observation. The main reason for the discrepancy is that many of the houses that are less than 30 m2 are not included. According to official records about 4,200 new weekend houses are built each year. (From a breakdown in the characteristics of those built in 1983, it appears that 97% are built by the private sector, either by artisans or by private contractors, 97% have only one level and 89% are detached houses)(see Table 5.8). - 118 -
Tahle S.j: WEEKEND HOUSES. 1983
of hiiich Supplied with math- -'ec- Piped Tntal_ kitch.n raam_ Tollet trtcity Water
PercentaaeDistribution:
By Source of State or NSB Loan to Finance: Private Individuals 5 5 s s s 4
Without State or NSB Loans 95 95 93 91 93 67
Total 100 100 98 97 98 71
By Builder: Socialist Sector 3 3 3 3 3 3
Artisans 18 18 18 18 18 12 Private Building Contractors 79 79 77 76 77 55 Private Sector 97 97 9S 94 95 68 Total 100 100 98 97 98 71
By Number of One Level 97 97 94 93 97 68 Levels: More Than One 3 3 3 3 3 3 Hot Knoin 0 0 0 0 0 0
Total 100 100 98 97 100 71
By Number of 1 Dwelling 89 89 86 85 87 60 Dwellings per 2-4 Dwellings 7 7 7 7 7 7 Building 5 or Hore 4 4 4 4 4 4 Not Known 0 0 0 0 0 O
Total 100 100 98 97 98 71
SQurr&: Yearbook of Housing Statistics, 1983. Hungarian Central StatisticalOffice. Table 76. - 119 -
5.29 The second houses built in 1983 were well appointed: 100% had kitchens,98% a bathroom and electricity, 97X had a toilet and 71X piped vater. In 1983, 78% of -weekendhouses were larger than 20m2 (on average 45m2) and had solid walls. The mission's impressions,however, from a casual visit through the countryside were that a lot of weekend houses are less well equipped. If this is true, it is possible that official statistics, mostly because they are based on permits, may undermeasure this construction activity.
5.30 The development of some weekend houses was helped by the State. From 1970 to 1980 local councils obtained funds to develop weekend house plots for sale. Since 1980, local councils have not been given investment funds for recreation. A special fund has been created, however, for infrastructurefor all types of housing plots, but directed mainly for weekend houses. This fund usually amounts to about Ft 150 million per year. Only permanent residents are allowed to improve their dwellings. A new regulation, which is proposed in 1986, would give local councils the authority to increase taxes on holiday visitors: a head tax of Ft 12-15 per day (currently Ft 2) and much more for foreigners. The yearly tax on weekend houses which is now Ft 300-600 per year would be increased to Ft 1,000-1,500 per year.
d. Investment Issues for the Seventh Plan
5.31 There has already been a significant shift in the pattern of housing construction. The number of houses built with private finance has remained in the region of 55-60,000 per year since the mid 1970s. In contrast, the number financed by socialist sources fell from an annual rate of 30-35,000 during the Fifth Plan to about half that in 1982-3 (Table 5.9). The expected growth in investmentresources devoted to private housing, noted in Chapter II (para. 2.60 of Vol. I), is therefore to be mainly at the expense of socialist sector housing. Only a moderate increase in State house-building is provided for in the Seventh Plan. The construction of 320-340,000 new dwellings is planned, 63-65,000 in 1986 and 67-71,000 in each year 1987-1990. This is just less than the level which obtained in 1983 and 1984, and at least 15X lower than the average for the last ten years. Because socialist sector housing is primarilya council responsibility,and because councils are to have the freedom to determine their own allocation of resources, it is not known how much such housing there will be. If the Plan target is achieved, and if the rate of demolition is at about its recent level, then the population per dwelling would fall to about 2.6 by the 1990, equivalent to many much more developed countries. This may well sound implausible given Hungarv's income level, but one has to take into account factors which are specific to the Hungarian population and to the housing stock: there are almost no large apartments,different generations do not like to live together, the divorce rate is high and young people want to live independently at an early age. Alternative scenarios are possible; the rate of demolition of older houses might increase, or councils reduce their own construction even further. It does seem likely that the program will be largely driven by private demand and that this is likely to be reflected in the demand for larger accommodation,so it is plausible to expect a significant increase in size. - 120 -
Table S,9: SOCIALIST AND PRIVATE HOUSING CONSTRUCTION. 1975-83
Total Cost/ Invest- Cost/ Investment Number Dwelling mnnt Dwelling Current Prices Constructed (current) (1981 prices) (1981 prices) (Ft b.) ('000 Ftl (Ft b.) f'000 Ft)
sgcialisst FinancialSources
1975 12.800 37,957 338,000 15.900 419,300 1976 12.100 32,212 376,100 14,200 440,600 1977 15.900 33,980 467.400 17.800 525.100 1978 15,700 31.660 494,400 16,800 532,200 1979 16.000 34.056 469,300 16,600 488.400 1980 15.500 30,337 509,800 16,100 532,000 1981 13.000 22,772 568,900 13,000 568.900 1982 12.9oo 19.092 674,100 12,100 635.300 1983 9.992 16.569 603,100 8,900 538,900
Private Financial Sources
1975 15.900 61.631 257,200 1976 17.300 61.693 280,400 22,900 371.900 1977 18.700 59.416 314,500 23,400 393,600 1978 19.500 56.493 344,900 23,300 413,100 1979 20.900 54.140 376,800 23,500 434.600 1980 22.500 58.728 383,100 24.300 413,300 1981 24.600 54.203 453,800 24.600 453.800 1982 28,100 56.464 497,500 26.160 462.300 1983 33.600 57,645 583,200 28.700 498.000
5.32 In recent years house building has been about 4.9% to 6.0% of GDP. This is in the middle of the usual range of other countries. For example, in 1978, residential construction was 3.3% of Britain's GDP, 7.4% of Japan's, 6.2% in West Germany, 5.9% in Korea, 3.3% in Colombia and 8.3% in Greece. A critical questicn, however, concerns costs. It appears that house-building costs have been rising at a significantly faster rate than other investment costs. Although the numbers of houses built with socialist finance dropped sharply in 1983, there was a much smaller drop in expenditure, which suggests a very sharp rise in costs. This may, however, be misleading, at least in magnitude, since it is difficult to construct an index of house-buildingcosts for a period when the size and amenities of housing were increasing, and also because it is hard to relate the actual investment in a particular period with the volume of dwellings completed during that period, at a time when the volume of output is changing very fast. House building costs (in state construction)have, however, been directly estimated for 1982-4, and rise from Ft 8,784 per square meter in 1982 to Ft 9,987 in 1983 and Ft 10,768 in 1984. These rises of 13.6% and 7.8% in successive years are larger, especially in 1983, than the estimated inflation of total fixed investment, which was 5.4% and 7.0%, respectively. Some unofficial estimates are that costs are even higher than this. It should be noted that these costs (amourting to some US$215 per square meter in 1984) are high by international standards; for example, it is proposed that construction costs in a World Bank housing project in Portugal should be restricted to US$142 per square meter, including on-site infrastructure. It is not fully clear why costs should be so high in Hungary, which has relatively low wage levels and subsidises its most - 121 -
importantbuilding materials (though compared with the Portuguese houses, Hungarianones are smaller, and must face a harsher climate). The widespread use of private builders is not a new phenomenon, as Table 5.10 shows, and does not explain the relatively faster rise in recent building costs, since State costs are higher than private ones. So, while Hungary has a pattern of housing investment that appears fairly similar to other countries, it may be getting a smaller return in terms of the housing that is actually built. The rising cost of housing is of considerable concern. It is hoped that the constructionsector in general will benefit from the increased competition that should result from further economic reforms. The Ministry of Constructionand Urban Development is studying ways of slowing the rate of cost increases.
5.33 In sum, there is nothing that appears particularly extravagant about the housing plans for the Seventh Plan. Average expenditures per house will rise, reflecting improvements in quality. A preference for smaller housing blocks, especially for detached and semi-detached housing rather than high rises, is recognised even for socialist sector housing. Although this raises infrastructurecosts per dwelling, there is a willingness to accept the trade-offsinvolved, although the choice will be made by local councils. It
Table 5.10: DWELLING CONSTRUCTION BY TYPE OF CONSTRUCTION ENTERPRISE
Absolute Numbers
State Non-construction Owned Organisations of Private Year Companies Cooperatives Socialist Sector Sector Total
1976 40,679 5,780 2,803 44,643 93,905 1977 40,692 5,530 2,685 44,489 93,396 1978 42,132 5,613 3,538 36,870 88,153 1979 43,053 5,041 3,300 36,802 88,196 1980 43,069 4,809 3,634 37,553 89,065 1981 35,150 3,941 3,367 34,517 76,975 1982 35,258 3,313 2,802 34,173 75,546 1983 32,446 2,904 2,324 36,540 74,214
Per .entageDistribution
197b 43.3 6.2 3.0 47.5 100.0 197 43.6 5.9 2.9 47.6 100.0 1978 47.8 6.4 4.0 41.8 100.0 1979 48.8 5.7 3.7 41.7 100.0 1980 48.4 5.4 4.1 42.2 100.0 1981 45.7 5.1 4.4 44.8 100.0 198: 46.7 4.4 3.7 45.2 100.0 19"5 43.7 3.9 3.1 49.2 100.0
Source: Cost of Dwelling Construction, 1976-1981, Ministry of Building Construction and Housing, Budapest, June 1982 and subsequent years. - 122 - may well be therefore that rather fewer new dwellings will be built. This will be greatly affected by the availability of finance for private ownership - an issue to which we return below. Assuming an average size of 70mz and a constructioncost per net dwelling area of Ft 13,500/mZ, each dwelling would cost Ft 950,000, and the whole program Ft 352 billion. One has however to add the cost of land equal to an average 15 of construction costs and 35% for neighborhoodroads, sewage, water supply, gas and district heating network. The cost of neighborhood infrastructure,Ft 176 billion, should be included in Lhe estimation of the cost of housing investment. This type of infrastructureinvestment is borne by councils for housing estates or by houseowners in most other cases.
5.34 A third item in the housing investment program is the program of reconstructionand modernization of the Council housing stock. For Budapest alone, this expense is estimated by the Council at Ft 25 billion for the Seventh Plan Period. During the same period Ft 5 billion will be spent for rehabilitationin the rest of the country.
5.35 One can assume that weekend houses are going to continue to be built at the same rate and with the same characteristics:4,000 second homes per year, 45m' each. This is equivalent to an investment of Ft 9 billion during the Seventh Plan (1984 prices). This is probably a conservative estimate because it does not include costs of neighborhood infrastructureand does not include investments in holiday shelters less well appointed than those included in official statistics. e. Major Policy Issues
5.36 Housing policy in Hungary has evolved in an understandablebut somewhat paradoxical way. In the years of rebuilding the economy after the war and establishing a socialist society, it was natural to see housing as a basic human necessity in very short supply, and to feel that it should be allocated according to need at a price that all could afford. Similar views were adopted on basic foodstuffs, heating, health and education, which accounts for the present pattern of extensive consumer subsidies. But for many of these other items, beyond a certain level demand tends to be inelastic in reponse to rising incomes, whereas this appears to be universally not true for housing. Although there is a minimum need for shelter, as incomes rise beyond a certain point, housing becomes a consumer good like many others, competitiveperhaps with other relative luxuries such as a private car and foreign travel. As a minimum standard becomes widely available, it makes sense to treat it in this way. There may be a strong case for helping families to obtain this minimum standard, but beyond this there is no justificationfor making housing artificially cheap - it would encourage excessive private expenditure on it, and since its supply is limited, would make it harder for individuals who want more of it to obtain it. A system of housing subsidies, for example, reduces the incentive to a middle-aged couple whose children have set up their own households to move to a smaller house. This makes it more difficult for the generation with younger children to find housing suitable for them. Furthermore, as Hungary has achieved a relatively equal distributionof income, a mass system of housing related subsidies is not a case of the rich subsidising the poor, but of everybody subsidizing everybody else. This raises the tax burden and reduces disposable incomes and - 123 - may dampen incencives. In sum, the subsidization of house rents brought about no social gains, and was a potential source of individual dissatisfaction with the allocation system and of budgetary difficulties for the authorities.
5.37 It was therefore natural to first tolerate and then to encourage private housebuildingactivity, and to endeavour to reduce rental subsidies. Private housing has the added advantage that it uses resources that might otherwisehave been spent on other items of consumption, thus increasing the total resources available for investment. Rents did, however, remain very highly subsidised (and still will, even at their full new levels) so it must have seemed natural to extend at least some of the same advantages to those who spared the State the need to supply them with housing by building their own. In consequence, building materials and housing loans are also subsidised. Mortgages in particular are extremely attractive, since the rate of interest is well below any anticipated rate of inflation. In addition, housing offers individuals the only capital asset that may be transferred to the next generation, so this is a further factor making for a high level of demand for housing loans.
5.38 Unfortunately,mortgages are not available to everybody, since even with additional state help with the down-payment, the amount to be found from private sources is several years of gross earnings. In the example, the downpaymenton even a very small apartment was Ft 190,000, which is about 3-4 years of individual earnings. (A recent survey found that young professionals in their twenties earned a monthly average of Ft 4,404 in 1982. This compared with Ft 4,641 for all white collar workers, and Ft 5,363 for all blue-collar ones.) So it is only the relatively well-off who can afford to take advantage of the subsidies to home ownership - normally it will be those whose parents can give them some additional help. The paradox, therefore, is that the well-intentionedassistance from a socialist government to help with the basic need for shelter may be providing its largest benefits to those who come from relativelyaffluent family backgrounds.
5.39 A straightforwardabolition of the housing loan subsidy would, at the present level of household earnings, put private housing too far out of reach of average young couples. We recommend, however, that assistance be targetted much more directly at the first years of house ownership - for example by providinggreater assistance with the down-payment, and perhaps phasing out the element of subsidy in the mortgage as incomes rise over the life-cycle. At the very least the interest rate should be indexed to the rate of inflation. If this is not done the incentive to hold on to a larger house than one needs after children are grown up is overwhelming. In addition, it would be desirable to find other assets - such as indexed bonds, that might be attractivealternative repositories for individual saving and bequest. A socialist society, of course, does not wish to permit an excessive accumulation- or at least inheritance - of wealth, but there is no social benefit from encouraging individuals to hold both regular residences and weekend homes rather than other forms of assets.
5.40 Long-run housing policy must also endeavour to remove, or at least make very selective, the other elements of subsidy in the system. Subsidies for certain building materials commonly used in dwelling construction, such as cement, could be gradually eliminated. More efficient use of those materials, - 124 - implyinga real reduction of investment costs, may ensue if building material prices reflect true cost to the economy. In many areas of the country, especially in Budapest, rents collected from State owned flats do not cover maintenanceand operating costs. Nowhere, it seems, do they cover depreciationor replacement. It is possible that such rent increases would only be politically acceptable if they are fully compensated by other increases in income, especially for those with low incomes and the elderly. But it is important to note that the present system is not only inefficient but also inequitable since the cost of present housing policies are paid by everybody and the benefits of it vary substantially among individuals.
5.41 While the number and size of dwelling production seems carefully measured in Hungary, prices seem less reliable. Prices of State and even NSB sponsoredhousing seem more like official transfer prices than measuremelitsof real costs to the economy. Indeed, the prices charged to the State or to NSB by constructioncompanies are calculated according to strict regulations. Those regulations set technological coefficients for each dwelling type, costs of machines, labor and other operating expenses are set centrally. Only raw materials can be accounted at actual prices - many of which are heavily subsidized. It would be useful to know how much dwellings and other buildings really cost the economy, even if it is intended to maintain the present system of subsidies, since more accurate prices would lead to better intersectoral resource allocation. It might be worthwhile to calculate the real cost (shadow price) of dwelling and other construction and at the same time to find the reasons why building costs have continually increased faster than the general price level. One reason is likely to be that the index does not fully take into account improvements in housing quality, but there may be other factors.
5.42 A number of other measures could improve the efficiency of housing investment. Efforts should be made to reduce as much as possible the scatter of private housing to avoid the extra infrastructure costs. In the case of weekend homes this would also avoid spoiling the landscape of now attractive areas. Local Councils could more systematically provide serviced sites near existing urban areas instead of allowing housing areas to sprawl, and sell these at an unsubsidised price. Swapping and returning State flats should be further encouraged, but efforts should also be made to provide nursing homes to free more flats (and also hospital beds) and to improve living standards for the aged (see below paras. 6.31 and 6.32).
5.43 Serious energy savings could be made if the consumption of district heat was measured in each apartment, and if in addition it was priced closer to the cost per unit of useful energy that households not connected to district heat pay on average for their heat sources. It would be better still, as argued in Annex II (paras. 2.15 and 2.17), if all household energy prices would rise closer to economic levels - i.e. long run marginal cost. It should be recognized that district heat is an energy product like electricity or gas, and that its distributcrs should operate as energy sector enterprises, not as local council departments providing a social service. While efforts to improve the insulation of State and NBB flats is laudable, low heat prices and the absence of consumption accountabilitywill make this investment ineffective. It is hard to insulate against open windows. - 125 -
B. Construction
5.44 The Construction Industry produced 7.8% of the 1984 Net National Product and provided 5.9% of total employment. On average, construction re;resents around 55% of all gross investment. The industry has been subject to a great deal of criticism for what are thought to be high costs and inefficiency. Many people blame it for long gestation periods of investments in all sectors.
5.45 The industry is dominated by State enterprises and cooperatives, which in 1984 accounted together for 51.7% of the total valae of output and 34% of total employmenton a full-time equivalent basis. State enterprises and cooperativesare classified as belonging to the construction sector as such if more than 50% of their activity consists of construction. In addition, in 1984 3,350 other enterprises and cooperatives engaged in construction,either for their own investments,or to build residences for employees or members or as a sideline activity.
5.46 In 1982, the private sector represented 20% of the value of all constructionand 28% of all employment. It contains several forms of organization, subject to a wide variety of regulations. Private contractors exist and are strictly regulated. Private citizens are allowed to build their own homes under the supervision of a licensed artisan if the dwelling will have two floors or less and if not more than six people are employed for construction. There are also construction associations, which are established as independent legal entities and benefit from a special taxation regime. Such association are not restricted by limits or turnover or on the number of members. Individual licensed artisans may work on their own, or with one of the other forms of organisation. Private sector construction enterprises finance most of their assets from own resources but may also apply for loans from the National Savings Bank.
5.47 The production of building materials is disctussedbelow. They are distributed to all legal public and private construct±dn enterprises either directly by the producers, or through a network of building materials distribution centers (EPTEK) and consignment stores run by EPTEK which sell building materials in smaller quantities. Direct distribution applies to all silica-based materials such as cement, red bricks and -oaf tiles, and to a variety of products of companies formed between 1975 a.id1980 to produce aluminium profiles, windows, insulation, concrete elem-nts, etc. Lumber is sold directly by the light industries sector. Reinforcement bars are sold in large quantities by the steel factory directly to state enterprises. All other building materials are sold through EPTEK centers and consignment stores. Private builders buy building materials mostly from the Fuel and Building Materials Trading Company (TUZEP), which is controlled by the Ministry of Internal Trade. TUZEP has a regional network of outlets. Private builders can also obtain building materials, at a higher cost, from a network of private distributors, or directly from building materials companies. a. Investment in the Seventh Plan
5.48 Investment in this sector, mainly consisting of machinery and equipment varies between Ft 12 and Ft 15 billion (at 1981 prices) between Versions 1 and 3 of the overall investment plan. - 126 -
b. Major Policy Issues: ImplementationDelays
5.49 Slowness in implementingprojects can be attributed to several factors; they include poor work organization, delays in financial disbursements,and inefficienciesand bottlenecks in the sectors producing the investmentgoods. Nevertheless, problems in the construction sector seem to get a major share of the blame. This is usually attributed to organizational problems within the large state firms and cooperatives and to poor organization of construction work.
5.50 The State sector of the construction industry is composed of large firms, which average nearly one thousand workers. Because of attractive alternativeemployment opportunities,due in large part to the boom in private construction,the turnover of productive skilled workers is very high. While skilled labor is in shortage, however, many firms have an excess of low-skilledwhite collar workers. Streamlining internal operations of constructionfirms may require shedding unproductive workers and superfluous white collar employees. The new wage regulations introduced in January have already led to improvements in this respect. In the first quarter of 1985, employmentin the construction sector dropped by about 16,000.
5.51 On the constructionsites themselves, the highly mechanized erection of the basic structure of buildings contrasts with the slow labor-intensive finishingworks. In particular the slowness in the installationof heating systemsand elevators cause severe delays in commissioning buildings. Constructiontime of residential buildings erected by State owned companies has steadily increased (see Table 5.11), partly because economies of scale were lost as smaller housing blocks were built in response to popular demand, partly because quality requirements, for such things as insulation, increased in response to rising energy prices, and partly because of the difficulties State firms have had in adapting to the new requirements. The Government is proposingto induce greater respect for deadlines and quality requirements by introducinga Performance Guarantee. Such guarantees would be built up throughwithholdings on payments for work in progress to ensure timely completionand adherence to all contract specifications.
5.52 The sector should benefit from the general economic reform- described in Chapters III, IV and V of Vol. I. The replacement of administrative prices by competitiveprices, penalties for delays and quality deficiencies, combined with an increase in the share of profits of construction firms for workers incentivesand the elimination of the depreciation tax, may go a long way in solving the sector's problems. Similarly, changes in systems of labor managementcould be beneficial, if they lead firms to adapt their labor force to production requirements, though it is not yet clear that employee-dominated councils and assemblies will be prepared to see wholesale redundancies.
5.53 Efforts at research and training may need to be increased. In contrast to many other countries, the construction sector does not have a self-funded,self-controlled organization in charge of training and research. Research is centrally managed, financed out of a levy on the turnover of all constructionfirms paid out to the National Technical Development Coumittee (OMFB),the official governmental scientific advisory body. Funds collected by the Committee are used for research programs mentioned in the Plan, - 127 -
Table 5.11: NUMBER, SURFACE, COST AND CONSTRUCTION TIME OF FLATS BUILT BY STATE-O-WNEDCONSTRUCTION COMPANIES
Average Construction Area of Average Time per Flats Cost FlaL Year Number (m. sq.) (Ft) (days)
1975 43,985 52.1 316,500 8.9 1976 37,062 54.4 353,500 9.5 1977 40,373 54.4 380,600 8.8 I978 41,775 54.2 396,000 8.5 1979 42,105 54.2 413,700 8.6 1980 40,188 54.2 424,300 9.2 1981 36,330 54.7 447,500 9.2 1982 34,602 55.2 485,300 9.6 1983 31,344 54.9 547,900 10.3
Source: Cost of Flats Built by State-owned Companies, 1975-1979 and 1979-1983, Central Statistical Office, Budapest, 1981 and 1985. production-orientedresearch and development, and for the construction of prototypes. Funds are channelled to regearch insitututes, universities and individual researchers and, mainly for prototype development, back to construction companies. It may very well be that if individual enterprises retained the funds or had greater direct control over research the results would be more usable.
5.54 Training of workers is mainly organized and financed by companies. As mentioned in para. 6.11 below, many companies offer scholarships to young people in apprentice vocational schools as a way of attracting them. Specific training is given in State institutes or on company premises in cooperation with the National Pedagogic Institute. Construction company management is trainedat the Management Institute. Ministries offer a variety of courses, among others at the National Training Center for the construction Industry. Costs of training in this center are shared between the Ministry cf Building Constructionand Housing and the construction firms.
5.55 High personnel turnover reduces the effectiveness of training programs for State firms and large cooperatives. Although it may have beneficial effects on the sector as a whole, it may discourage them from undertaking training.
C. Building Materials
5.56 In 1983, the Building Materials Industry represented 3.2% of the value of gross production of all industries, employed about 70,000 people or 5% of all industrial labor and owned about 6.3% of gross fixed industrial - 128 - assets. Together with metallurgy, it is the most energy-consumingsubsector. Mainly because of low value in relation to bulk, building materials are generally traded over shorter distances than other industrial products. In 1983 they represented 1.5% of total imports and only 0.5% of exports, accounting for a net import balance of about Ft 3.5 billion. Cement imports account for about 15% of Hungary's 5 million ton annual consumption; and wood imports - particularly coniferous woods from the Soviet Union - account for about half the value of total annual utilization. Bricks, roof tiles, and insulationmaterials are also imported to some extent, but not in sufficient quantitiesto satisfy demand, which was estimated at about 10% more than the total supply. There was an annual shortage of 150 to 200 million bricks and blocks (about 10% of production),of 40 million rooftiles (about 35% of production)and of 150 to 200,000 doors and windows (10-13% of 1983 retail sales). However, during 1985, the shortage of bricks, roof tiles and wood materialswas eliminated, in part by an expansion in production capacity and ia part because of a drop in the number of houses built. a. Major Policy Issues
5.57 Prices for basic building materials are held below world levels in Hungary, in order to contain construction costs, especially for housing, and some enterprises are compelled to operate at a loss. If these pricing policies persist, they could affect expansion and new investment plans adversely and continue to have adverse effects on the balance of payments. Other ways of helping households to have better access to housing could be found.
5.58 A second question is the responsivenessof the industry to changing demands. Especially now that households have more say and use more of their owa resources in dwelling construction, the d,-and for building materials will become more varied than it was when the State was the main investor and used mainly heavy panel technologies. This will require major changes in the attitude and the technical know-how of this sector, plus the investment to produce this wider range of products. b. Investment During the Seventh Plan
5.59 A number of possible projects have been worked out by the Ministry of Building and Urban Development, in consultation with the NPO, mainly with the idea of replacing current imports and meeting urgent demands. It is to be noted that the total investment envisaged is in line with current NPO projections.The project list includes the following: - 129 -
Table 5.12: BUILDING MATERIALS: TENTATIVE PROJECT LIST
Expenditure Total during 7th Plan Project Project Description (Ft b.) Cost
(a) Cement factories reconstruction 4.6 7.6 (b) Glass wool and pipe insultation 0.4 0.4 (c) Reconstruct aggregate production 1.5 1.5 (d) Brick factories reconstruction 1.8 1.8 (e) Glass canning container factories 1.5 1.5 (f) Other replacement of obsolete and worn-out equipment 4.2 4.2 (g) Medical and chemical glass container production 0.9 0.9 (h) Lime kilns reconstruction 1.0 1.0 (i) Thermal, noise and water insulationproduction 0.4 0.4
Total 16.3 19.3
Investmentin Building Material Production Capacity which does not belong to the Construction Industry Sector
(a) Window and door factories reconstruction 0.4 0.4 (b) Particle board and wood chip panels production 2.0 2.0 Cc) Thick particle board production 2.0 2.0
Total 4.4 4.4 - 130 -
ANNEX VI
EDUCATION AND HEALTH
A. Education
Introduction
6.01 In Volume I, Chapter II, we observed that Hungary has a relatively well-educated adult population. This results from her highly developed and long-establishedsystem of basic education. Schooling is compulsory for 10 years, from 6 to 16 years of age. Primary education is almost universal, except with the Gypsy minority, almost all following at least a year of kindergarten. Eighty-four percent finish it in 8 years and another 11X by the end of the tenth year. About 93S of those who complete primary education continue directly to secondary education or training. In recent years, about 44X have gone on to vocational schools (3 years, no final examination), 28% to technical secondary schools (4 years, with final examination) and about 21X to academic secondary schools (gymnasium) (4 years, with final examination). In 1983, about 317,000 were receiving secondary education, about 29% at night or by correspondence (see Table 6.1). Some 40X of these attended academic secondary schools. The technical secondary schools combine theoretical and practical training for about 60 industrial and agricultural professions and for medium level cadres in management, health service, arts, commerce, transportation, mining, engineering, etc. These schools issue certificates upon successful completion of a final exam which enables students to participate in the entrance examinations for higher education. Vocational schools train students to become skilled workers, as does an extensive system of apprenticeships. Skilled worker certificatesare issued for about 130 different types of jobs.
6.02 Access to higher education is competitive, based on exams and school grades, and only about 42S of applicants are successful. Attendance at higher education is much lower in Hungary than in some comparable countries. In 1983, the proportion of the relevant age-group receiving higher education was only about 15.5P (including evening and correspondence students) compared to an average of 20Z in East European non-market economies and 37T in industrial market economies in 1981. In the upper middle income developing countries listed in the World Development Report, 1984, however, higher educational enrollment averaged 142 of the population age 20-24 in 1981, very comparable to Hungary's level and only a little lower than the industrialised country average for 1960 (though the latter showed enormous inter-countryvariation).
6.03 Nearly 60X of secondary students and 56S of all higher education students are female. The gender breakdown of courses of study is largely predictable, with women over-represented in educational training, and under-representedin industrial and agricultural vocational schools, where Table 6. 1: SECONDARYSTUDENTS BY TYPE OF SCHOOL - - (4 yearcurriculum)
Of all Students Of all Students Numberof Studentsin Day, Evening Ratio in Day Ratio of Ratio In Day Ratio of Typeof School and CorrespondenceSections Sections Females Sections Females 1970 1975 1980 1981 1982 1983 Percent,1981 Percent,1983 GrammarSchools (General) 168.208 1S7,846 124,618 124,391 124,629 121,198 74.8 64.9 80.6 64.4 Industr./Tech./Secandary91,067 111,693 105,378 100,865 95,1S3 92,812 50.5 24,5 59.0 16.5 Agric.Tech. Secondary 19,746 17,675 13,278 13.130 13.153 13,147 70.1 24.6 78.0 20.0 Econ.Tech. Secondary 38,50S3 50,10 41,900 40,197 38,825 37,797 54.5 91.2 61.4 89.8 Cormerc.Tech. Secondary 11,897 15.391 13,582 13,451 12,539 12,145 43.7 79.5 50.8 83.9 CateringTech. Secondary 2,502 4,527 5.961 6,062 5,688 5,682 28.6 46.4 37.1 44.8 Transp.Tech. Secondary 1,SS9 2,910 2,963 3,074 3,206 3,102 67.5 31.3 72.8 30.4 PostalTech. Secondary 1,134 2,811 3,696 3,817 3,956 3,918 82.3 83.8 87.S 87.6 SanitaryTech. Secondary 9,988 12,359 14,31S 14,747 15,072 15,557 94.4 97.8 96.9 98.8 KindergartenTeacher's Technicalsecondary 727 S.012 5,897 5,332 4,938 4,950 100.0 99.9 100.0 99.8 Art Vocat.Second. 1,834 1,179 1,974 1,987 2,068 1,921 94.0 61.3 94.2 63.4 Total 3147,165 382,493 333,570 327,453 319,227 316,633 63.9 56.3 71.2 57.5
Source:Statistical Yearbooks, 1982 & 83 HungarianCentral Statistical Office. - 132 -
only about one quarter are females, and in engineeringand veterinary higher educationwhere the percentage of females reaches only about 20%. Fifty-nine percentof medical students are women (Table 6.2).
6.04 After subsidies, education is the largest budget item. Excluding culture,sports and scientific research, the 1983 recurrent budget for educationwas almost Ft 35 billion - about 3.9% of GDP. It is rapidly growing - taken together with culture, sports and research, this item has grown from Ft 51.1 billion in 1983 to Ft 64 billion budgeted for 1985, an annual growth rate of 11.9% in current terms, considerablyfaster than GDP. The budget is shared by the Ministry of Education (MOE), by other ministries and by local councils. Operating costs per student vary from Ft 10,000 per year in primary education,to Ft 20-25,000 per year in secondary education, and to Ft 70-75,000per year in higher education. Within secondary education costs varv from Ft 40-45,000 in technical education to Ft 8-10,000 in vocational education,where much teaching is done in shifts. Local councils cover all costs of kindergarten, primary, and secondary education as well as of child protectionand of special education. MOE covers 80-85% of the costs of higher education. Other ministries are responsible for the budgets of institutions of higher education ;.ntheir sector. For instance, the Ministry of Health funds the medical universities, the Ministry of Agriculture funds the -universitiesfor agricultural science and the College of Agriculture,etc.
6.05 The education sector is also ore of the largest employers in the economy. About 33,000 kindergarten, 85,000 primary school and 28,000 secondaryschool teachers are employee!by local councils. About 10,000 professorsand researchers are employed in higher education. Between 1970 and 1983. student/teacherratios in primary education fell from 17 to 15, in secondaryeducation from 17 to 13, and in higher education from 5.5 to 4.4. In the 1950's, primary school teachers had to teach around 30 hours a week in front of classes of 40 pupils. Now they are only required to teach an average of 25 hours per week with classes of about 30.
6.06 A high proportion of educational facilities are old and obsolete. Fifty percent of school facilities are either schools built before 1940, mostly during a wave of school building in the 1920's and in the 1930's when 6-year primary education was made compulsory, or other buildings built before 1940 and transformed into schools after 1945. In 1983, there were nearly 42,000 primary school classrooms, a 17,000 net increase since 1950, and about 10,000 secondary school classrooms, a net addition of 5,300 since 1950. Many classroomsare regarded as inadequate, 10% are rooms not originally intended for such use and another 10% are in bad repair and need immediate replacement. The relative shortage of classrooms forced the use of double shifts in primary schools up to 1965 in most of the country; this is still the case in some schools in large urban centers, including Budapest. Rotating shifts are also used in some vocational schools. The average number of pupils per classroom in primary school has continued to fall - it was 35 in 1970 and 30 in 1983. This also fell in secondary education, from 37 in 1970 to 33 in 1983. Although school facilities are well maintained, their age makes many of them ill-suited for contemporary methods of education. The Ministry of Educationalso considers that many schools lack needed science and language laboratoriesand proper gymnasiums. - 133 -
Table 6.2: STUDENTSOF HIGH-LEVEL EDUCATIONINSTITUTIONS BY EDUCATIONALBRANCHES (1983)
Percentage Percentage Number of Number Of which Female Students of Undergraduates of students in day Graduated from Undergraduates in Day Sections Graduated Sections Day Section_
Engineering 25.673 67.1 6.861 4.456 19.1 Agriculture 5,381 73.7 1,362 1.015 36.6 Veterinary 559 100.0 81 81 21 Hedical 7.679 100.0 1,250 1.250 59.4 Sanitary 3,533 29.3 1.275 355 90.1 Economics 11,335 50.3 2.630 1.391 65.6 Law & State Administration 6,357 46.6 1,409 51 52.8 Arts & Philosophy 5,703 59.0 1,347 611 73.5 Natural Sciences 4,468 81.8 1.076 718 46.7 Teachers' Training (higher grades) 12.335 63.0 2.844 1,610 77.4 Teachers' Training for Handicapped children 1,492 28.3 509 78 93.6 Physical Education 1,079 40.3 329 99 49.5 Teachers' Training (lower grades) 8,780 60.2 2.543 1,339 87.8 KindergartenTeacher 3,474 34.1 1,595 530 99.6 Fine Arts 2,017 84.6 459 428 52.1
Total 99,865 63.0 25.570 14,472 52.2
Source: Statistical Yearbook. 1983 Hungarian Central StatisticalOffice Table 24.17
ii) FacinR the Secondary Bulge
6.07 Chapter II (para. 2.42 of Vol. I) outlined Hungary's demographic fluctuationswhich has complicated the management of education and especially of educational facilities in Hungary. The baby boom of 1953-6 caused a peak in demand for primary education in the early 1960s and in secondary education around 1970. The echoing boom of the early 1970s created a demographic wave which will crest in primary schools in 1986 and then will continue in the secondary school system, cresting in 1992 (see Table 6.3). The crests will be followed by sharp declines in enrollment. About 50X of the additional elementary school classrooms brought into use were not originally built as such, and some of the newly built classrooms were designed to have later alternative uses, especially for secondary schools. The crest will be followed by sharp declines in enrollment which reflect the sharp reduction in the birthrate since 1978. Enrollment in higher education has not varied much as a consequence of successive demographic waves. First year entrance cohorts in day courses have remained around 16,000 since 1970 and total enrollments in day courses around 62-63,000.
6.08 Coping with this lemographicwave as it entered primary school has been one of the main accomplishmentsof the Sixth Plan Period, and this will continue into the Seventh Plan. Preparing for it in secondary education is under way. Secondary education investment shows the only large planned increase (see Table 6.4). The amount of secondary teacher training has been increased. Post-graduate training courses have been organized to upgrade - 134 -
Tabl. 6.3: PROJECTIONSFOR 1983-1990 OF PRIMARYAND SECONDARYSCHOOL AGE POPULATION('000)
Amp 1911 1934 1933 1936 1937 19AS 1969 1990 6 179.6 172.3 164.7 159.0 144.4 137.0 129.0 121.5 7 187.2 179.4 172.2 164.6 159.0 144.3 136.8 129.0 a 173.9 187.1 179.3 172.1 164.5 158.5 144.2 136.7 9 1S2.2 178.7 187.0 179.1 172.0 164.3 158.7 144.1 10 148.0 152.1 178.6 186.8 179.0 172.0 164.2 158.6 11 145.2 148.0 1S2.0 178.S 186.7 179.0 171.8 164.1 12 146.7 14S.2 147.8 152.0 178.3 186.6 178.8 171.6 13 148.4 146.6 14S.1 147.6 151.8 178.2 186.4 178.6 14 148.7 148.3 146.4 145.0 147.6 151.6 178.0 186.2 15 142.9 148.S 148.2- 146.3 144.8 147.4 151.4 177.8 16 132.3 142.7 148.3 148.0 146.1 144.6 147.2 151.3 17 128.9 132.2 142.5 148.2 147.8 146.0 144.4 147.0 18 128.0 128.7 132.1 142.4 148.0 147.6 145.8 144.3
Primary School Age Population (6-13) 1,286.2 1.309.3 1.326.6 1,339.8 1,335.7 1,319.9 1,270.0 1.204.2
Secondary School Age Population (74-17) 552.7 571.7 585.5 587.4 S86.3 549 i 621.1 662.3
Sourc : Populationof Hungary 1981-2001. National Population Projection. Research Institute for PnpulationSciences. Research Report 55, Budapest. May 1983.
primary school teachers into secondary school teachers. Currently, 5,600 primary school teachers have the formal qualifications to teach in secondary schools, and will be gradually transferred there. In vocational education, many teachers have qualifications only equivalent to those of primary school teachers, and should gradually have been replaced by university graduates; for the time being they will continue to teach in vocational schools. Teachers who normally would be pensioned, at 60 for men and 55 for women, will be retained until 65 but given a lighter course load after normal pension age.
6.09 Although these steps are necessary, it is important that the temporary nature of the fluctuation be fully appreciated. By international standards, Hungarian average class sizes and teacher loads are not large, and there is a great deal of educational research in both industrialized and developing countries that indicates that class size is not a significant factor in student achievement. 1 ' It would be an error to invest heavily in
i-' Class size.-especially very small classes, does make some difference to school achievement, but in the range of 25 and up the effect is very small, and reduction in class size is not likely to be cost-effective. See Dean T. Jamison "Reduced Class Size and Other Alternatives for Improving Schools" in G.V. Glass et al (eds.) School Class Size: Research and PolicY (Beverly Hills & London: Sage, 1982) pp. 116-129. - 135 -
TabLe 6i.4: INVESTMENT IN EDUCATION AND CULTURAL AFFAIRS. SIXTH AND SEVENTH PLANS (b. Ft. at 1981 Prices)
6th Plan 7th Plan Original Current Omacrlntian Plan Estimatn Versinn 1 Vprsion 2 Vgrsion 3
Kindergarten 2.9 2.7 1.3 1.3 1.3 Primary School 14.0 15.8 9.4 10.9 11.4 Special Schools and Child Protection 2.3 1.4 2.O 2.5 3.5 Secondary Education 3.3 3.3 11.0 11.0 11.0 Higher Education 2.5 2.9 2.8 3.8 5.3 Other Education 1.6 1.1 O.S 0.5 0.5
Education Subtotal 26.6 27.2 27.0 30.0 33.0
Public Education 7.0 6.1 7.0 7.0 7.0 Hungarian Academy of Sciences 2.6 2.0 1.9 1.9 1.9 Sport 1.5 1.9 1.1 1.1 1.1 Youth and other Programs 0.8 1.7 1.0 1.0 1.0
Non-EducationSubtotal 11.9 11.7 11.0 11.0 11.0
Planning Reserves 0.0 - 1.0 2.0 2.0
Sector Total 38.5 38.9 39.0 43.0 46.0
Out of Which: Large Investments 1.0 1.4 2.6 2.6 2.6 Other State and Council Investments 0 0 34.7 37.7 40.7 Enterprise Investments 0.7 0.9 0.7 0.7 0.7 PlanningReserves 0 0 1.0 2.0 2.0
Sgurce: NPO
classroom space or teacher training to accomuodate only a temporary expansion in the number of students (which at its peak will only be about 15S larger than at present). Increasing class size will of course only be possible where the physical size of the classroom permits (they are normally designed for 30-32 students) and where the current number of students would allow further increases. (In Budapest and large towns current class sizes are around 30; in smaller settlements it can be as low as 20.)
(i4.) Pricing and Priorities in Education
6.10 As would be expected in a socialist economy, primary and secondary education are free. School meals and most school supplies bought by households are heavily subsidized. There are plans to eliminate all meal payments for poor households. Virtually no financial support is given to gymnasium students, but in technical secondary education, scholarships of Ft 200-700 per month are available, intended to help with the purchase of educational supplies. In vocational schools, more assistance is given. Students can rent books and other supplies at a very low cost, meals are highly subsidized and many scholarships are available from the state and from the companies where the student will work upon graduation. For professions which are not attractive to students, such as the so-called "hot professions," mainly in steel and foundry industries and in mining, stipends can be as high as Ft 1,500 per student per month. - 136 -
6.11 In higher education, day courses are free but recently students who do not have passing marks have been required to pay a symbolic amount. Students pay for stuppliesbut many, such as books and course notes, are sold at a small fractiou of cost. Scholarships are distributed depending on examinationresults and on the income (not occupation) of the parents. Many students also get a scholarship from the company with whom they have agreed to work after graduation. Sixty to 70% of all students get some sort of scholarship. Most get small state scholarships, based on merit, of Ft 150-200 per month; a few are as high as Ft 1500 per month. Additional scholarships are given to students from low income families. For these, total stipends rarely exceed Ft 2,000 per month, a level which requires many students to work in the evenings and on weekends. Approximately half of all students in higher education live in dormitories where they pay only about one half of operating costs.
6.12 These differential patterns of financial support represent an attempt to influence educational preferences. The view of education and manpower planners is that already too many secondary school students end up without specializedprofessional skills. About one-third leave secondary schools with neither training as skilled workers nor plans for further education. Planners consider that the current level of higher education enrollment produces sufficienthighly skilled personiLelto meet economic demands and that gymnasium enrollment is sufficient to supply higher education with a sufficientnumber of well prepared applicants. A one- or two-year curriculum has been developed which allows gymnasium leavers not entering university to acquire specialized skills. In contrast, the general public appears to feel that a gymnasium education offers better chance of access to higher education, greater social mobility, and flexibility in choice of job and continues to press for an increase in the number of places in gymnasiums and higher education.
6.13 Planners are surprised that not more students opt for vocational education. There is no evidence of a fall in the popularity of higher education (though there are plenty of complaints about the meager returns to it), in spite of the fact that the earnings profile of graduates of higher education has been below that of skilled workers for much of their working lives. Those with higher education generally start employment at Ft 3,500 per month, whereas skilled manual workers start 5 or 6 years earlier at 3,500 to Ft 5,500 per month, and the former only catch up with the latter when they are, on average, around 40 years old. The gap is tending to widen. A 1982 survey of graduates of higher educational institutions,aged 29 or less, showed that those aged 20 to 24 earned 80-85% of skilled workers in the same age bracket, compared with 96% a decade earlier; the 25-29 year olds earned 92-94% compared with 107% in 1972.1'
6.14 Do these data tell us anything about the relative value to Hungary of education at different levels? Given the rigidities of the Hungarian labor
The data are reported in an article by Istvan H.'rcsaand Ferenc Kesedi: "Some Characteristics of the Financial Situation and Living Conditions of Young Professionals" in Munkaugyi Szemele, August 1984, pp. 15-21 (JPRS-EPS-84-145,Nov 30, 1984). - 137 -
market, it would certainlybe wrong to attempt to use them to calculate any rate of return to educational investment,but there is some flexibility in individualwage determination. They suggest a relatively low valuation of the productivityof higher-levelgraduates, which is surprising. The Mission has not had time to explore this question fully, but it is an important one, since investmentin human capital may be as important to Hungary's future developmentas investment in physical capital. Since one of the elements of the current phase of economic reform is to try to encourage efficient firms to expand at the expense of inefficientones, and to some extent do so by raising the relative wages of those with scarce skills so as to attract them away from unprofitablefirms, it will be important to monitor carefully the relative scarcitiesof different skills, and use this in giving advice to children who are trying to decide among alternative specialised courses.
6.15 We are, however, dubious about the merits of trying to use economic incentives- even the present small ones - in the direction of steering individualstowards a type of education that is more expensive to provide than the one that the public appears to prefer. The questions are difficult ones, but there is widespread evidence that in many countries there is a great deal of formal vocational training that is expensive to carry out, and not very useful compared with general education followed by on-the-job or intensive practicaltraining. Some of the most successful countries, such as Japan and Korea, have very widespread general education. This is especially likely to be importantin a country facing such slow labor force growth as does Hungary, in which it is likely that a high proportion of the labor force will have to change occupations during their working lives. The need for avoiding excessivespecialization in technical training is appreciated in Hungary. In 1985, selected technical high schools will modify their curricula to increase the proportion of general training in the curricula and to provide qualificationsthat increase a student's chances of being admitted to a universityor other institutionof higher learning. There is a long-term objectiveto delay the age at which students make virtually irrevocable decisionsabout their eventual career (often now this is at age 14). It is intendedto increase the proportion who get a 4-year secondary education and developa unified curriculum for the first two years of technical and gymnasiumeducation.
6.16 As we have seen, Hungary does not have a particularly large higher educationsector by international standards. Given the reliance that Hungary'sfuture development is going to have to place on the export of technologicallyadvanced manufactured exports, there may be a danger that relativeincome prospects may deter some of the most promising students from attendinguniversity; there are no reports of this as yet, but it bears watching. Since the work available to graduates of higher level institutions is generallymore interesting, it seems in many ways socially quite just that they should receive lower earnings, but if this had a negative effect on the stock of skills it might not be socially desirable. b. Sixth Plan Investment
6.17 The share of education investment in all investments increased from 3.52 during the Fifth Plan to 3.8Z during the Sixth Plan. Even though the governmentwas forced to reduce the level of investment in many sectors, - 138 -
investmentin education was 2S above its planned Ft 26.6 billion (1981 prices). As can be seen in Table 6.4, investment in kindergarten, special schoolsand child protection and other education were well below planned levels, investmentsin secondary education were on target, but investments in primaryand higher education were above planned levels. In the recent past, the investmentbudget for education was only Ft 8 to 9 billion per year. Of this budget,MOE only manages Ft 1.3 billion directly; other ministries such as Agriculture,Trade and Health manage Ft 1 billion; the rest, around Ft 6 billion, is spent by local councils.
c. InvestmentsDuring the Seventh Plan
6.18 As discussed in Chapter V (para. 5.20 of Vol. I), in the Seventh Plan, local councils are to have much greater autonomy in the sectoral allocationof their investment, with the central ministries playing only an advisory role (whose nature is still not fully defined). This means that the shape of the likely Seventh Plan investment program will not be known much before mid-1986. The projections in Table 6.4 are therefore purely indicative. It is expected that the emphasis will be on meeting the quantitativerequirements of both primary and secondary education to accommodatethe demographic wave spoken of earlier. In the lowest version of the overall investment plan, the share of all education investment going to secondaryeducation is expected to more than triple at the expense of investmentsin all other parts of the education system except higher education. In Versions 2 and 3 of the overall investment plan, the investment in secondaryeducation remains at 11 billion (1981 prices) and the extra resourcesare devoted to increasing investment in primary education, special schoolsand child protection and in higher education. In other words, the expansionand upgrading of secondary facilities is regarded as an overriding priority. These investments would be distributed roughly in two-thirds for gymnasiumand technical schools, one-third for vocational schools. Both NPO and MOE agree that the net addition in the number of classrooms needed to accommodatethe demographic boom is 3,300. NPO would like as much as half of this capacity to be created by transformingexisting building. MOE argues that in order to maintain the quality of educational facilities to a reasonablelevel, 2,500 new classrooms ought to be built and only 800 created by transformingexisting buildings. We have not been able to explore this issue,but would call again attention to our commments (para. 6.09) on the desirabilityof meeting the bulge by larger class sizes rather than new buildingwhere possible. Possibly, classrooms could also be rented in other buildingsor spare primary school facilities could be converted. Other equipmentto maintain and improve educational quality may be more important.
6.19 Table 6.5 shows the achievement expected from the Seventh Plan investments. Crowdedness in kindergartenand primary schools will have decreasedsubstantially by 1990. The investments in secondary education will not prevent a small, temporary increase in crowdedness.
6.20 In higher education most resources will go to upgrading equipment and expandingdormitory facilities by 102. No major new building in higher educationis envisaged. This means that higher education will expand only in a limitedway to meet the demographic bulge, at the cost of some intergenerationalinequities. The level of first year admissions has been - 139 -
Irab]e 6.5: EDUCATIONAL CONSEQUENCES OF ALTERNATIVE SEVENTH PLAN SCENARIOS
_ _l990 Qcscrlptlqn~ ~ ~ ~ ~ ilB 195 Verslon I Version Z Yc-rs5ign3
K indergarten
Kinder-garten Capacity per 100 Childrcn in Age Group 3 5 Ycars 64.1 90.0 106 106.3 106.3 Percentage of Children in Age Gr3up 3 5 in Kindergarten 79.5 93.0 95.0 95.0 95.0 Pcrcentage Capacity UtiiizaEion 124.0 103.4 89.3 89.3 89.3 Avcragc Number of Children per Kindergarten Group 31.2 26.0 20.0 20.0 20.0
Primary School
Number of Pupils per Group 26.6 27.1 24.5 24.5 24.5 Number of Groups per Room 1.18 1.10 1.04 1.03 1.03 Percentage of Pupils in Study Hall 38.2 46.2 53.0 53.0 S3 0
Secondary School
Number of Students per Room in Secondary Schools 30.8 32.2 33.7 33.7 33.7 in Vocational Training 27.9 28.7 29.6 29.6 29.6 Percentage of Students Living in Dormitories in Secondary Schools 23.8 20.9 18.5 18.5 18.5 in Vocational Training 20.1 19.1 18.6 18.6 18.6
Higher Education
Percentage of Students Living in uormotories in Day Courscs of Higher Education 47.1 50.0 52.3 S2.3 55.0
Sourcc: NPO roughly constant at around 1,000 for many years. It is expected to increase to nearly 17,000 by 19I0, mainly to increase economists, teachers, engineers and technicians. During the 1990-95 period, enr3llment will be expanded by 2,500 to accommodate part of the demographic bulge which will have reached higher education, but admissions are expected to reach only 18-19,000 by the year 2000. Because the studenitswho will seek to enter higher education in the 1990s will be part of the demographic bulge, they wili th-refore have much smaller chances of attending day courses than their immediate seniors and juniors. Up to now, the Government has succeeded in reducing pressure on access to higher education and increasing capacity utilization of education facilities by enrolling one-third of all students ir.evening and correspondencecourses. It is not clear whether this will retain its appeal at a time when there are increasing opportunities to earn incomes in the second economy or in work associations, and when the return to further education is low. It may be worth while investigatingwhether a gradual expansion of higher education day courses combined with a stretching of facility utilization (the equivalent of a two shift system) may not be more cost-effective than continuing to rely heavily on evening and correspondence courses. - 140 -
B. Health
Introduction
6.21 As with other items of social infrastructure,investment in health facilitieswas neglected after the Second World War. When in the 1960's, infrastructuregot higher priority, housing was most heavily emphasized. Subsequently,things improved, but investments in the health sector have been very modest. From 1976 to 1980, they represented only 1.9% of all investments or 0.6% of GDP; in 1981-85, they will represent 2.7% of all investments and 0.8% of GDP. This level of investment in health facilities is low compared to other similar countries.
6.22 The state budget for health was 2.6% of GDP in 1983. This is relatizelylow by internationalstandards, but it is rising fast. Together with sc_ial welfare (about 20% of the total) budgetary expenditure rose from Ft 31.4 billion in 1983 to Ft 34.6 billion budgeted for 1985, an annual increaseof 10%. More recent calculations put direct budgetary expenditure for health and social welfare in 1985 at Ft 54.2 billion, 5.1% of GDP. There is also some private expenditure on health, but it amounts to only 0.7% of private consumption - equivalent to a further 0.4% of GDP. For rough comparison,the U.K. devoted 5.7% of its GDP to health in 1980, and the U.S. 10.5% in 1982."'
6.23 Emphasis in health investments has been on expansion rather than on upgrading,and Hungary has been able to satisfy the quantitative requirements caused by a steadily increasing demand. The number of persons per hospital bed fell from 121 in 1970 to 108 in 1983. For comparison, there were 119 in both Denmarkeand England and Wales in 1978, 164 in the United States, 112 in Canada (1977) but only 64 in Finland. However, the impression of adequacy given by such a purely quantitativemeasurement may be misleading. Rehabilitationand modernization of existing hospitals have in the past been neglected; an estimated one quarter of all beds still need immediate replacementand there is a general problem of obsolescence. One third of all hospitalswere built before 1945 and most training clinics are around 100 years old. Many hospitals are built over several floors without elevators; in many hospitals electricity,water and soiled water drainage systems are not sufficient to support modern nursing practices and contemporary medical equipment. Most hospitals are under-equipped. About 40% of all medical equipment in Hungary is more than 10 years old, indicating the need for replacementand for additional investment.
6.24 On the human resources side, there is no shortage of trained staff. Populationper physician has fallen from 550 in 1970 to 377 in 1984, giving Hungary one of the highest ratios of doctors to population in the world. (The 1980 average ratio for industrializedmarket economies was 1:554.) This ratio
1 Especially for the U.S., and to a lesser degree the U.K., a comparison with Hungary needs to take into account that the costs of medical services are higher in the West because they include rents on property, and economic profits on some medical equipment. - 141 -
is also going to increase steadily for the forseeable future - in 1983, about 2,600 of Hungary's stock of 28,000 active physicians in the State Health Servicewere within five years of retirement, but there were 6,824 medical students."' Hungary is also well supplied with nursing staff.
6.25 The system offers free care through a patient referral system. Patients first go to the general practitioner (GP) assigned to their district, usually 2,500 persons per GP. They ere then, depending on their ailment, referred up an increasingly specialized chain - local specialist consultation offices, urban hospitals (in small cities), county hospitals, regional hospital centers and finally a network of specialized institutions. This network is now tight enough so that no person in Hungary livresfurther than 20 km from the nearest specialist or 40 km from the nearest hospital. a. Major Policy Issues
6.26 In spite of this apparently favorable array of services, there is plenty of evidence that the present state of health in Hungary leaves much to be desired, and current trends are disturbing. Infant mortality was 19 in 1983, about half its level 15 years before. This is no disgrace, but it is almost twice the level now averaged by Western industrialisedcountries. The mortalityof very young children has also improved. But life expectancy at birth has been stagnating in the last few years - indeed for males, it is about the same level (65.6) as in the mid-1950s. For females it is 73.5. The gains from improved survival in childhood for men have oeen offset by higher mortalitybetween the ages of 30 and 70 - life expectancy at age 30 dropped almost three years between 1970 and 1983. The chances of a man's dying between 40 and 60 rose from 17Z to 262 between 1969-70 and 1982, a rise of over 50Z (Table 6.6). In contrast, in Japan it was 11%. In this respect, Japan is the healthiest of countries, as Table 6.7 shows, but it is important to note that Hungary is an extreme case in the opposite direction. For a woman of the same age there was a 14Z greater chance of dying in 1982 than in 1969-70,but the risk was only 44X of her male contemporary, and the change in female life expectancies at all ages since 1970 have been slight. The fact that male mortality between age 50 and 60 is now strikingly high in Hungary by internationalstandards is a phenomenon of social significance and individual tragedy,but also of economic importance, since it means that a labor-scarce economy is losing a relatively large proportion of its most experienced workers before the age of retirement.
6.27 Table 6.8 compares mortality by cause in Hungary in 1982 with that in Austria in 1981. The similarity is striking. Hungary has a pattern of mortalitytypical of advanced countries - the leading causes of death being heart disease, cancer and strokes, in that order. Although the incidence of differentdiseases cannot be precisely compared because of differences in age structure,this is not very different in the two countries, and it is evideat that Hungary has a particularly high incidence of heart disease. Indeed, it
"z This includes student physicians, dentists and pharmacists. About 861 of all active physicians are in the State Health Service. It is not clear to what extent the remaining 141 are solely in private practice or retired. - 142 -
Table 6.6: AGE-SPECIFIC DEATH RATES, 1969-70 and 1982 (Per 1,000 Age Group)
Age GrouP Males Females 1969-70 1982 1969-70 1982
Under 1 yr 39.29 22.45 32.07 17.47 1 1.87 1.34 1.76 0.82 2 0.97 0.67 0.78 0.40 3-4 0.66 0.42 0.54 0.31 5-9 0.46 0.34 0.31 0.26 10-14 0.47 0.38 0.28 0.23 15-19 1.06 1.02 0.41 0.43 20-24 1.45 1.41 0.53 0.47 25-29 1.68 1.61 0.67 0.69 30-34 2.04 2.48 0.95 1.08 35-39 2.72 3.91 1.45 1.79 40-44 4.23 6.29 2.27 2.71 45-49 6.12 9.72 3.59 4.19 50-54 9.53 15.03 5.82 6.20 55-59 14.78 21.30 8.43 9.83 60-64 25.80 30.46 13.95 14.69 65-69 42.68 46.34 24.90 25.39 70-74 66.49 70.50 44.78 41.84 75-79 104.51 107.96 77.91 71.75 80-84 159.00 164.63 131.31 122.60 85 and over 269.11 254.59 227.18 216.03
All ages 12.33 14.71 10.67 12.33
Source: Central Statistics Office, Demographic Yearbook, 1982.
Table 6.7: MALE DEATH RATE, AGES 50-54 AND 55-59. VARIOUS COUNTRIES (Per '000)
Year 50-54 55-59
Japan 1978 6.2 9.2 Netherlands 1979 6.8 11.5 Norway 1979 7.5 11.8 England & Wales 1979 8.6 14.0 Austria 1976 9.8 14.7 U.S. 1978 9.8 14.9 Czechoslovakia 1978 11.8 18.6 Poland 1978 12.1 17.3 Hungary 1982 15.0 21.3
Source: UN Demographic Yearbook, 1980, and Table 11.6. - 143 -
Table 6.8: LEADING CAUSES OF DEATH, HUNGARY AND AUSTRIA 1982
Austria Hungary Deaths per Percent Deaths per Percent 100,000 of all 100,000 of all Population Deaths Population Deaths
Heart Disease, high blood pressure 236.9 19.6 313.1 23.2 Other diseases of the circulatorysystem-' 190.6 15.8 94.2 7.0 Cancer 228.5 18.2 299.0 19.6 Stroke 186.3 15.4 222.6 16.5 Generalarteriosclerosis 24.4 2.0 96.8 7.2 Accidents 61.9 5.1 68.4 5.1 Respiratorydiseases"b; 56.1 4.6 63.0 4.7 Suicide 27.3 2.3 43.5 3.2 Chronic liver disease and cirrhosis 28.5 2.4 32.2 2.4 Diabetes 15.8 1.3 17.9 1.3
All causes 1206.5 100.0 1348.1 100.0
Source: UN Demographic Yearbook 1983, pp. 35, 462, 464.
-i Includes 55.1 deaths per 100,000 classified as 'other forms of heart disease' in the Hungarian Statistical Yearbook 1982.
;/ includes bronchitis, emphysema, asthma, influenza and pneumonia.
is clear that this contributes heavily to the high mortality of middle-aged males. Heart, cancer and the various circulatory diseases all have in common the fact that their incidence appears to be greatly affected by the lifestyle of the individual and the environment in which he lives. Obviously anything that can be done to reduce levels of cholesterol intake, reduce smoking and increaseexercise, ought to be done, and this is a recognized priority of the Ministry of Health. The issue here is less cost than commitment. There are, however, some obvious economic costs to measures to reduce environmental pollution,such as that caused by the combustion of high sulphur coal and leaded gasoline, so here there can be no absolute prescriptionof what appropriatelevels ought to be. We understand that it is Hungary's policy to follow internationallyrecommended standards in this respect, which we commend. The marked difference between changes in male and female mortalilty, however, suggests that the principle cause for concern is male lifestyles, rather than environmental pollution.
6.28 Faced with this troubling situation, the Ministry of Health is naturally anxious to make earlier diagnoses of major problems. It has - 144 -
proposed setting up a system of monitoring to detect cardiovascularproblems, hypertension,nephrologic problems, diabetes and cancer at an early stage. (Such a system for detecting tuberculosishas existed for 40 years.) It seems obviouslydesirable to do what can be done with relatively inexpensive equipmentwhere there is some hope that detection can lead to reasonable prospectsof treatment. The benefits and costs of regular health examinations have, however, been objects of great medical controversy for many years.
6.29 Beyond the particular problem of rising mortality in middle-age, Hungary faces the same difficultiesas other demographicallymature countries. Her population will continue to age steadily. At present there are about 1.3 million over the age of 65, about 12.2% of the population. The numbers will rise steadily to 1.6 million in the year 2000, and to about 2.0 million by 2025. So, even if the present trends in adult mortality can be reversed, there will still be a growing incidence of chronic disease. This means that importantand painful policy choices will have to be made concerningthe extent to which Hungary will seek to meet these problems by upgrading its medical technology,and to what degree and how it rations access to it. One of the reasons why the U.K. spends such a strikingly smaller proportionof its national income on health care than does the U.S. (para. 6.22, above) is that it has consciously taken the decision to restrict access to some of the latest and most expensive technology. The U.K. has only one-sixth of the U.S. capability in CAT-scanning (in proportion to population) and coronary artery surgery is performed at a tenth of the U.S. rate. Renal dialysis is performed at one-third of the U.S. rate, and denied to patients over 60. The Hungarian Government has decided to only equip a few research hospitals with the most up-to-date expensive equipment. b. InvestmentDuring Seventh Plan
6.30 As with education, the choice of how much to invest in health facilities,and the priorities to be adopted, will be largely in the hands of local councils. In view of the poor physical condition of many hospitals, it is expected that the major emphasis will be on their reconstruction,but that a smaller proportionof investment will be devoted to this than in the Sixth Plan Period, and that a rather larger amount would go to equipment (Table 6.9). Without more details on the proposed medical equipment, it is of course impossible to comment on these items. At the time of the mission's visit there was no consensus on priorities between NPO and the Ministry of Health, which appeared to be proposing a much larger amount for hospital reconstructionthan is included in Table 6.9. A fall in the utilization of bed capacity from 89.7% in 1970 to 83.8% in 1983 suggests that there may be a case for rationalization.1' Efforts are being made to divert patients from
'' Care should be taken when interpretingthe bed capacity utilization: many hospitals have many more beds than the capacity they were designed for. Hospitals are so crowded that in most cases when bed utilization decreases, they continue to be used above design capacity. Only in a few of the newer hospitals, for which there is a shortage of equipment and personnel, is there excess capacity. The Hungarian authorities do not believe that there is a case for closing a single hospital; this is something the mission was not able to explore in detail. - 145 -
Table 6.9: INVESTMENTS IN PUBLIC HEALTH SECTOR DURINGTHE SIXTH AND SEVENTHPLANS (Ft b. 1981 prices)
7th Plan 6th Plan Version 1 Version 2=3
Medical Instruments & Equipment 3.5 5.0 5.0 Hospitals & Clinics 11.5 7.4 8.9 Social Network (Elderly homes, etc.) 1.5 3.0 3.0 Homes for Children (Orphans,Handicapped, etc.) 0.5 0.8 0.8 Consulting Offices (DistrictGP & Specialists) 1.8 1.2 1.2 Day Care Centers 1.9 1.0 1.0 Public Health, Sanitary Centers 0.4 0.4 0.4 Other 2.2 1.4 1.4
Total 23.3 20.2 21.7
Source: NPO, January 1985 crowded hospitals to less-utilizedones. It is interesting to note that although there are fewer hospital beds per person in England and Wales than in Hungary, occupancy rates are slightly lower - 81Z in 1980. To some extent this may be a consequence of the slightly more youthful British population, but it may also be an indication that Hungary does not need all its hospital bed capacity.
6.31 It might be worth investigatingwhether more could be done to reduce the demand for hospital beds. The introductionof a series of small charges into medical care has sometimes been suggested to reduce wasteful use of the health care system, while still ensuring that it is universally available in case of genuine need. For example, it is possible that the introduction of small charges per night might encourage patients to prefer, and doctors to prescribe,shorter lengths of hospital stay. This might formalize a system of making voluntary but sometimes expected contributions to medical staff, which now sometimes occurs and which leads to abuse. A number of other suggestions for trying to provide the right set of incentives to both patients and medical staff are under consideration. One is that the patient be entitled to decline the hospital prescribed by the patient admission system and to choose a hospital with better conditions. It is expected that the patient will bear same costs. A somewhat more radical change which is apparently not currently being considered would be a system in which patients are registered with a hospital (and have the right to choose one other than the one nearest to where they live) and where the hospital's grant is based on the size of its registeredpopulation. This is very similar to the capitation fees of doctors in the British National Health Service, or the practice of Health Maintenance Organizationsin the United States. - 146 -
6.32 Another way to reduce demand for hospital beds would be to build more nursinghomes for the elderly. A room in such a home certainly would be cheaper to build than the Ft 1.5 million (1984 prices) it costs to reconstruct an obsolete hospital room. During the Sixth Plan, 6,343 new places for the elderlywere planned. 6,553 were in fact completed by the end of the Plan. More obsolete facilities had to be replaced than anticipated; there was a net increaseof only 3,994 places. Another reason for the shortfall from the plannednumber -as that many local and county councils decided to reallocate money earmarked for nursing homes to hospital investments. Given the emphasis to be placed on Council autonomy, it is likely that the same will happen during the Seventh Plan, unless discouraged. One also should keep in mind that building nursing homes not only frees hospital capacity, but might also free a substantial amount of housing. The mission recommends that before any hospital is renovated, a careful analysis be done of all the future health care needs of the area. This study should indicate whether the hospital ought to be rebuilt in the present location, or in another location, or be merged with the reconstructionof another facility, and for what purpose and to what capacityit ought to be rebuilt. - 147 -
ANNEX VII
TOURISM AND CULTURE
A. Tourism
General Context
7.01 In Hungary tourism is an important source of foreign exchange. In 1984, the total revenue from foreign visitors was estimated at around Ft 22 billion. Net of tourism expenditures of Hungarians abroad, it is estimated that in 1984 the sector earned US$164 million in convertible currencies. Arrivals of foreigners grew from about 6 million per year in 1970 to nearly 17 million in 1978. These were predominantly from other socialist countries, whose numbers then fell sharply to 1982. In contrast, visitors from non-socialist countries have grown steadily, though they are still a minority of both tourists and other visitors (see Table 7.1). Of the 10.5 million visitors in 1983, 65% came as tourists and 72% came from socialist countries. Austria, followed by Yugoslavia and Western Germany dominate non-CMEA tourism. Czechoslovakiadominates CMEA tourism (see Table 7.2).
7.02 The development of tourism is fairly recent. Facilities for internal tourism began to be developed seriously in the early 1960's. Employers and trade unions have invested heavily in this area. International tourism has been seriously promoted only since the late 1960's. The major concern which has guided the development of international tourism has been the profitability of investments. In most cases, efforts made to promote internal and international tourism complement each other. Some trade unions and companies have under-utilized resort facilities and NPO is encouraging them to use the excess capacity to profit from the lucrative internal and internationalsummer tourism.
7.03 The State has played a major role in the development of tourism. Before 1980 it provided grants and subsidies to encourage it. As early as the mid-1960's it established a Tourism Development Fund. Although there was a priority fund for the development of infrastructure,before 1980 the main effort was concentratedon the development of hotel capacity. From 1980, when resources were much scarcer, the tourism sector was gradually weaned from Government grants. Hotel financing has been done through loans. Large tourism company investments have been financed through bank or foreign loans, smaller investments through Tourism Development Fund loans or grants. Infrastructurehas been financed from a Resort Development Fund and from the Tourism Development Fund. The idea behind the infrastructureprogram has been to exploit intensively the relatively few areas which have touristic value but with great care not to spoil them. During the Sixth Plan, grants worth Ft 900 million to develop infrastructurefor internal and international tourism were given to four priority areas - the shores of lake Balaton, the Danube bend, - 148 -
Tabl a 7. 1: TOURISM - VISITS BY FOREIGIERS TO HUtGARY Number of Tourists (thousands)
1970 1975 1981 1982 19B3 1984
Tcjrists From Socialist countries 3.442 4,064 9.131 4,996 5.2Z1 6.903 From hon-Socialist countries 59S 93l 1.31! 1,477 1.543 1.428 Subtotal 4.040 4.995 10.450 6.473 6,764 8.731
Non-tourists From Socialist countries 2.142 4.174 3,394 2.129 2,300 3,006 From Non-Socialist countries 138 235 997 1.Z30 1.3L9 1.62 Subtotal 2,280 4,409 4.391 3.359 3,699 4,698
Total From Socialist countries 5;584 8.238 12.525 7.125 7,5Z1 9,910 From Non-SoLialist countries 736 1.166 2.316 2.707 2.9z 3.519
Total 6,320 9,404 14.841 9.832 10.463 13.429
Percentage Oistribution of VisIts by Foreigners In Hungary
Tourists From Socialist countries 54 43 61 51 50 51 From Non-Socialist countries lt i ti 11 LI iA Subtotal 64 53 70 66 6S 65
Non-Tourists From Socialist countries 34 44 23 21 22 22 From Non-Socialist countries 1 127 1 Subtotal 36 47 30 34 35 35
Total From Socialist Countries 88 86 84 72 72 74 From Non-Socialist countries _1 _12 1A 28 ZA 2Z1
Total 100 100 100 100 100 100
Foreign Exchange Incomes & Expenditures Connected with Tourism (Million Forints)
Incomes CMEA currencies n.a. 2.891 7.162 5.604 7.535 9.109 Non-CMEA currencies n.a. 1 982 6.95Z 9-74 1105 12.976
Total n.a. 4.873 14,114 15.353 18.550 22.085
Expenditures CMEA currencies n.a. 1,833 2,516 2.168 2,776 3.179 Non-CMEA currencies n.a. __el LI!I 3.11 L.80 4.961
Total n.a. 2,733 5,191 5,280 6.579 6.140
Net Incomes CM4EA currencies n.a. 1,058 4.646 3.436 4.759 5.930 Non-CMEA currencies n.a. 1.08Z 4.277 6.637 7.Z12 S.OIS
Total n.a. 2.140 8.923 10.073 11.971 13.945
Source: Statistical Yearbook 1983, Hungarian CSO. Budapest. 1984. - 149 -
Table 7.2: INTERNATIONALTOURISM BY COUNTRIES IN 1983 VISITS BY FOREIGNERSTO HUNGARY
Visitors Percent- Cumulative ('000) ages Percent
Austria Non-CMEA 1,605 15.3 15 Yugoslavia Non-CMEA 732 7.0 22 Federal Republic of Germany Non-CMEA 703 6.7 29 U.S.A. Non-CMEA 78 0.7 30 Italy Non-CMEA 64 0.6 30 France Non-CMEA 35 0.3 31 United Kingdom Non-CMEA 34 0.3 31 Canada Non-CMEA 17 0.2 31 Czechoslovakia CMEA 3,097 29.6 61 Poland CMEA 1,431 13.7 75 German Democratic Republic CMEA 1,033 9.9 84 Romania CMEA 483 4.6 89 Soviet Union CMEA 426 4.1 93 Bulgaria CMEA 309 3.0 96 Subtotal 10,047 96.0
Other countries 416 4.0 100
Total 10,463 100.0
Source: StatisticalYearbook 1983, Hungarian CSO, Budapest, 1984. the shores of lake Velence and the Matra and Biikkmountains. The infrastructureprovided consisted mainly of roads, electricity,water and drainage networks.
7.04 The Tourism Development Fund operates according to the following procedures. Each year's allocation to the Fund is decided at the time the State Budget is drawn up. Each year the fund usually amounts to Ft 300-400 million plus the repayment of previous loans. The National Tourism Board (an independentDepartment of the Ministry of Internal Trade) prepares a distributionof available funds among categories (see para. 7.07). This allocationis approved by the national Tourism Council (a coordinating committee chaired by the Minister of Internal Trade, which is responsible for inter-sectoralcoordination of tourism development). When the distribution is approved,a trade communique is issued which sets out the objectives to be achieved and invites application for grants and loans from eligible companies. Such companies vary from specialized hotel and catering companies to any other enterprise (even an agricultural cooperative)which has sufficientcapital, well-located land and a profitable investment scheme. Applicationsare screened by a special independent committee in which the Ministry of Internal Trade (MIT), NPO, the National Association of - 150 -
Cooperativesand the Ministry of Finance are represented. Two additional institutions: the National Development Bank and the Hungarian National Bank are included in the committee to advise on the solvency of the applying enterprises.
7.05 Approximatelyone-half of the Tourism Development Fund is distributed in the form of grants and is used for such things as tourism advertisement, the provisionof sanitary facilities near tourist beaches, parks, sport facilities,campgrounds, car parks, etc., and also for mosquito control and for the operation of regional management committees in resort areas. About one-thirdof the fund's resources is lent at 13% interest to already existing productiveenterprises who want to make small investments such as trade and sports facilities,restaurants, campgrounds, motels, etc. The rest of the fund is used for grants which support major events which attract foreign touristssuch as Budapest's Spring Cultural Festival. This fund does not lend to private investorswho want to start similar facilities, who must instead obtain loans from the National Savings Bank (NSB) at the same interest rate. Companiescan also apply to the National Bank of Hungary for projects which complementtourism investments such as tennis courts, swimming pools, horse riding stables, etc.. As of 1986, tourism development projects may compete for the central equity allocation.
7.06 In 1984 there were 34,700 hotel beds (equivalent to 43,200 accommodations)in Hungary or an average of less than 4 per 1000 inhabitants. This is extremely small compared to, for instance, 84 per 1000 in neighboring Austria,around 20 in Romania, 12 in Yugoslavia, 28 in Greece and 34 in the German Federal Republic (see Table 7.3). Such a figure compares more to the situationin the German Democratic Republic, not normally considered to have much touristappeal. In addition to these 34,700 beds, however, there is a much larger amount of other accommodation. 154,800 bed places are offered in bed-and-breakfasttype accommodationsand about 100,000 in camp sites, holiday homes, tourist homes, rest homes etc. In 1982, there were also more than 119,000beds (equivalent to 135,000 accommodations) in holiday homes of the National Council of Trade Unions (SZOT) and of enterprises, of government institutionsand of cooperatives,all mostly used for internal tourism.
7.07 Since 1970, the long-term concepts for the development of tourism have been worked out by NTB. The long-term goals have been to increase the net revenue from tourism and to eliminate the qualitative shortcomings of older tourist facilities. NTB does not give out direct instructions; it rather develops concepts to be discussed with NPO and MIT and with the managementof the main tourism companies. In the view of the NTB, tourism is still very underdevelopedin Hungary, as the figures on bed-capacity suggest, and revenue per visitor is still relatively low. With 6.5 million tourist arrivals,Hungary has about 2.5% of the world total while it only has 0.5% of world tourist receipts. In 1983, tourists spent on average the equivalent of about US$54 per visit in Hungary, whereas already in 1980 they spent US$463 in Austria, US$174 in Yugoslavia, US$361 in Greece and US$302 in Portugal (see Table 7.3). One of the reasons for low expenditures per tourist is the low price level of all goods and services in Hungary, but the other reason is that the average length per visit is short. Of the 1.5 million Austrians that visit Hungary, about 1 million come for day trips to shop. Among the main attractionsare food and other goods which benefit from considerable consumer - 151 -
Table 7. 3: TOURISM INTERNATIONAL COMPARISON
Income per International No. of International Bed Places Receipt per Caoita Population Tourist Bed Places Tourist In hotels Tourist uS Dollars millions Arrivals In hotels Receipts Per Thousand Visit 1981 1illions Thousands Million USS Inhabitants USS "ne m~~() (1 19l80 lZ) 1980 (2) 1s80 (Z)
Oenmark 12.470 5.1 n.a. b8.6 1.317 13 n.a.
German Fed. Rep. 12.460 61.6 9.7 2.086.0 20.827 34 2.147
AelgiLn 10.7bO 9.9 n.a. n.a. 1.6B1 n.a. n.a.
Austria 9.810 7.6 13.9 63s.0 6.441 84 463
United Kingdom 9.660 55.8 n.a. n.a. 6.845 n.a. n.a.
Italy 6.840 56.3 16.1 n.a. 8.213 n.a. 454
Spain 5.430 37.9 9.8 984.2 6.968 26 711
Greece 4.290 9.8 4.0 273.2 1,734 28 361
Yugoslavia 2.800 22.6 6.4 272.8 1.11S 12 174
Argentina Z.520 Z8.4 n.a. n.a. 344 n.a. n.a.
Portugal 2.450 10.1 3.8 100.0 1.147 10 302
Mexico 2.270 73.1 4.1 n.a. 1.670 n.a. 407
Hungary 2.270 10.7 9.4 29.3 504 3 54
German Dem. Rep. n.a. 16.7 1.5 67.7 n.a. 4 n.a.
Czechoslovakia n.a. 15.4 5 82.7 338 5 68
SgUrjMg (I) World Tables. IBPO. 1983 (2) World Tourism Statistics Yearbook. World Tourism Organization. 1981 subsidies - another argument. if one were needed, for the removal of these subsidies. Efforts are being made by NTB to try to keep such visitors at least overnight in Hungary. Recently extensive promotion campaigns were conducted in France and in Scandinavia, where it was mainly health-related tourism that was advertised. a. Investment in the Seventh Plan
7.08 The expected rate of growth of the tourism industry has been much debated in Hungary. The Seventh Plan proposal is based on the NPO estimate that over the next Plan period the number of foreign tourists may increase by 15X (excluding day trippers), that over the same period the number of hotel nights spent by foreign visitors will increase by 18% to 20Z and that foreign exchange receipts will increase by 40-45%.
7.09 The proposed investments are divided in three main programs. The first would involve the reconstructionof 3,500 existing hotel rooms, in average category, 2 or 3 star hotels; 251 would be in small towns, and the rest in Budapest. The reconstructionalso includes a holiday village near Balaton lake and the refurbishing of old buildings for castle tourism. Their - 152 -
reconstructionwill cost around Ft 4 billion or about Ft 800,000per room. The reconstructioneffort would include the rehabilitationof 10,500 accommodationsin campgrounds and hotels.
7.10 MIT has proposed that the second program would consist of the constructionof 14 to 15,000 new hotel rooms at a cost of Ft 15 billion, an average of around Ft 1 million per room. The new hotels would be mostly 2 and 3 star hotels and a few I and 2 star ones. It is estimated that there is no need to build 4 or 5 star hotels during the Seventh Plan. The last 4 star hotel built was the 360-room Flamenco in Budapest. It was financed by a Hungarianhotel chain, built by an Austrian contractor and is operated under the trade name of a Spanish hotel chain. The average cost per room in this hotel was Ft 2.4 millio,.. This is not a particularly high figure by internationalstandards; it should be noted, however, that the Hotel Atrium in Budapest cost over Ft 6 million per room, and rooms in the Forum hotel almost Ft 5 million.
7.11 The hotel building proposals are still at issue between MIT and NPO - indeed, their differences in view are striking. NPO's figures are based on an expectationof an additional 4,500 rooms oi hotel capacity in the Seventh Plan, which includes 1,300 that have been started in the Sixth Plan and are to be commissionedin 1986. In addition, NPO proposes that 13,000 accommodations be created outside hotels (including 9,000 accommodations in campgrounds). NPO considers that the tourism sector does not have the financial resources to pay for a large increase in hotel capacity, since existing enterprises have extremelyheavy debts. Nor are State funds available for financing a large expansion. In a competitive economy, this would not itself be a critical factor,since if further investment was profitable but could not be undertaken by existing enterprises, other enterprises would enter. The NPO does not exclude the possibility of investment additional to that planned, if it is financed mostly by foreign working capital.
7.12 A more fundamental issue is the size of the market. NPO considers that priority should be given to measures that will increase expenditure per tourist rather than to increasing the number of visitors. This mission has not been able to study the potential market, but there seems no reason to assume that it could not grow substantially. Hungary currently receives only a small fraction of the tourism expenditures of its neighbors. For instance, 40% of tourism receipts in non-CMEA currencies come from the Federal Republic of Germany. For Germany, however, this represents only about 0.2% of total tourism expenditures. Furthermore, it is clear tnat at peak periods hotel rooms in Budapest are in extremely short supply. On the other hand, it is argued that this is very seasonal. In addition, it must be noted that the hotel industry is a capital intensive one with very high overhead costs - relativelysmall differences in hotel occupancy rates make an enormous difference to profitability, so it is wise to be cautious. The investment plan projected by NPO of Ft 5.7 billion (1981 prices) will be exceeded if sector revenues and profits are substantially greater than predicted, making more domestic funds available, and if more foreign working capital becomes available than anticipated. The industry is well organized, well managed, and since 1980 has no longer benefitted from large State subsidies.
7.13 The issue is an important one because of the sector's potential contributionto export earnings. An added attraction, though one that - 153 -
deserves further investigation, is a claim by the NTB that studies have shown that the domestic resource cost of tourism exports is about 152 less than industrialexports. The issue cannot be left entirely to the market because of the debt structure of existing companies, and although profile restrictions on other enterprises have been removed, it cannot be assumed that new enterpriseswill be sure to enter the hotel industry if profitable opportunitiestruly exist. Moreover, the divergence of view about hotel capacity must also affect decisions about the magnitude of necessary infrastructureand complementary investments. The Mission regrets that it did not have time to investigate the issue mor4 carefully. We recommend very carefuL re-evaluationof these questions, both to enable Hungary to make the best use of its opportunities for earning convertible currency, but also to prevent over-expansionof facilities, which can readily waste resources and have undesirable environmental consequencesas well.
7.14 In addition to the accommodation programs, a third major investment program during the Plan will consist of the development of new tourist products and the provision of ancillary facilities, at a cost estimated by MIT at Ft 2 to 2.5 billion and by NPO at Ft 1 billion (1981 prices). Hungary has firmly opted against the development of mass, low budget tourism of the kind encouragedby Spain since the mid-1960's. Instead Hungary wants to develop special tourist packages for the more discerning, higher spending tourist. Some of the new products envisaged include the restimulationof spa tourism - Hungary was once world famous for its hot spas and attracted tourists from all over Europe; horse riding tourism (there is, as mentioned before, a special allocation in the tourism development fund for such activities); cultural tourism connected to the theater, opera, visual arts and especially to the Budapest Spring Festival; hunting tourism (favorable because it generates demand in the normal off-season); sports tourism (on the occasion of competitionsor connected to sports training camps); convention tourism (the new sports palace can seat 10,000 people and the Budapest Convention Center can seat 2,000); as well as other special programs such as ornithological tourism or tourism by gypsy wagon in the Puszta. NPO considers that developmentof tourism should be intensive by improving and extending services and upgrading resort areas, and increasing efficiency. It also believes that stays could be longer, but seems less convinced that the tourism market prospectsare good enough to justify all of the investments proposed by MIT.
B. Culture
7.15 Except for a small number of composers and artists, such as Bartok, Kodaly, and Vasarely, Hungary's rich cultural heritage is little known to foreigners largely because of the language barrier. It is, however, a source of considerablenational pride, and there is a determination to preserve and nurture it. Even when other infrastructurewas starved, funds were found to support artists and build and maintain museums and theaters.
7.16 Cultural affairs are managed by the Ministry of Education and Culture. Out of the Ministry's recurrent budget of Ft 50 billion, Ft 7 billion are devoted to cultural affairs. This amount covers the operationof the National Institute for the Arts, 3 theaters, an opera and 3 libraries, 10 museums, and 2 national archives. - 154 -
7.17 At the present time, the only new State investment (of any type) definitelyapproved but not yet begun is the National Theater, on which work will begin in 1985. The location and the design of this new theater has been discussedsince at least 1971. After thorough consultationwith the public, a decree was issued on the subject by the Political Committee of the Party. It is expected to cost Ft 3 billion (Ft 2.5 billion in 1981 prices). The new theaterwill have a capacity of 1100 seats and will be located in the vicinity of Heroes Square. A large amount of publicity has been given to the project and the public has already contributed Ft 90 million towards building costs.
7.18 The reconstructionof the National Art Museum is considered a priority after thieves took some of the most valuable paintings (fortunately since recovered). Refurbishing the museum and installing proper security protection is estimated at Ft 0.5 billion. The Government also plans to spend Ft 2 billion during the next Five Year Plan to preserve, rehabilitateand increase the collection of the Museum of Fine Arts, the National Museum of Applied Arts and the Museum of Ethnography.
7.19 A program of reconstructionis planned for the Museum of National Science, the University Library and Budapest and county theaters. Already underway, this program will cost Ft 1 billion. Reconstructionof parts of the former Royal Palace in Buda will continue; begun in 1949, this will have cost over Ft 2.3 billion (at current prices) by the time of its expected completion in 1990. The Basilica of Budapest is also being reconstructed. This work started recently and will be completed in 1990, with a total cost of around Ft 2 billion.
1.20 A separate Ft 100 million project will refurbish and, where necessary, rebuild a series of monuments and castles around the country. The castle at Veszprem, for instance, is included in this program. Many historic buildings,mainly private houses, will be refurbished and reconstructed without funds from the Ministry of Education and Culture. Many old houses in the Castle District in Buda are being rebuilt with Budapest City Council and private funds, but the amounts spent are not available separately. a. Pricing
7.21 This in an impressive investment program. The case for it, and for subsidies to foster access by all citizens to national cultural assets, is overwhelming;a common sense of national heritage and cultural identity can enrich national unity and sense of community. While it seems rational to admit primary and secondary shool age children to museums free, entry fees might be increased for foreigners. Admission to certain other cultural events, however, such as the opera and certain plays, now inexpensive but very bard to obtain, could be priced more realistically,at least for some performances. Currently, revenues from ticket sales cover about 50 of the cost of operating cinemas, 25S of plays and only 101 of the costs of running the opera, where tickets are priced around Ft 100. The cost of a subscription to several operas is therefore modest, benefitting a few subscribers but denying access to many. Revenues cou1 I be easily gradually increased, and access might actually be widened, if prices for some performanceswere brought such closer to normal European levels. Appendix L
- 155 -
The Cost of Capital to an enterprise V
Let MRt marginaL rate of return on investmenc
r rate of interese
6 rate of depreciation
o - rate of inflation in investment goods' prices
We assume that an increase in investment adds to productive capacity in the next period, We first characteriz. the investmanc policy of a profit aezisizing enterprise in the absence of taxation. Suppose that the firm is
EalTo-ing a profit oo i-i.u.g iw7estmict poLcy. Semtconsider & deviation frow this poLicr ubic increases its capitaL stock br one unit in period t, holding the cavital stock constant at other daces.
This requires (1) ac increase inx iwetinet by one unict in period
(t-1) and is financed by an eztra unit oE borrowing. Since a proportion 6 of capital stock depreciates every period, maintcenanceof the old (i.e., pre- deviation) capital stock in subsequent periods requires (2) a decrease in
investment expenditure by (1-S)(1.o) in period t. This is because the price of invescment-goods in period t is '(l*o) , assuming it is 1 in period t-1.
This saving in funds can be used towards loan repayment, which is (lIr).
I/ The trestment here foLlows M. King: PubLic Policy and the Corporation (1977). - 156 -
Hence the extra sur needed for loan repayment is
(A.1)
Since gross profits from invastment is M&R, the net profit is
MDR - (r-o) - 6(1+o) (A.2)
By assumption this operation cannot be profitable, since the original policy was profit-wazisizing. Hence (A.2) is noupositive.
Next consider the opposite experiment where the firm reduces capital
stock in period t by one unit, holding capital stock constant in all other periods. By syetry, this yields a net profit of
(14+) * (r-o) - MDI (A.3) which mist, by profit-uimirization, be nonpositive. This impLies that both
:A.2) and (A.3) are zero. Hence, we have
Proposition L: The cost of capital to a profit-r simizing firw is the sum of
the real rate of interest and deprceciation valued at current (period t)
replacement cost and not at historic (period t-l) cost
.MRR (r-o) * 6(l*a)
real rate depreciation at (A.4) of interest current cost
We next consider a system of profit taxation and depreciation
allowances. Suppose chat
(1) A fraction, f, of investment expenditure qualifies in the following year
for an annual depreciation allowance at a rate of aZ per annum on its
written down value - 157 -
(2) A fraction,f 2, of invesSt nt ezpuzditure may be deducted for profit tax purposesin the year in which ic is made. This is the case of free
depreciation.
(3) A fraction,f 1 (= I-fl - f2 ) of investmencexpenditure qualifies for an
investmentsubsidy-at a rate of gZ.
To derive the cost of capital, vw nov consider as before che same deviationfrom a profLt-mmxiuizinginvestment policy. The effective price of one unit of iavestmenc is:
P E1 + f2 (1-) + f3 (1-g (A. 5) P I - f -f 3 s, uhers r is the Linear profits tam. (A.5) ref'Lectsthe fact that free depreciationreduces the cost of a fraction f2 of a project by the rate of profits caz, r , while the cost of a fractian f3 is reduced by the rate of investmentsubsidy. Thus the firm can finance an extra unit of investmentby borrowingan amount p.
Assum that a fraction,y 1 , of real interestpaymencs is tax- deductibleand a fraction 'r2 of the inflationaryelement of interesc payments is cax-deductible.In an indexed tax system with incerest- deductibilityy 1 L and Y2 °0 in an unindezed system,
Yi a Y2 1.
The extra taxable profits in period t from the deviation policy are
'ML - af1 -r(r1 -o)o - T2OP i.e., the return less depreciation allowance less deductible interest
payments. Taking into account (as before) that the loan must be repaid in
period t and that investment expenditure has to be reduced in period t to - 158 - maintain capital stocks unchanged in subsequentperiods, the net profit of the deviation policy is
MRR -rp - (XRR - af -Y 1(r-o)p - y2 apl
- P t(5(I*) - o]
Hence
MRR r ((r-o) (1-$ y 1 ) * 5(1+o) - rY2 o
L f f (A.6) - ra( )-
For the tax system to be nondistortionary,(A.6) must reduce to (A.4).
Some manipulationof (A.6) estabLishes
Propositios2: The system of profit. tazatiot,interest. deductibility and depreciation allowances is nondistortionary in three cases:
(1) Free depreciationand. non-deductibiLt.y of interest payments:
E 1,p p 1,y 1 -Y2 O
(2) True economicdepreciation at a rate a - 6(i+o) and deductibilityof
real interestpaymencs -(y 1 1, Y2 0) .
(3) True economicdepreciation at a rate a - 6(1*o) - o and deductibiLity
- of nominal interest payments (y T2 1)
Own Funds
With own funds, the opportunitycost is b, the deposit rate at the
NBH. Let u be the accumulationtax. Then an analogous argument shows that - 159 -
( 2 f3) HRR ((b-a) 6(1*o)J - ra t (A.7)
This establishes
Proposition 3: With free depreciation (f 2 = 1)
HU a 1_ C(1*) +4 0(1o)I (A.8) so that the cost of capital is raised above the sun of (i) the real rate of interest (b-o) and (ii) depreciation at current cost [6(1ao)] by the accumulation tax. Appendix 2 - 160 -
The lmpLicit Premium on Export Promotion Credic
Assume the National Bank of Hungary (NBH) lends as export credit X forints at
an interest rate r. Assume this is repaid over T years, in equal
installments, A. Then, by the annuity formula:
A r (I + r) X Al (1 + r) l-T
Let the NBH's discount rate be s. Then the present value V of this loan co
the NBH is:
T A V t X, or (A2) t-1 (l+s)
U=( 1 )T+L 1 (1+0A - X (((1 T) - 11 (lr) )
Note that if r-s, the vaLue to che NBH is zero (i.e., there is no premium on
exporc credit). For there to be premium, we must have r c s.
Now, for small z, (l1z) , l+Tz. Thus, the ratio in (A3) can be approximated to:
(1 + (Tl) s - 11 r (L+Tr) 1 + Tr -) [1*(T. r - 1 a (1+Ts) 1 + Ts Appendix 2 - 161 -
As sEaEed in the text, we can take ss.12 and r - .08. Then, for T-12 years,
V -.20 X
or for every forint Loaned out in the export credit program, the NBS is willing to "lose" 20%. In this sense, the NBH -- or the government -- attaches a premium of 20% on export promotion investment.
If the payback period is shortened to 10 years, the implied premium drops only slightly, to 18%. Thus, it is the profits tax deduction on interest, rather than the lengthening of the payback period, that is mainly responsible for the premium. Agpendix 3
:rsza4S76rvfzstaV - 162 -
1. Major Investment Projects Completed 1983-84
same and place or project eroJ@ct nnded __X_x:r__L_t-: __r 9eform 13 1683 1.3;3 't- 5&ilUon torLnts
1. kagite !AL, at Hal ia 1983 727 36 - 3 Z 2. Cr.0il FroduCtIoe at £1 1961. 594 87 16 697 * 3. £tmophwtc Lla'nrd Puiralsa PA scrp at AZ.4W 1911 574 49 32 655 * b. Q..japoil aod natal -1 'lifiS 1mgy in KIaau1Alas z9.f. 1422 U 2 :557 23 5. m:s slU auttitutUa Ln Kal6 L985 523 34 7 e 6. Few StatiCsOsvelopmnt UJpsst in Buapest l983 530 17 - 547 7. DmUo IbaLL1g.c Wbf" Convuter Steel Wor. DW=uJvm 1983 T727 '1 - &WC8 8. LeIan Ibtalu%g.a Works.Cafxird Ste' wrks, rMt c 1983 8519 387 - 5206 9. Llgit .Ka 'W oin Sz~i=fShirW, psdeauct deoLapmnt 1983 52Z5 568 - _ol3 10. Stel Foauna In orhiss 196 401IT 17 _4 3,4 11. epe fttb11.e Iwoag ,Zdrac pomw stam unit construction 1961 59 276 :X) AdO 12. Unitad _mgd.cmnt Lao aBo ELctrlcaLCo. Ltd.. devL1ant of vsacu ee4IUI.n 19n3 758 - - -9 n 13. United Z_caid t LSo au ELectrical Go Ltd., devolopmnt of lioIt sbru wuuch 1983 3816 - 36(T 14. Autobe Factory MMU, quLLty Iauent 1983 60 133 - ' "
- .. AutobsFactory DCRIUs. biy - 163 - 1. Major Investment Projects Completed 1983-84 Name and place of project Fro ect ended Ir^,-: -.re BefoemL;83 140 :g9a'. 311Ul0n torints 6L. P_mm of a11aa NLLL1I5 Stoac 1963 16'J' - - 1.24 * '2. Oveabr Ctntae at Udhic_hm 1963 '76 30 - 5Cd 43. MN" Atrim /PunLat - NALtV -Ayatt GO./ L963 l856 1 - L857 44.HoR4l, ht /Panta - Ponts Co.1 1913 1092 1 - 1_93 45.roe r&%.. Akr4p C*j 1963 17&1 - - 17.1 4.. IbtaLKUmL1t /Ptgmnia.Nwt.L Co./ 1963 9g6 - - 9C8 47. r1I nt of HotelSport /H4*uia Co.I 19Sf 350 199 37 ,=6 4'. Groaeries rainiarg Co.. South-bad stap bs1s 1.6 Su 20 -_sal 49. Caqaty Deloant of Rver RequLattin aS 3 gLe Dredgi.,g 1983 106 15 - 1C95 Hlbdri Estate /50-63its/ * 50. aEtpa, X. District, Fe durvstr5et 1966 2717 _ _ . 51. * - K UlalId 1984 2991 1 - Z992 . 52. * hzo 1981 994 - _" a 53. " m. District. Klpet. stap 1. 1966' 535 - 535 a 54. Mv!.District, Sam%Ilo. 19166 650 _- M 55. * XI DistrictRIkefresur, stage t. L9s6 565 1 1 567 W S.. * Xm. Distrit Cowl. stage XI. 1966 759 1 1 6SL * 57. !X.DX istrictG [aim Street .986 639 3 - 542 * Se. DOeWum, Ujkwt 1963 3592 3 _ 3595 59.59 a.ft, Centz9. 193 L166 2 116a Go. Pca. G rtvazs 1963 799 - -7 * 61.SZikeefeherr, Lein,staW I/A 1963 666 1 _ 67 62. Tatabiaa. Mefilda 1963 486 '6 _ 557 *63. Tatebnya, wrtvmr 1963 511 33 54 66. Dvelo_ at Rofpital in Gy6r 1986 769 236 126 '151 65. Deute bsJ.Llurgcal;frm. slag tip am,Itat1on 1964 55 '39 2.1 T35 trget oup deClont -DelOnt with credlt aUing exvmt surP1I Appendix 3 - 164 - 2. Major Investment- Projects Started before 1983, and as yet uncompleted ,Jam ana: Ace of pro.ect Project ended ___ _-_ plavnudI Before 1;63 ! X6 ?est .o:i- 1983 .l:oin for--.:s 1. Goal 4L=3 at Mcsek, cold cl prOductUo 1992 212 660 939 20729 c225- 2. mnrnz Plant at Many 1911 1321 7:4 966 1319 x690 3. lr.ll PLa.u. au 1985 38h5 443 390 '30 -acs .. iraLr.g Plant at y4a hif a 1985 4622 6LL 801 625 565i 5. !auite Minesat Feny6fd 1915 177 .19 407 357 1:6C * 6. ?res3ure r.tenrlf-1er ar. Alva 1916 1'2 30L 809 522 1.1; * 7. Crm4u oil productimn at Stna, oLL rield East 1996 196 IOL 93 :=3 - * 8. Devlopint of fixed asats for kcdrarbon rms-r-zi in Zala Countr 1985 '11 410 1,-4 241. :2-3 9. Coa ML.: in Cazi.nbareika, 1985 1i7 229 175 24 o: 10. P.Lt:o aairCs9 o1 -tre daveinnt 1985 378 99 iC 35 62C an 11. 3wLL Mines In Dorgo. Un plant at Ianca.eg 198 24' 426 746 '225 36-1 12. lionr% of N1uclew Enwg in ?tM 198 39723 10524 1:.00 36212 3685, o 1. ?3apest, E1ctric 1orks,rnetuark devSo nt 1985 491 253 c217 166 !127 e 14. 'donsC of Nuclear aer. in PuMs, _mlz estate for sraff 1985 733 23 LO 8 -; 15. )an.ze .Mtallurgical w1rt", COIC.nSPlant. DLeuivro 1967 1009 L261 :840 '966 g 0a6 15. :a=bw .%ta1ur,.ca1 Wark, Conti,ia fal1T aM f6srAea 1985 1502 1S 3 53 58a3 -7. Al Earl Workts in Almisf=Itd, r-d A starAp 1985 1438 1T '63 : 53 611 :. etalurLcal stari'ng mtsnial quality improvmnt, Sa,cdmresztur L985 50 245 *'34 "is8 L.7 '9. s1.ra.ULCa Workc in d2d, increasing of blast alr teperacurg 1985 119 341 94 42 596 m 20. Mseta1iureical Warks In tzd, slag prceaig plat. 1985 L66 667 1191 62 2'86 2c1 GANZ."9AVAGLocomtive, V ~n&nd .'Lchniz Worm reconstrc:Ion 1. 1985 1014 243 74 -155 4.175 22. GANZ-MAVAGLocoawtive, Wa aM ?.chlm woaru reconstruction 7. 1915 1036 531 148 2373 4138 23. ur.Aartan Sk=p an C;i Factory remutrution 1995 1053 270 102 30 1'55 2r. C.ayw 'or Microrlect.ronica. ucreaectronical pW-rs and =urts poducr.4-ibsis 1985 L28 394 98 1180 LM 25.Lignt COrgte and ZhSUlatir ?iteria1 Prouin Cu'y at -a.ola 1985 666 215 '5 13 939 26. Mitra am Concrete ?PrdUcA C;OxM , H=lljuws 1985 28 579 751 489 1847.? 27. NJLitrgen works at Pit, unet ructionoa ,ecatnactga 1985 129 (.21 225 160 935 .a 28. Alkaloid Producing Factor/, gevelopmnt of glyfait rOduo:.ign 1985 136 242 201 59 638 am 29. "anube Petr3l.,.. Cocvany. levs1omnt of arointic production 1986 53 156 304 '44 1357 on. 30. Danube Petrolew Conany. catalytic cracic plant 1985 2636 2458 a92 fl1 6147 31. rharmceutycal Waort.Iabiny. 9rdution of Cavintan L9e85 46 3-.6 268 222 1'320 32. &rsry Ka5binya.roonstruction 1985 14 121 330 88" 1349 23. Recreston Area Sio6ac, Golde Such, dvelopent nestant 1965 565 65 7 267 X0h Appendix 3 - 165 - 2. Major Investment- Projects started before 1983, and as yet uncompleted ixe _re. NAM ad PlaceO >C:eCtPr Pro;ect ended Wo;r,! :-3 :;4 est -s 1g3£ :r f_ori nts 34. Coogwative Brvwry, MbrttU 1985 32 359 227 213 931 35. Cooperative.Quchc Freeing PLant, AlbertLrsa L985 93 241 197 5' 5.5 36. Eluding of Niortf-South Ltn ofr Urderoud, dapest 1990 18.63 1729 1797 11392 33330 37. Broadeninr of Bridp Arvid 1985 1567 7_3 622 - 228 2664 38. Dewlopmnt of Arpwrt FeriheV, Bidapet 1986 5075 1355 1259 1iai 31z. m 39.Ra±lway zden±zation, 9±cske4Szirlpt 1985 632 59 59 ,4' 89' * W0. Modernu.tjon of Railway Station, Magest -Xelenfald 1985 LO0g 373 210 !127 1729 * 41. RalLwey odernization,Hatvn-FUzsonomw 1985 521 64 - !CT 692 * 42. Higmay MtI, TbrokbilInt-raCabinya 1986 2.6 326 322 544 3678 * '3. tUH sy 4. C3odl yGvot s 1.985 2564 151 33 300 3C'8 i 44. HIsay .15, DKIaest - KICUMMit 1965 958 126 234 ?kG2 3360- i 45. Rely Station Dew1olnt at ZinyW, Stag V. L985 96 41 i15 285 573 * '6. Natural Gas Pipelu.nZsid-auat 1987 7TN6 5 - L 3;0 1110 47. Hi&sny M3, sectionof entry Into bidapest 1985 900 173 . 216 1360 48. Reconstruction of Boulweard Robert Kiroly - HunprLi 1985 113 227 136 574 113r 49..- rafrLc Road io.11, er.tryz sct on, Buapest 1985 8LS - - 4 al' 50. ReconstrurtLon of Suburtan Ra±Lways,Szandt.ndre L985 256 153 101 52 562 51. HusuprMcani=n CCaCLY. T,raffic U.ant n. 2. 19e5 285 195 215 63 7,58 * 52. XrIaztIna r. CrO33tarCentre 19e5 468 359 436 297 L560 53. Post orfice .O. 2. at Szeicesfehsrvir 1985 53 1_01 107 332 593 54. Hotel Aqua at Hiviz /Danubius .4otei Cuacany/ 1985 S4 287 25'. 57 692 55. Store SKALA, 9hd-pcst 1985 433 301 1.18 207 IC159 56. CEPOServlICin doint Co. block store Lnvestmwnt 1985 1152 176 363 1.5 1836 g 57. RegionaL ;4torworks of Contey , Gydr.sopron. stage r. 1988 223 127 71 '2 -23 a 58. Regr*LL 1 Waterzorks Ln Yld-4Igrid an .Mitra Region 1986 309 129 92 23 60 * 59. RegionaL Waterarks In .±C. stap 1. 1989 65 126 l1S 498 904 SO0. RegionL uiatenrlrs of ;est-8h1aton, stae 11. 1986 388 7,. 66 1L6 64' *61. Regmul System of aer SuppLy ln eru of 1989 34 30 52 505 621 * 62. Regional 'ater.orics of Pics.J cs, stygp II. 1988 290 151 L41 903 1485 63. Sewage Treatment Plant in apust iv. District 1985 1293 193 100 14' 1720 64. ?rotectUg Systes of 3-. ?alaton 1987 123 119 166 235 643 65. CentralSeb.ag Treatment Plant at LMLi1C 1966 426 56 14 69 565 66. Central Seagp Treat nt Plant in S1ll=k 1986 4184 3 - 78 565 67. xidapest, 'kterwcrks, LCFunel intake Cmpl 11i. 1985 2252 169 151 a 25ao HousIrV Estates r68-Ln29 item/ * 68. Wispest, I.. Distict Baikisumor 1986 8567 183 28 - 4.2 8736 * 69. . Ka3zjWUiLl6 1986 1010 747 335 285 2377 * 70. dbu"a 1986 5112 35 1 - 8 5220 n. * sv. District iCxoszt szn 1987 162 270 382 4391 5705 72. * Utjpst, stag r. 1986 5542 51 2 659 6254 * 73. " = Ujpest, sta. II. 1987 1563 77m 51,3 1928 4782 a 74. " 3 . Districtmiria Varia 1986 532 1 - 20 553 Appendix 3 - 166 - 2. Major Investment - Projects started before 1983, and as yet uncompleted Mmard place of poject Poject eded lefor 1983 1-' Fe3t 7:- 1983 mullon fortnts U 75. &4apest, St. Distr:ct J6si9fwxos 1986 178s 30 17 62 .397 * ,'6. ' X. District K Sbi jhauJsa 1985 3521 - - 311 3e 2 * 77. "bKnym Centrus 1998 1515 27 '16 55 1566 a 78. )XS. Di.trict ^azaarit 19S? 392 277 540 3C42 '-2.; * 79. XIr. District szmgedStret 196 1431 52 10 166 165.. * 80. - UJI±pdtVro 1965 1244 2 - 235 1-C1 * 81. a Vaci Street-Gyr4nUL Street 1906 1.07 - _ 30 22.7 * 82. q Va..oS 1967 1103 380 :;2 31. 2XC6 * 83. XIV. District ZU616 1985 4397 2 - 293 '692 a 81. " xx. District Klspsst stae IVA l985 1545 - - - 2 :'-3 * 85. - .Klspet stag If 1987 4579 593 '23 .C58 7C'.3 * 86. XV. Dit:rict Ujpalota 1986 5237 43: 25 5506 * 87. XVIm. District R tkaa sztur sta 1x. 1985 1is 70 :.6 - L l-o66 * 88. ' Rdlmissuztur stag M. L986 1305 602 560 570 :C37 * Ag. XVII. District HAV2unn 1986 3816 10 3 47 3956 * go . XX. District 2esterzsebet stap Ix. 1985 24M0 10 - 33 '-6 * 91. - P "etazsetsta IIIA 1986 1126 7 33 210 '376 * 92. Pesehrzsetet stap 111/3 1986 475 245 190 298 308 " 93. X I. DLitricz Cseped s3g IV. 1986 2469 _ 24 65 :79 :669 9'. . CspL sta v. L987 730 357 318 1112 2517 U 95. Ciepel. wiLr.Major 1985 798 1 - '.1 840 *gE. e IX=. District N6mlmt 1985 932 1 - 16 '.9 97. DeCecen Tocaimrt 1986 llC8 562 506 3t89 3565 98. ounaujiras 3a :.985 766 L01f S1 140 :.^91 U 99. Cy& ady Erit 1985 2395 34 1 - 20 2410 a 100. Cy& J6Zse AttiA 1.985 905 - - 11 916 a 101.oyrCYn8ila stap . 198 1115 165 .37 5-.;5 1962 * 1C2. y5ar KM 9i1a staW IJ/A 1988 24 12 19 533 588 * 103. Oyor Kui 963A stge 11/-r- 1992 ao 26 '2 1733 L81 a 104. iO cSkaMit A* i 1985 795 89 39 - 2 971 * 105. KocsIct Szdcluayi Viros stag LI. 1985 14S. Li 3 5 L432, * 106. KeCOCeait Szi&heii v"es stae Lr. 1996 is 94 76 3722 3900 - 107. K unfilegyrzza Petctl 1995 '01 L9 1 534 955 1U3.C EALnVUO3 1985 54 :16 6 19 624 * 109. MLU.h1c Avas stag I1. 1985 2236 5 - 2 3243 110. MI lc Avas stag 1U/1-3 1985 382 300 :C4 '.3 ' 399 * Lll. Msi31c avas stap 11/s-S 1986 6 52 294 28T 639 LL12. MLuAlc Joil Stret 1985 208 211 !20 11 560 * 113. sIcolc Szlnw.N.pler 1985 907 31 6 2 346 Appendix 3 - 167 - 2. Major investment - Projects started before 1983, and as yet uncomplctcd Nias ud ple of pio,jct Project WNWd Bteor 196U3 LB. Rot o 1963 sIIaon rorinta * 1.14 ad NowOjartw 196 595 35 ;3 "91 * us. uyirmemi Ujvim 19S L97 73 u27 2 T 3 * 16. Pi SJ.6a &.ar etMe 1. 1985 205 93 LS 200 503 * 117. PiCaJNrw SI6o at.a 2/1. 196s 794 I - r SC2 * 118. Pica Slki "6-rr stw 2/U. 1965 0 3 29 20 16W8 * 119. Pks SWU Qarwtr ata 4. 1985 690 89 25 21 d75 * I20. Pica S1j Ourtw ataW 5. 1985 46 1'5 L1O 471 7,2 *- 121. Soaprn JarvinChakrtr 1965 8.9 12 - 3 364 * 122. Sm.d Qiarti larth 1965 51. 91 8 . so * 123. Sz_pd Fe16viroe star 1. 1985 774 9 1 2 796 * 124. S=Gd Ndkh 1985 12M6 31 22 'S 133S * 12S. Sznf4hirwir Len stap 1'3 1965 iSs 226 ' 46 7(3 s 126. sziamofhirvir Lein stap rl. 1915 7 46 261 285 566 n 1z2. sJgLIC SzGiLwWi 1985 356 226 152 63 8L -1Z8. SzU1 thelQ 0ad 1967 81 79 70 365 595 l29. YuZprin. aOu1wk Street 1965 '65 37 1 - 1 502 U30. Umlated tmeatstnts of P6k Strwt f4au-u Estate in 3uda- 1485 12' 315 25L 143 833 post LU1. District 131. EAzj Pltubzzi.u ;be &batfrg Plit of t.U taumi .4lAOc 1985 862 41 25 51 989 U32. R coatructca of ibspita1 Liial6 in ed&mst 1985 55 172 1.6 157 520 i133. Oevoai of ogpitat l.a Debrd 1L987 59 1ST ; .50 6a a" • 131. loapitaL ian Kapavir, Oprating Blocic :985 73 68 67 3'.0 5 • 135. RPconsuction of Ho"Ita. ln NyLrq4WNim 1965 333 La? 130 7'6 726 '.136. tloniL3 t&mtitute for fTmu owag racntructun 1915 139 226 191. 53 61' r137. bspiWt HatiieM in Srlzk 1985 509 '1 12 6 ;a 141. Recostruction of cmw Nloal Palac in a&da 1988 1832 L33 122 286 2373 142. Pww station devalopmut in Debrmo 1967 192 11. 137 167 6'2 - T t Umip da lOint - 0v.opmnt with credit al-Ing GxO=~ surPLIS Appendix 3 - 168 - 3. Major Investment - Projects started in 1983 or 1984 ma ana ;zjc@ of; ect Prooct zap=wa 3-<: et -: :-z .. ::a:::n ;1arima 3efzr !;E z es5: -:t ,_ coegt:zr. L;8i3 -- :. s .aturnl ps ;r.c:.ion a:t Ern ratLtwa 3a 650 sL.LLon a year 983 1985 - 137 328 265 .;_ - * 2. Natural Pa uctjo. at Jllea t5tur.l as lC20 aLl2.O =3 /yar 1963 1985 - l8 209 1-2 533 3 3. , oilau dm tim at !4aWlen4vl cr-a o:l 2180 thiouzn tl14 year 19 1987 - 6 :28 2296 2'20 :' 46. PUtn . ca =nes eogmoent n 2 0 &.c tiyear :0 :985 - - : 050i -- 2 -5 5. Icyis, coal :n:s vlcoort trt_.mn Coal -,30 tsad tyr 982 1 8 0 1'07 466 5C. :5 S. Briquette tactory at .olw Omquett -50 thousaz t:yea 1. 63 1985 - 7, 298 2-'7. 1:362 ;2 7. .Azng*an 'pnr. aM c.. Factory. surl,= product Uv'lopnt of aV±9ltLwal =acnlnery .50 11c1n Ft:yar 196. i986 - - 53 667 72 8. _mvloe1p- of gJ3S facztOrY at yac3 gLIS Sajcszanr,tr - :usand t/year 1983 1985 - 57 9'. .29 =, J- 9. econstnxtzon of Gr4rgl wheel g-riLa^Ww" ftacto Grin:l 't.ousa 4 year 196w 1987 - 29 5;0 57i 586 27 10. T*Lwa C.cajl Afla* po1yet11.nU ?olyeti. InV plant 3. ! : 0 twiousaz0 t/year 19686 1987 - - -_, =2.5* 5-.66 -3 1I. b tr-l.ta Zo~z . vtsoreaver lipt ^atirg oLi wilt L5 thou.wn tiyar 196' 1986 - - -2 -C0 322 - _ 12. Pmrscau-ca. ':s3opl. iroduc- tr-yczn t atofrtaLcin z-1 i.on Pft/year 198'. 1967 - - .2 -29 52 -; U. Devlomer.cn zf 1ai- carevntlg:-4 teniuolataG wa4n*a: factory at Sopgrn 500 tnci;aM =/year 1983 1985 6 322 255 :5 5 i i- - 14. Developmnt of Csopel Pawgr .oncs Sa_L:s ;roduc: 2.3* ouam t/year 16' 198? - - :2400 12.41 -7 15. BrwAuy at Sz6ry beer 250 tusand zl-year 1.96' 2987 - - '5 8'. 759 9 * 16. laterawve gaLn ;roduc.:::r. ;raw. _91O 1965 - - ;2 585 1297 -} stag '. at BaaL.i * 17. RaLIW Wrto8p at Csazwua 5ridip 503 a : 1g3 1967 : 0 96 16a 323 59 - !8. RaLiway aderrj.Zacin at .atat-ya r1-ay 1± 1.?I 16' 169 - - - -i7 , 19. .UtwL Pa ;±eIPIZM :.;*-"-A el:n- 75 Ia 1563 ; .9t6 2 :3 2Z5 23 ;33 - - 20. Rait.&my eiect-' cat.on ?1.aaoasalcz- rai1ay .;I 192 Ia 1983 1;88 3 32 21? 598 2.105 - Pic-a A 21. RaL;my =der._zaticn Sy _5rcc ;ay _5o a926 1586 - -5 0096 - 22. Ra:l4-y mc.jar.zton Szo' s- .pacliy rail y 1 51 1'82 1 9836 -9 '6 :39 290 524 - 23. Pircgms of Rulway FoI. '-4 St= .1r.g stacl 129 pn :1983 1985 - 7 - 2 196 3C1 e 2.. roasoar C.tnt_e at iaposvr staticu 12 1XUW -Cs3 198' 1569 - 9 17 68a -:0 3 * 25. Cosar Centre at Szol_-. s3tatOnS 9 tZcUaaz pSB 2.98' ;S - 23 37 S46 -1 3 * 26. Ct-uoa entre at V*sz;re star-nari 15 thusand sx 1583 :588 - ;; i5 S23 929 2 a 27. Deve1cont of Kr=szac Cessbar t= ciCuit n 5.3 thousad s 6 - - 63 7.- -J3 .5 * 29. -vow tlophon Centre at Sz3na::ily s3a.ors 20 ousad pta ;99_ 2 1'. 72 -- 8 2 29. adapest. postal ser'ce -renter iui.1Airt 2 6 houa 2 1983 ;7 9 56 S2 392 L9 2 3G. P1cors963cc t. r. .s r 1 985 - 99 231 _55 7.5 - 31. w Cnt. r at dapest 1983 1585 - 155 399 1.50 -C4 - 32. aP.rstrctioaz if 4iteL 3:aomema z* 14'4 peC 1983 1L65 - '0 3C27 8. 12G4 - 33. SmrtI.ng :jus Taverna MOSo 224 pCS 1913 : 985 5 50 127 610 792 - 3'. H-btl Therm1 at &iJk /jauezus :o./ ro 200 Xcs 2 X 6' .;8;6 - - :60 550 7.0 9 35. Holiday t%ia at .'= 696 pcs 198I :586 - - 9 .1;3 1122 - * i6. Lan.n Hausirg Estate. stage , rat 395 Pts 1983 1969 2 9 32 j86 1G29 - a-tsasohervir '37.3 elavLiros HOUSIrN Estate. .3a,:l ' . r.ACt 535 XS 1563 . 0 t.,; .6 225 542 - at sse 38. S-entear±. kagu HOua±r.g Estate t .as 300 pcs 8 8 ;0 ' 33 .72 576 - *39. Reconstruct.on of HospItal :_ bed3 6'.8 Xc 2.983 _.58 3 '8 : 379 1305 .2 Szycenervar '.0O 2ecogstruction of Hasg-.al La tr3 M rds C2 P= :;8' .90 - ;9' 75 9'0 :' -L_. Rointr:tc_on -' :lOspLzal at Szged xecs -10 Xc 2.8' 2.587 - 31 25 9". 11= 5 -2. RP tr:OrS ....Ofi Of tMU * retCLr a:t 198' 1V7 - 25 29 o-z' 508 5 Apt J 7arvot guP de.velpet _ .YLOPment vit. creit -- '-g expxrt surplL.s 310i frca zm-socaL.st C3=tr1eo ICI.:AR:CDP BY SOWWE INIFA1. TEHS Iten 1960 1965b/ 1970b/ 1975b/ 1975 1978 1979 1980 1981 1982 1983 1984c/ 1985c/ 1976Forints - 1981Forints Billiorsof CbnstantForints MIuwfacturingand Hining 71.7 100.4 136.4 194.3 203.5 240.0 252.9 249.3 261.7 274.1 278 289 301 Agricultureand Fbrestry 65.1 68.3 80.4 97.2 118.0 128.5 126.8 131.5 136.0 151.8 153 162 166 CAXUtfuction 18.6 21.0 30.6 43.7 43.2 52.7 Y .9 53.4 Y4.1 53.7 55 55 55 Transport,Ccn,minic.tion 19.5 25.2 33.3 43.0 52.7 58.6 60.6 61.1 63.9 64.6 65 64 65 Tradeand Other Miterial Sectors 24.4 28.7 44.6 64.3 70.7 82.1 83.7 79.6 81.9 81.5 77 77 79 Nbn-rcterialSectors 32.5 39.5 47.9 63.0 77.8 88.7 92.7 95.1 98.5 100.4 109 110 115 Qastoa Dities,Valuation 0.1 0.2 0.6 0.9 74.1 88.7 78.9 81.0 76.5 68.4 63 62 63 StatisticalDiscrepancy a/ -9.9 -7.7 0.0 0.0 0.0 0.0 0.0 ------ Total 222.0 275.6 373.8 506.4 640.0 739.3 750.5 751.0 772.6 79l4.5 8W 819 844 Real otth Rates Mbnufacturing aid Mining - 0 6.3 7.3 - 5.6 5.3 -1.4 5.0 4.7 1.4 4.0 4.2 Agriculture aid Fbrestry - I.U 3.3 3.9 - 0.9 -1.3 3.7 3.4 11.6 -0.8 5.9 2.5 Coustrnmtion - 2.5 7.8 7.4 - 4.6 4.2 -2.7 1.3 -0.7 2.4 0.0 0.0 Transport, Cmumication - 5.3 5.7 5.2 - 3.7 3.4 0.8 4.6 1.1 0.6 -1.5 1.6 Trade and Other Hbterial.Sectors - 3.3 9.2 7.6 - 5.3 1.9 -4.9 2.9 -0.5 -5.5 0.0 2.6 Hk2nm-terial Sectors - 4.0 3.9 5.6 - 4.8 4.5 2.6 3.6 1.9 8.6 0.9 4.5 astaosDuties, Valuation - 14.9 24.6 8.5 - 7.1 -11.0 2.7 -5.6 -10.6 -7.9 -1.6 1.6 Total - 4.4 6.3 6.2 - 4.6 1.5 0.1 2.9 2.8 0.7 2.4 3.1 Sburce:Central Statistical office. a/ The statistical discrepancy arises frcu the joining of twocontant-price GDP series in 1970 and1981. 'D/ Gtrothrates for 1965, 1970, and 1975 are average amnual growth rates for the five-year period. c/ 1984figres are preliminary and 1985are a forecast. Attadhnt 4 HUARY: XP fYE IOM1E iN WAL MM Itm 1960 1965 b/ 1970 b/ 1975 bI 1975 1978 1979 1980 1981 1982 1983 1984 c/ 1965 c/ - 1976 Ibrints - 1981 Fb%ints 8ilti(m of oaitait Ibrints OGuption 177.9 213.9 282.4 356.1 471.9 527.5 540.2 543.5 559.3 566.2 568 572.5 582 Cross Fixed Dwuestnt 55.0 70.6 120.4 168.2 193.5 227.5 229.2 216.0 206.7 203.4 197 182.5 183 diar in Stocks 3.3 4.4 3.3 11.5 22.5 53.8 5.1 10.4 14.8 10.3 2 10.7 11 t?tExhorts of C & IS -13.3 -5.4 -32.3 -29.4 -47.9 -69.5 -24.0 -18.9 -8.2 14.6 33 53.5 60 Statistical Discrepicy a/ 0.9 -7.9 - 0.0 0.0 0.0 0.0 - - - lbtal 222.0 275.6 373.8 506.4 640.0 739.3 750.5 751.0 772.6 794.5 81.3 819.2 844 ReAl Grth Rate_ Caouption - 3.8 5.7 4.7 - 4.6 2.4 0.6 2.9 1.2 0.3 n.8 i.7 Gros Fixed twsunt - 5.1 11.3 6.9 - 4.8 0.7 -5.8 -4.3 -1.6 -3.1 -7.4 0.3 aIiuw in Stocks - 5.8 -5.6 28.5 - 149.1 9.5 103.9 42.3 -30.4 -60.6 435,'J 2.8 Tbtal - 4.4 6.3 6.2 - 4.6 1.5 0.1 2.9 2.8 0.7 '!.4 3.0 Saorce. Catul Statistical Office. u/ 11e statistical discrepiy arise from the joinin of two ca.tm-price GDPwries in 1970 uid 1981. b/ Groth rates for 1965, 1970,ard 1975are averge amul gwth rates for the five-7 er period. c/ 1984 fixes are preliminary id 1985 are a forecast. 1559F (10) - 171 - Appendix 4 H:GA GI 5 FDE DI SM (Ft. b. (constant)) Item 1976 1977 1978 1979 1960 1980 1961 1982 1983 1984 a/ 1985 bI -~ 1976 Fbrints - 1981 Fbrints Mining 6.0 7.3 7.8 8.4 9.1 10.2 9.4 9.4 10.7 11.0 10.6 Electrical Eieray 8.2 9.8 10.9 12.5 13.0 14.1 12.9 13.0 13.9 12.6 13.0 Mktallurgy 3.7 5.0 5.9 8.1 7.7 8.6 7.3 5.3 5.3 4.6 3.5 Engineering 10.3 14.5 13.9 13.0 11.3 12.4 10.6 .0.6 10.3 9.3 9.4 Building Pkterials 4.1 4.7 4.7 4.5 3.1 3.5 2.5 2.2 2.4 2.1 2.6 Chemical Industry 11.4 12.6 11.7 9.1 7.2 8.1 8.9 10.5 9.9 8.4 9.0 LiSht Indcarry 6.8 6.8 7.5 5.8 4.6 5.1 5.1 6.7 4.9 4.3 4.1 miscelLaeous Industry 0.7 0.7 0.7 0.8 0.8 0.8 1.0 0.8 0.5 0.4 0.4 Food Industry 7.5 10.9 11.5 10.9 8.1 8.9 8.2 7.5 6.5 5.d 5.6 lbtal, rndustry 58.7 72.3 74.6 73.1 64.9 71.7 65.9 66.0 64.4 58.5 58.2 Construction 4.1 5.3 6.8 5.7 4.8 5.4 4.1 3.3 3.0 2.5 2.4 Agriculcure and Forestry 22.5 24.7 27.1 26.6 23.5 27.3 29.7 29.5 24.7 22.3 22.0 Agriculture 21.4 23.4 25.5 25.1 22.1 25.7 27.9 28.2 23.6 21.3 21.0 Forestry 1.1 1.3 1.6 1.5 1.4 1.6 1.8 1.3 1.1 1.0 1.0 Itrrnsporc and C=mnicatiow ZM.8 21.3 23.5 25.6 24.8 27.9 24.6 23.5 23.0 21.7 19.3 Trrie 8.1 7.7 7.6 8.0 9.3 104 10.7 9.1 8.6 7.7 7.3 Internal 7.5 6.9 6.9 7.4 8.5 9.5 10.2 8.5 8.0 7.3 6.9 External 0.6 0.8 0.7 0.6 0.8 0.9 0.5 0.6 0.6 0.4 0.4 I&ter F=xKw 8.5 9.3 9.7 10.6 10.5 12.0 12.0 11.5 11.7 11.1 11.7 Otwr Materia1 Branhies 0.7 0.6 0.9 0.6 0.8 0.8 0.7 1.0 1.2 0.8 0.7 btal, Material 123. 141.2 150.2 150.2 138.6 155.5 147.7 143.9 136.6 124.6 121.6 Non-Hterial 28.7 32.8 33.4 354 3$.7 39.7 35.1 33.2 31.8 29.6 27.2 of ihidch Health/Educ. 9.3 10.9 11.2 12.5 13.1 14.9 13.7 13.0 13.2 12.4 11.6 HIusirg/Fcon. Serv. 12.1 15.2 144 14.2 13.8 16.1 13.0 12.1 13.9 12.7 11.7 Other 2.4 3.0 3.3 3.3 3.8 4.3 3.8 3.2 2.5 Socialist Sector 152.1 174.0 183.6 185.6 173.3 195.2 182.8 177.1 1684 154.2 153.6 ci Private d/ 18.6 18.8 18.8 18.9 19.3 25.5 26.6 27.7 30.8 33.7 35.6 Agricuture 1.0 0.9 0.9 0.9 0.8 1.1 1.0 0.9 1.0 1.0 1.0 Hbusing 17.6 17.9 17.9 18.0 18.5 24.4 25.6 26.8 29.8 32.7 34.6 lbtal, EBccXizy 170.7 192.8 202.4 204.5 192.6 22D.7 209.4 204.8 199.2 187.9 189.2 Source: Central Statistical Off icr. aI Preliminary data. b/ Plarmed. c/ lcxludes Bln. Ft. 4.8 ram re. dI rmehzdes prvate i' es tso in inusstry. contnctizm, agriadtize, arid trmort. 2C60F 1559F (15) Attachment 4 (Ft h. tr,wt pwrices) It.,. 1976 1977 1978 1979 1980D 19182 1983 1984 1985 FX.-tqr &F L-p 60B W. UP.p iw. -- B WP. ,Ap i -b aq.-bv.rw - - iv -b AP -bw. A. bi Orrev,cy Thul AAA 230.1 238.6 267.3 24n.7 .D9 282.1 308.9 281.0 299.9 299.4 314.3 324.5 324.8 374.1 365.0 414.0 30 414.6 410.1 Peble 101.3 208.9 120.2 123.5 120.9 136.1 130.7 144.3 I20.8 13h.4 131.6 143.7 141.4 158.7 160.1 173.9 I1.T t12.8 201.1 193.0 Ikr-Rtble 103.5 121.2 118b 143.8 119.8 164.6 151.4 164.6 160.2 163.5 167.8 170.6 183.1 166.2 214.0 191.1 236.9 207.7 222.9 217.2 Ssialist 22.7 15.3 27.8 17.5 25.8 19.5 11.9 21,0 36.1 15.6 42.5 1.11 43,9 14.6 41.3 18.3 46.2 24.7 47.5 30.4 kvloewd h4.5 84.1 70.1 99.6 73.1 119.0 93.8 118.1 98.6 120A 90.31 12.3 97.2 lie.) 123.5 125A 143.4 136.3 130.4 158,0 DNeoptrnt 26.3 21.8 20.5 26.5 20.9 26.1 25.7 25.3 17.5 27.5 35.0 26.0 42.0 53.3 47.2 47.4 47.3 46.7 45.0 A9.8 5. by Woict mte!zy TOhAI 204.8 23D.1 238.6 267.3 240.7 30.9 282.1 308,9 281t. 299.9 299.4 314.3 324.5 31264 P74.1 365.0 414.0 3M3.5 424.6 410.1 Piel. Electri fryy 5.0 25.7 5.8 29.9 7.3 37.8 in.7 45.8 11.7 44.4 12.2 47.6 19.2 64.7 312. 79A 31.5 14.0 19.5 85.5 Rju Ibtrials, 6ni-fin, Prbcdcts, Spre Pats 60.4 114.4 I2.h 129.8 71.1 144.8 11.7 1414.5 87.6 147.6 19.2 153.9 AR.3 150.2 107.3 Ih6.9 124.1 176.3 128.1 16.7 Ietiijrwy, TrYapwrt F41*ip., rther npitul Caids 55.9 48.0 63.8 56.4 66.2 66.5 78.0 68.1 73.5 57.9 75.8 55.2 87.2 57.8 96,4 W0.1 105.0 61.4 122.4 69.0 1tra1trial OIrzav (bidk 36.2 28.) 42.5 212A 44,1 25.4 46.8 25.2 4S.1 24.9 47.7 29.1 49.1 29A 51.0 31.9 58.5 71.2 84.1 42.7 I4Wlterqale for the FmId lmistry, Live A,iuils, FRodRrodwts 47.3 23.7 54.9 29.8 52.0 26.4 59.0 25.3 62.9 25.) 75.5 28.5 80.6 22.7 A.0 26.7 93.8 26.6 90.4 29.2 2 Mille 102.3 I20.9 120.2 123.5 120.9 136.3 130.7 144.3 120.12 136.4 131.6 143.7 141.4 158.6 180.1 173.9 177.1 182.8 201.7 193.0 Pie), F.lectric nkra 0.4 26.8 0.6 21.1 0.7 25.1 0.9 31.0 0.1 34.6 1.0 40.0 121 47.6 1.2 52.6 1.2 58.9 1.5 61.0 2.w raer Lt31m,Sevoi-Fin. N ltr(octs, re Parts 22.2 45.1 28.8 49.4 28.4 52.6 29.2 50.7 21.2 47.0 31.6 50.7 32.1 54.5 38.4 M1.8 41.8 62.3 45.9 64.4 1 ItlXiiswy. Tr prt hiPiip., flt6r (apital ( I xl2 43.6 11.6 50.6 6.0 52.2 19., S9.7 43.3 55.6 37.0 55.5 30.2 e3.0 Y4A. 69.4 38.5 19.9 36.2 93.0 42.0 livtia iaI frwtinr Ckxos 29.2 22.3 22.2 11,8 22.4 15.2 22.5 15.3 20.4 14.2 23.2 25.5 26.2 16.5 26.8 17.2 29.5 12.1 74.7 20.3 ,rw littcrills fw dti hiom Irsik'try, liv hwirsls, )ki. Profukcts 25.8 3.1 18.0 3.2 17.2 3.8 18.4 4.0 16.9 3.14 20.1 5.3 21.7 5.4 24.3 3.7 24.h 3.8 26.7 5.3 I1,-H401r Il0.5 122.2 18.4 243.8 I9.8 164.6 ISI.4 164.6 160.2 163.5 267.8 170.6 283.2 166.2 214.0 292.2 236.9 207.7 222.9 217.7 1 t, O!1'8tric ftvr7y 4.6 8.9 5.2 8.8 6.6 12.7 9.8 24.8 22.0 9.6 I.2 7.6 18.2 17.2 10.2 26.6 32.3 25.1 28,0 24.6 I.h";, !;%Te Paru 38.1 h4.3 42.8 70.4 42.7 92.2 58.4 93.8 60.6 IOD2. 56.4 203.2 56.0 95.7 8.9 205.1 82.3 226.2 62.3 129.3 . tIiI2.3 16.4 23.2 M0.4 14.0 26.9 18.3 36.8 17.9 2 20.3 23.0 27.2 23.2 27.0 22.6 25.1 2. 29.5 27.0 I,1 I I I. r.m'r (nis 11.0 6.0 20.3 1.6 22.7 In.2 24.1 9.9 24.7 10.7 24.5 13.6 22.9 12.9 26.2 24.8 28.9 29.5 29.4 22.3 us. '11i' ii *1 ti. thr ' ,.I Ih'.iy v, lve c1i; t1r'14rts 312.5 20.6 16.9 26.6 314.8 22.6 40.6 21.3 4.60 21.7 55.4 23.2 584.9 17. 61.7 23.0 69.3 34.9 63.7 24.0 Iimi 1 I- II1.1111mi Pe.1. (lwr int n is S. per iod avw ) 1976 I977 1918 1979 2980 2981 I982 1983 1964 1985 Cm-irici.al tite 42.515 40.96S 31.911 35.519 32.532 34.314 36.631 42.h67 41.042 50.09 tati Oirmyct.i Ite 270.76R 20.481 IR.956 20.013 22.139 30.965 36.631 42.6h7 48.042 50.09 I-r,. - V-1m... Tiii,_..t2.k Y,. v,r'i ik-is.s - 173 - Appendix 5 The Seventh Five-Year Plan of the Hungarian National Economy 1986 - 1990 Enacted by the National Assembly, December 21, 1985 Published as a supplement of Nepszabadsag December 23, 1985. The Scope of the Act Article 1 This act determines the rates and main directions of economic growth, as well as the targets and ways to realize them, for the modernization of the economic structure, internationaleconomic relations, scientific research and technical development, improvements in living standards and conditions for the period from 1 January 1986 to 31 December 1990. - 174 - PART ONE SECTION I Main Objectives of the Plan GeneralEconomic and Social Policy Objectives Article 2 1. It is necessary to develop and modernize the country's production forces, increase national income, raise the technological standard of the economyand the population's living standard, and improve living conditions. Internationaleconomic relations are to expand based on mutual advantages. Our country'sdefense capability is to improve. 2. In order to fulfill the plan's targets, it is necessary to create a businessenvironment in which there is increasing motivation to be creative and innovativeand to increase output, one in which there is growing economic competition. The conditions for socialist enterprise are to improve and its opportunitiesare to expand. Greater social and financial recognition is to be attached to more valuable production. The increasing forms of democracy should present opportunities for work and residential communities to help achieve these aims through their active participation. Article 3 1. The main trends in economic development must be improvements in efficiencyand quality and therefore in international competitiveness, especiallyas a result of accelerated technological development and structuralchanges. This must be the basis for stabilizing the foreign and domesticbalance of the economy, boosting the rate of economic gi-owth, improvingliving standards and conditions, and increasing investment. 2. It is necessary to continue to press for comprehensive improvements in the economic management system which give incentives and stimuli to independentcollectives and individuals to show initiative and enterprise, to producemore and to utilize human creative abilities and material resources more efficiently. Article4 1. It is necessary to halt the decline in technological progress; and it is necessary in certain fields to achieve a technological level that graduallyapproaches the highest international standard. It is necessary to speed up the structural transformation that will make it possible to improve the export capacity, adjust to the requirements of international competition, take advantageof the international division of labor, and keep pace with - 175 - technologicaldevelopment. We must aim for the expansion of efficient activities and the contraction or termination of uneconomic ones, without damaging internal and external balance. 2. The greater part of production growth must be based on improved economic efficiency. In order to achieve this, labor productivity must increase at a much higher rate than output; there must be no fall in production per unit of fixed assets; savings in the use of specific energy and material inputs must occur within the economy as a whole. The economy's transportationdemands are to decrease. A modification in the structure of production is to help improve the internationalmarketability of domestic commodities. Article 5 We must maintain full employment while simultaneouslyenforcing the requirementsof efficiency. We must facilitate the transfer of workers who cannot be efficiently employed in their present jobs to other jobs. Article 6 1. We must comprehensively strengthen the balance of the natlonal economy in external and internal relations, in both the material and financial spheres. 2. In order to maintain our creditworthiness,we must continue to reduce the amount of our foreign debt. In order to achieve this, we must maintain an adequate export surplus. 3. Supply to the domestic market must be improved. To this end, producers should pay more attention to fulfilling demands as to quantity, composition,and quality. While bearing the requirements of our foreign economic balance in mind, imports should also assist in fulfilling demand. 4. The balance between the income and expenditure of the state budget should be gradually improved by attempting to reduce its role in income redistributionand by reconciling expenditureswith resources. The expendituresof economic organizations are to correspond with their financial means. An increase in the population's savings is to provide for an increase in credit. Article 7 Our internationaleconomic reLations are to expand on the basis si the country's endowments and to serve its interests. We must widen economic cooperationwith the socialist countries and discover new and more efficient forms of cooperation. Our relations with the developed capitalist and developing countries are to expand on the basis of mutual advantage. - 176 - Article 8 We must strengthen our country's defense capacity in the interests of the security of our people's endeavors, taking into consideration the developmentof the international situation and the possibilities created by our national economic development. Article 9 1. The national economy is to adjust flexibly to the changing external and internal economic conditions. It should respond to major world economic developments. 2. The changes stipulated in the practice~of economic policy and in the fundamentalcharacteristics of economic development are to take place gradually. The improvement and strengthening of the balance of the economy, the creation of conditions necessary for achieving a lasting and more accelerated rate of economic development,and the development of procedures take priority at the beginning of the plan period. Based on the results achieved, a more rapid increased in investment and a perceptible increase in the standard of living will take place in the second part of the plan period. The Rate and Main proportions of Economic Growth Article 10 1. The rate of economic growth is to increase gradually as efficiency improves. National income should increase by 15-17 percent in the 5 year period. 2. Industry is to play an increased role in creating national income. The contributionof industry to the national income is to increase faster than its output. In the building industry, agriculture, transportation,and domestic trade, output and the contribution to national income will grow at about the same rate. 3. The rate of economic growth can and must be greater than stated in paragraph I of this article, if it is based on further improvement in efficiency,compatible with the requirements of the foreign trade balance, and if the surplus resources created as a result facilitate a more favorable realizationof goals. Article 11 1. Domestic consumption is to increase at a slower rate than the growth of national income at the beginning, then it is to increase at a similar or a slightly faster rate. In 1990, it is to exceed the 1985 rate by 13-16 percent. 2. There is to be an increase in the proportion of accumulation serving the modernizationand development of production for domestic consumption, simultaneouslywith a genuine improvement in the quality of investments. The - 177 - net accumulationproportion of the domestic utilization of national income should approach 15 percent by the end of the plan period. 3. Domestic consumption is to increase by 8-10 percent. The resources which contribute to improving living conditions are to increase similarly. 4. National wealth is to increase by 12-15 percent, including a 19-20 percent increase in the stock of fixed assets. Trends in the Development of Production and Marketing Article 12 1. The main trend of production development is to be ttoeincrease in the income-producingcapacity of the national economy. There is to be a dynamic development of production activities that make a greater contribution to increasing the national income and improving the export capacity and balance ot the economy. 2. The increase in production will primarily lead to the expansion of efficientexports, and simultaneouslyto a better fulfillment of domestic demand. In order to achieve this, it is necessary to accelerate the reorganizationof the production structure and to expand the production of modern, good quality products which are also consistently competitive in more demandingmarkets. We must improve the level of services for these products. 3. Production development is to be based on the modernization of production technologiesand the reduction of specific energy, material and labor inputs. This is also to be assisted by rapid application of the results of scientific research and use of the latest methods, encouraging technicalprogress. 4. Production develovment is to be implemented primarily by modernizing,transforming, and better utilizing existing calacities, as well as through investments that reflect technologicaldevelopment and that are quickly remunerative. Economic organizationsmust strive to use modern organizationalmethods. Development projects are not to increase the burden on the natural environment. Article 13 1. Industry is to be the main promoter of development. IL._role in expanding resources and exp3rts and in the general modernization of the economy is to increase. Agricultural development is to continue to be an importantstabilizing factor in economic progress. The output of the constructionindustry is to increase further. 2. Production activities are to be developed in a way consistent with the requirementsof the areas in whick they are located. 3. Cooperation among economic organizations in the Fields of technologicaldevelopment, production, transportation,dco:mestic end foreign - 178 - trade, and storage must be more continuous and more efficient. There is to be a comprehensive development in the relations between large and small organizations,enterprises, cooperatives and other economic units, including economic associations. The role of management must be strengthened and long-term contracts must be encouraged. Article 14 1. The modernization of the economy and the increase of its efficiency must also be supported by central economic development programs. Such programs should be created for: - the rationalizationof energy management; - the modernization of technologiesand efficient material use; - the utilization of waste materials and by-rroducts; - the social-economicutilization and spread of electronics; - the development of the production of electronic spare parts and units; - the development of the production of drugs, insecticides, and other chemical products. 2. State action programs should be prepared for the domestic disseminationof highly important internationaltechnological developments which facilitate achieving the goals of several sectors, and which are necessary in coordinating certain activities. These programs are to be based on the individual decisions and independent economic activity of economic organizations. Stste coordination, competition,and organization measures will also promote the implementationof these programs. Modernization and Development of Fixed Assets Article 15 1. Compared to the level of 1985, investment in the economy is to increase at a gradually accelerating rate from 1987. A total of 1,200-1,250 billion forints can be allocated for investment in the socialist sector over the 5 years. Investment must promote the coordinated, efficient development of the sectors of the national economy. 2. The efficient utilization of the available stock of fixed assets, its modernization in order to increase efficient productive capacity, and the improvementof its operating capacity are tasks of equal importance with development. 3. Compared to 1985, the proportion of socialist sector investment in the production sectors, particularly the processing and food industries, is gradually to increase. It is primarily the small and medium sized, modernizing and efficient development projects which promote technological development and can be carried out quickly that take priority. The distributionof investment among economic organizations and sectors is to depend on internal resourcLs based on real income production, economic regulations,creditworthiness and assistance which serves specific goals. As a result of measures to reduce specific consumption and of participation in foreign investments, investment in domestic energy and basic material production might decrease compared to 198i-85. - 179 - 4. Investment in the production infrastructureas a whole is to increaseat essentially the same rate as investment in direct material production sectors. In the area of nonproductive infrastructure, it is necessary to develop to a greater extent than previously secondary education, the supply of medical machinery and equipment, and the number of places in social welfare homes for the aged. The supply of housing and of healthy drinking water is to further improve. 5. We must use investment funds more efficiently than in the past. The whole system of economic management must encourage the selection of profitable development goals. More attention must be paid to adequate preparationand efficient and quick implementationof investments,as well as to the efficient utilization of new capacities. 6. The proportion of investment in high technology machines and equipment is to increase. The Standard of Living and Living Conditions of the Population Article 16 1. The standard of living and the living conditions of the population are to improve in step with the increase in productivity of the economy. The funds that can be allocated for social consumption -- the expansion of consumptionand the development of the infrastructureaimed at improving living conditions -- are to increase at about the same rate, by 8-11 percent. In the improvement of living standards and living conditions, improvementsin quality must gradually become most important. 2. The primary goal at the beginning of the plan period is to maintain the average level of real wages and to increase it appreciably in the second half of the plan period. We must increase child support and maintain the real value of social incomes for a gradually increasing proportion of the population. 3. Incomes derived from work are to depend on collective and individual performanceand to increase proportionatelywith the quantity, quality, and efficiencyof the work done. 4. Social policy is to strengthen social security through more proportionateallowances and to take needs better into consideration. In order to use available funds more efficiently, it is necessary to modernize the management and organization of the system of social policy, and to strengthen the staff of experts. New forms of social assistance should be more widely adopted. 5. The infrastructureaffecting large strata of society is to improve slightly and the unjustified differences present in the basic supply are to diminish. Socio-economic programs are to improve housing, public education, and the development of economically backward areas, while programs of action are to improve important areas of health care. - 180 - 6. It is necessary to continue to improve the supply of goods for the populationand to better fulfill the demand for services. SECTION II ScientificResearch and TechnologicalDevelopment Article 17 1. Scientific research is to contribute more to the implementationof scientificpolicy and economic development goals. Basic research projects should encourage new technologicaltrends that determine the development and solution of social and economic tasks. 2. Among technical research projects, priority must be given to material science and biological research. Activities directed towards researchand development and the application of biotechnologicalprocedures, and research in computer science, telecommunications,automation, information systems and their application are also important. 3. With social science research, priority must be given to analyses serving the scientific foundationsof economic policy and dealing with social structureand the system of institutions, the scientiiic foundation of social policy, the structural and intellectualprocesses of society, and our cultural values, and education. 4. It is necessary to improve the supply of machines and instruments for research and development. Article 18 1. Consistent with the main trends of production development, Eechnologicaldevelopment is to strengthen -- through a multifaceted developmentof production methods -- international competitiveness,flexible adjustment to market conditions, the reduction of specific inputs, and efficientmaterial and energy consumption. Research and development, the modernizationof production technologies,and product aevelopment are to proceed in harmony with one another, improving each other's efficiency, and successfullyutilizing the available assets. 2. The main task of the state guidance of technologicaldevelopment is to promote technologica development and the introductionof modern productionsystems. Priority must be given to improving the efficiency of material and energy consumption,widespread introductionand use of electronics,developing technologiesbased on microelectronics,and developingand applying biotechnologies. This applies to central economic developmentprograms as well as other programs. - 181 - 3. In achieving development goals, it is necessary to rely increasingly on cooperationwith the CMEA countries and on coordinated programs aimed at scientificand technological development. It is necessary also to expand cooperationwith other countries in the adoption of modern scientific-technologicalknowledge and procedures. Article 19 1. We can allocate some 3 percent of domestic use of the national income for scientific research and technological development. 2. In using material and intellectualresourcea, we must pay particular attention to the tasks included in the National Medium-Term Research and DevelopmentPlan and to technological development aimed at implementing the goals set out in the central economic development programs. The National Scientific Research Fund should be used to help improve the level of basic research. 3. The proportion of national expenditure on research and development projects on which enterprises themselves decide is to increase. Technologicaldevelopment aimed at the implementationof enterprise goals is to become an integral part of economic activity. This must also be assisted by economic management. '4. It is necessary to modernize the direct and indirect methods of state guidance of research and technological development and to increase the requirementsof efficiency. In financing, it is necessary to increase the role of the bidding system and of financial institutions concerned with innovation. The banking system must be used more widely. 5. Particular attention must be given to the training and retraining of research and development experts who are capable of producing international- level research and development results, and to creating the conditions to encourage their work and recognize their activity. SECTION III Industrya-yd Construction The Main Tasks of Industry Article 20 1. Through a dynamic increase in exports, improvements in efficiency, and a higher level of fulfillment of domestic demand, industry is to make a greater contribution to increasing the income-producingcapacity of the national economy and to improving and consolidating the economic balance. - 182 - 2. By following the trends which determine international scientific, technological, and economic development more closely, research activity must be made more efficient, technological development accelerated, and production of modern and good quality products increased. The development and application of technologies and installations that save energy and materials and preserve the environment, and the expansion of activities containing a high level intellectual and manual labor must be more rapid. 3. Economic organizations are to be differentiated according to the efficiency of their activity. Economic organizacions that achieve better results by modernizing their production structure, increasing their competitiveness, and reducing their specific inputs are to develop faster. Inefficient activities must be made efficient. It this is not possible, they must be reduced, if necessary by state initiative. 4. It is necessary to continue the modernization of the internal activities and organizational systems of economic establishments. Article 21 1. Industrial production is to increase by 14-16 percent and its contribution to national income should increase even faster. The efficient development and modernization of manufacturing industry -- in coordination with other sectors of industry - is to play a prominent role. 2. The export of manufactures is to increase faster than production. It is necessary to improve the export structure: the export of modern, good quality products of a high technological level, which can be exported profitably, is to increase. It is also necessary to improve our marketing. 3. Economic organizations are to strive to fulfill the expanding and increasingly demanding domestic need adequately. They are to pay particular attention to improving cooperation and increasing the level of industrial services. Industry is to help the development of the food industry and the production infrastructure by making modern and better quality products available. Article 22 1. The implementation of central economic development programs aimed at developing the production of pharmaceuticals, insecticides, and semi-finished products, as well as electronic spare parts and units, and at participating in the realization of other economic development programs is to play a prominent role in industrial development. 2. Investments are to contribute efficiently to the modernization of industry and to the renewal of its structure. By 1990, industrial investments are to considerably exceed those of 1985. 3. The expanding production cooperation between foreign and Hungarian enterprises is also to promote faster technological and economic development and better utilization of the advantages deriving from international cooperation. - 183 - Energy Management and Energy Production Article 23 1. The main task in energy management is cousiderably to reduce specific consumption and to develop a less energy-intensive production and product structure. A maximum 0.4 percent increase in energy consumption is to accompany a 1 percent increase in national income. The total energy consumption of the national economy is to increase at an annual average of 1 percent including a maximum 3 percent increase in electric energy consumption. Within this constraint, it is necessary to meet the energy demand of the national economy, including that of the population. 2. It is necessary to continue the implementationof the program aimed at rationalizingenergy management. The new tasks are, primarily, to promote the absolute saving of energy and the spread of energy saving technologies. 3. Coal production is to satisfy as much as possible of the demand of power stations and of the population by bringing new mines into operation, by organizing labor better, and by modernizing and utilizing available fixed assets more efficiently. 4. By increasing the efficiency of hydrocarbon research and by adopting secondaryand tertiary excavation methods, we must achieve an annual 2 aillion metric tons of crude oil production, and an annual 7 billion cubic meters of natural gas production by putting new gas fields into operation. In developing the supply of natural gas we must give priority to increasing the supply of natural gas to homes. 5. We must finish constructionof the first phase of the Paks Nuclear Power Station and begin constructionof the second phase. The electric energy production of this power station is to be twice as much as in 1985 by the end of the plan period. The reconstructionof coal-fueled power stations is to lead to an increase in capacity and reduce pollution. 6. In order to assure the long-term energy demand of the economy, Hungary is taking part in the construction of the Progress Natural Gas Pipeline,which is a joint energy investment of the CMEA countries. It is necessaryto continue the construction of the Bos-Nagymaros River Barragc System, paying great attention to environmentalprotection. Basic Material Industry Article 24 In accordance with the main trends of technologicaldevelopment the basic ma.erial industry should promote improved utilization of materials and hence efficiency of production in manufacturing industry by improvements in the quality and characteristicsof materials and by introducing and producing new and modern structural and other materials. - 184 - Article 25 1. Production of metailurgy can slightly increase, in accordance with domestic demand and profitable export possibilities. 2. The increase in the production of iron metallurgy should serve decisively the better fulfillment of domestic demand. In addition to maintainingthe level of steel ingot and rolled steel production, and producingblast furnace coke when the Duna Iron Works coking plant is brought into operation, it is necessary to increase production of more valueble products of a higher level of processing, of better quality, higher precision, and better appearance. There should be an increase in the production of cast- and forged-iron products. It is necessary to increase the proportionof alloy semi-finished and finished products in nonferrous metallurgy. The most unprofitablemetallurgical activities must be reduced. 3. It is necessary to maintain the level of bauxite production oy continuouslyreplacing exhausted mines and by taking environmental protection measures. The development of aluminum metaliurgy should contribute to meeting effective domestic demand -- primarily through an increase in the standard of processing of semi-finished products - and to increasing profitable exports. Article 26 1. The output of the building material industry is to satisfy the increasingdemands of the population and of the construction industry. The productionof modern and good quality building materials that improve the efficiency of construction projects should increase. It is necessary to prepare and start the reconstructionof certain cement works in order to ensure an increase in production and reduction in environmental pollution. 2. A faster than average increase in the production of products meant for purposes other than construction is to lay the foundations for a better fulfillmentof the demands of domestic consumers and for an increase in profitableexports. Article 27 In the heavy chemical industry, crude oil processing is essentially to remain at the current level and the production of artificial fertilizers is to increase slightly. It is necessary to increase the extraction of more valuable products in crude oil products through the development of the processing technology. The production of synthetic basic materials is to increase primarily through starting production of linear polyethylene. ManufacturingIndustry Article 28 The processing industry is to develop at a higher rate than average, primarily through increasing the production of exportable products. To achieve this, it is necessary to expand production capacity primarily by small, modernizing investments and additional profitable projects. - 185 - Article 29 Light chemical industry production is to increase faster than the manufacturingindustry average in accordance with foreign and domestic market demand. Production of drugs, insecticides, semi-finished products, and of plastics is to develop particularly fast. The export of more highly processed chemical products - mainly drugs, finished rubber goods, and insecticides- is to increase. The production of household products and cosmetics is increasingly to satisfy population demands. Article 30 1. The engineering industry is to develop at a rate exceeding the industrialaverage. It is necessary to modernize the structure of production and marketirg. Production efficiency is to improve and the supply oriented to both domestic and international markets is to increase. 2. Particular attention must be paid to products and spare parts necessary for the popularizing of electronics. The adoption of electronics in the engineering industry must be widespread and it is necessary to improve the supply of technical consumer goods to the population. It is necessary to promote the conditions necessary for the development of robots and their domestic utilization on a wider scale, and to encourage the spread of automatization. 3. The production of public road vehicles, vacuum-technologyproducts, processing and telecommunicationinstallations, health and educational equipment, agricultural and food industry machines, and of consumer goods is to develop faster than average -f market possibilities and conditions allow. 4. Machinery exports to CMEA countries are to develop on the basis of internationalagreements and through the gradual modernization of the product structure. Non-ruble exports of machinery should increase vigorously. Technological-productioncooperation with foreign enterprises - especially in the application of advanced technology - is to facilitate the improvement of the export capacity of the engineeringindustry. Article 31 Light industry is to satisfy the increasing domestic demand to a greater extent than previously, by producing more fashionable products, and by reducing present shortages in supply. In the export of light industry products, it is necessary to increase the proportion of profitable products that meet quality requirements. There is to be an increase primarily in the export of modern products of the ciothing and furniture industry. By importing simple products requiring large amounts of material, capacities are to be liberated for the production of modern products that are competitive on demanding markets. The paper industry is to fulfill more thoroughly the needs of producers and of the population. By improving the quality of its products and increasing their variety, it is to contribute to a widespread improvementin packaging technology and to the production of more modern printing industry products. - 186 - Article 32 It is necessary to satisfy the demand of the population for industria! services better than previously. This is to be done by increasing the market sensitivity of economic organizations, widening the network of state and cooperative small organizations and ventures that are more flexible and operate at lower costs, and by better utilizing the available capacities. It is particularly important to improve the repair of vehicles and to expand the supply of electronic goods, computer, information,and constructionservices. Building Industry Article 33 1. Following the decrease in the past period, construction and installationis to increase, in accordance with demand, by 12-15 percent. The building industry output is to adjust both structurallyand geographicallyto changing demands. 2. Production is to increase by modernization and increasing productivity,and the utilization of the stock of machines is also to improve. It is necessary to reduce the duration of construction time by better and more organized work. 3. Competition among enterprises is to become general and the range of services is to expand. The modernization of building industry organizations is to continue. Article 34 1. The construction sector of the building industry is to build dwellingswhich match effective demand in their number, price, and type. It is necessary to improve the quality of the dwellings and to curb the increase in constructioncosts. Modern technology should allow more favourable prices and better quality than traditional construction methods, and should increasinglybe used. More attention is to be paid to the availability of housing construction capacity in the capital, and the capacity for renovation of houses, and for district and block rehabilitation. This work is to be carried out economicallyand to be well planned. 2. It is necessary to be prepared for a greater volume of construction projects abroad than in the past. These works must be organized and executed so that this activity will be economically attractive. Article 35 1. Ir planning buildings, the technical design organizations are to bear in mind savings in construction and in operating costs. The quality and appearanceof new buildings and construction is to improve and new buildings are to fit in more harmoniouslywith the environment. Cooperation between designers,planners and customers is to improve and there is to be an - 187 - increase in the designers' interest and responsibility in building good quality houses and buildings that do not exceed the allocated schedule of costs and time. 2. The interests of designers, investors, and builders are to be coordinatedin order to apply quick and economical solutions and to better utilize the available capacities. SECTION IV Agriculture,Food Processing and Forestry The Main Tasks of Agriculture and Food Processing Industry Article 36 1. Agriculturalproduction in the coming 5 years is to be 7-10 percent greater than in the previous 5 years and the production of the sector is continue to expand. The sector's contribution to the national income is to increaseat at least the same rate as production. Agricultural and the food processingindustry are to fulfill domestic demand at a higher level and efficient exports are also to increase. Production is to adjust flexibly to domestic and foreign market requirements. The quality and competitivenessof products is to improve and the variety to increase. By increasing the level of processingand introducing new products we must increase the volume of food products that can be produced economically and profitably sold in foreign markets. 2. It is necessary to prevent the further decrease in arable land. It is necessary to continue the intensive efforts to maintain and regularly improve the fertility of the soil. 3. The income-producingcapacity of the large-scale agricultural plants is to improve considerably and production losses and specific inputs are to decrease. The energy and material intensity of production is to decrease and the utilizationof waste materials to increase. 4. The practical utilization of the results of scientific research and technologicaldevelopment must be accelerated. We must use efficient biotechnological procedures, computer systems, and electronic solutions that have already been successfully tried. The utilization of modern cultivation, fertilization, and plant protection methods is to increase and the packaging and storageof products is to improve considerably. 5. There is to be an increase in the utilization of agricultural and food industryby-products and wastes for feeding fertilization to regenerate the soil and energy purposes. - 188 - Article 37 Compared with 1985, agricultural and food processing industry investmentis to increase considerablybased on the increase in income generated. The replacement of worn out machines and equipmwentmust receive priority. Investment should serve the better utilization and reconstruction of available fixed assets and result in an increase in infrastructure that facilitatesproduction. It is necessary to ensure the efficient utilization of foreign credit. Article 38 1. Producer cooperatives and state farms are to play an important role in production development. Their associations are to promote the rational concentrationof material and intellectual forces and the rational flow of developmentfunds. They are to make use of the possibilities provided by various organizationaland interest forms. 2. Increasing the production of household and ancillary farms continues to be an important task. This must be aided by maintaining interest in them. It is necessary to improve the supply of means of production that facilitate the activity of small farms, and marketing of produce must be better organized. Cooperation among industrial and commercial organizations, consumer cooperatives, and agricultural large-scale plants should ensure that the products produced in small farms contribute more to improving supply and to increasing exports. Article 39 1. The organization and efficiency of domestic and foreign marketing of agricultural and food products must be improved. Using various organizationalmethods, cooperation between producers and marketing personnel is to improve and so is the knowledge of producers of market procedures. Entrepreneurial activity is also to increase. The steps between production and sale must be reduced. 2. Market development is also to help foreign market sales. Small increasesin the export of goods -- including processed foodstuffs -- which meet the requirementsof consumers and which are economically produced will yield a corsiderable sum of foreign currency. Article 40 1. Plant cultivation must be increased at the fastest possible rate by continuing to increase efficient yields and by the best possible utilization of fixed assets. 2. Based on continued technological progress, improvements in average yield, and increases in sowing area, cereal production is to be around 17.5 to 18 million metric tons by 1990 and an increasing part of this should be exported. In order to achieve this, it is necessary to expand storage and transportationcapacities. - 189 - 3. Production and processing of oleaginous plants is to increase faster than average -- based on an increase in exports. The composition, quantity, level of processing, and variety of gardening products is to adjust to the demands of the population, the food industry, and the foreign market. Efficientconvertible currency export of these products is to increase. It is necessary to promote better utilization of irrigation capacities and wider introductionof irrigation. 4. The fresh fodder and silage fodder necessary for animal husbandry is to be produced on a smaller arable land area by increasing yields. Pasture and grazing land management is to become more efficient. A greater proportionof the by-products of plant cultivation is to be utilized for fodder. Domestic production is to accept a greater role in supplying protein fodder for livestock. Article 41 1. In addition to fulfilling domestic demand, animal husbandry is to develop in response to the conditions of foreign market sales. 2. Cost-effectivecattle-breeding based on mass fodder is to increase. Slaughter-cattlebreeding, which uses less labor and other inputs, is to increaseby introducing efficient breeding methods. Milk production must meet demand, a particular milk output must be produced with fewer dairy cows than at present. 3. In the production of pigs for slaughter, a considerable improvement must be achieved in meat quality and production efficiency. If foreign market selling conditions are favorable, both large-scale and small-scale production is to increase. It is necessary to carry out the reconstruction of a number of specialized pig-breeding plants and the modernization of certaiumeat-processing industry plants. 4. In addition to fulfilling domestic demand, the production of poultry for slaughter should make it possible to fulfill contractual obligations and to efficiently increase convertible currency exports. Article 42 1. The ancillary activities of large-scale agricultural plants are to continue to contribute to the increase in farm income. By expanding their activities,the large-scale enterprises are to take an active part in food processingand marketing, in the production of background industry products, in compensatingfor shortage goods, in maintaining and increasing exports, and in developing services for producers and individuals. 2. In order to develop ancillary activities it is necessary to improve cooperationbetween large-scale agricultural enterprises and other economic organizations. This cooperation should help especially the large-scale enterprisesoperating under unfavorable conditions and in economically backward areas to utilize the available manpower and fixed assets. - 190 - Forestry Article 43 1. Wood felling and the industrial processing of lumber must be increased. In the course of processing, the range of products and their quality and level of processing are to increase. The timber industry is to contributeadequate materials to housing construction. There is to be an increase in the utilization of forestry and timber industry wastes for industrialand energy purposes. 2. In order to increase the stock of trees and to meet the long-term demand for timber as well as to make better use of the arable land, it is necessary to continue afforestation,changes in the forest structure, and increasedprotection of forests. The environmental protectior.and recreation functionsof forests are to be emphasized more. 3. The technological conditions of forestry must be modernized, the mechanizationof hard manual labor should be continued, and the utilization of machines should be improved. SECTION V Production Infrastructure Article 44 1. The production infrastructuresectors must help in the modernization of the production and marketing structures. They are to contribute to the improvementof the population's living conditions and to the development of socia-economiccontacts among settlements. 2. The funds that can be allocated for derelopment must be used for the gradual developmentof infrastructuralsectors that are lagging behind and for the elimination of bottlenecks. The outstanding goals are the vigorous reconstructionand development of the telecommunicationsnetwork, the protectionof the quality of water reserves, and the more complete satisfactionof the need for drinking water. 3. It is necessary to promote the faster development and more widespread application of information systems and information technologies. In order to achieve this, it is necessary to develop the systems and proceduresof information recording, broadcasting, processing, and publishing. We must create conditions for disseminating information technologyon a social level. - 191 - Transportation Article 45 1. Transportationmust meet the slowly increasing passenger and cargo transportationneeds inherent in social and economic development and the increasinginternational relations, striving at the same time to maintain the present level of services and to improve it wherever possible. 2. Transportationneeds at the national level are to be fulfilled with decreasingexpenditures, primarily by a more even use of the transport capacitiesover the year and by gradually increasing the use of modern transportationmethods. We must ensure that the share of railway transportationdoes not decrease considerably. Article 46 1. We must concentrate development funds primarily on eliminating bottlenecksin the transportationnetwork and on reconstructingand developingmain tracks and railway junctions. By this means and by improving the organizationand efficiency of maintenance, we must make sure that deteriorationof the state of the network is curbed. We must use the existing rolling stock efficiently and maintain its technical condition by replacingand modernizing when necessary. At the same time we must strive for the increased protection of the environment. 2. In order to maintain the operational capacity of railway transportation,it is necessary to continue the modernization of tracks and stations, reconstructionof railway junctions, electrificationof lines, and developmentof safety equipment. 3. We must prepare for an increase in the performance of public road transportation. The utilization of public institutions' vehicles must be increased. It is necessary to increase and modernize the population's stock of private cars. 4. To ease traffic congestion in the network of roads around the capital, it is necessary to begin the constructionof a highway ring that avoids Budapest and the connecting Danube bridge. It is necessary to continue the constructionof highways in progress. 5. More attention must be paid to maintaining the existing road network, limiting the deterioration of the technical standard of roads, strengtheningroad structures, and widening road surfaces. We must strive for the gradual construction of network and access roads between settlements. 6. The development and modernization of roads and bridges under council management- including the capital's network of public roads and bridges - must be carried out in accordance with the needs and possibilities of mass public transportation. We must strive to achieve an increase in the standard of constructionof public roads under council management. - 192 - 7. The development of local public transportationin towns is to continue. The subway network is to expand and surface transportationis to be modernized in Budapest. Reconstructionof the stock of public transportationvehicles in the provincial towns must begin, and the trolley network is to develop, too. 8. In water transportation,modernization of river boats must continue and that of ocean navigation ships is to begin. Harbour facilities will imrove. The reconstructionof the Csepel free port must begin. 9. The Second-runwaywill become operational at Ferihegy Airport. By further developing the navigational guidance system, air safety and environmentalprotection are to improve. Post and Telecommunications Article 47 1. The main task in telecommunicationsis the rapid reconstructionand developmentof the telecommunicationsnetwork. The operational reliability of telecommunicationservices is to improve and the traffic capacity of the existing telecommunicationsystems to increase. We must prepare to meet increasingrequirements for data transmission. 2. A priority aim of expanding the telephone network is to improve the telecommunicationnetwork among settlements. The number of telephones is to increase by at least 220,000. We must endeavor to create technologicaland economic conditions that ensure an even faster development. 3. It is necessary to effect technical improvements in radio and televisionbroadcasts. We must reduce the existing differences in the receptionof radio and television programs throughout the country. Water Management Article 48 1. The primary tasks of water management are the systematic utilization of the domestic water resources and water power, water saving, and the protectionof water quality. 2. Water management must become more efficient. In production, water-savingconsiderations are to be reflected in the choice of basic materials and of production technology. Water saving by the population and public institutionsmust be assisted by measures that encourage such saving and by modernization. We must endeavor more efficiently to utilize the existing water supply capacities by efficient linking of population, industrial,and agricultural water supply systems. 3. Available development funds must be concentrated on increased protectionof surface and underground water reserves. The supply of water to - 193 - the public mu>. be developed first in the areas where there are still no availablewater reserves of desirable quality from a public health point of view. 4. The water supply system development must improve the supply of healthydrinking water. Improvement of water quality in important protection areas must be achieved by developing sewage water disposal and purifying systems. It is necessary to apply cost effective ways of sewage water disposaland purification on a larger scale. In addition to the construction of water and sewage systems connected with new houses, increasing emphasis must be given to connecting existing houses to the system. 5. Construction and strengthening of protective works must continue and modernizationof those in important areas must begin, to protect against floodsand seepage. Water management is to be consistent with the soil protectionand improvement needs of agriculture. SECTION VI Domestic Trade and Tourism Domestic Trade Article 49 1. The consumer-goods trade is to ensure the adequate fulfillment of demand by increasing the supply of goods. Conditions for purchasing goods are to improve. This can be done by modernizing the commercial network, developing its structure in accordance with demand, and by improving customer service. Trade is to adopt modern marketing forms on a wider scale and its technicallevel is to increase. 2. The network of shops is to expand proportionatelywith turnover; the reconstructionof the network is to continue, and the existing regional and specilizationdisparities are to decrease. Standards must improve in commercialactivity and after-sales services must increase. Shop opening hours are to conform better to consumers' requirements. 3. In the catering industry, it is necessary to modernize and transform the existing network, to expand the shops that provide fast (and cheap) food, the price and quality of which meets demand better. Article 50 1. Development of the system of linkages between trade and production and an increase in the influence of trade on production is also to contribute to strengtheningthe domestic market balance. We must operate an organizationalsystem which strengthens rational economic competition. - 194 - 2. Modernization of commercial activity is to be based on the independenceof economic organizations, their interest in attracting and keeping customers, as well as on increasing economic pressure. It is necessary to increase commercial activity's income-producingcapacity. Article 51 The equipment trade is better to fulfill the demands of small and medium-sizeconsumers. Its activity is to be more market-oriented and the purchase and inventory of the means of production is to adjust to demand. The collection of by-products and waste materials must increasingly facilitate their recycling. Tourism Article 52 1. In international tourism, we must encourage tourist visits and longer sojourns as weLl as the use of facilities by improving the quality of touristservices, increasing the range of services, developing the infrastructure,and improving the amenities of resort areas. We must strive to increase the hard currency income from tourism and to improve its profitability. 2. We must make use of the possibilities inherent in international cooperation,both in supplying services and in implementing development projects. Local resources are to contribute more to the development of the tourist infrastructure. The regional and seasonal inequalitiesof tourism must be reduced. 3. The number of places in higher-categoryhotels is to be increased, mainly by the investments already begun. In order to improve the composition and quality of the tourism network, we must strive to increase - in accordance with demand -- the number of places in low- and medium-priced hotels, and to improve the standard and facilities of the existing ones. It is necessary to continue the reconstructionof the hotel network and the developmentof health resorts. 4. In order to develop domestic tourism and better to meet local demand, it is necessary to expand lower-cost travel and accommodation. The country'snatural endowments are to be better utilized for tourism. SECTION VII InternationalEconomic Cooperation and Foreign Trade Article 53 1. The economy is to adjust better to world market requirements and to increase its participation in the internationaldivision of labor. Business - 195 - organizationsmust respond to qualitative and structural changes in the internationaleconomy to a greater extent than previously. Improved foreign trade relations and foreign market activity are to provide for steady and vigorous economic growth. 2. The growth of foreign trade is to exceed the increase in national income. Over the plan period, total exports could increase by 16-18 percent. Imports could increase more slowly than exports at the beginning of the period and faster at the end of it. 3. In adddition to the increase in exports, profitability is to improve by exporting goods which generate more income and are more marketable. This must be achieved by improving the quality, technological standard, and reliabilityof products; by quickly adjusting to demand and by better productionmanagement and trade performance. 4. An increase in imports must facilitate primarily the technological modernizationof the economy, the production of good quality and competitive goods, and the application of high-technologysystems which are cost effective. We must continue to import energy resources, materials, and semi-finishedproducts which are required by the economy, and consumer goods that satisfy the population's demand. The competition created by imported goods is to stimulate domestic producers to improve the economic and technologicalcharacteristics of the goods they produce. 5. It is necessary to expand our international financial relations and to strengthenedthe economy's credit-worthiness. We must gradually meet our credit obligations. The required amount of foreign credits for economic developmentmust be secured. Internationalcredit transactionsare to promote the modernization of the economy, acquire foreign technological expertise,and spread high-level technology. Article 54 1. In line with our political and economic goals, long-term cooperation -- based on economic, scientific, and technical programs -- with the Soviet Union and other CMEA member countries will play a decisive role in our internationaleconomic relations. 2. Efforts to expand mutually advantageous commodity trade with the socialist countries to a greater extent than before are necessary. Economic cooperationbetween producers is to increase faster. It is necessary to enter into international contracts. 3. To support economic progress, our country is taking part in mutually advantageousdevelopment projects within the framework of multilateral cooperation. It is necessary to help institute direct cooperation among business organizations and research institutes of CMEA countries. - 196 - Article 55 1. It is necessary to pursue mutually advantageous economic relations - including commercial L.ade - with advanced capitalist countries. It is necessary to expand the forms of cooperation relating to types of production. It is necessary to promote the expansion of joint participation in third markets. 2. Cooperation with developing countries must progress. Relations are to be maintained and expanded, and new sales opportunities must be discovered in rapidly developing regions. Article 56 1. Business organizations must approach foreign markets on a wider scale and familiarize themselves with their technologicaland economic requirements. Business organizations are to consider it part of their activity to know and respond to the opportunitiesand competitive requirementsof foreign markets. To fulfill foreign trade targets, it is also necessary to improve the organization of the system of foreign trade. 2. It is necessary to promote joint ventures between foreign and Hungarian enterprises which involve technologicaland production projects, and in this way stimulate the modernization of the economy, especially the industrialsector. 3. Internationalrelations with foreign monetary institutionsand banks must be further developed. SECTION VIII Employment Article 57 1. The main target of the employment policy - apart from maintaining full employment - is to attain a significant improvement in labor efficiency. This must be achieved by accelerating technological development, miodernizingthe system of labor organization and the system of incentives, improvingwork discipline and the attitude to work, improving the standard of management,and better coordinating schooling, further training, and labor demand. 2. Labor productivity in industry and agriculture is to increase more than output while productivity in the building sector is to grow commensuratelywith output. The inprovements in productivity will make it possible for manpower to transfer to both the productive and nonproductive infrastructuresectors and thus to increase services and improve their quality. - 197 - 3. The central and local governments are to assist and support from central funds the transfer of labor required to adjust the structure of the economy. It is necessary to assist people who are disadvantaged as regards employmentand those who have been looking for a job for a long period of time. It is necessary to improve the conditions and prospects of commuters. 4. It is necessary to make better use of official working hours. It is necessaryto create more variety in forms of employment, including introducingflexible working hours. 5. The 40-hour legal work period must become general (as an average over the year). SECTION IX The Standard of Living and Living Conditions of the Population Personal Income Article 58 The per capita real personal income could increase at a gradually acceleratingrate to increase by 9-11 percent over the next 5 years. Compared to the previous 5-year period, incomes derived from work are to grow faster, and to approach the growth in social incomes. Incomes derived from work in normal working hours are to play a greater role in wage increases. Average real wages will grow by about 5 percent in 5 -ears. Article 59 l. The achievements of economic organizations and differences in the output of employees are to have more influence on wages and other incomes derived from work. Economic organizations are to modify their internal system of incentives to stimulate organizational units and employees to higher performances. Wage increases are to be higher than the average for those who perform a more productive activity, work in unfavorable conditions, or irregularworking hours. 2. To a greater extent, wage increases are to depend on the successful results of enterprises and to be aecided through the internal regulatory system. Those working in the budget-financed sector are to receive the same increasesas those in the production sector. Centrally regulated wage increasesmay be implemented in the second half of the period to eliminate unjustifieddifferences in incomes. Article 60 1. The greater part of social income will continue to be allocated within the benefit system framework and will be based on the level of - 198 - participationin work. However, in the distribution of certain benefits more attention is to be paid to preventing situations of deprivation developing. A network of family aid centers must be established. 2. The growth of enterprise funds available for welfare policies must depend on the efficiency of enterprise operations. Employees of the enterprisemust have a greater say in the use of funds. 3. To reduce the differences in family per capita incomes caused by the number of children it is necessary to increase state benefits, to support the rearing of children. It is necessary to maintain the real value of family allowancesand student grants by introducing a new system by the end of the period. Child care grants must be allocated more widely and the new system must gradually replace the existing child benefit system. 4. The real value of pensions must be maintained for an increasingly large number of people. The real value of average and below average pensions must not drop, and that of the lowest pensions is to increase. The real value of above-a-erage pensions is to decrease to a lesser extent than before. Article 61 By developing the social infrastructure,social incomes in kind are to be introduced on a wider scale. Payment for non-basic benefits must be introducedmore widely. Fees must reflect costs better, and there should be discounts where justified. Article 62 Public savings must be stimulated by credit policy measures and by new forms of savings. it is necessary to encourage investmentof public savings in the development of production, commerce, and the social infrastructure. Personal Consumption,Supply, Services, Consumer Prices Article 63 1. In 5 years personal consumption could grow by 8-10 percent at a regularly increasing rate. To supply products and services that better satisfy demand, it is necessary to achieve housing goals, and to promote a healthier diet, more cultivated and useful ways of spending free time, the modernizationof the consumption structure, and better quality home life. 2. Flexible adjustment to changing demand must be stimulated by instrumentsof economic regulation and further development of the organizationstructure in marketing. Goods shortages must gradually be eliminated. A greater supply of cheaper goods must be provided. 3. In expanding products and services, a growing role must be played by small- and medium-size factories and small businesses. While gradually increasingthe competition by imports, it is necessary to improve the market balance and promote the modernization of the production structure. - 199 - Article 64 1. Production and comerce are to prepare for a vigorous growth in the consumption of manufactured goods, qualitative changes in durable consumer goods, and a growing demand for modern technological prnducts. Public services are to improve in quality and to be available to a greater number of people. 2. The protection of consumer interests must increase. Article 65 1. The rate of increase of the consumer price index must be lover than in the previous plan period. Within this framework, consumer good prices - both controlled and "free" prices - must in general follow the changes in producer prices. 2. Improvements in market situations, the balance of supply and demand, and increased efficiency in price control can lead to an increase in the number of goods and services whose prices are flexible. This should improve the supply of goods. It is necessary to create a stronger relationshipamong quality, modernity, and the consumer price. Housing and Management Article 66 1. It is necessary to improve the housing situation by building new dwellings, reconstructingand modernizing existing ones, and by further improving housing management. 2. The goal is to construct 320,000-340,000 dwellings, mostly to be privatelyhomes or condominiums. It is necessary to increase the share of state-owned rented housing in the second half of the plan period as against 1985. 3. The constructionof privately-owned homes must be promoted by preferentialcredits, an increase in social benefits, employer and local support, and greater availability of building sites. The role of housing associationsbased on people's own initiative should increase. 4. In cases where apartments are provided, it is necessary to consider more carefully the income, assets, and welfare situation of families. Priority must be given in housing and local grants to young married couples who have an unfavorable welfare situation, families with several children, and others in need. 5. Improvementsin housing management are to lead to more apartment exchanges, more tenancy rights being given up, and the establishment of a more flexible financing system. - 200 - 6. It is necessary to improve the organization, standards and conditionsof housing maintenance. It is necessary to continue the improvementand modernization of state-owned and private apartments. More attention is to be given to urban renewal in older parts of towns. Educationand Culture Article 67 1. The modernization of education must continue. This process must concentrateof revising the conter.tand strengthening the role of education, improvingthe quality of teaching, and increasing the number of classrooms. 2. It is necessary to satisfy completely the demand for kindergarten places. 3. The number of classrooms in primary schools must be increased. As the number of pupils drops, teaching in two shifts is to be phased out, and conditionsin teaching, education, and day-care facilities are to improve. 4. By constructing new schools, expanding those available, and by provisionallyoccupying premises intended for other purposes, we must succeed in providing suitable conditions for educating cohorts which show a temporary increase in size. 5. Increased efforts must be made to extend the size and resources of child and youth welfare networks, and to increase the number of places and classroomsavailable in rehabilitationInstitutes. 6. In higher education, apart from university reconstruction, an importanttask is to modernize the content of education and improve the conditionsof teachers' training. Preparationsare to begin to provide suitable staff and material inputs to cope with higher education for cohorts of increasing numbers. 7. Education is to satisfy the demands of technological and economic progressbetter than at present. Cooperation between business organizations and medium level and higher educational institutions is to improve. Improvementsmust occur in vocational training and in the teaching of computer science and foreign languages. 8. Significant attention must be paid to physical education, physical culture,and student sport. Article 68 1. Further progress must be made in spreading cultural education and increasinggeneral and professionalknowledge. Tasks connected with this goal are to involve all areas of public education, culture, and fine arts. 2. It is necessary - by relying on public funds as well - to begin building the National Theater, to continue with the reconstructionof - 201 - provincialtheaters, selected public museums, and Saint Steven's Cathedral. The HungarianRadio and Hungarian Television's programming capacity must be increased. Health and Social Services Article 69 1. In improving the level of health and social services, the main tasks are to improve public health services, modernize technical conditions, develop welfare and family-aid activities, and modify the health sector's system of incentives and management. 2. Concerning out- and in-patient treatment, it is necessary to improve the supply of medical machinery and equipment. Hospital projects in progress will increase the number of hospital beds slowly. It is necessary gradually to improveservices supplementary to hospitals as this becomes possible. 3. In accordance with our demographic policies, more effort must be made to reduce infant mortality. The demand for infant nursery places will be almost completely met. 4. Suitable programs are to help prevent and more effectively cure serious diseases. 5. It is necessary to improve conditions for organized home care of the elderly. More senior citizens' day homes must be opened, and more places provided in old people's homes, welfare homes, and pensioners' apartments. 6. More public attention is to be given to promoting a healthy life style for people, especially young people. SECTION X Regionaland Community Development Article 70 1. Regional development must effect a more efficient resource use in various regions, continue to reduce disparities in regional development, reduce undesirable regional differences in the standard of living, and steadily improve the country's urbanization system. 2. Production capacity must improve by heeding efficiency requirements, adjustingbetter to regional and local resources, and by regional specialization. A more modern production structure must be promoted through use of local resources and cooperation opportunities,more effective regional manpower mobility, and regional relocation of non-utilized production capacities. - 202 - 3. The aim of the social and economic program for the development of the most backward economic areas is to increase employment opportunitiesand strengthen the economic base by modernization and new investments in selected smaller regions of northeast Hungary, the South-Transdanube,and the Central Plains. 4. In reducing unjustified regional differences in the standard of living, the critical factor is to bring the supply of basic amenities to communitiescloser to the level in the towns. The quality and delivery system of medium- and higher-levelservices must be improved by modernizing the institutionalsystem, using it better, and by more equitable regional development. 5. In addition to reducing problems in supply to the capital city and large towns, suitable small towns and villages should develop faster. It is necessary to further reduce the incentives for people to move to the cities, especially large cities. 6. In Budapest, disparities among districts must be reduced. It is necessary to continue with the reconstructionof apartments and institutions. It is necessary to make more effective use of production, infrastructure,and expertise in Budapest and in the conurbation zone. A more modern system of linkages between the capital city and its urban zone mu,stdevelop. 7. Development in large towns and country seats should emphasize qualitativeelements more, and the better use, expansion, and reconstruction of existing infrastructure. The economic base of small- and medium-sized towns must improve. 8. Development is to continue at a faster rate in villages with favorable resources. The provision of basic services is to improve, particularlydrinking-water supply, transportation,primary school education, and privately-ownedhousing. The social disadvantages of villagers are to be moderated and the villages' ability to prevent people from moving away is to increase. SECTION XI EnvironmentalProtection and Nature Conservation Article 71 1. Environmental protection and nature conservation must be regarded as an importantsocial task. The aim is to reduce deterioration of the environment,which includes improving the immediate environment of the population. It is especially necessary to neutralizehighly dangerous waste materials, reduce air pollution, and to protect drinking-waterreserves. - 203 - 2. In addition to increasing the level of nature conservation, scientificmethods must be used to explore our most important natural resources. 3. Above all, the quality of arable lands must be preserved by ameliorationmethods and by the spread of environmentally protective farming methods. 4. It is necessary to reduce the noise caused by production and traffic. 5. It is necessary to reduce the pollutant effects of community wastes throughwaste collection that satisfies environmental protection measures, by systematicdisposal and neutralization,and by recycling. 6. Wide-scale cooperative public efferts are to help achieve environmentalprotection goals. Article 72 1. It is a priority task to protect drinking-waterresources along the Danube, in the Center-Transdanubearea, in the Pecs region, and in the Sajo valley. The Balaton's water protection program will concentrate on immediate measures for improving water quality. 2. Waste emissions, especially of sulfur dioxide, must be reduced, particularlyin the seriously polluted towns and surrounding areas. 3. Noise intensity is to decrease near Ferihegy Airport; this must be achieved by further developments in aviation technology and by other methods. Article 73 1. Environmental and ecological conditions in non-polluted regions must be preserved,and in damaged areas selective environmental improvements that directly affect the population must be made. Central intervention in environmentalprotection must concentrate on regions with cumulative damage. 2. It is necessary to implement environmental protection measures in a consistentway in industry, agriculture, and the infrastructure. New investmentsand complex reconstructionsare to be implemented in compliance with the requirementsof environmental protection and efficiency. Those responsiblefor producirg pollution are to take mcre interest in its preventionand reduction. It is necessary to change to preventive environmentalprotection by'the coordinated adoption of economic regulators. 3. To realize environmentalprotection goals, it is necessary to increasecoordinated management and organization across sectors, especially in cases of new developmentsand specially-designatedenvironmental protectiontargets. - 204 - SECTION XII The Principles of Finance and Price Policy The Principles of Finance Policy Article 74 1. The main finance policy task is to help the economy's efficient developmentand to improve and consolidate its foreign and external balance by regulating income processes. 2. Business organizations, the state, and the population are to take their income shares in accordance with the rates stipulated in this act and in considerationof the deductions required for credit commitments and external balance. 3. In this plan period it is necessary to draw up and, under the proper conditions, implement further important modernizations in taxation. Article 75 1. The role of the state in the redistribution of the net national income within the sphere of production is to shrink. The rate of taxation of business organizations is to decrease gradually from the middle of the plan period as revenue generated in the economy grows. The relative rates of subsidy and preferences granted to production enterprises are to decrease with developments in price formation. 2. The Accumulation Funds in the state budget are to promote the implementationof specific infrastructural,energy, and other significant developmentprojects in the interest of the national economy. Expenditures on direct production activities and the production infrastructuremust foster an increase in the ability to self-finance. 3. The growth of state budget expenditure on consumption must accord with decisions regarding revenue, must take into account a possible reduction in the rate of consumer price subsidies, and must achieve reasonable savings in national public expenditures. Priority must be giver to modernization of budgetary institutions. 4. The funds provided from the state budget must be used in all fields with maximum efficiency. Article 76 1. It is necessary to gradualiy increase the effect of financial and credit policies on economic decisions which promote the &oals of the national economic plan. - 205 - 2. At the beginning of the plan period, a banking system must be established,consisting of an issuing bank and commercial banks. It is necessary to develop a system that can systematically and efficiently implementfinancial and credit policy. 3. The increase in money circulation is to be kept proportional to economic growth, and is to help realize the policy of price restraint and the planned regulation of aggregate demand. The Principlesof Price Policy Article 77 It is necessary to increase the role of the market at the same rate as the balance of supply and demand improves. Market conditions and prices must provide more incentive to business organizations to reduce input costs, have cost-effectivemanagement and introduce structural changes in production,so as to be efficient by international standards. They must increasecompetitiveness and be prevented from passing costs of inefficient operationsonto buyers. Article 78 1. A policy of curbing price increases must be continued. General economic policy, which considers economic efficiency and equilibrium improvementsas priorities, price and finance policy, and the development of market conditions will help in this. State pricing policy that aims to curb increases in the price index must use economic measures to affect factors that cause price increases, without lessening the effectiveness of the economic management system. 2. The reduction of the growth rate of the price index must be achieved by these measures. PART TWO The Economic Management System Article 79 The economic management system - national economic planning and economic regulation, and the decision-making,organizational and institutionalsystems - must promote the realization of targets and tasks provided for in this act. - 206 - SECTION XIII National Economic Planning and Direct State Decisions which Implement the Plan. Article 80 It is necessary to carry out and modernize national economic planningaccording to the provisions of the Act II of 1985 on the System of National Economic Planning. Article 81 1. The Council of Ministers is to make direct state decisions for implementingthe targets provided for in this act with regard to: - the implementationof central economic development and other programs between 1986-90; - central investmentsand state subsidies for particular development projects; - other state measures which promote technologicaldevelopment and modernization of the production structure; - state measures that promote the expansion of foreign trade relations; - central measures concerning the standard of living; - other important measures that use state funds. 2. It is necessary to assist the implementationof plan targets by entering into international agreements. 3. In annual plans and during their implementation,further decisions are necessary to promote the implementationof medium-range targets. Economic trends and developmentsmust be analyzed, and must influence decisions. - 207 - SECTION XIV The Economic Regulatory System The General Principles of Regulation Article 82 1. Economic regulations are to serve -- with greater assurance than before - the fulfillment of economic policy targets provided for in this act, with special regard to: efficient and competitive progress in production,the modernization of the production structure, the acceleration of technologicalprogress, the targeted improvement in supply and the realizationof the main consumption rates. 2. The economic regulatory system is to rely on the financial interests of business organizations and employees in improving economic results and is to reveal differences in efficiency among business organizations. Opportunitiesfor increasing investment and personal income are to become differentiatedon the basis of efficiency. Regulations should improve opportunitiesfor those business organizations capable of growing, and force unprofitableactivities to become efficient, or, if this is not possible, to stop. 3. During the first half of the plan period, it is necessary to further develop the economic regulatory system in a supplementary and corrective way, as required to achieve economic policy targets. 4. From the middle of the plan period, depending on initial results, comprehensivemeasures should be introduced in the process of developing the economic regulatory system. Principlesof Price Regulation Article 83 1. In the competitive sector, domestic prices are to follow primarily prices determined in the world market. Regulative pricing restrictionsare to be reduced gradually in the manufacturing and building industries, domestic trade, and in transportation. In energy and basic material productiondomestic price calculationsmust follow world market prices. It is necessary to adjust producer prices in agriculture, starting from average domestic costs, and gradually approaching foreign market rates. 2. Increasing competition,and the growing impact of market pressures will gradually bring down producer prices in the manufecturing and building industries. Producer prices in infrastructurecould iicrease somewhat faster than average. - 208 - 3. The proportion of free prices is to increase as conditions in the regulated domestic market improve. 4. Market supervision and price control must help disclose unfair practices, eliminate their causes, promote compliance with pricing regulations,and improve market balance. 5. The unification of the turnover tax system must be completed by the middle of the plan period. Principles of Income and Wage Regulations Article 84 L. Income regulation must foster a stronger profit orientation with respect to fixed assets, and a differentiationof economic organizations by efficiency. 2. Different income regulations may be introduced for public utilities, public services, agriculture, and small companies. Within the framework of general regulations,allowance must be made for subsectors whose characteristicsjustify a limited concern with profits. 3. Similar requirementsmust be imposed on competing organizations which operate under different regulations. 4. Economic establishments must avoid developing financial deficits in conducting their business. If such deficits occur, organizations are to eliminate them themselves. If they are not capable of doing so on their own, their financial situation must be resolved according to the appropriate rules of procedure. Financial interventionby the state can only occur in exceptional cases and in the interest of the national economy. Article 85 1. Wage regulations, in conjunction with other elements of the economic regulatory system, are to provide strong incentives for efficient management and promote a rational turnover of labor. 2. In the sphere of competition,wages paid by economic organizations are to depend on profits. Regulations must gradually be introduced under which enterprises pay taxes on the wages of individual employees. In fields outside the sphere of competition, central regulations which also create an interest in increasing efficiency must apply generally. Principlesof Financial Regulation of Accumulation Article 86 1. Financial resources for enterprise investment are to be interest funds [erdekeltsegialap], bank loans, as well as state development subsidies in the fornmof state grants, budget grants, or in certain cases state loans, and funds from other enterprises or from the public. - 209 - 2. Central investments are to be financed out of internal enterprise funds, grants from central funds or state loans, and through state budget grants. 3. Profit considerationsare to provide the incentive for business organizationsto invest financial resources elsewhere if they cannot be used profitably in their own organizations. This practice must take various forms. Principlesof Financial Policy and Credit Policy Regulation Article 87 1. The volume of loans is to depend on enterprise and individual deposits and on credit operations abroad. Financial institutionsand policies must actively stimulate saving. 2. There must be central regulation of domestic credit transactions. State decisions and funds must support priority projects. 3. Following the reorganizationof the banking system, the central bank is to use suitable regulators to influence commercial banking and the flows of money and credit. 4. Loans must serve business interests. Commercial banks are to be guided by profit considerations. 5. Credit to economic organizations for modernization and development must be moderate in the first half of the plan period but may increase faster later. Principlesof Regulations of Foreign Trade Article 88 1. It is necessary to use the -:egulatorysystem to create an economic environmentwhich is oriented towards fully realizing our foreign trade policy. 2. An active policy on the rate of exchange must be conducted to influenceforeign trade trends and to protect the value of the forint. 3. Producer economic organizations must orientate themselves toward profitableexports, select the most favorable lines in sales and purchases, and fulfill foreign obligations. Principlesof Market Supervision and Commodity Trade Article 89 1. Within legal limits enterprises may sell their products and buy their inputs freely and arrange their own contractual relations. The Council of Ministers may introduce measures limiting commodity trade within the frameworkof the annual national economic plans to promote market equilibrium. - 210 - 2. In developing markets and influencing product sales, market supervision mu,t promote the unhindered development of trade and the development and efficient operation of economic competition. Where a considerable and persistent imbalance between demand and supply of certain products develops, market supervision must help reduce it primarily by indirect measures that improve the market situation. 3. Trade and market supervision must help modernize the product structure, reduce material and energy requirements of production, improve the structureof material consumption and the efficiency with which available raw materials are used, and increase the recycling of waste materials and by-products of production. SECTION XV Council Kanagement and Regulation Article 90 1. The independence of councils in management, planning and participationin use of available resources is to increase. It is the task of the local councils to operate and develop the basic and secondary network of infrastructuralpublic institutions. 2. The councils are to use their financial resources primarily to maintain, operate, modernize and reconstructwhen necessary the existing institutions. Remaining funds must be used for development, considering future conditions. 3. Part of the development funds must be divided among local councils in proportion to the number of people living in each settlement. The per capita amount of these development funds is to be the same for each county but differentiatedamong local councils. Gradually increasing with each year, it must reach 5,700-5,800 forints per capita in 5 years. 4. Important council development goals are also to be supported. To this end, the municipal and county councils are to provide support for housing supply, drinking water supply, sewage disposal and treatment and secondary education. Target-oriented grants may also be given for no more than two of the most important county-level tasks. - 211 - SECTION XVI Principles of the Development of the Decision-makingand OrganizationaiSystem Article 91 The activity and organization of economic management bodies are to develop to improve the efficiency with which the decision-making system operates. Decision-makingauthority is to be exercised consistentlyand responsibility for decisions is to increase. The role of social participation in the making and implementingof decisions is to strengthen. Article 92 1. Central economic management must actively develop markets. To achieve this, it must promote the development of an enterprise organizational system that serves this aim and must take a stand against the continuation of unjustifiedmonopolistic situations and against monopolist abuses using the provisions of the regulations banning unfair economic activities. It is necessary to contintueto foster operating conditions of small-scale enterprises that improve efficiency. 2. The change to new forms of enterprise management must be completed early on in the plan period. The increasing enterprise independenceand responsibilitywhich results from this must be allowed to evolve freely. SECTION XVII Concluding Regulations Article 93 1. The targets and tasks stated in the Plan are based on current projectionsof world economic conditions and improvementsin the effi-iency of social production laid out in the first part of the law. 2. If foreign economic conditions develop more favorably than expected and production efficiency improves more than planned, available surplus resources are to be used, after evaluating the order of priority, for investmentsaimed at developing telecommunications,modernizing the manufacturing industry, accelerating development of barkground industry. reneving the stock of vehicles of the transportatic=sector and introducing technologicalimprovements more vigorously, on the one hand, and for increasing real wages more quickly and maintaining the real value of pensions on a wider scale as well as increasing the support provided for housing constructionand developing public education, on the other hand. - 212 - 3. If foreign economic conditions and production efficiency develop less favorably than planned, accumulation and consumptionare to increase proportionally,more slowly than planned, but the level of average real wages and the real value of various social allocations must be maintained (if possible). Article 94 1. The National Assembly authorizes the Council of Ministers to take necessary measures to implement the Seventh 5-Year Plan of the national economy and to approve the annual plans of the national economy within the frameworkof the fundamental economic policy guidelines. 2. The Council of Ministers is to constantly monitor the implementation of the Plan and to report on progress to the National Assembly in the middle and at the end of the Plan period. Article 95 In implementingthe Plan, the state administrativebodies are to proceed in a coordinatedway and in accordance with the regulations on their spheres of authority. Article 96 The councils must prepare their 5-year and annual plans, economic organizationsmust prepare their medium-term and annual plans in accordance with the stipulations of this law and the law on National Economic Planning. Their active participation must contribute to the implementationof the national economic plan. Article 97 This law becomes effective as of 1 January 1986. The National Assembly obliges the state administrationbodies and calls upon the economic organizations consistently to carry out the stipulations of the law and the decisions relevant to them and to ca-rryout their work for the implementationof the goals set out in the Plan in a way consistent with these goals. The National Assembly calls upon citizens to do their utmost for the implementationof the Plan. The National Assembly calls upon the social organizations and the organizationsrepresenting interests to contribute using their particular means and by mobilizing the population to creatively work to implement the stipulations.