Discussion Papers 1993.
Spatial Research and the Social-Political Changes 109-115. p.
ENTERPRISES OF LOCAL TOWN COUNCILS IN HUNGARY
109
ENTERPRISES OF LOCAL TOWN COUNCILS IN
HUNGARY
MIHALY LADOS
INTRODUCTION
The present paper demonstrates a little part of a recent research. This investigation
surveys possibilities, methods with which the local council, and later the local self-gov-
ernment, could complete its continually narrowing financial resources in the second part
of the 1980s. Today these possibilities have already a rich assortment: from the bond
issue, through the different competitions, to the foundational finance.
The basis of my paper is a questionnaire sent to the local councils of towns in Decem-
ber, 1989. So the result is a self-portrait. All of the towns l received this questionnaire and
nearly 40% of the local councils completed it. This can be considered a very good repre-
sentative sample.
In Hungary there is a political and economic system change. One of the main ideas is
the forming of a market economy. Enterprise is a category in market economy. Relations
between the local councils' economy and the enterprise as a possible source of sup-
plemental methods will be studied here. First existing forms will be presented, then the
barriers of enterprises and finally the possible trends of the near future.
ABOUT THE LOCAL COUNCILS' ENTERPRISES
Antecedents
Enterprise as a word was a dead, a forgotten, a non-used word until the 1980s in Hun-
gary (and Eastern Europe). Although many enterprises worked in the agricultural co-oper-
atives as complementary activities—sidelines 2—in the 1970s, the word became known
again only at the beginning of the 1980s when the new small enterprises could be started.
The spread of the new small companies was very fast in construction (particularly in plan-
ning), in commerce, in service and in computer technics. From the middle of the 1980s we
could hear more and more about small enterprises. Small companies joined the local
councils as well.
Enterprise and local council? Risk taking and administration? It is a very interesting
question. It is one step in a long process. The "motive" of this process has been the lack of
capital.
Lados, Mihály: Enterprises of Local Town Councils in Hungary.
In: Spatial Research and the Social-Political Changes. Pécs: Centre for Regional Studies,
1993. 109–115. p. Discussion Papers. Special
110
MIHALY LADOS
In the 1970s many agricultural co-operatives having bad land situations needed a com-
plementary activity to survive. The basic activity was often sustained by complementary
activities. 3 The economic crisis started at the beginning of the 1980s. Private capital had
to be injected into economy. Private small enterprises could act in this way in 1982.
Meanwhile, the public budget deficit was continually growing. Therefore, local bud-
get was under hard restrictions in 1986 and 1987, and, at the same time, it received more
freedom to "make money". So the local council's enterprises cannot be considered as a
result or a merit but a compulsion.
Change in the regulation of local council economy
Modernized regulation of local council economy started on January 1st, 1986 gave
freer movement to local authorities: creation of the homogeneous fund involved the func-
tion as well as the development fund (so it was possible to rearrange these funds); moder-
ation of the controlled management of local budget; free spending of "interest incomes";
freer loan raising; the possibility of bond issue etc. Later there was a chance to join an
economic company, then at the end of the 1980s the "Economic Company Law" and the
"Economic Transformation Law" were created.
How did town authorities utilize the new possibilities and what were their effects on
the local budget? Changes in the "interest incomes" theoretically give an answer to these
questions.
Our basic idea was that council and institute enterprises give the major part of the
growth of "interest incomes". For its sake we have to investigate the structure of this
source group or to map the local council's existing enterprises. There is a scarce informa-
tion about the structure of the "interest incomes".
The questionnaire about the council's enterprises
Our questions were the following:
1.
What kinds of enterprise were found by the local authority?
2.
What kinds of enterprise were found by the institutes of the local council?
3.
Did the local authority take the initiative or join the establishment of
joint venture before the existence of the "Economic Company Law"?
4.
Did the local authority take the initiative or join the establishment of
joint venture after the "Economic Company Law" had been passed?
5.
Is there any establishment of company by the local authority going on?
6.
Did it try to attract foreign capital?
On the basis of all the answers received it can be ascertained that more than half of the
towns took the first steps towards enterprises. But if answers are investigated in detail, it
can be seen that the number of real, existing enterprises is very few. Only four councils
had three or more positive answers to the questions.
Lados, Mihály: Enterprises of Local Town Councils in Hungary.
In: Spatial Research and the Social-Political Changes. Pécs: Centre for Regional Studies,
1993. 109–115. p. Discussion Papers. Special
ENTERPRISES OF LOCAL TOWN COUNCILS IN HUNGARY
111
Some statements regarding the answers:
1.
The local councils' characteristic enterprises are: contractual operating
in some areas of local communal tasks and job creating investments.
2.
The institutes' characteristic enterprises are as follows: utilization of
their free technical capacity (machines, equipment, rooms etc.), "own
overhead" investments (for example their own technical group for the
maintenance), letting rooms in student hostels (during holidays) and or-
ganizing different courses (language, swimming, cooking, typing, using
the personal computer, yoga, autogen training, sewing etc.).
3.
Joining an economic company was accidental. It is proved by seven
examples which were received from the councils because these cases
belong to different branches: the work of a butcher, the establishment of
a holiday-village, the foundation of a yacht harbor, the development of
a phone network, organizing transactions, the building of a petrol sta-
tion.
4.
Councils prefer the limited liability company (KFT) and corporation
(RT). They have taken as apport money in 70% into the companies.
(This sum of money was less than 3 million forints in all cases.) The
council generally does not launch an enterprise but it becomes a partner.
5.
The aim of the establishment of enterprises is mainly to create jobs. The
characteristic areas are tourism and local media (printing and news-
paper publishing companies).
6.
Information about planned joint ventures was very scarce. The main
barriers of these are the lack of infrastructure and the chaotic situation
in land ownership.
I think the local council's enterprises are in an embryonic state, so they have not got a
strong weight in the local budget.
BARRIER FACTORS
In the questionnaire
In spite of the legal possibility, many factors hinder the development of the councils'
enterprising activity. The survey on personal opinion was concerned with this problem.
(Table 1) Councils listed the three main barriers in "open questions".
"Lack of money" and "want of capital" are considered the gravest barriers (41% of all
the answers). The proportion distorts upwards a little because in 15% of the answers the
"want of capital" was identified in the first place but in these cases the second and the
third factors have not been printed. In 5% of the answers the "want of capital" has been
written to all the three points.
Lados, Mihály: Enterprises of Local Town Councils in Hungary.
In: Spatial Research and the Social-Political Changes. Pécs: Centre for Regional Studies,
1993. 109–115. p. Discussion Papers. Special
112
MIHALY LADOS
The following five problems were named as a second barrier in a similar proportion:
"want of capital", "dissonance of the regulation", "lack of the enterprising vocation" and
"the scarcity of specialists", "lack of information and experience". Among the barriers
having been identified in the third place, the "lack of enterprising vocation" appeared in a
higher proportion.
Besides the most important factors, there were other causes on the list as well but the
frequency of these factors did not amount to more than 4%. (Table 1) Some of these
answers are shown in the following:
"The personal composition and educational level of the present admin-
istration are not suitable for these tasks." (graded answer for the fourth-
fifth places)
"The preparation of a decision is very long and bureaucratic because of
corporative hierarchy." (sixth-seventh places)
"There is not a financial source in the budget expenditure large enough
for the enterprises. Enterprises need more and more money each year
but they have given little back until now." (eighth-nineth places)
TABLE 1
Barrier factors of local council enterprises
1st
2.nd
3rd
Altogether,
Barrier factors in order of importance
%
place fac ors in percentage of all
answers
1st
Want of capital
41
33
5
3
2nd-3rd Regulation
12
3
5
4
'
Lack of enterprising vocation
12
1
5
6
4th-5th
Lack of specialists
8
2
5
1
Lack of experience and
8
—
5
3
information
6th-7th
Bureaucray
4
—
2
2
Rural localization
4
—
2
2
8th-9th
Lack of self-goverment
3
—
3
—
property
Low return
3
—
—
3
10th-llth Lack of infrastructure
2
—
1
1
Lack of enterprise areas
2
—
—
2
12th
Lack of partner
1
—
—
1
Altogether
100
39
33
28
Source: Survey results
Lados, Mihály: Enterprises of Local Town Councils in Hungary.
In: Spatial Research and the Social-Political Changes. Pécs: Centre for Regional Studies,
1993. 109–115. p. Discussion Papers. Special
ENTERPRISES OF LOCAL TOWN COUNCILS IN HUNGARY
113
The opinion of the Veszprem county council
The council of Veszprem county has carried out a total fact-finding investigation about
the enterprising activity of local councils. It is worth comparing the barrier factors men-
tioned in that investigation with the answers in our questionnaire.
The local councils of Veszprem county considered the "underdeveloped infrastruc-
ture" as the greatest barrier. But in our questionnaire this factor is mentioned only in the
tenth-eleventh places. The "want of capital" is the second cause in the council's report,
while in ours it is the first. The "low return of capital" is regarded as the third most import-
ant problem by the councils of Veszprem county. (In our research it is in the eighth-nineth
places.) The proceeds of the enterprises of the councils in Veszprem county is 2 or 3%. At
the same time, the interests of permanently fixed deposit—for three to six months—was
nearly 14%.
"Lack of experience" is put in the fourth place in Veszprem county (just as in our
questionnaire, where it is in the fourth-fifth places). In their opinion, on the one hand, the
council has not got enough practice in the enterprise law, and, on the other hand, they have
no international experience, and there are very few council workers who are able to make
transactions in foreign languages. The "retarding force of the risk" is mentioned as a sub-
stantial factor, too. This element is reflected in two answers: "There is no safety" and "The
body and leaders of the council must not hazard the sources of the commune".
Another point of view
In my opinion the hindering role of the "lack of money" is overstated. The main bar-
riers and equal factors in my view are the following:
(1)
The lack of the mobilizable self-government property and assets.
(2)
The lack of human capital and specialists.
(3)
Non-organized and uncompleted enterprise organizational system and
jurisdiction.
(1) The "appraisal of property" is in an embryonic state. It concerns both the
real and the landed properties. These are important questions because the very essential
aim of the local self-government is increasing the settlement's wealth, namely founding
resources for the development of the settlement (it means investment or a higher level of
function). It is in close connection with infrastructure. The lack of proper infrastructure
prevents the settlement from running any enterprises.
(2) A business attitude differs from the earlier budget deal situation. It means
different human relations. There is the need for manager-type people who are skilled in
business negotiations. Now only very few presidents and secretaries of the councils or
heads of departments can take up such a role.
The "lack of experience", information and knowledge of foreign languages are in
Lados, Mihály: Enterprises of Local Town Councils in Hungary.
In: Spatial Research and the Social-Political Changes. Pécs: Centre for Regional Studies,
1993. 109–115. p. Discussion Papers. Special
114
MIHALY LADOS
close connection with the above mentioned problem, too. The last one, the lack of knowl-
edge of foreign languages, has special importance when councils are planning to initiate
foreign capital into enterprises.
(3) There are enterprise groups or enterprise specialists within the scope of
some local councils already. They execute tasks as part-time-employees. 35% of the coun-
cils plan to employ an enterprise specialist or to organize an enterprise team in the future
• but 53% of the local councils do not plan to run such an organization at all.
Besides the three main factors, regional differences in chances must also be emphas-
ized.
TRENDS OF THE NEAR FUTURE
The direction to be taken in the near future is determined by the barrier factors: the
completion of regulational frames, the formation of organizations and securing of per-
sonal pre-conditions. We have to consider the question of self-government property with
special attention. The regulations concerning enterprises must be interpreted and publish-
ed.
Though the germs of institutional system have been formed (i.e. the Exchange), there
are not organizations of syndic. According to the two thirds of local councils, especially
in small towns, management of self-government property need not be organized separate-
ly from the council. They say that it would have rather few tasks. The councils which want
separate syndic, on the one hand, think that the councils' enterprising activities will ex-
pand, and, on the other hand, they say: "...this activity is totally different from administra-
tion".
In the future the council needs "brain workers" who know the new market regulation,
who are able to negotiate (even in foreign languages), who know financial processes and
the capital market. We have tried to learn from the questionnaire whether the councils
need courses to prepare for the future (bond issue, foundation of companies etc.).
12% of the councils answered that they did not consider it important to organize the
above mentioned courses. 16% of them thought that such courses are important but they
would not need them. The councils which want these courses prefer to get knowledge
about the forms, foundation and activity of companies, establishment and activity of
funds. Only some of them would like to have information about appraisal and the existing
Exchange. This means that the majority of councils would commission outside specialists
or organizations to deal with enterprise tasks.
The courses related to the shares or bond issue would be popular, too. I think the local
councils consider important the processes of the capital market and the preparations for
these processes. In my opinion the listed wants reflect a certain enterprising vocation, and
this is a guarantee for the beginning of a change in the local councils' way of thinking and
their attitude towards self-government economy.
Lados, Mihály: Enterprises of Local Town Councils in Hungary.
In: Spatial Research and the Social-Political Changes. Pécs: Centre for Regional Studies,
1993. 109–115. p. Discussion Papers. Special
ENTERPRISES OF LOCAL TOWN COUNCILS IN HUNGARY
115
CONCLUSION
In my paper it was supposed that council enterprise as a possibility to increase finan-
cial resources becomes stronger in the local budget. The questionnaire refuted this theory.
Because of the basic barriers (poor infrastructure, lack of self-government property etc.),
the lack of experience and specialists, and underdeveloped appraisal, maybe it is better
that these council enterprises have not been created in more number.
Finally, the enterprise is just one of the many possibilities—true, a very important
one—as a technique for the completion of local financial resources.
NOTES
In 1990 there are 165 towns in Hungary besides the Capital
2 Especially in food industry but mainly around Budapest in engineering industry and even in electronics indus-
ttY.
3 The rate of basic activity is under 20% (!) in a number of co-operatives around Budapest and in Komarom
county.
4
i
It i s 32 million forints income from 460 million forints in the case of the local council of Veszprem county.