Closing of investigation no. VIZSG/3/2023 – overpricing of the Operational Programme for Supporting Socially Disadvantaged Persons (RSZTOP)

The Integrity Authority is filing a complaint for budget fraud and money laundering committed in a criminal organisation, mismanagement, and agreement in restraint of competition in public procurement procedures, following the conclusion of its investigation into four EU-funded projects supported under the Operational Programme for Supporting Socially Disadvantaged Persons (RSZTOP). The Authority’s investigation has verified an overpricing totaling HUF 10.2 billion in two of the four projects: the Directorate General for Social Affairs and Child Protection (DGSACS), the beneficiary of the grant, worked together with suppliers that charged extremely high rates for basic food commodities.

In the course of the public procurement procedures, one of the projects (RSZTOP-1.1.1-16-2016-00002) resulted in the DGSACS signing a framework agreement with a single winner, which precluded any chance for real competition during the reopening of competition; whilst in the other project (RSZTOP-4.1.1.-16-2017-00001), following the conclusion of a framework agreement with the three winners and the disqualification of one of the tenderers, the remaining two tenderers likely colluded with one another during the reopening of competition to determine the prices for the products to be procured.

Based on its procedures, the Authority believes that the consortium led by Halker Kft. harmed socially disadvantaged people by overpricing one of the projects (RSZTOP-1.1.1-16-2016-00002) by 70%, totaling HUF 7.6 billion gross, while Káta-Mill Plusz Kft. harmed socially disadvantaged groups by overpricing the other project (RSZTOP-4.1.1.-16-2017-00001) by 37%, or HUF 2.6 billion.

The Authority’s assessment indicates that these companies bear the main responsibility for the failure to distribute over one-third (38%) of the packages, totaling 1.4 million, to socially disadvantaged groups. Owing to mismanagement, only 2.3 million packages were distributed instead of 3.7 million. 

The extent of overpricing is well illustrated by the following chart, which shows that the DGSACS purchased 1 kg bags of granulated sugar, intended for the food packages as part of project no. RSZTOP-1.1.1-16-2016-00002, at a price nearly five times the gross consumer price as measured by the HCSO. One-kilogram bags of granulated sugar, priced at an average of HUF 266 per unit, were purchased for HUF 960 eachat the outset of the programme. Five years later, this price also increased, reaching HUF 1,036 (compared to the average price of HUF 262 during that period).

(It is important to note that the average gross consumer price measured by the HCSO cannot be compared one-to-one with the contractual prices due to the distribution costs of package delivery. However, the Authority asserts that the differences displayed in the illustrated chart speak volumes and adequately demonstrate the identified instances of overpricing. In the course of its investigation, the Authority found that all direct and indirect costs, in addition to the purchase prices, incurred during the execution of the project did not surpass 20%.)

Based on these circumstances, the Beneficiary could have chosen to refrain from entering into a disadvantageous contract and to conduct a new public procurement procedure.

“Social outrage is justified when one considers that the individuals who engaged in the misuse of resources profiteered at the expense of the most vulnerable people in need of help, namely the elderly and the poor. The network led by the two companies practically stole HUF 10.2 billion from the poor. This case is a prime example of what I often stress to the public: the detrimental impact of the abuse of authority and corruption predominantly affects the most vulnerable layers of society. Sadly, this case will probably go down as one of the many instances where the perpetrators and the stolen money will have disappeared into thin air by the time significant progress is made, virtually without any consequences”, said Ferenc Biró, President of the Integrity Authority, regarding the outcome of the investigation, who continued by adding, “With adequate powers, the Integrity Authority could have thoroughly uncovered the illegalities. For this reason, expanding these powers should stand as a critical task for the National Assembly.”

The four investigated projects received a total of HUF 31.2 billion in grants at the time of awarding, with 85% of this amount provided by the European Union. The implementation period of the projects in question lasted from 1 October 2016 to 31 December 2023.

*Although the DGSACS was not the only beneficiary in project no. RSZTOP-2.1.1-16-2017-00001, the Authority concentrated its investigation solely on the part of the project associated with the grant of approximately HUF 2.2 billion, in which the DGSACS was the beneficiary. Nevertheless, the Authority conducted a comprehensive investigation into the other three projects, as the DGSACS was the only beneficiary in those instances.

The Authority’s investigation has identified suspicions of several criminal offences and illegalities, prompting the organisation to file a complaint and initiate proceedings with the Hungarian Competition Authority.  

Budget fraud, money laundering, and commission of an offence in a criminal organisation: based on the investigation’s findings, the Authority believes that––

• the winning contractor of one of the projects and its affiliated companies supposedly issued invoices for fictitious business activities amongst themselves, thereby committing budget fraud.
• they offset their revenues from overpricing with carousel fraud, while hiding and covering up the wealth gained through criminal practices and where the money came from.
• there was no factual business activity backing up the cost transaction valued at HUF 1.9 billion, which was billed around to offset the revenues.

Mismanagement: Based on available information, the contracting authority breached its asset management obligation, as defined in the Public Procurement Act (“PPA”), by violating the PPA’s regulations.

Agreement in restraint of competition in public procurement procedures: The Authority believes that the parties formed an agreement to fix prices and other contractual terms in order to influence the outcome of the public procurement procedures and divide the market, thereby restricting fair market competition. Therefore, in addition to filing a complaint for the uncovered criminal offences, the Authority is also initiating competition supervision proceedings with the Hungarian Competition Authority.

In its 2022 Integrity Risk Assessment Report of the Hungarian Public Procurement System, the Authority stressed that enhancing competition is crucial to the efficient operations of the public procurement system, which requires further reducing the number of single tender procedures and eliminating or reshaping procedural solutions leading to market closure, including procedures under section 115 of the PPA and framework agreements widely utilised in centralised public procurement.

The investigation into the Beneficiary’s procurement method using framework agreements in the projects shows that the framework agreement similarly led to competition limitations in this case and caused overpricing in the projects cited in the complaints.

Recommendations

The Authority points out to the Beneficiary that conducting a public procurement procedure does not oblige the contracting authority to enter into a contract. If the contracting authority can only finalise a contract with unfavourable conditions, it has the option to cancel its procedure and potentially launch a new one.

• In looking ahead, the Authority suggests that the Managing Authority examine, including for possible instances of overpricing, the contents of the invoices, along with the prices of the items listed therein, that the Beneficiaries wish to settle; review its current audit procedure; develop a more stringent procedure; and integrate control points into its inspections that will prevent the possibility of the identified instances of overpricing.
• Furthermore, the Authority suggests that the DGSACS review its procurement policies and processes, while also establishing a preventive control system that would safeguard against the risk of entering into manipulated or overpriced procurement contracts. Moreover, the Authority suggests that the DGSACS refrain from employing the framework agreements under section 105 of the PPA or entering into long-term procurement contracts.
• The Authority recommends that the DGSACS allow the possibility of partial bids in its future public procurement procedures that are akin to the investigated Projects. The Authority contends that this move will assist the Beneficiary in enhancing competition, ensuring equal opportunity, and engaging a growing number of economic operators in public procurement procedures, thereby significantly improving effectiveness in the use of resources. In this context, the Authority also recommends that the DGSACS review its procurement plan regarding its next procurement of food packages funded by the EU and omit setting reference requirements for public procurement procedures similar to the one in question.