Transparency International and the Hungarian business community

1. Transparency International and the Hungarian business community Budapest, February 10, 2009

2. CONTENTS • Corruption and its impact on Business • Corruption in Hungary • Transparency International Hungary’s anti-corruption efforts 1

3. CORRUPTION’S IMPACT ON BUSINESS Corruption has considerable direct impact on the operation of business: it increases costs, reduces ability to compete, and inhibits investment Description • In countries with widespread corruption companies are coerced to spend a relatively significant portion of their revenues on bribes Increases cost of doing business Corruption’s impact on business • Corruption favors those actors which have engaged in effective corruptive procedures and helps them capture markets Distorts competition • Higher uncertainty of business success caused by the secretive nature of corruption discourages investment and induces misallocation of resources Discourages investment Source: Oriens, Lambsdorff 2

4. KEY FACTORS DETERMINING LEVEL OF CORRUPTION The most important factors determining the level of corruption are income, business freedom, and government effectiveness. The three variables together explain more than 90% of the CPI score Relation with level of corruption Description Mechanism Income level • GDP per capita on purchasing power parity • The higher the income, the lower the level of corruption • Higher income enables operating a more efficient bureaucracy, reducing incentives for bribing both on the supply and the demand side Business freedom* • Ease of doing business • The higher the business freedom, the lower the corruption • The lower number of mandatory business contacts with the state lowers the number of potentially corrupt transactions. Government effectiveness** • Quality of public services, quality of policy formulation and implementation • The more effective the government, the lower the level of corruption • Effective governance results in better government institutions, which in turn are harder and less profitable to corrupt • Statistical analysis: • Regression analyses with data of 65 countries between TI’s CPI, and per capita GDP PPP data from the World Bank, Business freedom score from the Index of Economic Freedom, and Government effectiveness score from World Bank’s Worldwide Government Indicators 3 * Business freedom is measured by the Heritage foundation as a component in the Index of Economic Freedom. It is a quantitative measure of the ability to create, operate, and close an enterprise quickly and easily ** The Government effectiveness index measures most importantly perceptions of the quality of public and civil services, and the quality of policy formulation and implementation Source: Oriens analysis, Transparency International, World Bank, Heritage Foundation

5. CONTENTS • Corruption and its impact on Business • Corruption in Hungary • Transparency International Hungary’s anti-corruption efforts 4

6. CORRUPTION PERCEPTION INDEX 2000-2008Higher score implies lower level of corruption Between 2000 and 2008, the corruption situation in Hungary did not improve in absolute terms, and deteriorated relative to peers in Central Eastern Europe EU-15 Hungary CEE Source: Transparency International 5

7. CORRUPTION’S IMPACT ON BUSINESS The negative impacts of corruption on businesses are significant in Hungary Evidence in Hungary • 10% of firms spend more than 2% of their annual revenues on bribes Increases cost of doing business Corruption’s impact on business • Of 77 larger enterprises, 44% claims thatfailingin a tender might be a result of bribe from a competitor Distorts competition • 24% of firms stated they had decided not to make major investments because of fear of having to pay bribes Discourages investment Source: Oriens analysis, EBRD: Business Environment and Enterprise Performance Survey, 2005, PricewaterhouseCoopers: IV. Global Crime Survey – Hungary, 2007; Gallup: Corruption in the sphere of small and medium-sized private enterprises, 2000 6

8. RECOMMENDED KEY FOCUS OF ANTI-CORRUPTION EFFORTS IN HUNGARY Anti-corruption efforts should focus on improving the efficiency of government, since on the basis of the size of government expenditure alone one would expect Hungary to be much cleaner Roots of corruption in Hungary Predicted CPI • Based on Government effectiveness score, Hungary’s predicted level of corruption is in line with its perceived level • However, statistical analysis of the relation between corruption and the size of government reveals that the actual size of the government should imply a much lower level of corruption • Anti-corruption efforts thus should target the efficiency of government spending, since there is a substantial potential for Hungary to reduce corruption • Additionally, by increasing business freedom the level of corruption could decrease further • TI’s CPI, 2008 • Based on GDP PPP per capita • Based on Business freedom score • Based on Govern-ment effectiveness score • Based on Govern-ment size score* * Government size score is measured by the Heritage foundation as a component in the Index of Economic Freedom. It is defined to include all government expenditures Source: Oriens analysis, Transparency International, World Bank, Heritage Foundation 7

9. CONTENTS • Corruption and its impact on Business • Corruption in Hungary • Transparency International Hungary’s anti-corruption efforts 8

10. TI HUNGARY’S ANTI-CORRUPTION EFFORTS – HOW THE VARIOUS ACTIVITIES BUILD UPON EACH OTHER TI Hungary has developed a wide range of mutually supportive general and targeted activities in order to most effectively combat corruption A less corrupt and thus more business friendly environment • Enhancing business freedom • TI-H has launched targeted projects to enhance business freedom • Improving govern-ment effectiveness • TI-H is actively helping the government improve its effectiveness • Raising awareness of corruption as a problem • TI Hungary organizes continuous media and PR activities to enhance the effectiveness of its targeted actions • Ongoing analysis of the corruption situation • TI Hungary conducts regular surveys applying TI International’s methods to monitor the corruption situation Source: Transparency International Hungary 9

11. ACTIVITIES – ONGOING ANALYSIS OF THE CORRUPTION SITUATION By publishing the National Integrity System and the latest CPI rankings, TI Hungary helps obtaining a comprehensive picture about corruption in Hungary Past activities of TI Hungary • National Integrity System (NIS): TI Hungary has prepared a comprehensive study on the transparency and accountability of the Hungarian institutional setting from the perspective of corruption • Corruption Perception Index (CPI): TI Hungary has published TI’s global survey Plans for 2009 • NIS: TI Hungary will continuously monitor the implementation of measures recommended in the NIS • CPI: TI Hungary will update and publish the index and study for 2009 Source: Transparency International Hungary 10

12. ACTIVITIES – RAISING AWARENESS OF CORRUPTION TI-H puts significant emphasis on promoting anti-corruption together with its Corporate Sponsors through mutually beneficial activities Past activities of TI Hungary • By its high visibility on corruption related issues, TI-H has established itself as a key actor in policy-making and promoting anti-corruption Plans for 2009 • Organizing Anti-Corruption and Compliance conference together with Corporate Sponsors • Organizing Anti-Corruption Day Campaign together with Corporate Sponsors • Setting up Advocacy and Legal Advise Center • Airing anti-corruption ads • Establishing Newsletter • Additional PR by Fair Play Marathon Source: Transparency International Hungary 11

13. ACTIVITIES – ENHANCING BUSINESS FREEDOM TI Hungary is planning to launch several targeted projects which aim to directly improve the business environment in which companies operate Past activities of TI Hungary • Training of judges: TI-H has prepared a training handbook and detailed curriculum • Whistleblowers’ protection: TI-H has introduced the issue in Hungary, a bill is being drafted at the Ministry of Justice Plans for 2009 • Monitoring public procurements • Launching judicial trainings • Promoting the adoption of Business Principles for Countering Bribery by the private sector • Promoting Integrity Pacts • Establishing a Competition Database on the compliance of Hungarian enterprises with Competition Law Source: Transparency International Hungary 12

14. ACTIVITIES – IMPROVING GOVERNMENT EFFECTIVENESS TI-H devotes significant resources to improving government effectiveness - a key area where interventions are likely to have high impact Past activities of TI Hungary • Participating in policy formulation for public procurements: the related law has been amended by TI-H’s recommendations, Integrity Pact has been incorporated Plans for 2009 • Monitoring party and campaign financing • Taking part in anti-corruption policy formulation • Issuing policy positions • Advocating transparent public procurement system • Monitoring the utilization of EU funds • Monitoring state media spending Source: Transparency International Hungary 13

15. REQUIRED RESOURCES IN 2009 The cost of implementing the plan for 2009 is EUR 320,000. TI-H seeks to raise EUR 60,000 of this sum, which is not yet covered in its budget, from corporate sponsors Support sought from corporate sponsors EUR thousand TI-H’s budget for 2009 EUR thousand 320 Project-related expenses Core operational costs CEE Trust Core Funding Corp. project donors Grants and other income Total To be raised from corporate sponsors Source: Transparency International Hungary 14