Performance and Accountability of Municipal Holdings in Hungary – The Role of Context and Adaptation

Empirical studies show that there are still governance and accountability challenges in the case of State Owned Enterprises and other hybrid organizations (Grossi et al., 2015). To tackle these challenges these entities... [ view full abstract ]

Empirical studies show that there are still governance and accountability challenges in the case of State Owned Enterprises and other hybrid organizations (Grossi et al., 2015).

To tackle these challenges these entities often look for patterns from the private sector or/and the more developed countries to improve their actual practice. Their special political, legal and cultural context, however, may prevent the proper adaptation and best utilization of the imported ideas.

This paper intends to investigate to what degree the so-called municipal holding concept fulfilled the prior expectations in Hungary and why. The focus of the research will be the ex-ante and ex-post performance and accountability level of those municipal companies that have been incorporated into a holding like structure in the last 15 years. The evaluation will also reflect to the specialty of the environment in which this innovation occurred.

Traditionally, middle sized and larger cities in Hungary have owned 5 to 15 separate local companies for providing utility, transportation, social and cultural services. They were diverse not only in profile, but also in size and profitability, and performed their support processes, like accounting, procurement, HR, in parallel. These companies have primarily been “administered” by the related departments of the mayor’s office.

Due to the fragmentation and the lack of professional governance most of the city portfolios have been making heavy losses or at least have not performed according to their potentials. Beside the financial problems it has also been widely observed that the strategic alignment of the municipal companies along a significant development program (like the reconstruction of the city center or opening a new industrial area) was very difficult because of the contrasting interests.

To change the status quo one of the innovative mayors in the Millennium started examining the private enterprise groups and, more specifically, the German Stadtwerke practice and following this pattern created a holding like structure that integrated most of municipal companies. A professional holding management has been nominated with direct reporting line to the General Assembly and the mayor. Shared services have also been established within the group. In the first years significant savings have been realized, though concerns have also been raised because of high level of power concentration and the “black box” characteristic of the new structure.

Following this example between 2002 and 2012 almost all the 22 Hungarian cities over 40.000 inhabitants considered the holding option, and many of them realized it, including Budapest, the Hungarian capital. This phenomenon or movement, that even the reigning central governments considered partisan like, have made not only strong political waves but also stirred professional debates that did not subside until now.

The research will be based on case studies to be conducted by the authors at some of the most significant municipal holdings.

The findings may help academics and practitioners alike to better understand the supporting and inhibiting role of the context and the level of adaptation that is needed to make a proven practice applicable and successful in the another environment.