The new Environmental Protection Act ("Act") of Hungary enters into effect in December 1995. The Act along with the new Privatization Act of Hungary which entered into effect in June of this year, provide a brand new framework for the protection of the environment generally and during the privatization process specifically.

Although environmental audits have become more wide spread during the course of the privatization process, with cautious foreign investors testing the limits of their financial liability and trying to have the State Property Agency (now APV Rt) undertake liability for existing environmental damages, it was the new Privatization Act which actually made the conduct of such audit compulsory prior to the sale of state owned assets. Accordingly, investors now are put on notice of the lurking environmental dangers by the tender documents themselves and one of the criteria considered by APV Rt upon determining the winner of the bidding process is the bidder's suggested resolution of environmental clean-up.

In the past the Hungarian Government tried to avoid the undertaking of environmental guarantees ( which would usually last three to four years) and preferred to reduce the purchase price of the assets instead. Accordingly, APV Rt and its predecessor privatization agencies undertook such guarantee in only 15 privatization cases in the past and limited the Hungarian Government's financial liability for environmental damages to HUF 7 billion. Thus far, only eight of the guarantees expired representing HUF 1,36 billion, the rest, however, remain valid and binding. Until now the privatization agency paid HUF 292 million representing a mere 4% of the environmental guarantees undertaken, which by far is below the extent of the liability incurred for other guarantees, e.g. loan guarantees where the above ratio is about 20%. With the gradual decrease of the valid guarantees, by 1998 the Hungarian Government's guarantee obligation is expected to be reduced to HUF 0,5 billion.

Special attention will be given to environmental issues in the upcoming privatization of Hungalu for example, a conglomerate of the most important companies of the Hungarian aluminium industry. The expected cost of the environmental clean-up of Hungalu is about HUF 4 billion, but the compulsory environmental audit may reveal causes giving rise to additional clean-up costs. Managers of the Hungalu companies are of the view that investors should undertake to finance the environmental clean-up and in return should be able to pay a lower purchase price. Pursuant to a government decree brought in August, Hungalu must have an environmental audit conducted and a clean-up schedule prepared at its companies no later than by June 30, 1996. Such schedule should subsequently be fully implemented by December 31, 1998. The environmental audit of two Hungalu companies has already been prepared. The clean-up of Aluminium Kft of Inota is expected to cost HUF 800 million, whereas that of Motim Kft is estimated between HUF 1 billion and HUF 2,5 billion.

The Act contains provisions which facilitate the enforcement of environmental clean-up and the protection of the environment generally, by imposing the general duty to terminate causes posing a threat to the environment. Courts and authorities are also given a much wider range of means for restricting or terminating environmentally dangerous activities.

Under the Act, users of land may be required to provide a so called environment protection collateral or take out liability insurance prior to commencing activities which may be potentially dangerous to the environment. Additionally, violators of environmental rules and regulations are subject to severe fines, which are proportionate to the amount, gravity and frequency of the environmental damages caused.

Activities likely to cause harm to the environment are also subject to licencing at the government level. Licencing is preceded by environmental impact studies, the nature of which varies according to the level of danger posed for the environment. Following such studies, the authorities may issue the licence but may also make it conditional upon the applicant complying with various environment protection measures, or may restrict or suspend any previously authorized activity.

Pursuant to the above, foreign investors intending to acquire an interest in Hungarian companies will be more and more compelled to comply with environmental protection rules in the future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information please contact: Beiten Burkhardt & Mittl Wegener Lawyers, Jozsef Nador ter 9, H-1051 Budapest, Tel: (36)(1)2661881, or enter a text search "Beiten Burkhardt Mittl and Wegener" and "Business Monitor".