PORTUGALDoing Business inFINANCIAL TIMES SPECIAL REPORT | Wednesday April 11 2012

Wealth from water

www.ft.com/portugal­2012| twitter.com/ftreports

Inside this issueThe euroEven in thedepths ofthe worstrecessionin 30years,enthusiasmis undiminished Page 2

Economy Amid the gloom,some light is beginning toappear Page 2

Banking Bankers will tellyou how different Portugalis from Ireland and GreecePage 2

Privatisation Controversialprogramme will clear almostevery saleable asset off thestate’s books Page 2

Reform Commentary bythecountry’sgreatest19thcenturynovelist isgiven anew airingPage 3

Politics If the bailout fails,it will not be because ofpolitical opposition Page 3

Business climate Evencontrarian investors mustconsider a series ofalarming data Page 4

Tourism The industry ispinning its hopes on visitorsfrom the newly wealthy inLatin America Page 4

Energy Green technologyhas placed Portugal amongthe vanguard of alternativeenergystates. Butcredentialshave comeat a highcostPage 4

Adecision to cancel con-struction of a high-speed rail link betweenLisbon and Madrid has

thrown into sharp relief the dis-appointment of Portugal’s hopesthat joining the euro would putthe country on the fast track tobecoming a mainstream Euro-pean economy.

Once seen as a milestone ofmodernisation, the €3.3bnproject was abandoned inMarch, less than a year after animminent financial collapseforced the country to followGreece and Ireland in seeking amulti-billion-euro bailout fromthe European Union and Inter-national Monetary Fund.

For the indefinite future,Europe’s high-speed rail net-work will stop at the Spanishborder, after Pedro Passos Coe-lho, Portugal’s prime minister,ruled definitively against build-ing the Portuguese stretch of aline that would have connectedthe two capitals in three hours,three times faster than today.

In terms of living standards,since joining the single cur-rency, Portugal has moved fur-ther away from the rest ofEurope, rather than closing thegap as it had hoped. Accordingto Peter Weiss, a EuropeanCommission economist, incomeper capita fell from 70 per centof the EU average in 1999 to 63per cent in 2011 and is expectedto fall to “close to 60 per cent”this year.

After the euphoria of becom-ing a founding member of thesingle currency, Portugal is hav-ing to come to terms with the

cost of belatedly adapting itseconomy to life in the eurozone:a debt crisis, painful austeritymeasures, its deepest recessionfor more than 30 years andrecord unemployment, 15 percent in February and is stillclimbing. One in three peopleunder 25 is out of a job.

José Adelino Maltez, 60, apolitical scientist at Lisbon’sTechnical University, says:“Compared with the sufferingand effort of many central Euro-peans, my generation hasn’t

done much to deserve the livingstandards we enjoy. But, likethe 2m people who left Portugalfor Europe from the 1960s, thegeneration below 30 is becominggenuinely European. They knowthe state is not going to employthem, that they will have to goout and compete for a job.”

In return for €78bn in bailoutfunds, the previous Socialistgovernment agreed in May 2011to a three-year adjustment pro-gramme based on three maincomponents: fiscal consolida-

tion, measures to strengthen thefinancial sector and wide rang-ing economic reforms to tacklelow growth and weak competi-tiveness, seen to be at the heartof Portugal’s difficulties.

Mr Passos Coelho, whosecentre-right Social Democrats(PSD) won a general electionless than three weeks after therescue agreement was signed,took office without any previousgovernment experience, but afirm belief in the adjustmentprogramme as the best and only

way forward. He formed agovernment coalition with theconservative Popular party(CDS-PP), ensuring a comforta-ble majority in parliament.

Having promised to “gobeyond” the requirements of thebailout, Mr Passos Coelho told aPSD congress in March that Por-tugal was engaged in a “tran-quil revolution” of economicreform. “The country will nothave a second chance,” he said.“We cannot [afford to] fail.”

The prime minister has lived

up to his promise to press scru-pulously ahead with the adjust-ment programme, establishing areputation for Portugal as thequiet, diligent student amongthe eurozone’s three bailed-outcountries.

Presenting the conclusions ofthe third quarterly review of theagreement by the so-calledtroika – the European Commis-sion, IMF and European CentralBank – in early April, Mr Weiss,who is deputy head of the ECmission to Portugal, said Lisbonhad fulfilled the agreement“almost to the letter”. Compli-ance was “extraordinarilygood”.

The government cut thebudget deficit from 9.8 per centof gross domestic product in2010 to 4.2 per cent last year.This was significantly below theofficial target of 5.9 per cent, butincluded the one-off impact ofrevenue from a transfer of bankpension funds to the state,equivalent to about 3.5 per centof GDP.

Lisbon was nevertheless ontrack for a structural adjust-ment in the deficit amounting to7.5 per cent of GDP over 2011and 2012, according to the troikareport. “This is enormous,” saidMr Weiss. “This is very ambi-tious.” He also noted that two-thirds of fiscal consolidationwas being accomplishedthrough spending cuts. The defi-cit target for this year is 4 percent of national income, fallingto 3 per cent in 2013.

Targets are being met at enor-mous cost. Public sector employ-ees will see their income cut byup to 30 per cent over 2011 and2012. Private sector pay is alsofalling sharply. Social paymentshave been reduced and taxes,particularly VAT, increased.

Resolved to see reforms throughStructural adjustmenttargets are being metbut at enormous cost,writes Peter Wise

Pedro Passos Coelho, the prime minister, who took office without any previous government experience, addresses the PSD congress Epa

Continued on Page 2

The country hasa long maritimetradition and isnow seeking toexploit the seain fresh ways,writesVictor MalletPage 4

2 ★ FINANCIAL TIMES WEDNESDAY APRIL 11 2012

Doing Business in Portugal

Resolvedto seereformsthrough

The unemployed, who havehad their benefits cut,workers earning the mini-mum wage of €485 a monthand elderly people receivingstate pensions of even less,find it increasingly difficultto make ends meet.

José Cordeiro of CáritasPortuguesa says requests tothe Catholic Church welfareagency for assistance rosemore than 40 per cent over2010 and 2011, a growingnumber of them comingfrom previously self-sufficient families on mod-est incomes.

“Portugal has a traditionof ‘honourable poverty’;people don’t like to show it.They keep it to them-selves,” says Prof Maltez.“But every day, you seepeople in shops asking forhalf a cutlet, one piece offruit.”

Despite the hardships,protests have been peacefuland relatively low key. Fol-lowing the biggest generalstrike to date, in November,a second 24-hour stoppagein March drew less supportafter the second-largesttrade union confederationagreed a labour pact withgovernment and employers.

Uppermost in people’sminds, says Antonio CostaPinto, a professor at theInstitute of Social Sciences(ICS), is uncertainty overwhether the sacrifices beingasked of them will producethe promised results.

The risks are many. Adeeper than expected down-turn in the EU, whichaccounts for 75 per cent ofexports, has already led to adownward revision ingrowth forecasts, with theeconomy expected to con-tract by 3.4 per cent thisyear and stagnate in 2013.

A recession in Spain, thecountry’s biggest exportmarket, would be evenmore disruptive. Heavydependence on imported oilalso makes Portugal vulner-able to any further increasein crude prices.

In common with othercountries implementingausterity programmes, Por-tugal also runs the risk thatdrastically cutting publicspending will aggravate itsfiscal problems, killing thepatient with the cure.

Some economists believethe bailout package was upto €20bn below what Portu-gal needed, having failed totake into account publicsector debts of about thatamount.

It has helped fuel a beliefthat Lisbon may not be ableto resume financing its debtin the market by September2013, as envisaged in therescue agreement, but willneed more funds from inter-national lenders.

Mr Passos Coelho insistshe will not be asking formore money or more timeto pay. He points out, how-ever, that the EU and theIMF are committed to con-tinuing their support forIreland and Portugal if theycannot return to the marketas scheduled due to “cir-cumstances beyond theircontrol”.

In a positive sign, yieldson 10-year governmentbonds have fallen fromabove 17 per cent in Janu-ary to below 12 per cent.

“Our assumption is thatthe [adjustment] pro-gramme will be enough,”said Mr Weiss. “The pro-gramme is very ambitiousand we don’t believe thegovernment can do more.Whether Portugal is able toconvince the markets is, ofcourse, another question.”

Continued from Page 1

Banks expect they willsoon be in a better state

The first thing a Portuguesebanker will tell a visitor ishow different the country’sfinancial sector is fromthose of Ireland and Greece,the other two eurozonemembers bailed out by theEuropean Union and theInternational MonetaryFund.

Unlike in Ireland, theywill say, it was not thebanks that sank the nationwith rash financial manage-ment, but the other wayround.

Unlike in Greece, theywill add, the crisis-strickeneconomy of Portugal is wellplaced for a recoverybecause of its internationalinvestments and relativelystrong exports. Bank depos-its have risen, not fallen,since the crisis began.

“In Portugal, the bankingsector was not at the heartof the crisis,” says a seniorexecutive at one of thecountry’s big five banks. “Itwas the result of fiscal pol-icy developments and thedowngrades of the economy[by credit rating agencies].”

José Maria Espírito SantoRicciardi, president andchief executive of theinvestment banking arm ofBanco Espirito Santo (BES),says that Portuguese bankswere well provisioned andprofitable until the state’sdebt and deficit problemsdeepened the sovereignbond crisis and forced thebailout.

Again, unlike Spain orIreland, Portugal has notrecently gone through aboom and bust in the prop-erty market. Its banks havenot needed rescuingbecause of sour propertyloans.

“In Portugal, it wasexactly the other wayround,” says Mr Ricciardi.“It was the republic thatcreated the problems for thebanks … The lowering ofthe ratings of the republicbrought down the bankswith it. For the banks, thatclosed the funding markets,which were substituted bythe European CentralBank.”

Even if Portugal’s bank-ers are not to blame – andthere were problems at twosmall banks, includingBanco Português de Negó-cios, nationalised in 2008after the collapse of Leh-man Brothers when it ranup €700m of losses – they

are still dependent on lifesupport in the form of ECBliquidity. And, like thestate, they still need to finda way to move beyond crisismanagement to recoveryand growth.

As recently as the end ofMarch, Moody’s, the ratingagency, again downgradedor partially downgraded thefive main banks: the state-controlled Caixa Geral deDepósitos; Banco ComercialPortuguês, or MillenniumBCP; BES; Banco BPI; andBanco Santander Totta,subsidiary of Spain’sSantander group.

Moody’s said it expecteddeterioration in the banks’domestic asset quality andprofitability, given the pooroutlook. It also blamed thedowngrade – all are nowclassed as “junk” or non-in-vestment grade – on thebanks’ risks arising from

their large holdings of gov-ernment-related debt, aswell as lack of access to pri-vate wholesale funding.

The agency said: “Whilenone of these pressures arenew, in Moody’s view theycontinue to mount againstthe backdrop of the eurodebt crisis.”

Portugal’s €78bn bailoutpackage included €12bn torecapitalise banks, andexecutives have been decid-ing whether they need themoney being pressed onthem by the EU, the IMFand the ECB to achieve theenhanced capital ratiosapplied across Europe.

Bankers and analysts esti-mate only about half theoffered money will be takenup, with Mr Riccardi sayingBES does not think it will

take even “one cent”, whileMillennium BCP, for exam-ple, is expected to accept€2bn.

If all goes to plan and theeconomy begins to recoverafter this year, the stateshould actually profit fromits bank recapitalisationlending, with escalatinginterest rates to encourageearly repayment.

In the meantime, Portu-guese banks are beingasked to recapitalise,reduce their debts, andsimultaneously continue toprovide credit to the realeconomy. It is a tall order.

“Banking sector delever-aging is the linchpin of pri-vate sector deleveraging,”says Cristina Casalinho,BPI’s chief economist. “Butif the credit tap is closed bythe banks … that seeps intothe economy and the pri-vate sector acts accord-ingly. You see investmentshrinking, you see realestate in the doldrums.Housing credit has juststopped. Portugal is veryreliant on bank credit, asare most continental Euro-pean economies.”

Mr Ricciardi also notesthe contradiction betweenthe desire to strengthenbanks, while wanting themto lend more to drag theeconomy out of recession.

Nearly half of BES’sbanking income comes fromabroad, and it is clear thatinvolvement in emergingmarkets is a source ofstrength for Europeanbanks when the eurozone isstagnant, just as netexports could be a lifesaverfor the economy as a wholewhen domestic business isso mired in gloom.

Mr Ricciardi insists thatPortugal is not Greece. “Ithink the markets are per-ceiving that we are doingour work well,” he says.“People are aware that nowit’s time to work, time tosuffer, and time to get outof this situation – and hope-fully never to return to it.”

Financial servicesRecovery is forecastto begin next year,says Victor Mallet

Hardships fail to diminish enthusiasm for euro

When a waiter accidentally splita tray of beers over Angela Mer-kel, the German chancellor, inFebruary, a Portuguese TV com-edy programme quickly adaptedthe scene, making the employeea mischievous Portuguese immi-grant intent on revenge for theperceived wrongs a German-ledEurope was inflicting on hiscountry.

The sketch may have raised alaugh, but the Portuguese arenot given to blaming Germany,Europe or the euro for the sover-eign debt crisis or the hardshipsmany people face as a result of adeep and protracted recession.

António Pinto Costa, a politicsprofessor at Lisbon’s Institute ofSocial Sciences, says: “Euro-scepticism has increased as liv-ing conditions have worsened,but these feelings have not beenmobilised politically and there isvirtually no anti-German ornationalistic anti-European senti-ment.”

Portugal’s qualification as afounding member of the euro-zone in the late 1990s wasgreeted with euphoria, as thecountry began to enjoy the bene-fits of falling interest rates and aconstruction boom fuelled byEuropean Union funds.

Even today, when the costs ofadapting to euro membershiphave become starkly evident to acountry facing its worst reces-sion in more than 30 years, pollsshow that only 16 to 18 per centof the population describe them-selves of distrustful of Europeanintegration.

“People who remember howpoor Portugal was before wejoined are not going to say badthings about Europe,” says JoséAdelino Maltez, a political scien-tist at Lisbon’s Technical Univer-sity. In terms of development, hesays, Portugal has moved in ashort period from a country com-parable with Morocco to “some-where near the suburbs ofMadrid”.

European structural fundshave made an important contri-bution to modernisation andhigher living standards. But thequestionable benefits of someinfrastructure investments andpublic-private partnerships areseen as symptoms of a past lackof fiscal rigour that led to thecurrent debt crisis.

“We, the passive majority ofthe Portuguese, have seen ourlifestyles improve over the pasttwo decades, mainly for electoralreasons, without the same sense

of sacrifice as some central Euro-pean countries,” says ProfMaltez.

“But we haven’t achieved thesame levels of education or pro-fessional training.”

Portugal, he believes, hasbegun making those sacrifices,particularly the younger genera-tion, as the unemployment rateamong under-25s rises above 35per cent and many graduatesemigrate in search of jobs befit-ting their qualifications.

Before joining the euro, thecountry kept its exports competi-tive through low wages and bydevaluing its currency, a policythat had the effect of stokinginflationary pressures and lower-ing living standards.

One of the most important fac-tors now contributing to thelower costs needed to makeexports more competitive is asharp reduction in public sectorpay – a loss of up 30 per cent in

real terms in 2011 and 2012 –which, to varying degrees, isbeing replicated in the privatesector.

The Portuguese, however, havea tradition of resilience.

Some commentators expresssupport for the view that it isGerman and French banks thatlent unwisely, rather than Portu-gal itself that is being bailed out.

But by every discernible sign,the Portuguese remain commit-ted to keeping the euro, what-ever the cost.

The radical Left Bloc (BE) losteight of its 16 seats in last June’selection. The party had declinedto meet representatives of the so-called “troika”, the EuropeanCommission, International Mone-tary Fund and European CentralBank, when they visited Lisbonto discuss the bailout.

“I was furious that theyrefused even to talk to the troikaand put their views across,” says

a young biologist, who had previ-ously been a BE supporter. Thehardline Communist partygained 16 of the 230 parliamen-tary seats in the election, com-pared with 15 previously.

Neither party campaigns forPortugal to leave the euro, call-ing instead for “a more socialEurope”.

“Euro-scepticism has no partypolitical representation in Portu-gal,” says Prof Costa Pinto.

“No extremist groups or patri-otic anti-European parties haveemerged in the way they have inAustria, the Netherlands, Franceand elsewhere.”

“The political parties thatformed in Portugal after thereturn of democracy in 1974 areall based on German models,”says Prof Maltez. “Many of ourleading politicians were educatedin German institutes.

“Portuguese democracy isEuropean from the inside out.”

Single currencyCommitment to theproject remains strong,reports Peter Wise

Countrypreparesfor lifeafter debt

Even in the goodyears before theglobal crisis, thePortuguese econ-

omy was stagnant.This was the alert

sounded by Poul Thomsenof the International Mone-tary Fund said in May 2011,when the European Com-mission, European CentralBank and IMF negotiatedLisbon’s €78bn bailoutpackage.

The idea that low growthand a lack of competitive-ness form the crux of thecountry’s difficulties is analmost universally accepteddiagnosis.

As a consequence, therescue programme has beendesigned to place moreemphasis on raising produc-tivity and reducing labourcosts than those agreedwith Greece and Ireland.

“The country needs tobecome more open to com-petition,” said Mr Thomsen,who headed the IMF mis-sion in the bailout talks.

In the decade ending in2010, annual growth aver-aged 0.7 per cent, comparedwith an average of 1.1 percent for the eurozone as awhole.

Employment was staticover the same period. Thefigures underline the extentto which Lisbon has under-performed its Europeanpartners, but, as CristinaCasalinho, chief economistat Banco BPI points out,Portugal was not alone.

“People worry about Por-tugal growing so poorly,”she says. “But the fact isthat over the past decadePortugal, Germany, Den-mark, Italy and Japan allhad similar growth rates.”

But while Germanyenjoyed export-led growthof 3 per cent in 2011, Portu-gal entered its worst reces-sion in more than a genera-tion.

The economy, hit bystringent austerity meas-ures, shrank 1.6 per centlast year and is expected to

contract 3.4 per cent thisyear, according to the Bankof Portugal.

The central bank has alsorevised its growth projec-tion for 2013 to zero, from0.3 per cent, a more pessi-mistic view than govern-ment forecasts, whichenvisage a mild recoverynext year. If the bank isright, Portugal will haveseen minus or zero growthin four out of the five yearsfrom 2009 to 2013.

Chronic annual trade defi-cits of 7 to 11 per cent ofgross domestic product overthe past decade led to asteady accumulation of pri-vate and public sector debt.

By 2009, combined house-hold and non-financial cor-porate debt had reachedalmost 240 per cent of GDP,one of the highest levels inEurope. Amid the gloom,however, some light isbeginning to appear.

Whether growth nextyear is slightly below orabove zero, economistshope the trough of therecession will be in 2012.

Ms Casalinho says: “If wecan avoid a quarterly con-traction of more than 4.5per cent this year, com-pared with the same periodin 2011, we should be ableto escape a vicious down-ward cycle.”

Public debt is forecast topeak at 115 per cent of GDPin 2013 – below the 120 percent considered unsustaina-ble – before gradually fall-ing to about 80 per cent.

The risks are neverthelesshigh. Recession in Europe,which buys three-quartersof Portugal’s exports, andparticularly in neighbour-ing Spain, which accountsfor a quarter, would be badnews. A further rise in oilprices would make the out-look even worse.

On the domestic front,the principal danger is thatthe austerity programmebeing implemented totackle the debt crisis willfatally undermine thegrowth the country needsto boost tax revenues andreduce social spending.

“The treatment is sostrong, I fear that we maykill the patient with thecure,” says Carlos Loureiro,a tax partner with Deloitte.

But positive signs are alsoemerging. Exports grew 13.5per cent in value in 2011 to€61bn, the highest annualfigure to date, with goodsaccounting for about €42bnand services for €19bn. Atthe same time, a sharp dropin domestic demand hasseen annual import growthfall in value terms from 10.4per cent in 2010 to 1.8 percent last year with a con-traction of 4 per centexpected in 2012.

From an exceptionallyhigh average of about 10per cent of GDP in the dec-ade to 2010, the currentaccount deficit is estimatedto have fallen below 7 percent of GDP in 2011. Someeconomists believe a zerotrade deficit is within reachby the end of this year. Thedecade-long loss in competi-tiveness has also beenhalted and is beginning tobe reversed.

“Something is definitelychanging,” says Ms Casal-inho. “Imports are nolonger such a huge drain ongrowth. Exports are theonly engine we have andthere are encouragingsigns that exporters are

consistently makinginroads into new marketsoutside Europe.”

China was the biggestgrowth market for exportsin 2011, increasing by 68 percent from a low base,largely due to car exportsby AutoEuropa, a Volkswa-gen plant near Lisbon.Vehicles are the second big-gest exports, accounting for13.3 per cent of the total,after machinery and tools,including auto components,at 14.5 per cent.

Germany, the second larg-est market, made the big-gest contribution to exportgrowth last year, as compa-nies supplying componentsbenefited from its exportboom and the Portuguese-based plants of companiessuch as Bosch, Siemens,Leica and Volkswagenincreased overseas sales.

“Foreign investment is animportant means of increas-ing our exports,” says PedroReis, head of Aicep, theinvestment and tradeagency. “Portugal can serveinvestors both as a door toEurope and a window over-looking Latin America andAfrica.”

EconomyPositive signsare emerging,writes Peter Wise

Export engine: car sales overseas make up 13.3% of total

Extensive sell-offs constitute irreversible retreat by government

Pedro Passos Coelho, the primeminister, scored a big success asa pro-market reformer by sellingstakes in two state-ownedenergy utilities at high premi-ums within eight months ofcoming to office

The sales raised close to€10bn in investment and financ-ing commitments.

But his plan to include waterutilities and RTP, the state tele-vision broadcaster, in an exten-sive list of sell-offs, expected to

raise up to €7bn in direct invest-ment over three years, is alsoone of the most politically sensi-tive issues on the governmentagenda.

There is potential conflictbetween the prime minister’spledge to reduce the high subsi-dies paid to producers of renew-able energy and governmentcommitments made to the twoChinese utilities that acquiredthe state holdings in Energiasde Portugal, the dominantpower utility, and RedesEnergéticas Nacionais, operatorof the national grid.

According to a Portugueseanalyst, “short-term cash pres-sures may have held sway overmore long-term perspectives”.

In December, China’s Three

Gorges Corporation outbidrivals from Germany and Brazil,to acquire 21 per cent of EDP for€2.69bn, a 53 per cent premiumover the market price.

The deal involves a totalinvestment and credit packageof up to €8bn, much of whichwill be focused on overseas mar-kets, including Brazil, the USand elsewhere in Europe.

Two months later, State GridCorporation of China, the coun-try’s biggest utility, paid €387mfor 25 per cent of REN, a 40 percent premium on the marketprice.

The privatisation programmewill clear almost every saleableasset off the state’s books.

Pedro Reis, head of Aicep, Por-tugal’s investment and trade

agency, says: “These privatisa-tions represent a structural shiftin the role of the state in Portu-gal, marking a positive point ofno return. The state will nolonger be an active player in theeconomy.”

Mr Passos Coelho signalledhis commitment to this philoso-phy by quickly abolishing thespecial voting rights, or “goldenshares”, held by the state inEnergias de Portugal (EDP) andPortugal Telecom.

Despite European UnionCourt of Justice rulings againstthem, previous governmentshad resisted relinquishing theserights, which enabled the gov-ernment to veto strategic deci-sions by the former state-ownedmonopolies.

Most of the privatisationswere already part of Mr PassosCoelho’s election manifesto. Butthe economic adjustment pro-gramme agreed with the EU andInternational Monetary Fundrequires the government toaccelerate the plan by pursuing“a rapid and full divestment”from EDP and TAP, the stateairline.

TAP and Aeroportes de Portu-gal, the airports authority, both100 per cent state-owned, are thenext companies scheduled to besold.

CP Carga, the state railwayfreight service, Correios de Por-tugal, the post office, and CaixaSeguros, the insurance arm ofstate-owned bank Caixa Geralde Depósitos will also go on the

block, as well the state’sremaining 7 per cent stake inGalp Energia, the dominant oiland gas utility.

In addition to the stated aimof the privatisations to “reducegovernment financing needs,stimulate competition andattract foreign capital”, Mr Reissees a strong alignment betweenthe sell-off programme and Por-tugal’s efforts to expand itsexport markets beyond Europe.

“The premiums paid by theinvestors who bought stakes inEDP and REN show that theysee value in them that goesbeyond their market value, theirtechnical competence or thequality of their management –that is their growth potentialabroad.”

Investors buying into Portu-guese companies are interestednot only in the domestic econ-omy, he says, but also in thecountry’s “natural markets” inAfrica and Latin America, par-ticularly, but not only, formercolonies such as Angola, Braziland Mozambique.

State Grid Corporation ofChina is committed to financetotalling €1bn, including jointventures in Angola and Mozam-bique. Both the EDP and RENsales are also expected to pro-vide the Portuguese utilitieswith a toehold in China.

“If it was not for these privati-sations,” says Mr Reis, “it wouldhave taken Portugal years toregister on China’s strategicradar.”

Privatisation‘A rapid and fulldivestment’ is in train,writes Peter Wise

ECB liquidity provision

Source: National central banks

€bn

2007 08 09 10 11 120

50

100

150

200

Portugal

SpainIrelandGreece

Italy

‘The lowering of theratings of therepublic broughtdown the bankswith the republic’

FINANCIAL TIMES WEDNESDAY APRIL 11 2012 ★ 3

Doing Business in Portugal

If Portugal’s €78bn bailoutagreement fails to producethe desired results, it willalmost certainly not bebecause of political opposi-tion, social unrest or a lackof government belief.

As Antonio Costa Pinto, apolitical scientist at Lis-bon’s Institute of Social Sci-ences, puts it: “All the polit-ical conditions are in placeto fulfil the programme: asecure government coali-tion that firmly believes inwhat it’s doing; supportfrom the main oppositionparty; and a low level ofsocial confrontation.”

When Pedro Passos Coe-lho, the prime minister, ledhis centre-right Social Dem-ocrats (PSD) to a generalelection victory in June2011, he inherited a rescue

agreement that the previ-ous Socialist governmenthad negotiated only amonth earlier with theEuropean Union and Inter-national Monetary Fund.

But Mr Passos Coelho,who formed a majority coa-lition with the small, con-servative Popular party(CDS-PP), is decidedly morecommitted to the three-yearprogramme than the centre-left Socialists (PS), whowere forced to negotiate theagreement to avert animminent financial col-lapse.

Prof Costa Pinto com-ments: “The government isnot implementing the pro-gramme because it isobliged to, but because ittruly believes this is bestway forward.”

The sovereign debt crisisled to an early general elec-tion less than three weeksafter the rescue agreementwas signed. José Sócrates,the Socialist leader who hadbeen prime minister for theprevious six years, suffereda heavy defeat and with-drew from active politics.

Mr Passos Coelho, whohad no previous govern-ment experience, formed acoalition government withthe CDS-PP that commandsa comfortable majority of 34seats in the 230-seat parlia-ment. Including the PS,now the main oppositiongroup, the three partiesthat support the bailoutprogramme won more than77 per cent of the vote,although the turnout wasonly 58 per cent.

The prime minister haspromised to “go beyond”

the agreement in an effortto restore confidence in thedebt-stricken economy, say-ing he will “surprise” finan-cial markets by achievingdeficit-reduction targetsahead of schedule.

As important ministers,he has appointed techno-crats with no political expe-rience.

Álvaro Santos Pereira,the economy minister, waspreviously a professor at aCanadian university. Abook he published a monthbefore negotiations on thebailout began advocatesmany of the same reforms.

Vítor Gaspar, a previoushead of the European Cen-

tral Bank’s research depart-ment, brings impeccabletechnical credentials to hisjob as finance minister. OneLisbon newspaper hasdescribed him as “the voiceof Portugal’s sat nav”, un-emotionally guiding thecountry along the route tofiscal rectitude.

Nuno Crato, educationand science minister, is aprizewinning mathemati-cian who has written bookson educational reform, butnot previously held politicaloffice.

Paulo Macedo, the healthminister, is a banker whowas headhunted by the pre-vious PS government tobeef up tax collection.

Almost half the ministersin the government are tech-nical experts without previ-ous experience of politicaloffice, far from unusual inPortugal and a little belowthe average for the past 20years. According to onesociologist, academics and“independents” in govern-ment are seen as symbols ofcompetence and opennessto civil society.

Antonio José Seguro, thePS leader who succeededMr Sócrates, accuses thegovernment of ideologicalzeal in implementing theadjustment programme,resulting in excessive aus-terity that he says willchoke off any potential forgrowth and result in adownward spiral of debtand recession.

The PS opposes plans toextend the privatisationprogramme beyond the bail-out agreement to includeassets such as water utili-ties and RTP, the state tele-vision broadcaster.

Only the hardline Com-munist party (PCP) and theradical Left Bloc (BE)oppose the bailout deal. TheBE saw its share of the votedrop sharply in the election.The two parties polled justunder 13 per cent of thevote between them.

The Communist-leaningCGTP, the main tradeunion confederation failedto mobilise substantial sup-port for a 24-hour generalstrike in March, the secondin four-months, reflecting arelatively low level oflabour unrest and socialresistance to the adjust-ment programme.

Union leaders said asharp reduction in purchas-ing power meant that manyworkers could not afford tolose a day’s pay.

Prof Costa Pinto com-ments: “The chief difficultyfacing the government isnot political opposition, alack of commitment orlabour unrest. It’s uncer-tainty.

“Uncertainty among thepopulation over whetherthe sacrifices they are beingasked to make will bringthe promised reward of aneconomic recovery, orwhether a recession acrossEurope will leave us evenworse off than we are now.”

Bailout agreement enjoyssupport across party linesPoliticsBut there is noguarantee thatausterity will payoff, says Peter Wise

SocialDemocrats(PSD) 108

Portuguese General Election

Source: National Electoral Commission

Jun 5 2011 (% and number of seats)

Socialists (PS) 74 Popular Party(CDS-PP) 24

Democratic UnityCoaliition

(PCP) 16

Left Bloc(BE) 8

Others0

38.7%

28.1%11.7%

7.9%

5.2%

8.5%

Our situation is compa-rable only with that ofGreece: the same pov-erty, the same politi-

cal disgrace, the same economicmess.” This caustic observation,written in 1872, is one of numer-ous commentaries by JoséMaria de Eça de Queirós, widelyconsidered Portugal’s greatest19th century novelist, beinggiven a new airing by modernpundits.

Cristina Casalinho, chief econ-omist at Banco BPI, says: “Eçade Queirós was a very cynicaland sceptical writer who every-one likes to quote nowadays. Hecriticised corruption, the mal-functioning of the judicial sys-tem, the poor quality of politi-cians, the lack of business driveand much more.”

A number of Portuguese com-mentators are suggesting theproblems underlying the coun-try’s lack of competitivenessstem from traits that are notjust a few decades old but goback more than a century.

Ms Casalinho is not whollyconvinced by the pessimism.“The progress on the trade bal-ance couldn’t have materialisedunless the Portuguese economywas more competitive than peo-ple think,” she says, pointing toa 13.5 per cent increase in thevalue of exports last year andthe possibility of a zero tradedeficit by the end of 2012.

Miguel Sousa Tavares, one ofthe country’s most trenchantcolumnists and himself a best-selling novelist, commentedrecently: “Eça was perhapsmore caustic than we are todayand that’s cause for optimism. Ahundred years ago, he saw nofuture for Portugal, but we’restill here.”

Portugal and Greece wereviewed “in foreign books andmagazines” as two “chaotic”countries that could be “erasedfrom the map of Europe”, wroteEça de Queiroz.

Until recently, many interna-tional analysts thought bothcountries would be forced out ofthe eurozone. But most Euro-pean leaders and economistsnow acknowledge that it wouldbe wholly unfair to equate Por-tugal with Greece in terms ofthe scale of its debt difficulties,the transparency of its publicaccounts or its cross-party com-mitment to reform.

Eça de Queirós’s scathingcommentaries have beenrevived amid a debate over eco-nomic reforms seen as vital tomaking Portugal more competi-tive and productive. The needfor structural reforms has beenwidely acknowledged for more

than a decade, but successivegovernments have shied awayfrom the political cost of imple-menting them.

The reforms now lie at theheart of the economic adjust-ment programme Lisbon hasagreed with the European Unionand the International MonetaryFund, which see them as vital tothe sustained export-led growthneeded to lift the economy outof debt and recession.

The agreement sets out tightdeadlines for implementingthem over three years.

Many believe this externalpressure is the best chance Por-tugal will have to push thereforms through.

Carlos Loureiro, a tax partnerat Deloitte, says: “This time, wehave a window of opportunity todo something less cosmetic andmore structural than in thepast, especially in those areaswhere it will be politically pun-ishing.”

New labour laws, expected totake effect within months, areamong the most politically con-tentious reforms. The new legis-lation will make it easier to fireworkers and substantiallyreduce the cost of doing so.

According to the Organisationfor Economic Co-operation andDevelopment, employees inPortugal with open-ended con-tracts have been among the

most protected in Europe, withdismissal compensation averag-ing about a month’s pay forevery year worked.

The new laws will increaseworking hours, introducing an“hour bank” of up to 150 hoursa year.

The aim is to introducegreater flexibility by enablingemployers to draw on this bankand extend the working week toa maximum of 50 hours duringpeak periods, compensatingworkers with time off duringslack times or pay at normalrates.

Overtime pay will also be cut,four of the 10 bank holidays ayear will be eliminated and

annual leave restricted to maxi-mum of 22 days, from a previouspotential maximum of 25 days.Unemployment benefits will bereduced and paid for shorterperiods than previously.

Portugal’s slow-moving justicesystem is also due to undergowhat Mr Loureiro describes as a“courageous” reform.

The current bureaucratic sys-tem, in which cases, includingtax disputes, can take manyyears to resolve, is seen as aserious deterrent to foreigninvestment.

Specialised courts are to becreated to deal with business lit-igation, with priority for taxcases involving more than €1m.

Procedures are to be simplifiedand measures introduced toclear the backlog of existingcases, including arbitration toincrease out-of-court settlementand justices of the peace tohandle small-claims disputescases.

“The justice system is oneof Portugal’s most seriousproblems and for the firsttime, structural changes thatwere obvious to many peopleare going ahead,” says MrLoureiro.

Getting these and otherreforms (see box above) on thestatute book will represent animportant step toward greatercompetitiveness that no previ-ous government has attemptedso comprehensively or so fast.

If they also produce thedesired results in practice, evenEça de Queirós would have hadto formulate a rare accolade.

External pressure ‘best chance for change’CompetitivenessFor the first time,there is appetitefor structural reform,reports Peter Wise

A statue of José Maria de Eça de Queirósm, ‘a cynical writer who criticised corruption, the malfunctioning of the judicial system and the poor quality of politicians’ Dreamstime

ContributorsPeter WiseLisbon Correspondent

Victor MalletMadrid Bureau Chief

Miles JohnsonMadrid Correspondent

Jill JamesFT Contributor

Stephanie GrayCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

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‘All theconditionsare in place’ÁlvaroSantosPereira

Legislation

Other business-relatedreforms tabled or under way:● A bankruptcy law, based onthe US “Chapter 11”, to replacecurrent legislation which,according to Carlos Loureiro, atax partner at Deloitte,condemns companies to a“slow and painful death”, butoffers no hope of recovery formany that face financialdifficulties but are viable.● A competition law to giveregulators greater powers andresources to gather evidenceand ensure fairness. Under thecurrent system, consultantssay regulators are losing toomany cases on appeal.● An industrial licensing lawthat Álvaro Santos Pereira, theeconomy minister, describes asthe “most advanced inEurope”, aligned with the bestpractices in the world andexempting the vast majority ofcompanies from the need foran industrial licence.● Tenancy regulations toreplace antiquated controlsthat stopped many rents frombeing increased significantly fordecades, leaving flats empty incity centres and hamperinglabour mobility.

4 ★ FINANCIAL TIMES WEDNESDAY APRIL 11 2012

Doing Business in Portugal

Regulatory uncertainty clouds outlook for power sector

Before the crisis struck,Portugal’s energy sectorwas lauded as an examplefor others in Europe to fol-low, with its use of greentechnology placing itamong the vanguard ofthose trying to diversifyaway from fossil fuels.

Renewable energyaccounts for more than 40per cent of electricity con-sumption and is estimatedto have saved about €2.5bn

in fuel imports since 2005,making Portugal one of thefew countries in Europe ontrack to meet the EuropeanUnion’s target for a fifth ofenergy consumption to begreen by 2020.

For a country blessedwith a long and windycoastline, and long hours ofsunshine, Portugal is seenas a natural geographicalfit for turbines and solarpanels.

Wind power has domi-nated, with 4,300 of the18,000 installed megawattsof capacity in the electricitygrid powered by gales fromthe Atlantic and the hills tothe north.

This success, however,has come at a cost. Partlyto stimulate investment,previous governmentsadopted a strategy of feed-in

tariffs, meaning the statewould undertake to buyelectricity from green pro-ducers at an above-marketrate for a fixed period.

Another issue has beenthe “tariff deficit” built upover the past decadebecause of the gap betweenthe subsidised price con-sumers pay and the highercost of producing electricityas oil prices have risen.

This difference, guaran-teed by the state, stemsfrom longstanding contractssigned with producers suchas Energias de Portugal(EDP), the former powermonopoly, in the late 1980s.

Under the terms of thefinancial aid package, Por-tugal is required to try torenegotiate these contracts.

These deals have comeunder increasing scrutiny

because of high consumerenergy prices and a per-ceived lack of competition.

“The Portuguese energymarket has been one of theleast competitive inEurope,” says CarlosPimenta, former secretaryof state for the environmentwho now runs a windenergy company.

As the economic situationhas deteriorated, the highprice of electricity hasbecome increasingly contro-versial. With public sectorworkers forced to acceptpay cuts and unemploy-ment continuing to rise,households suffered anincrease in the VAT paid onelectricity from 6 to 23 percent last October.

For a country seeking toboost its competitiveness,shrink its budget deficit,

and boost confidence follow-ing the trauma of the Euro-pean Union and Interna-tional Monetary Fund bail-out, high electricity pricesdo not help to attractinvestment.

While the EU has praisedthe progress with economic

reforms, the troika (Euro-pean Commission, IMF andEuropean Central Bank)has remained under-whelmed by the lack ofaction in the energy sector.

The most recent troikareport argued “substantial

further action will be neces-sary to set the surging debtof the electricity system[the tariff deficit] on a sus-tainable path by correctingthe excessive rents associ-ated to the production ofrenewable energy”.

So far, efforts to renegoti-ate contracts with electric-ity producers and reducesubsidies, have not onlybeen slow, but occasionallychaotic.

In March, the governmentsuffered its first significantcasualty when HenriqueGomes, secretary of statefor energy, resigned afterclashes over the direction ofthe sector under reformsordered by the troika.

The government was alsoplaced in the awkwardposition of running theprocess to sell off a 21.35

per cent state stake in EDP,which was eventuallybought by China’s ThreeGorges in a €2.7bn deal.

To lower the high priceswould have reduced EDP’svalue while a sell-off wasbeing attempted.

To try radically to alterthe contracts now risksdamaging internationalcredibility at a time whenthe country is striving toattract foreign investment.

With a new energy minis-ter in place, analysts areexpecting progress to accel-erate. How policy will lookin the end, however,remains a guessing gamefor a nervous sector.

“The regulatory uncer-tainty is the most impor-tant thing in Portugal’senergy sector right now,”says Felipe Echevarría

Olaso, an analyst at Espir-ito Santo investment bank.

The government is awarethat, as a member of theEnergy Charter, an interna-tional agreement to protectinvestors in energyprojects, it is unable unilat-erally to alter the feed-intariff agreements withouttriggering legal battles.

This means it will beforced to negotiate a settle-ment.

Whether this will erodethe country’s competitiveadvantage in wind energy,a sector estimated to havecreated more than 5,000jobs, is also likely to playon the minds of ministers.

“It is important we canreach a mutual agreement,”says Mr Pimenta. “Both forthe renewables sector, andthe country.”

Oceangoingnation opensnew chapter

In the midst of an appar-ently interminable eurozonecrisis, the Portuguese canbe forgiven for wallowing innostalgia when it comes totheir maritime history.

After all, this smallnation on the Atlanticshore discovered most ofthe “new world” previouslyunknown to Europe, withthe result that it becamethe richest nation in thewest in the 16th century.

The names of BartolomeuDias (Africa), Vasco daGama (India) and Fernão deMagalhães – Magellan, wholed the first circumnaviga-tion of the globe but waskilled in the attempt – echodown the centuries.

None of this is of muchpractical use, however, for acountry trying to extractitself from recession andfrom dependence on bailoutmoney from the EuropeanUnion and the InternationalMonetary Fund.

The crisis has spawned aclutch of schemes to revivePortugal’s marine indus-tries – or create new ones –and monetise its maritimetraditions.

Professor José FerreiraMachado, dean of the NovaSchool of Business and Eco-nomics, has this yearlaunched a Major in Mari-time Business subtitled“creating value with theoceans”. He says: “If youhad asked me two yearsago, I’d have said the onlything I know about oceansis that I swim.”

The idea is to train agroup of bright studentswho can make the most ofthe country’s marineresources, whether in areassuch as fisheries, offshorealternative energy, shippingand port management orcoastal tourism.

“We have this discourse,this narrative of the oceansthat is very romantic andnostalgic,” he says. “This isnot the way of doing it. Wehave to have a hard-nosedbusiness approach. Howcan we make money withthe oceans? How can wecreate sustainable value?”

The government has evenmore ambitious long-termplans. Manuel Pinto deAbreu, secretary of state forthe sea, is negotiating atthe UN for an extension ofthe country’s continentalshelf and the associated sea-bed rights.

Portugal, with its Atlanticcoastline and the islandgroups of Madeira and theAzores, already dominatesan area of nearly 2m sq kmand hopes to double that ifthe negotiations are suc-cessful over the next sixyears.

“We are not looking onlyat fisheries,” Mr Pinto deAbreu says. “We thinkthere’s much more. Marinebiotechnology, metallic andnon-metallic minerals, eve-rything that’s on the bot-tom.”

Commenting on theresources, he says: “Weneed to discover them,prove they are there andcreate incentives for invest-ment in this area.”

Generating value fromthe sea in the short termremains difficult.

In freight, the containerterminal at Sines, south ofLisbon, on the routes fromthe Americas and Asia toEurope, could become ahub, but there is stiff com-petition from busier portsin northern Europe and inValencia, Spain.

In fisheries, there is scantcapacity for further exploi-tation of strained resources,except perhaps throughmarine aquaculture.

“The fisheries industry isnot a heavyweight eco-nomic sector in the contextof the domestic economy,”says António SchiappaCabral, secretary-general ofAdapi, an association of 42commercial fishing groupsrepresenting 74 vessels upto 80 metres in length.

Mr Schiappa notes thatPortugal, whose nationaldish is salted cod, consumesabout 600,000 tonnes of fisha year, twice as much as itproduces, and is the world’sthird highest fish consumerper capita after Iceland andJapan.

Mr Schiappa insists that,for all the talk of offshorewind farms and the devel-opment of maritime tour-ism, it makes sense toinvest in research andsound management of theestablished business of fish-ing. “There’s recreationalfishing, there’s sailing, butto contribute to the eco-nomic growth of the coun-try, I see only [industrial]fisheries.”

Others believe that thereare immediate benefits tobe had from promoting

sports and leisure tourismconnected with the sea.

Last summer, Cascais,near Lisbon, hosted the firstround of the America’s CupWorld Series – a televisualsailing competition featur-ing high-speed, wing-sailedcatamarans leading up tothe battle for sport’s oldestextant trophy in San Fran-cisco next year. And Lisbonwill this year be one of thestopover ports to welcomethe round-the-world crewsof the Volvo Ocean Race.

Mário Ruivo, an ocean-ographer who heads Portu-gal’s permanent forum onmaritime affairs, says theocean-themed 1998 WorldExpo in Lisbon showed theway towards examiningnew sectors from biotech-nology to tourism. “Wehave created a broader per-ception that the ocean ismore than shipping, morethan fishing,” he says.

John Duggan, a formerPwC partner who helpedprepare a report on themarine leisure industry,says that promoting mari-nas and all the associatedmaintenance and repairfacilities is a good way tocreate jobs and generategrowth.

“No matter how youmeasure it, water-based lei-sure activity is punchingfar below its weight,” hesays. “Portugal should betaking advantage of its loca-tion and its resources todevelop economic activityand employment.”

Hopes pinned on a new economic model

If attracting outside invest-ment can be difficult duringa recession, tempting for-eign capital into a countrythat has received an inter-national bailout is a gruel-ling task.

At present, Portugalwould not appear likely toattract a queue of investors.Anyone pondering whetherthe country’s current busi-ness climate may present acontrarian opportunitymust at the same time con-sider a series of alarmingdata.

Unemployment, whilelower than Spain’s, standsat 15 per cent and grossdomestic product isexpected to shrink by 3.4per cent this year.

Meanwhile the yield on10-year government debtstill hovers above 11 per

cent, following Standard &Poor’s decision in Januaryto cut Portugal’s credit rat-ing to junk.

Such an environment ishitting many businesseshard, as consumersretrench and credit remainsdifficult to come by, as thebanking system hoardsfunds so as to meet highercapital requirements.

John Duggan, a formerpartner with PwC in Portu-gal, says: “It is going to bedifficult to get the economyworking properly until wesee credit come back.

“When you speak to peo-ple you hear that tradingconditions are difficult inservice industries. Demandis there, but pricing isunder pressure and peopleare working twice as hardfor half the money. Manyretailers also had a terribleChristmas, with sales start-ing early.”

Ernst & Young expects afall in consumer spendingof 6.2 per cent this year, fol-lowed by a further contrac-tion of 3.1 per cent in 2013,while investment in thenon-financial corporate sec-

tor fell 19 per cent year-on-year in the fourth quarterof 2011.

Yet the shopping streetsof Lisbon bear witness tocontinued consumption bythe wealthy, and someshops have opened in thecity since the crisis began.

The recent opening of aflagship store by Gucci onLisbon’s Avenida da Liber-dade may be of little conso-lation to those who arestruggling to make endsmeet, but it is one of asmall group of companiesexpanding into the countryduring its difficulties.

Other encouraging exam-ples include Yo! Sushi, theBritish restaurant com-pany, which opened in Lis-bon last year, while Klépi-erre, the French shoppingcentre operator, opened itsfifth site in the Algarve lastApril.

More recently, there hasbeen some encouragingprogress in reducing thedeficit, and in the health ofthe banking sector, with theloan exposure of its eightlargest banks beingassessed as better than

expected by troika inspec-tors in a report released atthe end of last year.

At the end of March,Portugal reported that its2011 general governmentdeficit had come in at 4.2per cent of GDP, lowerthan the 5.9 per cent pro-jected by the troika inDecember, and down from9.8 per cent in 2010.

While fewer investors arewilling to commit them-selves to the countryagainst the backdrop of theEuropean debt crisis, andwith foreign direct invest-ment plunging by 46 percent in 2010 compared withthe previous year to €1.1bn,this fall does not look asgruesome when viewedagainst the fortunes of

some non-eurozone coun-tries. In the same period,the UK saw FDI fall 53 percent.

Pedro Reis, head of Aicep,Portugal’s investment andtrade agency, sees the eco-nomic situation as “chal-lenging”, but a series oflabour market reformsintended to boost the coun-try’s competitiveness areexpected to help.

“The new economicmodel of Portugal and theway out of this situationwill be through the open-ness of our economy,” hesays. “By that I mean boththe attractiveness for for-eign investment and theinternationalisation of ourcompanies”.

Privatisations will bringin foreign investment, withpartners likely to beselected not only for theprice they will pay but alsofor their ability to attractsubsequent investment.

The sell-off of the state’s21 per cent stake in Ener-gias de Portugal (EDP), theutility, to China’s ThreeGorges for €2.7bn in Decem-ber was contingent on fur-

ther Chinese investment.Reform of the labour

laws, regarded as amongthe most inflexible in theEuropean Union, will relaxrules on hiring and firingworkers and reduce thecosts of extra hours.

This, says João Alves,country managing partnerat Ernst & Young, will helpmarket the relatively youngand educated workforce bet-ter.

“There are many quali-fied young professionalsworking abroad, and manyPortuguese are very com-fortable working in theEnglish language,” he says.

Cultural ties to Brazil,Angola and Mozambiquecan also provide its compa-nies with a unique sellingpoint to foreign investorslooking to enter those fastgrowing markets.

“Portugal no longer stopsat the borders of Europe,’says Mr Reis.

“It is well positioned, his-torically, culturally, eco-nomically, logistically, tohave an important role inthe new global economy,”he adds.

Business climateMiles Johnsonconsiders theprospects forforeign investment

OutlookbrightdespiteVAT rise

T he financial crisis is tak-ing a long time toresolve, but there arethree big factors working

in favour of the tourism sector inPortugal, one of the country’supmarket leisure companiesbelieves.

José Carlos Pinto Coelho, presi-dent and chairman of Onyria, afamily group that runs resorts,villas, hotels, golf courses and res-taurants, says the country hasresisted the temptation to over-build. In addition, its pricesremain competitive, so that thereare still margins to improve.

And thirdly, the Arab springcalled attention to “the impor-tance and stability of long-terminvestments,” he says.

Like many businesspeople, MrCoelho thinks that rises in VATwere bad news for the tourismsector. (In most cases VAT in Por-tugal is now 23 per cent). He saysbusiness will try to persuade thegovernment to correct this. TheAssociation of Hotels, Restaurantsand Related Businesses is pushingfor the restaurant rate to be putback to 13 per cent this year and 6per cent next year.

“All the tourism sector is underpressure and [because it has]invested strongly in the past 10years, it needs time to recoverinvestments,” says Mr Coelho.“To increase VAT now is to takeoff from revenues importantamounts that were not foreseenwhen investment decisions weremade.”

His own company has opened

two properties, a luxury boutiquehotel near Lisbon and a golfcourse near Lagos in the Algarve.Mr Coelho says the Lisbon coastis now very attractive to the lei-sure and MICE (meetings, incen-tives, conferences and exhibi-tions) segments of the market.

He thinks Portugal can build abetter future for its tourist indus-try by developing Lisbon as abusiness centre to challengeMadrid and Barcelona and toemphasise the year-round poten-tial of the Algarve as a destina-tion.

He has a point where Lisbon isconcerned. City tourism hasbecome an engine of economicgrowth in Europe in recent years,particularly in capital cities thathave a tourism concept in place,says a report by consultantsRoland Berger published at theend of last year. It says Lisbonand Amsterdam had by far themost overnight stays relative tothe number of inhabitants.

“If a city can be reached easilyby air, it stands an excellentchance of attracting many tour-ists. Low-cost airlines are veryimportant in this respect,” thereport says.

It adds that accessibility by airhas an influence on a city’s posi-tioning as an conference location,too.

Cities with fewer than 60 directflight connections to other loca-tions are not accessible enough,says the report. This makes them“suboptimal locations” for confer-ences. Cities with between 60 and180 direct flight connections, onthe other hand, have establishedthemselves as perfect conferencelocations in recent years. Lisbonhas about 100.

In this year’s Global EconomicForum competitiveness index,Portugal was ranked 45th out of142 countries. From a list of 15factors, respondents were asked

to select the five most problem-atic for doing business in theircountry and to rank thembetween one and five. Access tofinance, restrictive labour prac-tices and inefficient governmentbureaucracy came out top.

Positive developments are

largely led by an increase in infor-mation and communication tech-nology use and improved infra-structure, especially roads.

The World Travel and TourismCouncil says real growth in traveltourism as a direct contributionto gross domestic product slowed

from 3.6 per cent in 2010 to 3.5 percent last year.

Figures produced by theNational Institute for Statisticsfor last year showed that Frenchvisitors are the biggest spendersfollowed by UK citizens and theSpanish.

Good news for investors is thatthe size of Portugal’s market islarger than it first appears.Although the population is about11m, worldwide 200m peoplespeak Portuguese. Former colo-nies such as Macao, Mozambique,Angola and Brazil, still retainbusiness ties.

As Latin American businessesexpand and individuals therebecome wealthier, turning toEuropean countries such asPortugal as a leisure and traveldestination may be seen as anattractive long-term investment.

UK and north European inves-tors eyeing Portugal automati-cally think of golf, chic villas and

upmarket resorts centred aroundthe Algarve and Lisbon. But forthose who take the time to look,there is a lot more. North of theAlgarve is the Alentejo, with fineinland scenery and quiet beaches.

Central and north Portugal arestill relatively unspoilt and prop-erty prices lower than those inthe south and around the capital.

Unlike the Algarve, wheremany properties are attuned toBritish and German tastes, housesin the interior cater very muchfor the local population and thereis the undoubted appeal of anauthentic lifestyle, albeit with avery slowly improving infrastruc-ture.

Talking of which, there is nomore touchy subject now thanthat of tolls. The recent imposi-tion of tolls on the main A22motorway along the Algarve coasthas prompted public petitions,action groups and even ministe-rial ire.

TourismLuckily, the industryhas several factorsworking in its favour,reports Jill James

Local charm: town square in Aveiro in the north provides the undoubted appeal of an authentic lifestyle Alamy

Although the populationis about 11m, thereare strong linkswith 200m peoplein former colonies

Maritime industryA hard-headedbusiness approachseeks ways toprofit from the sea,says Victor Mallet

EnergyThe governmentwants to escapeexpensive legacycontracts, saysMiles Johnson

Reform of labourlaws, amongthe most inflexiblein the EU, willrelax ruleson hiring and firing

How can wemake moneywith oceans?Prof JoséFerreiraMachado

Market hasbeen one ofthe leastcompetitive,says CarlosPimenta