Structural reforms can no longer be postponed

Portugal’s network of companies has surprised European and international partners, not just because of the quality, diversity and innovation of its products, but also because 50% of Portugal’s GDP is now thanks to their exports.

Text: Chris Graeme. Photos: CCLF/AMCHAM

Over the past 10 years something quite remarkable has happened. Portugal, once a sick man of Southern Europe, has become a pocket tiger economy, with 50% of its GDP earned from exports, punching well above its weight for a country of just 10 million people.

Portuguese companies have achieved this feat largely on the back of their own efforts — often in spite of the Government’s not always helpful polices — and the support of the various associations which represent different sectors of the economy and which have worked hard promoting goods and services overseas in trade missions and at trade fairs in Europe and all over the world.
And while Government agencies such as the Portuguese Agency for Overseas Trade and Investment (AICEP) have played an important role in supporting Portuguese companies in various ways, at a more fundamental level, successive governments have largely failed to grasp opportunities to create the right economic conditions through structural reforms, modernisation, justice reform and a lower, less complicated, tax regime, all of which companies need to develop and thrive.
Portugal’s Industrial Confederation (CIP) and allied sector associations have played their part, but the question is if the Government has delivered on its promises to streamline and reform the Portugal’s State apparatus and institutions?
At two events — one organised by the French Chamber of Commerce and Industry (CCILF) and partnered by the British Chamber of Commerce (BPCC) and the Dutch-Portuguese Chamber of Commerce (CCPH); the other by the American Chamber of Commerce in Portugal (AmCham) this week (March2/3), the President of the Industrial Confederation of Portugal (CIP), António Saraiva believes that while actively helping Portuguese companies through agencies like AICEP, successive governments have often hindered and put “stones on the road” to Portugal’s development.

Disruptive geopolitical scenarios

After 15 years representing Portuguese companies, António Saraiva acknowledges that Portugal’s companies have been hampered and challenged by a complex set of public health and geopolitical situations not seen in two generations, bringing with them unpredictability and instability, but that is exactly why it is even more imperative for all political and economic agencies and stakeholders to work together for the sake of the nation to support Portugal’s companies in becoming more competitive, robust and resilient to face the slings and arrows thrown at a small economy by challenging, if not hostile, external events and factors over which it has little control.
“Both Covid-19 and the war in Ukraine, in the wake of international recession and financial shocks a decade ago, have been very disruptive, and we didn’t know how to deal with them, regardless of our learning” he said.
And explained: “The war caught us off guard with huge increases in energy costs, natural gas, and laid bare a lack of strategy because of the degree of surprise that Member States have shown, the fragility that has been revealed, and which is more obvious in some cases than others. Germany, for example, which had abandoned nuclear power stations and fossil fuels like coal, had become very dependant on Russian gas, but through political agreements have woken up to a reality that they had been sleepwalking through,”
António Saraiva points out that the Sovereign Debt Crisis, the Portuguese Banking Crisis, and subsequent intervention of the Troika a decade ago had created periods of “considerable disruption and complexities; all extremely worrying challenges that Portugal fortunately overcame”.
“Today is no different. We were slowly emerging from the effects of Covid-19, and then were surprised by the Russian invasion of Ukraine, which has brought disturbances to the economy and social consequences as a result”, he said.

Portugal’s anaemic growth and lack of productivity

It is a fact that Portugal’s growth in 2022 was 6.7% — better than most of its European partners — but it is also true that this was down to the recovery, so that real growth, undistorted by the massive fall in GDP in 2020-2021, was in fact only 2.7% on pre-pandemic levels when growth in the Euro Zone countries averaged 2.9%.
Pointing to two of Portugal’s main challenges — economic and productivity growth – António Saraiva admits that although “we are recovering growth on 2020, that recovery needs to be more robust to compensate for years of lost opportunities for reform, particularly when looking at the series of growth figures for the past 20 years which reveal anaemic growth.
“Of course, if Portugal maintains a growth of 6.7% per annum, we’ll make up for this lack of growth, but looking back over the past 20 years it is frustrating to see that our growth has been sluggish when other countries within the Euro Zone have increased their growth year-on-year, particularly Eastern European countries” he says, giving Romania as an example of a country forecast to overtake Portugal this year.” (2.6% in 2023)

Three urgent reforms

Saraiva says that for years no Portuguese government has significantly managed to carry out three main reforms that Portugal simply cannot afford to put off any longer; reforms that should have been tackled immediately after the Great Financial Crisis 10 years ago when Portugal was lent €79Bn from a troika of leaders, including the International Monetary Fund (IMF), European Central Bank (ECB), and EU Commission. Some real progress was made in structural reforms and fiscal adjustment, particularly in competitiveness, exports and the current account deficit, but then effecting real structural change at an administrative level fell short, and systemic reform stalled.

The CIP president believes that successive governments failed to have the courage to ride on the momentum and continue reforms to the swollen public administration, antiquated and morose justice system, and complicated investment-hostile tax framework.
The public administration needs to adopt reforms aimed at improving efficiency, effectiveness, quality of service, and digitalisation. In short, Portugal is drowning in red tape and taxes.
“In the era we are now in, we continue to have a public sector employing 800,000 that continues to be bureaucratic, with too many documents, hampered by a whole range of deficiencies and insufficiencies. An administrative system that should serve the public and companies better. If we could reform this, it would make Portugal more agile, and make our processes more agile,” said António Saraiva.
The problem with Portugal’s justice system is that it is slow, with commercial cases in courts dragging on interminably, often taking three or four times longer than similar cases in courts in other European countries to be resolved, with the obvious attendant negative effects on the economy
Saraiva says there needs to be an overhaul to Portugal’s tax system which has too many taxes and which are too high and scare off investors in what he refers to as a society worn out by “tax exhaustion”.
“It is urgent to reform the tax system, to reduce the amount of taxes companies and families have to pay, and have taxes that are more predictable” he said in a nod to the fact that each government that takes office chops and changes taxes in a system that is overly complicated and needs streamlining.
Saraiva says that while governments do not have the political courage and parliamentary consensus to begin reforms, which would require two or three legislative terms — and given the current parliamentary majority it now enjoys — the Government should be able to get the backing of parliamentary groups to at least begin these necessary structural reforms.
“Covid-19, the War in Ukraine are circumstantial issues that only add to our structural problems and drag us down even more, whereas if we had carried out these reforms, we would have been better placed to withstand these external challenges, which also include climate change, cyber attacks, and the geopolitical uncertainties we’ve been facing”, added the industry leader.

Three objectives

Scaling up

Apart from structural reforms, Portugal needs to focus on three main objectives: Scale, Innovation and Internationalisation.
By scale the industry captain was referring to Portugal’s companies network which is still dominated by micro and small companies (80%), with few medium-size companies, and just a smattering of large companies.
“We have to gain scale, promote mergers and concentrations, reinvest profits in our companies”, he said, which implies abdicating some individualism, and indeed some entrepreneurs are doing that because they realise the more fragile they are (meaning small), the more exposed they are to external circumstantial shocks.”
Saraiva points out that Portugal’s companies in different sectors are more open to mergers and organising into clusters now because they have understood that they need to gain scale to compete effectively in competitive international markets, and be better able to withstand external shocks (recessionary, financial, inflationary and geopolitical) by merging or pooling together in partnerships.

Innovation and Capital

António Saraiva says that Portugal’s enterprise sectors need to differentiate their products, because in a global world Portugal needs to have attractive products and services, and therefore differentiation demands innovation.

But innovation requires investment, and investment requires capitalisation. Portugal has always lacked its own meaningful capital.
“Today we’re in a situation that makes this difficult because now, after the Sovereign Debt Crisis, Portugal’s banks are very averse to taking risks, while the new supervisory models in the banking sector have much tighter rules that limit our banks from taking on risk.
“Entrepreneurs are by their very nature risk-takers, but they have to look elsewhere for capital since our companies’ own capital is rather deficient. We need to strengthen our accounts and build up our own capital,” explains António Saraiva.

Investment attraction

On the plus side, Saraiva points out that Portugal has excellent conditions to attract overseas investment and emphasises the European ‘bazooka’ and other EU funding — €13.9Bn in grants and €2.7 billion in loans under the Recovery and Resilience Facility (RRF) over the period 2021-2026 — which all told should, in theory, benefit Portugal’s companies on the road to development, digitalisation and modernisation. Except it doesn’t. Much of it is earmarked for the public sector. The CIP president also points to year-on-year record amounts of FDI in the region of €2.4Bn over the past few years.
Portugal has also been the trendy go-to European destination over the past five years for company relocations and back-office launches, attracting capital from overseas investment funds — mostly in areas such as real estate in all its sub-sectors, and tourism. It has also become a magnet for startups attracted by government fiscal incentives, while its luxury and residential housing markets have been booming, with housing market values skyrocketing in the main cities by 17% in 2022 alone.
Antonio Saraiva takes this on board: “We have a highly qualified and excellent workforce, and a great variety of types of companies. We offer stability, a good climate, excellent workers, good communications networks — including Internet, motorways and rail — and we offer great conditions compared to other countries; less so in terms of having a low taxes, but more so in terms of tax benefits”.
“We need to promote and welcome this investment, we have the conditions for growth. Yes, there are threats on the horizon, but we can overcome them with our capacity for resilience, and we are playing our part and meeting our responsibilities, we are fulfilling our part of the bargain”, he adds in a nod to the need for the Government to create the right conditions, through reform and restructuring, to create fertile ground for Portugal’s companies to thrive and grow.
But innovation also requires Portugal’s companies to upskill and improve their employee’s qualifications and skills, because the digitalisation of processes and procedures demands retraining and new qualifications, and incentives for talent retention. (many highly qualified young people go abroad in search of better salaries and opportunities for career advancement)

PPR funding — too little, too late

António Saraiva is critical of the Portuguese government’s handling of the distribution and timely delivery of EU bazooka funding that form’s Portugal’s Recovery and Resilience Plan.
The CIP president says that while companies were given their marching orders to deliver their projects eligible for funding in a month and did so, 10 months later much of the funds haven’t been distributed, meaning that companies, which often clustered together in consortiums on big ticket projects of national importance, can’t now get their projects off the ground, and even risk having to return it because strict EU deadlines are involved.
António Saraiva says it’s regrettable that when the Government has been handed a once in a generation opportunity to change Portugal’s economy for the better with record investment never seen before, and unlikely to be seen again in our lifetimes, it is being held up by “long delays” and criticises the “fundamental bias” towards the State at the expense of private companies without which Portugal’s economy cannot move forward.
He says that Portugal’s Recovery and Resilience Plan Monitoring Commission (CNA-PPR) had announced that it had identified 15 investments in a critical or concerning situation largely because of delays in getting their applications approved or over-ambitious targets.
In its report released in March, the CNA-PPR said that deadlines were exceeding 300 days in some cases, and even in the cases of those projects for which funding has been approved, there have been delays in disbursements that threaten these projects getting off the ground.
Take the Mobilising Agendas which means RRP funding earmarked for Portuguese companies. Of the companies that have been chosen, there are still 10 whose contracts have not been signed off by the Government and many others piling up in administrative in-boxes awaiting evaluation.
“These delays have resulted in only €173 million from the RRP getting to companies, or just 11.5% of the agreed investments, and only 3.4% of the ‘bazooka’ Portugal has so far received from Brussels for this programme”, says Saraiva.
And worse, companies have been complaining that they are having difficulties in getting information in time about the warnings on deadlines which, together with the delays on both disbursements for approved projects, and delays on getting projects evaluated and decisions taken on those projects, has “significant implications on companies decisions to invest or getting those projects off the ground.
Saraiva said that at the end of the day, Europe had reacted to the Covid-19 pandemic by taking a difficult and complex set of decisions to release €700Bn of total European Union funding for NextGenerationEU and individual States’ RRF and these complex decisions were taken swiftly.
But because the EU it is a union and not a federation, the decision making process has been, at times, slow, when in other parts of the world and countries reactions were faster with funding reaching those economies quicker.
“In a competitive world, rapidity in decision making is vital and in some countries this didn’t happen and Portugal is an example” admitted Saraiva.
This concern over the slow evaluation, delivery and application of RRP funding is shared by the leader of another business sector leader, Luís Miguel Ribeiro who is the president of Portugal’s Enterprise Association AEP.
Ribeiro has widely said that at a time when €1.505Bn were paid out to direct and final beneficiaries, the rate of disbursements continues to be low. “Companies have received very marginal amounts and problems with paperwork and meeting deadlines are considerable and stopping companies from moving forward with their projects”, he told the news agency Lusa.
Nevertheless, Portugal is so far currently the sixth country in the European Union in terms of the most funds received from the European Commission; around €5.14Bn. (€4.07Bn in grants and €1.07Bn in loans)
In all, Portugal’s RRP has a total of €16.6Bn, of which €13.9Bn are grants and €2.7Bn loans with the purpose of undertaking reforms and investments by 2026.

Covid-19 funding — again too late

António Saraiva is of the opinion that Portugal’s delivery (of EU funds) was late, with insufficient quantities for the economy, its companies, and families.

“In 2020, Portugal was the country whose GDP had fallen the most (8.4%) and it was encouraging when in 2022 we had growth of 6.7% — which obviously was good, and better that than recession — but it must be remembered that we started off from a GDP base of-8.4% because of Covid-19, and then the effects of the war.
“Portugal was among the countries whose aid in terms of EU grants was most limited, worth just 5.7% of our GDP, whereas in Spain it was 14.4% and in France 15.2%.
Saraiva says that regardless of the amounts — and Portugal could have received more. “The Government could have gone further and given more to the private companies, and it could have been applied in a different way”.
Instead, António Saraiva says the government assisted companies through moratoria on loans and/or interest on those loans — shouldered by the banks — which made things worse for companies that were already in debt, and that now, with inflationary pressures and higher interest rates, Portugal’s companies are in a situation that is worse than that of many other Member States and their economies. “This aid could have been more generous”.
But it wasn’t, and what aid was made available during Covid-19 invariably arrived too late to help companies.
“We were already nine or ten months into the pandemic, and it was only then that the Portuguese State sent out the first funding measures to help families and companies”, he recalled
“These companies that were pushed into debt-based moratoria are now faced with high interest rates and are in a worse state than the other companies in other member states. If it were not for the courage, resilience of our companies, and despite our companies network being made up of micro and small companies, they have shown a capacity to withstand it all, which is laudable in my opinion”, says the CIP president.

Internationalisation

Portugal’s companies, working in partnership with national and regional trade organisations, have worked hard over the past 10 years to gear their production and business models more towards exports.

“It’s something we can be proud of” said Antonio Saraiva in the wake of news from Portugal’s Finance Minister, Fernando Medina, who armed with the latest trade statistics, announced that 50% of Portugal’s GDP now comes from its exporting companies.
The problem in the past was that companies, being small and “individualistic”, could not export their products consistently, and were over reliant on the traditional EU markets of Germany, France, Spain and the UK.
However, with companies increasingly exporting to the US market, now its fifth most important export partner, things are changing, with companies increasingly looking to new extra-Community markets overseas, and this has been largely down to cooperation and partnerships with Portugal’s business and enterprise associations such as CIP which, together with its national and regional partner sector associations, represents 150,000 companies responsible for 71% of Portugal’s GDP.
A decade ago the percentage of Portugal’s exports in relation to GDP was around 20%. Today it stands at 50%, admittedly much of it down to tourism, but also to the success of it metallurgy, and textiles sectors. “We will continue to work towards 70% or 80% as other countries of our size have.
“Our companies set out on the road to internationalisation and have achieved this, but again it requires support — and that’s not to say we’re cap in hand asking for State handouts, entrepreneurs know what they have achieved and done.
Rather, António Saraiva says that Portugal’s companies need the Government to remove all the obstacles (high taxes, bureaucracy, poor justice system) which he likens to “stones blocking the road” to the country’s development, and the removal of which is now even more urgent given the “huge degree of unpredictability” that the effects of the war and trade tensions with China have brought, on top of preexisting ones resulting from Covid-19.

Fat cows

António Saraiva also lays criticisms at the door of Portugal’s Prime Minister, António Costa over the Government’s controversial if well-intentioned changes to Portugal’s Labour laws which aim to provide employees with wage rises to offset galloping inflation and higher cost of living.

With alterations to Portugal’s Employment Code, CIP is calling on the Prime Minister to annul or at least attenuate the impact of some of the sudden changes to the code which come under the heading ‘Fair Employment’.
The CIP president said that contrary to the norm over past 20 years (in 2008, 2012 and 2019), the vast number of changes to the Employment Code was not anchored by a discussion and agreement with social and industry partners.
Moreover, he had imagined that after he had signed an agreement on competitiveness and salaries in October 2022, had expected that the Government would annul any changes on details.
“The Prime Minister who signed this social agreement with his hand, hasn’t got a handle on his parliamentary group” he said pointing out that the number of measures had shot up from the 64 initially presented to social partners (unions and business associations) to 86.
“Although I’m not going to cancel the agreement, which would be somewhat extreme, the implications of these measures is holding Portugals development back. Instead of removing the obstacles to our economic development, the measures are putting more stones on the road. These measures are prejudicial for all kinds of enterprises and it is the dishonesty of how it was done that is at issue.
“No one should sign a social pact in one legislature and then not have a firm hand to keep its parliamentary group in line and then, through ‘creativity’, end up putting stones in our way. It seems this is the kind of political stability that this majority government is pursuing to hold us back”.
Saraiva refers to an agreement in which the Government wants salary increases of around 5.1% with some unions calling for 18%.
“We don’t seem to be living in a country that is aware of the reality in this world. Companies are not, contrary to what some think, fat cows with inexhaustible supplies of milk.
“We help, we contribute, and we are aware of our social responsibilities and have maintained jobs. Just look at the low levels of unemployment that we have. This is down to companies saving jobs.
“We have leant painful lessons that we cannot always recover once we have let people go, as we did in some cases during Covid-19. All sectors complain of a lack of differentiated manpower, and so we’ve leant from this and have kept staff on despite enormous difficulties, at the expense of margins squeezed by brutal energy costs.
But don’t ask the impossible. This Government, like any other, should have the courage to make structural reforms to help us achieve our three objectives, and do so by supporting entrepreneurs and not demonising them, because without private initiative Portugal will not move forward”, concluded António Saraiva, President of the Industrial Confederation of Portugal.(CIP)