Campaign to speed up slow growth Only
Transcrição
Campaign to speed up slow growth Only
Inside PORTUGAL Designers are promoting a passion for fashion Page 4 FINANCIAL TIMES SPECIAL REPORT | Wednesday July 14 2010 www.ft.com/portugal2010 | twitter.com/ftreports Campaign to speed up slow growth The nation is addressing its lack of export competitiveness on several fronts, writes Peter Wise O Child’s play: largescale investment in education includes the issuing of a laptop to every primary school pupil Reuters nly 19 children attend the primary school in Várzea de Abrunhais, a village perched on a forested hillside in northern Portugal, whose ageing population, depleted by emigration and rural flight, cultivate orchards and vineyards. In September, a bus will ferry the children eight kilometres to a new school for 200 in the town of Lamego, leaving behind their whitewashed classrooms under a modernisation programme that has already seen 2,500 schools with fewer than 20 pupils closed. A further 900 closures are planned. In villages like this, the divide between the poor rural interior and more affluent coast is usually most evident. According to Organisation for Economic Cooperation and Development figures for the mid-2000s, Portugal is the European country where income is most unevenly distributed. Before its imminent closure, however, the school in Várzea de Abrunhais has achieved international recognition, having been selected last year by Microsoft to join the company’s Pathfinder network, an elite group of 31 schools chosen from across the world for their innovative use of new technologies. The achievement reflects Portugal’s large-scale investments in education technology, including the issue of laptop computers to every primary pupil – part of a wider effort to address what economists identify as the country’s biggest challenge: overcoming low economic growth caused by a loss of international competitiveness. Since 2000, gross domestic product growth has been the second lowest in the eurozone after Italy at an annual average of less than 1 per cent. In June, the government forecast the economy, which contracted 2.6 per cent last year, would gradually expand to growth of 1.7 per cent in 2013. Low growth has seen living standards stagnate in terms of the European average. According to figures from Eurostat, GDP per head was the same in 2005 as in 1998 at 79 per cent of the European Union average, whereas in Slovenia, for example, it had increased from 79 to 88 per cent. In 2009, investment in education, including a €2.45bn school rebuilding programme, was also part of government policy to increase public expenditure to help offset the impact of the global recession on jobs and growth. However, the combined effect of increased spending and fall- Inside this issue The economy Once, membership of the eurozone was about benefits. Now, it is tough love, writes Ralph Atkins Page 2 Social trends A tendency to back away from radical solutions can leave problems only partly resolved, writes Peter Wise Page 2 Interview José Sócrates, the prime minister, explains how difficult it is to instil confidence Page 3 Renewable energy Lisbon is embracing a green revolution, writes Mark Mulligan Page 5 Tourism The country is promoting historic towns and other nongolf attractions, says Jill James Page 6 ing tax revenue saw the budget deficit soar from 2.8 per cent of GDP in 2008 to a record 9.3 per cent last year. When fears that Greece might have to default on its debt compelled the EU to put together a €750bn stabilisation plan in May, international financial markets were already questioning whether Portugal and Spain would be the next dominoes to fall in a sovereign debt crisis that threatened to sweep southern Europe. Portugal’s Socialist government was forced to push through a series of increasingly severe packages of austerity measures, reversing plans to delay tough deficit-reduction measures until a recovery was firmly established. “Our deficit increased in 2009 because we were responding to the global crisis and that had a positive effect,” says José Sócrates, Portugal’s centre-left prime minister. The economy, he says, contracted less last year than in most other EU countries and expanded more strongly in the first quarter of 2010, with growth of 1.1 per cent, because of government support. “The crisis of market confidence that began with Greece forced Europe to change direction,” says Mr Sócrates. “Portugal, like other countries, was obliged to make an additional effort to reduce its deficit.” Additional austerity measures included a 1 percentage point increase in value added tax to 21 per cent and increases of up to 1.5 per cent in income tax. The country’s growth and stability plan, presented in February, had already frozen civil service wages for four years, reduced social spending and cut military investment by 40 per cent. Markets wanted to be reassured that Mr Sócrates had not only tabled the right measures, but also had the power to see them through. However, after winning the first-ever absolute Continued on Page 2 2 FINANCIAL TIMES WEDNESDAY JULY 14 2010 ★ Portugal The gain, then the pain, of life in euroland The economy Eurozone membership was about benefits. Now it is tough love, writes Ralph Atkins P ortugal is not Greece has been a popular refrain among European policymakers during the tumultuous past few months. Public debt as a share of gross domestic product is not as high as in Greece. Nobody has questioned the functioning of its tax collection system or statistical service. Lisbon knows it must develop export businesses; the larger number of golf courses that a visitor notices suggests it may be better at attracting affluent tourists to its Atlantic coasts than its Aegean rival. But as the crisis over Euro- Contributors Peter Wise Lisbon Correspondent Ralph Atkins Frankfurt Bureau Chief Victor Mallet Madrid Bureau Chief Mark Mulligan Madrid Correspondent Richard Milne European Business Correspondent Jill James FT Contributor Stephanie Gray Commissioning Editor Steven Bird Designer Jamie Han Picture Editor For advertising details, contact: Regina Gill on: +49 69 156 85 161 email: [email protected] or your usual representative pean public finances escalated, Portugal had to learn the hard way that membership of the continent’s 11-year old monetary union involves pain as well as gain. As with Greece, Portugal shows eurozone membership entailed a hidden danger that was only exposed when it was too late to avert a financial market crisis. In the run-up to the launch of the euro in January 1999, and for some time afterwards, the benefits of membership were clear, especially in the region’s less affluent countries. Low interest rates and low inflation encouraged growth. Businesses benefited, too, from lower transaction costs for cross-border trade and from using a stable, global currency. In the early years of the eurozone, Portugal’s economy grew strongly. During the initial phases of the global financial crisis that erupted in August 2007, euro- zone membership offered another benefit: a defence against foreign exchange crises. The problem – as has now become apparent – was that eurozone membership offered too much protection. Financial markets failed to distinguish between eurozone countries. As a result, governments could allow public finances and growth prospects to deteriorate with few repercussions. Late last year, everything changed. Greece shocked other eurozone countries – and financial markets – by revealing its public finances were even worse than feared. International investors began to question whether Greece would have to default, and started scrutinising whether other countries could face similar difficulties. It was not long before Portugal came into the spotlight. Although its fiscal position was not as bad as in Greece, the government deficit came close to 10 per cent of GDP last year. Government debt as a share of GDP was close to 80 per cent. It was also clear that Portugal could easily fall prey to a change of mood in international capital markets. Its net international investment position – Vitor Constâncio (left), former central bank governor, is vicepresident of the ECB domestic ownership of foreign assets less the foreign ownership of domestic assets – showed a deficit of more than 100 per cent of GDP. Nor was it clear whether Portugal would be able to create the growth needed to put its finances back on a sustainable path. Since the launch of the euro, Portugal had seen its competitiveness deteriorate almost as much as in Greece. Between 2000 and 2007, unit labour costs rose 19 per cent – compared with 22 per cent in Greece. Events took a turn in early May. Ironically, the European Central Bank had long arranged for its governing council’s regular interest rate setting meeting that month to be held in Lisbon. Even as Jean-Claude Trichet, its president, held a press conference afterwards in the Centro Cultural de Belém arts complex, financial market pressures were intensifying. “Greece and Portugal are not in the same boat, and this is very clear when you look at the facts and figures,” Mr Trichet said. But the next day, the ECB president was in Brussels lobbying eurozone leaders to act against a crisis that had spread far beyond Greece. After a frantic weekend of meetings, the European Union announced a €750bn stabilisation plan, and the ECB said it would intervene in government bond markets. Crucially, the Portuguese government had agreed bolder steps to bring its finances under control. Within a few days, José Sócrates, prime minister, was announcing additional austerity measures, including a “crisis tax” on wages and big companies. Portugal undoubtedly faces tough times. Austerity measures will act as a severe brake on growth. The country’s small export sector will have to grow rapidly to make a big difference. Some commentators argue that Portugal could leave the eurozone. An orderly withdrawal might make sense for countries that “are fundamentally different from the others”, Ansgar Belke, economics professor at the University of Duisburg-Essen in Germany, told the FT this year. “Portugal has little to export. It competes with emerging markets, so to turn the economy round it would have to cut wages so far that there would be a deep recession.” But exiting the eurozone is not a realistic option. Economically, the costs would be catastrophic. As importantly, Portugal is an integral part of the EU and the eurozone. Portuguese nationals hold two of the most important EU jobs. José Manuel Barosso, a former prime minister, is European Commission president. In Frankfurt, Vítor Constâncio, a former governor of Portugal’s central bank, has just become the ECB’s vice-president with the crucial beat responsible for financial stability issues. But Portugal’s contract with the eurozone will be different. Once membership was about its benefits, now it is tough love. Aversion to social unrest is a doubleedged sword Social trends Peter Wise on a tendency to avoid radical solutions to problems In May, tens of thousands attended open-air masses in Lisbon, Porto and Fátima when Pope Benedict XVI made a four-day visit to Portugal, a country in which more than 80 per cent of people identify themselves as Catholics. In June, thousands of mourners lined the streets of Lisbon to pay their last respects to José Saramago, the Nobel prize-winning novelist, who months before his death at the age of 87 described the Bible as “a catalogue of cruelties and of the worst of human nature”. Between these two events, Teresa Pires and Helena Paixão, divorced mothers in their 30s, married at a Lisbon registry office, becoming the first couple to take advantage of a new law making Portugal the sixth country in Europe to legalise same-sex marriages. The crowds which held up books by the Communist writer during two days of national mourning when his body lay in Lisbon’s city hall almost certainly included people who had prayed with the Pontiff at Praça do Comércio, a nearby riverfront square, or at Fátima, where the Virgin Mary is said to have appeared in 1917. Overlapping allegiances like this are not uncommon in Portugal, which describes itself as a country of brandos costumes, or mild ways, a vexed phrase that alludes partly to an understanding tolerance and partly to the kind of acquiescence that saw the country endure 41 years of repressive rule under the Salazar-Caetano regime. Portugal’s aversion to polarisation is a doubleedged sword. Social unrest of the kind that has swept Greece is not a pressing concern in a country where strikes and protests are relatively infrequent and lowkey. According to the interior ministry, Portugal also has the lowest crime rate among the 15 pre-expansion members of the European Union – at 38 crimes a year per 1,000 inhabitants compared with an average for those countries of 69. Conversely, a tendency to back away from radical solutions can leave problems only partly resolved. “Portugal has performed well in the past in bringing excessive budget deficits under control,” says a London-based analyst with a credit rating agency. “But it has never gone the full distance and sought to achieve a zero deficit.” Many employers would argue that a conciliatory approach has prevented governments from liberalising excessively rigid labour legislation, in spite of reforms in 2008 that made the labour market more flexible. Public sector employees are virtually guaranteed a job for life, regardless of performance, making it harder for young people to find employment or gain promotion. Brandos Costumes was used as the title for a 1975 film in which the female characters live trapped in a decaying mansion under the sway of a dictatorial father figure. Directed by Alberto Seixas Santos, the film is admired as a classic depiction of the stifling atmosphere of Portuguese society during the SalazarCaetano regime and the colonial wars in Africa. While brandos costumes remain a distinctive trait, the country has changed radically from the pre-1974 order, when women were barred from becoming judges or diplomats and a licence was required to own a cigarette lighter. More women now graduate from university than men and a majority of new judges are female. The country is one of a small number that grant paternity leave. José Sócrates, the prime minister, described the legalisation of same-sex marriages in January as “an historic victory for Portugal in the struggle Masses: thousands turn out for the Pope but big crowds also honour Bibleaverse novelist against discrimination and injustice”. In contrast with Spain, where hundreds of thousands protested in the streets before gay marriage was legalised in 2005, opposition in Portugal was relatively muted, although opinion polls show that only about 30 per cent of people support same-sex marriage. In 2007, Portugal legalised abortion on request during the first 10 weeks of pregnancy. Although 84.5 per cent of Portuguese describe themselves as Catholics, only 18.7 per cent say they practise the religion and only 10.3 per cent are regular churchgoers. One of the apparent paradoxes of brandos costumes is that tolerance itself can lead to what many would see as radical solutions. This certainly applies to drugs. In 2001, the government decriminalised the personal use and possession of all drugs, including heroin and cocaine, in a measure that some British newspapers said would set “alarm bells ringing across Europe”. However, in 2008, the Cato Institute, a US thinktank, concluded that “decriminalisation has had no adverse effect on drug usage rates in Portugal”, which “in numerous categories are now among the lowest in the EU”. It added that several drug-related problems, including sexuallytransmitted diseases and deaths from overdoses, had “decreased dramatically”. Officials point out that drug use remains illegal in Portugal and anyone in possession can have the drugs confiscated and be sent before drug commissions, which can include psychiatrists and social workers, and seek to encourage addicts into treatment and prevent recreational users from falling into addiction. After the revolution, fado, Lisbon’s raw traditional music, was seen as backward-looking and fell out of favour before enjoying a renaissance that is now in full flower. After the death of Amália Rodrigues, the great fado diva, in 1999, José Saramago revealed that the star fêted by the Salazar regime had made secret donations to the Communist party. “Life is always more complex than it appears,” he said. Campaign to speed up growth Continued from Page 1 majority for the Socialists in 2005, he had been reelected in September 2009 at the head of a minority government that needed opposition support to approve legislation. To ensure international credibility, Pedro Passos Coelho, the new leader of the centre-right Social Democrats (PSD), the main opposition party, agreed to support Mr Sócrates’s austerity measures in return for some small concessions, including a 5 per cent cut in politicians’ pay. The pact has earned Mr Passos Coelho political kudos and helped his party move ahead of the Socialists in opinion polls. He has sought to unite a party riven by leadership disputes since José Manuel Barroso quit as prime minister and PSD leader to become president of the European Commission in 2004. A believer in a smaller public sector who wants to privatise public transport, water utilities and state broadcasting, Mr Passos Coelho is sternly critical of official “complacency” over foreign borrowing. This, he wrote recently, has seen Portugal’s net external debt rise “above 100 per cent of GDP from only 33 per cent a decade ago”. Unless there is a prior political crisis, his first opportunity to challenge Mr Sócrates in a general election is not due until 2013. Voters are unlikely to be in a buoyant mood. Plans to cut the budget deficit by more than threequarters to 2 per cent of GDP by 2013 will restrain growth over the medium term. Unemployment, which reached almost 11 per cent in May, is not forecast to fall much below 10 per cent. Dealing with the lack of export competitiveness that is the underlying cause of low growth is a longer term problem that Portugal is engaging with on several fronts. An important issue is unit labour costs, which rose 19 per cent between 2000 and 2007. “We need to guarantee a combination of wage moderation and productivity gains in both the public and private sectors,” says Fernando Teixeira dos Santos, the finance minister. The government, he says, had been “strongly reformist” since taking office in 2005, but international markets were sometimes unaware of the important structural changes that had been made. This was the case with a sweeping social security reform in 2007. A plan to make the country a European pioneer in green energy aims to lower a €4.4bn trade deficit by reducing dependence on imported oil. Investments in wind energy and favourable weather conditions saw 70 per cent of the country’s electricity consumption generated from renewable sources early this year, says Mr Sócrates. The launch of a national recharging network for electric cars is among a number of projects aimed at developing export clusters for green energy technology. Similar efforts are being made to move the country’s traditional industries up the value chain into design, branding and high-tech production. In education, a large proportion of investment is focused on preparing children for the age of information and knowledge-based industries, in parallel with an ambitious government Technology Plan designed to achieve a sustained increase in productivity. That is why in the school bus to Lamego in September, the children of Várzea de Abrunhais will be carrying their laptops along with their lunch packs. FINANCIAL TIMES WEDNESDAY JULY 14 2010 3 ★ Portugal Severe test of inveterate optimist Interview José Sócrates Peter Wise finds the prime minister in buoyant form I José Sócrates: he feels he is on his own in bid to rouse energies AFP n his five years as prime minister, José Sócrates’s inveterate optimism has never been so severely tested as during the past six months. While Europe’s sovereign debt crisis has forced him to adopt successive packages of austerity measures, he has been buffeted by press coverage of unproven allegations of attempting to meddle in a local media group. International financial markets have compelled him, like other European leaders, to make radical changes in his economic policy and the emergence of a young new opposition leader on the centreright has seen his Socialist party fall behind in the polls. He also considers himself unsupported in trying to instil confidence in a country facing several more years of low economic growth, confessing to journalists in June that “I often feel I’m trying to rouse the nation’s energies on my own”. Despite all this, he remains determinedly buoyant, believing it is the job of politicians to dispel negativism. “Portugal is making progress,” he says. “We’re tackling the difficulties facing our economy and I have every confidence in the reforms we’re undertaking.” His sanguine outlook has been strengthened by encouraging economic data. In the first quarter of this year, growth of 1.1 per cent was among the highest in the European Union. In the five months to May, he says, fiscal revenue was substantially above target and state spending lower than forecast. He would have liked to have cut the budget deficit by only 1 percentage point to 8.3 per cent of gross domestic product this year, he says, to avoid the risk of choking off economic recovery, but was put under pressure by the sovereign debt crisis to target a reduction of 2 percentage points. “The alternative of not making additional cuts would have been far worse,” he says. “The financing difficulties we’d have faced would have had a much more negative impact on the economy than the austerity measures we have implemented.” Portugal will do “whatever it takes” to meets its commitment to cut the deficit to 2 per cent of GDP in four years, he says. “But performance over the past six months has exceeded expectations and I’m confident the plan we have set out will deliver the intended results.” Optimism for Mr Sócrates means “tackling difficulties with courage”. Portugal may not yet be above the European average in terms of living standards or competitiveness, he says, “but I challenge Portugal was the only country to revise its labour laws at the height of the recession, introducing more flexibility anyone to show me a country that has been more reformist over the past five years”. His government’s reform of pensions in 2007, he says, has taken Portugal off the list of countries with social security systems at risk. Public sector workers who retired at 60 now retire at 65, in common with private sector workers. A sustainability factor was also introduced, giving employees the option of working longer or receiving slightly lower pensions, as life expectancy forecasts increase. No other EU country, he says, has cut back its public administration as much as Portugal in recent years, reducing the number of civil servants by 73,000, or 10 per cent, between 2005 and 2009 and cutting the public sector wage bill from 14.8 per cent to below 12 per cent of GDP. Mr Sócrates says his was the only country to revise its labour laws at the height of the recession in 2008, facing down trade union protests to introduce more flexibility. “According to the OECD, Portugal had one of the most rigid labour markets in the developed world. Now, we are close to Germany and better than France,” he says. The challenge for the future is to apply the legislation more effectively. In education, he says, his reforms have seen every child at primary school taught English as a second language and given a laptop computer. A €2.45bn programme to rebuild, modernise and re-equip 205 secondary schools by 2011 has passed the half-way stage. More than 35 per cent of 20-year-olds are at university. An American recently stood as a candidate for rector of the country’s biggest university under new regulations that have opened up the system. “Our progress in science has been absolutely extraordinary,” he says. Between 2005 and 2008, Portugal increased public investment in research from 0.7 to 1.55 per cent of GDP, overtaking Ireland and Spain. The country now has 7.6 researchers for every 1,000 workers, one of the highest levels in Europe. Investments in green energy saw 70 per cent of the country’s electricity produced from renewable sources in the first five months of this year, he says. Creating Europe’s first national recharging network for electric cars aims to bring renewable energy to the transport sector. Support for the “digital economy” has seen Portugal move from 16th to first place in the World Bank rankings for “e-government” in five years. In February this year, Mr Sócrates says, 32 companies a day were being created online in a process that takes about half an hour. “Have these reforms solved all Portugal’s problems,” the prime minister asks. “Of course not. But I answer for the past five years. We are dealing head-on with the difficulties facing the economy and I’m very confident of the benefits these reforms will bring.” Must do better to catch up with European peers Education Peter Wise reports on low levels of attainment Rui breaks a chocolate bar into eight equal pieces and eats a quarter of it. How many pieces does he eat? According to the Portuguese Mathematics Society (SPM), this question from the national exam that 12year-olds sat in June is evidence that the arithmetical demands being made on the country’s schoolchildren are often undemanding. The fact that 20 per cent of children in this age group failed a similar maths exam last year highlights one of Portugal’s most pressing challenges: despite investment in schooling on a par with most western countries, educational outcomes are significantly below average for the developed world. “There is no doubt that Portugal has to achieve better educational standards than we have attained in the past,” says Isabel Alçada, the education min- ister. “We are working in every sphere to increase levels of qualification and improve the quality of schooling.” If slow growth and a lack of international competitiveness are widely acknowledged as the principal weaknesses of the economy, the low level of educational attainment among workers and small company managers is seen as one of the chief causes. In a 2006 report, the Organisation for Economic Co-operation and Development said the achievements of 15-year-old Portuguese students in reading, maths and science were among the poorest of the 31 OECD member nations. Portuguese schools, the OECD said, had not been able “to limit the repetition of low education from one generation to the next”, noting that “below average outcomes do not result from a lack of spending on education, but from the low efficiency of the system”. Photographs of the dozens of education ministers who have sought to reform the system line the entrance hall of the main ministry building in Lisbon – the short tenure of many who served after the overthrow of Portugal’s authoritarian regime in 1974 testimony to the political instability that has often undermined progress. Big advances have been made. Over the past 50 years, the percentage of the population with a secondary education has increased from just 1.3 per cent to 63.2 per cent. About 80 per cent of children receive pre-school education, compared with less than 1 per cent in 1960. More than 35 per cent of young people obtain a university education, once the prerogative of a small elite. But a wide gulf still separates Portugal from its European peers. According to the OECD, fewer than half of 25- to 34-year-olds have been educated beyond the ages of 15 or 16, compared with an OECD average of 80 per cent. For 55- to 64-year-olds, the percentage drops to below 15 per cent, the lowest level among developed countries. “We have to make a leap forward in both the quantity and quality of our education,” says Ms Alçada, who took office last Octo- ber. “We need to ensure that everybody of school age remains inside the system and provide an opportunity for adults to achieve the education they missed out on as children.” In one of Portugal’s biggest educational reforms to date, compulsory schooling was increased last year from nine to 12 years, roughly the equivalent of raising the minimum school-leaving age from 15 to 18. The Socialist government has also made English as a second language compulsory from the age of six. A technological plan for education has seen every primary school pupil issued with a laptop computer – more than 400,000 have been distributed to date. Almost every school has been equipped with highspeed fibre-optic internet connections, with one PC for every five students. Every classroom has a video projector and one in three an interactive whiteboard with computer and internet links. Some reforms have met strong resistance. A plan to introduce teacher assessments brought tens of thousands of demonstrators on Effort to exploit ties with former colonies pays dividends New markets Portuguese groups are looking beyond Europe for growth, says Peter Wise At the height of the civil war that ravaged Angola for 25 years after its independence from Portugal in 1975, grades de cerveja (crates of beer), became a popular medium of exchange in the absence of a stable local currency. More than 30 years on, Unicer, Portugal’s largest drinks group, is building a €100m brewery in Luanda, the Angolan capital, in a project that highlights the former colonial power’s position as the biggest foreign investor in Angola outside the oil industry. Portuguese wine is also widely drunk in Luanda, the world’s most expensive city, according to the consultants ECA International, with Angola becoming the biggest overseas market for Portuguese winemakers last year, accounting for €57m of exports of €246m. As demand falters in Portugal’s main export markets, led by Spain, Germany and France, local companies are building on common ties with Portuguesespeaking Africa and Brazil to expand outside Europe in some of the world’s fastestgrowing economies. “Portugal maintains a close and productive relationship with lusophone Africa through its common language, direct transport links, shared legal framework and long-standing business ties,” Alan J Katz, the US ambassador to Portugal, told a recent conference in Lisbon. “It’s uniquely positioned to serve as an effective ‘gateway’ for companies seeking greater levels of business in these markets.” He points out that in 2008, when, the world economy grew by only 2.9 per cent, economies in Portuguesespeaking Africa expanded by as much as 13.2 per cent in Angola, 5.9 per cent in Cape Verde and 6.8 per cent in Mozambique. “As these economies continue to grow, so does the demand for quality goods and services from infrastructure and energy equipment to medical technology and legal services,” says Mr Katz. Portuguese companies aim to be in the front line of groups supplying those needs. The country’s exports to non-EU countries have risen from 15 per cent of the total to more than 27 per cent over the past decade, with up to 10,000 Portuguese companies estimated to be doing business with lusophone Africa. These groups have invested more than $1bn in Angola over the past three years and helped to lift Portugal past China to become the country’s biggest foreign supplier, accounting for 17 per cent of imports of almost $16bn last year. As a result, Angola has become Portugal’s fourth biggest export market, ahead of the US, with sales to its former colony growing 35 per cent in 2008. People have followed trade. After 700,000 settlers fled the country’s Africa colonies ahead of independence in 1975, the number of Portuguese living in Angola is estimated to have doubled over the past three years to about 100,000. Portugal is also the main foreign supplier for Cape Verde and one of the top ON FT.COM Sharper shoes, cork oak exports and a specialist in apps www.ft.com/ portugal2010 five for Mozambique. Every week, TAP-Air Portugal, the national airline, runs 20 direct flights from Lisbon to Luanda and 14 to Cape Verde. Leading Portuguese companies, including Sonae (manufacturing and services), Pestana (tourism), Millennium BCP (banking), Mota Engil (construction) and Galp (oil), are rapidly expanding their operations in African markets, says Mr Katz. About 84 per cent of Portugal Telecom’s 70m customers live in Africa or Brazil, where gross domes- tic product was up 5.1 per cent in 2008. “Market diversification is one of the tools we have to use to reduce our foreign deficit,” says José Vieira da Silva, the economy minister. Seeing little prospect of domestic consumption or public investment growth at home or in European markets, Portuguese companies are increasingly looking further afield for opportunities, helped by a weaker euro. An acrimonious battle between Portugal Telecom (PT) and Spain’s Telefónica over control of Vivo, Brazil’s largest mobile phone operator, reflects the importance of the Brazilian market, home to most of the world’s 223m Portuguese speakers. Brazil, like lusophone Africa, is also proving a strong growth market for Portuguese banks. Banco Espírito Santo, has a 7 per cent shareholding in Brazil’s Bradesco bank and operates its own investment bank there. State-owned Caixa Geral de Depóstos, Portugal’s biggest bank by deposits, last year launched Caixa Geral-Brasil. Diversifying into new overseas markets is also seen as an important driver of technological innovation and marketing flair. Unicer, for example, has developed a non-alcoholic version of its best-selling Super Bock beer targeted at markets in the Middle East and north Africa. to the streets before a compromise was agreed last year. Ms Alçada is facing protests over plans to close 900 primary schools with fewer than 21 pupils each. Entrepreneurship has recently been introduced into the school curriculum. But a measure expected to have a far greater impact on the economy is the provision of vocational training in secondary schools. “After the 1974 revolution, there was an ideological bias in Portugal against technical teaching,” says Ms Alçada. “Secondary education came to be seen as an academic preparation for university and vocational training at school was often considered discriminatory.” Today, 180,000 of Portugal’s 351,000 secondary students are enrolled in courses aimed at equipping them with specific skills for the job market. Ms Alçada believes this will have an important impact on one of the country’s biggest educational problems: school drop-outs. Last year, 31 per cent of students abandoned secondary school early. This is one of the highest rates in Europe, but already represents a significant reduction from almost 40 per cent in 2004. Part of the solution, Ms Alçada believes, is adult education. Launched in 2005, the Novas Oportunidades (New Opportunities) programme offers adults and young drop-outs the possibility of completing the secondary education that they would normally have finished at 18. The scheme has proved a runaway success, with almost 1m people registering for courses over the past five years. “Parents need to have positive expectations of the education system,” says Ms Alçada. “In giving adults a chance to achieve the education they lacked, we increase their appreciation of its value and raise their hopes for their children.” 4 FINANCIAL TIMES WEDNESDAY JULY 14 2010 ★ Portugal Small size hides uncomfortable truth Portugal has more small and mediumsized companies (SMEs) than any other western European country, which explains many of the country’s difficulties. It also highlights some of the problems in all of Europe, particularly those underlying its sluggish growth compared with the US and Asia. Portugal has 848,000 SMEs providing the country with 82 per cent of its employment and 68 per cent of its value added, according to the latest pan European figures from 2005. That means it has 80 SMEs – classed as companies employing fewer than 250 people – for every 1,000 inhabitants. Some European policymakers pride themselves on the strength of the SME sector, as many of the companies are world leaders in their niches. However, this hides an uncomfortable truth. “Nobody wants to talk down small companies. But the ugly fact for Europe is that we don’t make enough big companies – not enough of our small companies go on to become big companies,” says a leading industrialist. Research from Bruegel, the Brusselsbased thinktank, backs this up. A recent policy brief finds that having bigger companies “could generate a considerable increase in the value of European exports”. It urges consolidation and policies to foster growth, especially among the smallest of companies. The authors argue that not all companies need to become large, but they need to be of a sufficient size. “They must be large enough to carry out complex global operations, including global production,” the report says. This is a particular issue in Portugal where more than 40 per cent of employees work at socalled microenterprises, which employ fewer than 10 people. The problem of size is not just about growth, but also about the availability of finance. In common with many SMEs across the world, Portuguese companies complain about the price of credit. Although banks say that the increase in credit costs merely reflects lower risktaking on their behalf as well as lower demand from cautious companies, there is a wider worry across Europe. That is that the current rules on bank capital – known as Basel II – and the new version being negotiated, catchily entitled Basel III, will hit SMEs hard. The updated rules will cause banks to hold more capital in a way that many business groups believe will lead to them discriminating against small companies when they lend, because of the latter’s poor credit ratings. Big Portuguese companies, like their European counterparts, are increasingly thinking about replacing their bank finance with money from the capital markets through bonds and private placements, which is much cheaper. The problem for SMEs is that that avenue is not open to them. Instead, they are forced to turn to the banks. One doing that is JJ Teixeira, a wood company in the north of the country. When the FT first visited it in February, its order books were full as never before. It made a record €25m in sales last year with its 250 workers. But since then, it has been in an endless series of talks and begging discussions with banks to try to stave off bankruptcy. It has been forced to push back the payment of its bills in a desperate scramble for cash. Pedro Azevedo, the company’s finance director, says: “My biggest worry is that we get into a spiral with SMEs, where one doesn’t pay another so they go bankrupt one after another.” JJ Teixeira’s fate is common across Europe. Business is starting to boom again. Many companies are seeing their highest sales ever. But their financial cushion is painfully thin after a tricky crisis. Late payment of bills is still a huge issue – JJ Teixeira gets paid in 187 days now against 120 days before the crisis (itself a high figure). Even without a doubledip recession, many SMEs will not survive. The question for Portugal, and bigger companies across Europe that depend upon dozens of SMEs, is how much those struggles will weigh on growth. The last thing either Portugal or Europe wants is for growth to become more sluggish. Richard Milne On parade: ModaLisboa organises Lisbon’s twiceyearly fashion week, helps promote local designers abroad and takes talent on the road AFP Local talent raises its game Fashion Mark Mulligan considers the prospects for Lisbon’s clothes designers P edro Noronha-Feio’s story is fairly typical of a new breed of designers trying to put Portugal – and the capital Lisbon – on the European map of fashion centres. As a youngster interested in industrial design and clothes, he headed to London, washing dishes and flipping hamburgers to put himself through the prestigious London School of Fashion. After graduating, he stayed in the UK capital, where he eventually teamed with Evgenia Tabakova, his business partner, to form White Tent, an innovative, upmarket label that is starting to make waves around Europe and further afield. While many young designers start out thinking of their domestic market first, Pedro had no doubts about his focus. “We decided from the outset that the brand had to be international,” he says. This global vision, however, did not stop him returning to Portugal for a good old-fashioned industrial apprenticeship. He worked at first with Ana Salazar, Portugal’s best known fashion designer, before heading to the country’s industrial north to learn the more practical aspects of his craft in the cutting rooms and sewing lines of the clothing workshops. Although Lisbon will never have the fashion cachet of Paris, Milan, or London, Portugal has long been known for its textile design and confection. Production has declined since the country joined the eurozone. However, while membership has resulted in the loss of business to lower-cost manufacturing centres in Asia, eastern Europe and northern Africa, it has also forced the industry to raise its standards. Textile and clothing manufacturers, and shoemakers, use more efficient production techniques these days and turn out more sophisticated designs and higher quality products than during the low-cost decades. This has allowed them to reposition themselves upmarket. Portuguese shoes, long considered cheap and of poor quality, are now the most expensive in the world, after Italy. The same is happening with clothing designers, manufacturers and retailers, says José Vieira da Silva, the economy minister, although he admits “it is a lot more difficult”. He says: “There is a more competition [than in shoes], and the market is increasingly global.” Nonetheless, apparel makers are rising to these challenges. Factories in Portugal form an important part of the production base of Inditex of Spain, the world’s largest integrated clothing group. Salsa, the jeans manufacturer founded in Portugal 16 years ago, has begun to make a mark on one of the sector’s most competitive segments. Natural fashion clusters, though shrunken by global competition, are becoming better organised. Overseas promotion and contact-making is part of a six-point strategy drawn up by the Portuguese Association of Textiles and Clothing to breathe new life into the industry. A local fashion institute, a focused MBA programme and more intelligence-gathering for the sector are also needed to develop the industry, it says. Paula Feferbaum, a Brazilian designer and promoter based in Barcelona, agrees that more infrastructure and marketing is needed to nurture talent. Although cosmopolitan and increasingly popular with students and young travellers, Lisbon is a long way from becoming a creative hub like her adopted city. “Lisbon is an artsy city, beautiful and inspiring,” she says. “There is also a lot of talent, but it is difficult to develop inhouse, as it were, because of the lack of quality fashion schools.” Her advice to young designers is “get inspired and go abroad for a career”. Indeed, some of the country’s most highly regarded fashion designers are based abroad: Felipe Oliviera Baptista lives in Paris, while Louis de Gama has called London home since 1992. Still, Portugal has come a long way since the 1970s, when pio- neer Ana Salazar launched her career. “When I started out, there was absolutely no fashion market in Portugal,” she says. Portuguese women are still, for the most part, conservative dressers, says Felipe Faísca, a noted “demi-couture” designer and retailer with a well-heeled clientele. Big international names such as Prada and Ralph Lauren remain favourites among the dames of Lisbon’s wealthier districts, although the economic crisis has stoked nationalist loyalty. “Women are starting to look more at local fashion,” he says. “They feel they should do something to help out the domestic economy.” ModaLisboa organises the city’s twice-yearly fashion week, helps promote local designers abroad and takes talent on the road. Eduarda Abbondanza, its director, sees the crisis as positive for the local fashion scene. “Jobs are hard to come by at the moment – young people are having to be creative and inventive,” she says. “Lisbon is a good city in which to be a struggling artist because you can still live relatively cheaply.” FINANCIAL TIMES WEDNESDAY JULY 14 2010 5 ★ Portugal Green technology at heart of state policy Renewable energy Government aims to set an example in efficiency, writes Mark Mulligan Electric car In the vanguard of mobility T o the thousands of holidaymakers who visit Viana do Castelo each year, the Portuguese city is a treasure trove of medieval architecture fringed by wild Atlantic beaches. Situated at the mouth of the Lima River, close to the country’s north-western border with Spain, the port is also renowned for its vital role in the centuries-long campaign against Spanish occupation. Away from the gothic spires and ancient battlements, however, modern Portugal is hard at work. Along with a smattering of other towns and cities, Viana do Castelo is the centre of Portugal’s most important industrial cluster since textile and footwear manufacturers began grouping around the northern towns of Felguiras, Santa Maria de Feira and the Vale do Ave area. Like neighbouring Spain and more distant European economies such as Denmark and Germany, Portugal has placed renewable technologies at the heart of both its national energy policy and industrial reconversion plan. Viana do Castelo is the site of its first wind energy cluster. Developed in stages after a public tender in 2005, the main complex comprises five new factories built between the port city and Lanheses, further upriver. In this cluster, a consortium made up of Energias de Portugal (EDP), the former state utility, Endesa of Spain, the domestic conglomerate Sonae and Enercon, the German wind turbine manufacturer, make the rotor blades, cement towers, generators and electrical components that form winddriven electricity generators of the type found all over the country. A further two new factories, and 11 refitted production and service centres complete the central cluster. According to government figures, €220.3m in direct investment has helped create nearly 2,000 jobs. Some of these positions, and those created by the project at about 30 ancillary service and parts suppliers, are filled by retrained workers from the textile and footwear factories in the same region. As well as adding to the 3,500MW of installed wind power in Portugal, the cluster exports the final product – state-of-the-art gearless turbine and tower set-ups – around the world. “Portuguese exports in the first quarter of 2010 rose 8 per cent,” says Carlos Zorrinho, state secretary for energy. “But exports in the energy sector increased 100 per cent.” The development of production expertise in alternative technologies such as wind power – and more recently solar and wave generation – is also part of a broader move towards higher value-added exports. According to Jose Vieira da Silva, the economy minister, in 2007 the country for the first time ever exported more technology-based goods and services than it imported. “We are using the energy sector to reinforce industrial clusters and change Power project: clean energy and emissions targets are more ambitious than the European Union’s the production model of Portugal,” he says. In the process, the country’s targets on clean energy production and cuts in carbon dioxide emissions have become far more ambitious than those set by the European Union. Under the plan, the country hopes to produce 31 per cent of its energy needs, including transport, from renewable sources, compared with just over 20 per cent today. About 60 per cent of electricity demand will be met through zero-emission generation, compared with an average of more than 40 per cent today. Central to the first target will be the roll-out of an electric car project being developed by local consortium Mobi.E, which will involve generous tax breaks and direct subsidies. “Countries that want to be leaders have to pay a market premium,” says Mr Zorrinho. “But when these new energy technologies are competitive, we will have an advantage.” This is especially true of electricity generation for homes and energy. Like many other countries, Portugal has had to offer subsidies – in the form of premium feed-in tariffs, or guaranteed wholesale prices – to encourage investment in renewable energy generation. Although margins over average wholesale prices remain large in the case of solar and wave energy, the more developed wind segment is running close to grid parity, or at market prices. All new renewable energy concessions are awarded through an auction process, which allows the government to set feed-in tariffs according to the most competitive bids. The next stage in Portugal’s green revolution, says Carlos Pimenta, chairman of the wind cluster’s board, is the raising of consciousness among the country’s 10m inhabitants. A pilot smart grid project in the city of Évora, about 100km east of Lisbon, could eventually be replicated around the country, he says. He is also encouraged by the spread of energysaving light-emitting diode (LED) illumination throughout industry and local government, as well as energyefficient buildings. That fact that EDP Renováveis, an offshoot of the utility, is now the world’s third-largest renewable energy group by installed capacity attests to the effectiveness of national energy policy, he says. Web is yet to displace system of paperwork and licensing Egovernment Online service is quick to receive, slow to disburse. Victor Mallet reports Small countries are often enthusiastic about adopting new technology – Singapore is a well-known example – and Portugal is eager to take the lead in southern Europe in the area of government services. “The Portuguese are addicted to technology. It’s something to do with the size of the country, like the Dutch,” says Francisco Contreras, secretary-general of the PortugueseSpanish Chamber of Commerce and Industry in Lisbon. Over the past five years, Portugal has sought to supersede its creaking, paper-based bureaucracy with online and face-to-face services to citizens and businesses grouped under the name Simplex – the Programme for Administrative and Legislative Simplification. The initiative was once described by the Organisation for Economic Co-operation and Development, the group of developed nations, as “unique among OECD countries”. The aims are to cut red tape, making bureaucratic tasks simpler for ordinary Portuguese and for investors both domestic and foreign, and to do as much as possible through online “e-government”. Among the outcomes should be greater efficiency, an easier life for the Portuguese, and a reduction in the size of the civil service. Simplex has done everything from eliminating oddities such as the certificates once required to prove the nonexistence of debts to the tax authorities, to providing a “one-stop” service to deal with the procedure of buying a house, and to offering would-be entrepreneurs the chance to establish a company in less than an hour. A separate more recent initiative has been the establishment of a central state procurement agency – again a programme that operates largely over the internet for the sake of speed, transparency and efficiency – to cut the costs incurred by a plethora of government and quasi-government institutions making their own purchases. “This system has done much to improve efficiency in terms of public procurement,” says Paolo Magina, chief executive of ANCP, the National Public Procurement Agency, who has just moved to the organisation from his previous post as chief financial officer of the railways. “Our challenge is to find better prices for goods and services – but still with high quality,” he says. “Portugal is the only country where all tenders, all procurement, are done online.” ‘The old regime of the public sector cannot be easily changed. It depends on processes that are deeply rooted’ Mr Magina and his 40 staff are responsible first for the entire state fleet of 29,000 vehicles, from cars to rubbish trucks, and secondly for procuring supplies such as fuel, computer software and cleaning services for the public sector. So far, the ANCP has adopted control of contracts for 12 types of goods and services, covering 90 per cent of the value of purchases, but aspires to reach the level of Denmark, another small country in which Mr Magina says about 30 categories of goods are included in the procurement system. “Next year, we are going for the consultancy contracts,” he says. The ANCP, he adds, has already saved €110m (the annual procurement budget is €1.2bn) and expects to have saved €150m by the end of this year. About 300 public bodies, including the metros of Lisbon and Porto and dozens of municipalities, have voluntarily joined the scheme. More may be included of their own free will or be obliged to participate under government austerity plans. Businesses in Portugal seem broadly satisfied with the new procurement system, but the verdict on Simplex is more nuanced: the problem is not that it does not work, rather that it has not yet succeeded in displacing the older, entrenched system of paperwork and licensing. “It’s working too well in some places,” says one tax expert, who complains that the system allows the government rapidly to seize assets in tax disputes but does not make it easy to stop or reverse the process if an injustice has been committed. The view that e-government is quick to receive and slow to disburse was echoed by Miguel Ribeiro, who was using a one-stop “citizens’ shop” in a shopping mall in Odivelas outside Lisbon one Tuesday morning to set up a new beauty care business. “It’s easy to operate on the pay side, to pay taxes or incorporate your company,” he said. “The rest, we don’t know. If you need money from public entities for developing the business, it’s very difficult, it’s a nightmare. You have some [official] credit lines where the bureaucracy is so complex, and it takes so long, that you give up.” Other investors agree that while Simplex is good as far as it goes, licensing procedures for businesses are still too complex. More time, it seems, will be needed before the Portuguese government is fully online. “The old bureaucratic regime of the public sector cannot be easily changed,” says José Gonzaga Rosa, partner at Ernst & Young. “This depends on processes that are deeply rooted in the public administration.” Rachel Torres “This is a country that has gone from having 100MW of wind energy 10 years ago to 4,000MW now. “It is also noteworthy that municipal governments which once thought nothing about wasting energy are now commissioning zero-emission buildings,” says Mr Pimenta. “Energy efficiency is not yet part of popular culture, but the broader population is being led by example from government and industry.” José Sócrates, the prime minister, is a passionate supporter of the electric car and plans to switch to one as soon as they become available in Portugal at the end of this year. That should be considerably earlier than in most European countries as a result of plans to make the country both a pioneer in the use of electric vehicles and an exporter of the related technology. The programme is a part of a wider strategy to reduce dependence on imported oil by replacing fossil fuels with renewable resources and building an industrial cluster around green energy. “We want Portugal to be in the frontline of the technological change under way in the area of energy and electric vehicles,” says Mr Sócrates. He set the strategy in motion in June, when he inaugurated the first post in a pilot network of 1,350 charging points due to be installed at car parks, shopping centres, petrol stations, airports and roadsides in 25 towns and cities by mid2011. For the occasion, he drove an electric car produced by Renault Nissan, which has signed an agreement to supply the Portuguese market with the Nissan Leaf, its electric runabout, from December, making the country its first partner in a “direct programme” to encourage the widespread commercialisation of zeroemission cars. Carmakers and international analysts estimate that 10 per cent of vehicles in developed countries could run on electricity by 2020. “That would mean 700,000 electric vehicles in Portugal and annual savings of about €300m a year in oil imports”, says João Dias, an economic adviser to the prime minister. Legislation regulating the system has already been approved, including a requirement that 20 per cent of new vehicles purchased by the public administration from 2011 are electric. Tax breaks, direct subsidies and generous tradein deals to encourage drivers into electric cars will include a €5,000 grant for the first 5,000 buyers. “Portugal is in the vanguard of electric mobility, because we have made the necessary investments in renewable energy,” says Mr Dias. “We already produce more than 40 per cent of our electricity from green sources. The surplus energy produced at night by wind turbines, which cannot be stored, can be used efficiently to recharge car batteries.” The charging network, run by a local consortium of technology and energy companies known as Mobi.E, draws on Portuguese technology first developed for bank cards and prepaid mobile phone systems. In the 1980s, the country made a conceptual leap forward by creating a single network of automatic teller machines, known as Multibanco, which is owned and shared by all the banks. This has resulted in one of the most advanced ATM networks in the world, enabling users to do anything from pay taxes or book train tickets from any bank machine. The system has been adopted for the battery charging infrastructure, meaning that rival power companies will use a single network, but charge competing rates to motorists, who will pay with their monthly utility bills. Exporting systems and technology is a crucial aspect of Portugal’s strategy. RenaultNissan is investing €66m in a plant to manufacture lithiumion batteries for electric cars in Portugal, producing 50,000 units a year for export and creating 200 jobs. Technology companies are involved in talks on the transfer of network technology to Japan and other countries. A company in northern Portugal plans to produce electric buses and another is developing a threeseat electric city car. “As soon they start rolling off the production line,” says Mr Dias, “that will be my official car.” Peter Wise Green philosophy: Sócrates gets behind the electric Nissan Leaf 6 FINANCIAL TIMES WEDNESDAY JULY 14 2010 ★ Portugal There’s more than just golf Tourism Jill James considers efforts to promote the country’s historic towns and reminders of Moorish past T rees are heavy with orange blossom. A gorgeous scent hangs on the air. When, eventually, you reach the attractive town of Tavira, it is easy to feel that you are in an older Portugal. This historic Algarve gem is one of a number linked by walking, bicycle and horseback trails that snake the length of the region through Alcoutim, Castro Marim, Loulé, Silves, Monchique, Lagos and Villa do Bispo. Portugal is realising that it has much more to offer visitors than sun, sea and sand and, as it considers the parlous state of Europe’s travel industry, it has an added incentive to find new recipes to attract tourists. Reminders of a rich and industrious Moorish past are everywhere. The country is promoting its wealth of historic towns, nature trails, cultural and sporting events and traditional gastronomic pleasures. Cheaper to live in and visit than large parts of western Europe – in spite of being in the eurozone – Portugal has nevertheless been hit by a downturn in visitors. Globally, travel and tourism have been hit hard by credit and housing market collapses. Households are cutting back on leisure travel and corporations reducing business travel budgets. The impact on tourism investment has also been significant. Yet, depressed though travel and tourism activity is, it still employed more than 235m people internationally last year, generating 9.4 per cent of global gross domestic product, according to figures from the World Travel and Tourism Council. Small economies, it is argued, suffer disproportionately when global economic storms strike and Portugal has certainly felt more than a stiff breeze. However, the country’s longer term indicators for the sector are more promising. The WTTC expects its contribution to GDP to rise from 14.4 per cent (€24.2bn or $35.8bn) in 2010 to 16.9 per cent (€43.7bn) by 2020. Real GDP growth for the travel and tourism economy is expected to be 1.9 per cent in 2010 and to average 4 per cent a year over the coming 10 years. Investment is estimated at €5.1bn or 13.8 per cent of total investment this Tavira: the historic Algarve gem is one of a number linked by walking, bicycle and horseback trails year. By 2020, this should reach €8.8bn, or 14.3 per cent. Diversity has become crucial to the future of tourism within Portugal and a wider range of products will certainly help it weather future economic whirlwinds. The Algarve, for example, launched a €300,000 campaign at the year’s start. Entitled “Algarve: Europe’s most famous secret”, it is aimed at drawing attention to the region’s natural landscapes, local gastronomy, historic sites and, of course, some of Europe’s finest golf links. Golf is still a mainstay of the industry in the region with wonderful championship and resort courses suitable for all abilities. However, hefty airline charges for golf equipment – as much as £60 for a single set of clubs for a return journey, say from London to Faro – have prompted promotional strategies aimed at easing the drain on golfers’ pockets. Medical tourism is another area to which Portugal is turning its attention. A Longevity Wellness resort, with its own medical spa and antiageing treatments, has opened in Monchique, Algarve. In Lisbon, Fly2doc is not only offering cosmetic surgery but medical and dental treatment including orthopaedic and eye surgery. Since Portugal thinks it has certain built-in advantages in this sector – including proximity to main European markets, up-to-date facilities and a good climate and hotel sector suitable for recuperation – the country will doubtless be eyeing that market increasingly. Nuno Aires, president of the Algarve tourism board, says its regional strategy is not only to promote its core offering but to highlight and market products such as wellness, nature, sports and culture. He says: “This market diversification strategy was put into place to withstand the recession and welcome visitors who may not have thought Algarve offered these niche markets. It has allowed for further visitor dis- Dreamstime persion throughout the region, while also aiming for a year-round appeal to visitors. An increase in flights from several European routes in 2009-10 has also opened up the region to new visitors.” Mr Aires says: “A number of key investments has also been made in the Algarve, further increasing the standard and options offered to tourists. These include new hotels, infrastructure for nature tourism, new wellness centres and sports facilities such as the new Motorpark.” He adds that there are plans for new spas, new five- and four-star hotels and new golf courses. Mr Aires says: “2010 has already seen an increase in visitors compared to 2009 with a 5 per cent increase in UK guests staying in hotel accommodation in the first quarter. We are positive for 2010, but are hoping the volcanic ash [a dust cloud that has has disrupted travel in parts of Europe] does not return to affect arrival figures further.” Business Frustration and obstacles remain In their attempts to attract foreign direct investment, Portuguese officials once talked about textiles, shoes and automotive parts. Nowadays, they speak of big projects in alternative energy and information technology. Yet Craig Sharp, a 33yearold Briton, has chosen an entirely different sector – surfing holidays – and he could be just the kind of energetic entrepreneur needed by countries such as Portugal to help revitalise their struggling economies on Europe’s periphery. Mr Sharp made his $1m of investments almost by accident. Brought up on the Isle of Wight, he spent several years surfing in Australia before returning to Europe to work for the family clothing business, which moved production to Hungary and then Morocco. By 2007, it was clear that competition from China was too intense for the company to continue, even in lowcost Morocco. Mr Sharp had visited Portugal on holiday, and he decided to embark the following year on a new venture that he calls Pocean (motto: “liquid magic Portugal”). “Golf is the big thing here, but surfing is getting more popular. You get a lot of families coming and learning to surf,” he says. “The first year we set it up, we did really well,” he adds, “and during that year we found a lot of demand for selfcatering.” As a result, the business has been transformed from a provider of surf holidays into a broader enterprise that owns or manages holiday flats and villas. It now has 34 properties on its books. Despite his focus on the esoteric art of surfing, many of the attractions and disadvantages of Portugal are much the same for Mr Sharp as they are for the big industrial investors such as Volkswagen, Cisco or Abertis. The climate is an obvious benefit for tourism and for attracting international staff to big companies. Good transport and communications infrastructure is another plus, as is Portugal’s membership of the European Union – although, as John Duggan of PwC points out, that can also work to Portugal’s disadvantage if companies decide to serve their Portuguese clients from the larger economy of neighbouring Spain. Portuguese officials also boast of the importance of the “lusophone triangle”, which links Portugal to the expanding economies of its former colonies in South America and Africa. “We are the border between Europe and Africa and Brazil,” says Basilio Horta, chairman of Aicep, Portugal’s investment and foreign trade agency. Such links, which have boosted Portuguese exports and encouraged inward investment from increasingly prosperous developing countries, have helped alleviate some of the pain caused by the global financial and economic crisis. Yet many of the obstacles to doing business in Portugal remain as frustrating as ever. A particular concern at present – exacerbated by successive rounds of budgetary austerity and tax rises – is what accountants and tax specialists call the “instability” and lack of clarity in the tax system, a problem that has prompted some investors, including Mr Sharp, to move their corporate domiciles to easier EU jurisdictions such as the UK. The unpredictability and slowness of the judicial system is another unresolved issue. Mr Duggan gives the example of a judgment on a VAT dispute that was handed down a few weeks ago – 16 years after the events in question occurred. As in Spain, employers criticise the country’s labour laws as being so protective of workers that they discourage hiring and worsen unemployment. Government officials, on the other hand, say that low productivity is mostly confined to smaller companies and that big foreign investors have achieved high levels of productivity under existing labour regulations. Perhaps the most common complaints of entrepreneurs are about bureaucracy and the intangible matter of Portuguese attitudes to work, where delays, languor and unreliability are remarkable even by the undemanding standards of southern Europe and north Africa. Slow progress towards greater competitiveness is particularly risky at a time when investors in old industries have been abandoning Portugal and many of the new ones in communications technology and other modern sectors have yet to arrive. The crisis, and the resulting squeeze on government budgets, only makes the situation worse. “We’re in a very delicate period,” says José Gonzaga Rosa, partner at Ernst & Young in Lisbon, who believes there is too much emphasis on knowledgebased industries and not enough on niche sectors, where Portugal could excel in traditional sectors such as clothing and ceramics. “This is bad timing for doing the transition of our economy. But the transition had to be done.” Victor Mallet