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Flawed governance culture still remains in Portugal

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Portugal is among all 27 member states receiving their share of the EU’s post- pandemic “pot of gold”, writes Colin Stevens.

Under the Recovery and Resilience Facility (RRF) Portugal will receive €13.9 billion in grants and €2.7bn.

That is the good news.

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But exactly what happens if Portugal (or any other member state) falls short of the tough spending criteria required by the RRF? How far can the Commission go in enuring the money is spent on real reform projects in Portugal?

On this, Portugal has been mentioned, but not singled out, by the European Commission.

Portugal, which has just passed on the EU presidency to Slovenia, has made great play of its so-called reforms but the reality of Portuguese politics, sadly, is a good deal more convoluted than its shiny “poster boy” image suggests.

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In recent years, there have been assorted scandals and events which highlight a raft of issues ranging from corruption and reform of the judicial system to the banking system and how the government managed the coronavirus.

Other matters still to be addressed include the investment climate and the rule of law situation in Portugal.

Overall, the RRF will provide up to €672.5bn to support investments and reforms (in 2018 prices). This breaks down into €312.5bn in grants and €360bn in loans.

The first pre-financing payments to Portugal will start this month.

But, crucially, payments under the RRF will be linked to performance and this is where all eyes will be (among others) on Portugal.

The Commission will authorise disbursements based on the satisfactory fulfilment of a group of “milestones and targets” reflecting progress on reforms and investments of the Portuguese plan. Since disbursements can take place a maximum of twice a year, there cannot be more than two groups of milestones and targets per year.

The Commission will prepare an assessment within two months and ask its Economic and Financial Committee for its view on the satisfactory fulfilment of the relevant Portuguese milestones and targets.

A Commission spokesman told this website: “Where one or more member state considers that there are serious deviations from the satisfactory fulfilment of the relevant milestones and targets of another member state, they may request that the President of the European Council refers the matter to the next European Council.”

But what happens if the milestones and targets associated with a payment request are not all met?

Well, if the Commission assesses that not all the milestones and targets associated with an instalment are satisfactorily met, it can make only a partial payment. The rest of the payment of the installment (whether loan or grant) will be suspended.

The member state in question can continue with the implementation of the rest of the plan.

After presenting its observations, the member state concerned then has six months to take the necessary measures to ensure the satisfactory fulfilment of the milestones and targets. If this has not been done within six months, the Commission can reduce the overall amount of the financial contribution.

For a payment to be made by the Commission, none of the previously met milestones or targets can be reversed.

In case milestones and targets are no longer achievable for objective circumstances, the Member State has the possibility to submit an amended plan to the Commission.

The European Parliament also has a role in all this and be asked to given an overview of the Commission's preliminary findings on the fulfilment of milestones and targets related to payment requests and disbursement decisions.

The key question for some is that the money is proven to be well spent.

So, in the case of Portugal, for instance, how will he EU's financial interests be protected?

Well, it will have to guarantee compliance with Union and national laws, including the effective prevention, detection and correction of conflict of interests, corruption and fraud, and avoidance of double funding.

Given Portugal’s relatively poor record in the disbursement of EU funds in the past, some question its capacity to handle such a huge pot of money now.

But the Commission has warned that it will carry out on-the-spot checks, covering all countries, including Portugal.

The Commission spokesman said: “Even if milestones and targets have been fulfilled, where the Commission finds serious irregularities (namely fraud, conflict of interest, corruption), double funding or a serious breach of obligations resulting from the financing agreements and the member states do not take timely and appropriate measures to correct such irregularities and recover the related funds, the Commission will recover a proportionate amount and/or, to the extent applicable, request an early repayment of the entire or part of the loan support.”

OLAF, the Court of Auditors, the European Public Prosecutors Office and the Commission itself may access relevant data and investigate the use of funds if necessary.

Portugal’s plan was the first to be approved by the commission and it is worth recalling how the Commission actually assessed Portugal's recovery and resilience plan.

Portugal had to meet no less than 11 criteria of whether:

  • Its RRF measures have a lasting impact;
  • the measures address the challenges identified in the country;
  • the milestones and targets which allow for monitoring the progress with the reforms and investments are clear and realistic;
  • the plans meet the 37% climate expenditure target and the 20% digital expenditure target;
  • the Portuguese plans respect the do no significant harm principle, and;
  • its plans provide an adequate control and audit mechanism and “set out the plausibility of the costing information”.

Portugal, importantly in its case, also had to show that is plan includes reforms that address long-lasting bottlenecks in the business environment (licensing and regulated professions) and that aim at modernising and increasing the efficiency of the judicial system.

Of course, the EU has part funded its massive recovery plan by borrowing on the financial markets.

Therefore, it (the EU) must also demonstrate to international institutional investors that it will treat them fairly and equitably.

A banking scandal in Portugal - the collapse of Banco Espirito Santo (BES), Portugal’s second largest bank in 2015 – suggests Lisbon will struggle to meet this particular demand.

The demise of BES has given rise to Recover Portugal, a group that represents a group of European financial institutions holding Novo Banco bonds. They invested in the reform and recovery of the Portuguese economy and are taking action against the illegal retransfer of Novo Banco notes in 2015.

This still unresolved case gives cause for real concerns among some international institutional investors about the risks of lending the EU €750bn to finance its RRF.

Portugal has also been hit by rule of law scandals and was criticised for its extremely contentious nomination by Lisbon for the position of the European Public Prosecutor’s Office (EPPO).

The Commission has also highlighted the slow pace of administrative and fiscal justice in Portugal, and has demanded reforms that the Portuguese government needs to take.

The harsh truth, clearly, is that a series of events in recent years suggest that, behind the reform headlines, a particularly flawed governance culture still remains in Portugal.

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