# EUR-Lex - 52013PC0747 - EN

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# 52013PC0747

**Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal /* COM/2013/0747 final - 2013/0362 (NLE) */**

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EXPLANATORY MEMORANDUM

Upon a request
by Portugal, the Council granted financial assistance to Portugal on 17 May
2011 (Council Implementing Decision 2011/344/EU) in support of a strong economic and reform programme aiming at restoring confidence, enabling the return of the economy to
sustainable growth, and safeguarding financial stability in Portugal, the euro
area and the EU.

In line with Article 3(10) of Decision
2011/344/EU, the Commission, together with the IMF and in liaison with the ECB,
has conducted the eigth and ninth reviews to assess the progress on the
implementation of the agreed measures as well as their effectiveness and
economic and social impact.

Taking into account the recent economic,
fiscal and financial developments and policy actions, the Commission considers
that some changes to the economic policy conditions underpinning the assistance
are necessary to secure the programme's objectives, as explained in the
recitals of the proposed amendments to the Council Implementing Decision.

2013/0362 (NLE)

Proposal for a

COUNCIL IMPLEMENTING DECISION

amending Implementing Decision 2011/344/EU
on granting Union financial assistance to Portugal

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union,

Having regard to Council Regulation (EU) No
407/2010 of 11 May 2010 establishing a European financial stabilisation
mechanism[1],
and in particular Article 3(2) thereof,

Having regard to the proposal from the
European Commission,

Whereas:

(1)       In line with Article 3(10)
of Council Implementing Decision 2011/344/EU, the Commission, together with the
International Monetary Fund (IMF) and in liaison with the European Central Bank
(ECB), has conducted, between 16 September and 3 October 2013 the combined eight
and ninth reviews of the authorities' progress on the implementation of the
agreed measures.

(2)       Quarterly real GDP growth
returned into positive territory in the second quarter of this year and
short-term indicators also point to a progressive bottoming out of the
recession. Real GDP is expected to contract by 1.8 percent this year and to
grow by 0.8 percent and 1.5 percent in 2014 and 2015, respectively. Tensions in
the labour market are expected to ease somewhat. Still, the unemployment rate
is expected to peak at 17.7 percent next year before starting to decrease
progressively. Uncertainties with regard to the macroeconomic outlook are high as
the sustainability of the projected recovery in 2014 and 2015 is contingent on
positive trade and financial market developments, which remain fragile.

(3)       Up to August 2013 the
government cash deficit recorded an improvement of 0.6 percentage points of GDP
(net of extraordinary factors) compared with the same period of last year.
Solid tax revenue performance and tight execution of most expenditure items are
supporting the budgetary execution. However, some deviations have been
identified with respect to the fiscal outlook of the 7th review.
These include shortfalls related to the reprogramming of EU funds and the
postponement of the sale of a port concession (one-offs) and other factors,
such as the higher than expected contribution to the EU budget, the underperformance
of some non-tax revenues, the transfer to Greece of dividends from Greek bonds
holdings in Banco de Portugal's investment portfolio, the lower than expected social
contributions to the public employees' pension scheme and overruns in the wage
bill and intermediate consumption. After the use of the provisional budget
allocations (0.3 percent of GDP), the net effect of the deviations is estimated
to increase the 2013 deficit by 0.5 percent of GDP. In addition, a capital
injection into BANIF amounting to 0.4 percent of GDP also increased the budget
gap although this operation shall not be considered for programme purposes.

(4)       The government is taking
corrective measures to ensure attainment of the 5.5 percent of GDP programme
deficit target, notably through the reduction of available funds for investment
and tighter control on the intermediate consumption of line ministries (0.1
percent of GDP). In addition, the government announced a one-off
tax-and-social-security-contributions debt recovery scheme, which is expected
to recover revenues of about 0.4 percent of GDP and is accompanied by increased
sanctions for criminal tax offenders.

(5)       The updated fiscal
projections show for 2013 a fiscal effort, measured by the improvement in the
structural balance, of 0.5 percent of GDP, slightly below the 0.6 percent of
GDP envisaged at the 7th Review. The projected underperformance is mainly
explained by delays in the implementation of the initially planned
consolidation package and its partial replacement by one-offs while unexpected
pressures have weighed on the budget reserves. The implementation delays are due
to several constraints, such as the political crisis in July and the subsequent
government reshuffle; the challenge of responding to the Constitutional Court
opinion of 29 August deeming some provisions of the draft law for a new
requalification system unconstitutional and the technical difficulties in
implementing certain measures, notably the redesigned social security contributions
from unemployment and sickness benefits above a minimum level, following the
ruling of the Constitutional Court of 5 April.

(6)       The government has
reaffirmed its commitment to the deficit target of 4 percent of GDP in 2014. In
this respect, the government has adopted consolidation measures amounting to
about 2.3 percent of GDP, which also cover for part of the slippages in 2013
that will carry over into 2014. The consolidation measures are to a large
extent included in the draft Budget Law, whilst some measures are implemented
through specific legislation. The measures are primarily of a permanent nature
and rest predominantly on expenditure savings. Overall, the cumulative value of
the consolidation package necessary to achieve the envisaged fiscal adjustment
has not changed with respect to the 7th review – approximately EUR
4.7 billion of permanent saving measures over 2013-2014, or 2.8 percent of GDP.
However, part of the consolidation effort is now back loaded to 2014 as a
result of the aforementioned implementation delays in 2013.

(7)       Most of the consolidation
in 2014, about 1.8 percent of GDP, should be drawn from the public expenditure
review (PER), which was carried out over the past year with the objective of
increasing equity and efficiency in the provision of social transfers and
public services. The main impact of the PER measures will be along three main
axes: (1) limiting outlays in the public sector wage bill, by reducing the
public-sector work force while shifting its composition towards higher-skilled
employees, aligning the public sector work rules with those of the private
sector and making the remuneration policy more transparent and merit-based; (2)
pension reform and (3) sectoral expenditure cuts across line ministries and
programmes.

(8)       To compensate for the
negative carryover from the 2013 budgetary execution and achieve the 4 percent
of GDP deficit target, the PER package is to be complemented by other permanent
measures aiming at further improving the efficiency and equity of the current
tax and benefit structure (worth 0.4 percent of GDP). Moreover, a number of
one-off measures worth 0.2 percent of GDP will be implemented, more than offsetting
the costs arising from the one-off upfront payments related to the introduction
of a mutual agreement redundancy scheme in the public sector.

(9)       The debt-to-GDP ratio is
expected to peak at 127.8 percent in 2013 and to decline thereafter. The upward
revision with respect to the 7th review is explained by the
correction of the 2012 debt data, which is now slightly higher, and the
non-realisation of some short-term debt-reducing operations. In particular, the
Social Security Stabilisation Fund is now expected to increase its holdings of
Portuguese Government Bonds more gradually and privatisation receipts will
mostly remain in Parpublica until the new ESA 2010 enters into force and the
status of the company is defined. Moreover, the Treasury cash balance at the
end of the year is estimated to be higher than previously assumed (by about EUR
2 billion).

(10)     The budgetary adjustment
process is flanked by a range of fiscal structural measures to enhance control
over government expenditure and improve revenue collection. In particular, a
comprehensive reform is bringing the budgetary framework, including at central,
regional and local government levels, in line with best practices in public
finance management. The new commitment control system is showing results but
implementation needs to be monitored closely to ensure that commitments are covered
by available funding. Reforms in the public administration continue with a view
to modernising and rationalising public sector employment and entities.
Progress in the reform agenda of the revenue administration is enhancing
monitoring and strengthening revenue compliance. The renegotiation of
Public-Private-Partnerships has made good progress and significant savings are
projected for 2013 and beyond. State-owned enterprises reached operational
balance on average by the end of 2012 and additional reforms are foreseen to avoid
a renewed deterioration of their results. Reforms in the health care sector are
producing significant savings and implementation is continuing broadly in line
with targets.

(11)     The banks' capital ratios
increased substantially in the past year allowing them to
meet the EBA regulatory capital buffers as well as the 10 percent Core Tier 1 programme target. This capital buffer remains adequate across
the board when using the new Capital Requirements
Directive (CRD) IV rules for evaluating the banks' own
funds. These new capital rules will apply from January 2014 onwards. Banco de
Portugal is currently developing a transition approach to introduce CRD IV. The
indicative loan-to-deposit target of 120 percent by 2014 is likely to be met,
with some banks already below this threshold. Efforts to diversify the sources
of funding for the corporate sector are being strengthened. Building on the
recent external audit of the existing government-sponsored credit lines and on
a set of policy recommendations, the authorities submitted a plan with measures
aimed at improving the performance and governance of these instruments. The crisis
management toolkit including a bank resolution fund, early intervention powers
and a recapitalisation law is being finalised.

(12)     Further progress has been
made in implementing growth and competitiveness-enhancing structural reforms. A
new reduction of severance payments entered into force on 1st
October and two compensation funds have been established with the purpose of a
partial financing of severance payments. Additional steps have been taken to
strengthen Active Labour Market Policies. Additional measures have been adopted
in the area of education, in which progress is overall satisfactory.

(13)     The implementation of the
Services Directive aiming at reducing barriers to entry and boost competition
and economic activity by facilitating access for new entrants to the market in
the different economic regimes is proceeding at a good pace and its
transposition is now close to completion. The framework law for improving the
functioning of the regulated professions involving a professional body was adopted
and the revision of the statutes of the eighteen professions concerned is the
next step to complete this reform. The Framework Law to set the main principles
of the functioning of the most important National Regulator Authorities (NRA),
including their endowment with strong independence and autonomy entered already
into force and the bylaws of the various sectoral regulators are to be adopted
soon. Implementation of the measures to reduce the electricity tariff debt has
been delayed, though the government has recently presented a new tax to
partially deal with this matter. Some legal provisions aimed at easing
licensing procedures and other administrative burdens have been adopted such as
the proposal of the New Base Law for Soil, Spatial Planning and Urbanism.

(14)     Further progress is still
necessary to make the transport sector more sustainable and open to
competition. There has been some improvement in the financial position of the
rail infrastructure manager, but significant additional effort is needed to
bring it to operational balance by 2015.The reforms in ports need to be stepped
up.

(15)     Some additional measures
have been adopted to improve the liquidity conditions of the business sector,
in particular Small and Medium Enterprises (SME).  
Reforms of the judicial system are close to completion. Progress has been
achieved in reducing backlog cases and landmark reforms such as the
geographical reorganisation of the court districts and the reform of the Code
of Civil Procedure have been or are on the way of being completed. Continued improvement of the functioning of the judicial system,
which is essential for the proper and fair functioning of the economy, through:
(i) ensuring effective and timely enforcement of contracts and competition
rules; (ii) increasing efficiency by restructuring the court system, and
adopting new court management models; (iii) further reducing slowness of the
system of courts cases (including tax court cases) is nevertheless necessary,

HAS ADOPTED THIS DECISION:

Article 1

In Article 3 of Implementing Decision
2011/344/EU, paragraphs 7 to 9 are replaced by the following:

‘7. Portugal shall adopt the following
measures during 2013, in line with specifications in the Memorandum of
Understanding:

(a) 
The general government deficit shall not exceed
5.5 percent of GDP in 2013. For the calculation of
this deficit, the possible budgetary costs of bank support measures in the
context of the Government's financial sector strategy shall not be taken into
account. The consolidation measures included in the 2013 budget and
supplementary budget shall be implemented rigorously throughout the rest of the
year. In addition, should further slippages arise in budgetary execution, the
government shall implement additional corrective measures;

(b) 
Portugal shall continue
implementing its privatisation programme;

(c) 
Portugal shall complete the implementation
of the strategy of shared services in public administration;

(d) 
Portugal shall continue
the reorganisation and rationalisation of the hospital network through
specialisation, concentration and downsizing of hospital services, joint
management and joint operation of hospitals. Portugal shall ensure the
implementation of the multiyear action plan for hospital reorganisation;

(e) 
Following the adoption of the amendments to the
New Urban Lease Act Law 6/2006 and the Decree Law which simplifies the
administrative procedure for renovation, Portugal shall undertake a
comprehensive review of the functioning of the housing market;

(f) 
Portugal shall develop a
nationwide land registration system to allow a more equal distribution of
benefits and costs in the execution of urban planning;

(g) 
Portugal shall devise
and implement alternative reform options of the labour market with similar
effect to those that were declared unconstitutional by the Constitutional Court
ruling of 26 September 2013;

(h) 
Portugal shall promote
wage developments consistent with the objectives of fostering job creation and
improving firms’ competitiveness with a view to correcting macroeconomic
imbalances. Over the Programme period, any increase in minimum wages shall take
place only if justified by economic and labour market developments;

(i) 
Portugal shall continue
to improve the effectiveness of its active labour market policies in line with
the results of the assessment report and the action plan to improve the
functioning of the public employment services;

(j) 
Portugal shall continue to implement the
measures set out in its action plans to improve the quality of secondary and
vocational education and training, in particular the government shall present
plans to make the funding framework of schools more effective and the
professional schools of reference shall be established;

(k) 
Portugal shall complete
the adoption of the outstanding sectorial amendments necessary to fully
implement the Services Directive;

(l) 
Portugal shall submit to
Parliament the professional bodies' amended statutes;

(m) 
Portugal shall approve the corresponding amendments to the
bylaws of the National Regulatory Authorities;

(n) 
Portugal shall publish quarterly reports on recovery rates; duration and costs of
corporate insolvency cases; duration and cost of tax cases and on the clearance
rate of enforcement court cases;

(o) 
Portugal shall improve the business environment
by completing pending reforms on the reduction of administrative burden [fully
operational Point of Single Contact (PSC) and 'Zero Authorisation' projects]
and by carrying out further simplification of existing licensing procedures,
regulations and other administrative burdens in the economy which are a major
obstacle for the development of economic activities;

(p) 
Portugal shall complete
the reform of the ports' governance system, including the overhaul of port
operation concessions;

(q) 
Portugal shall implement
the measures enhancing the functioning of the postal and telecommunications
sectors;

(r) 
Portugal shall implement
the measures enhancing the functioning of the transport system;

(s) 
Portugal shall implement
the measures eliminating the energy tariff debt;

(t) 
Portugal shall ensure that the new legal and
institutional PPP framework is applied and the PPP road contracts continue to
be renegotiated in line with the strategic plan presented by the government and with the regulatory
framework revision, in order to obtain substantial fiscal gains, particularly
in 2013;

(u) 
Portugal shall continue
to focus on measures to combat tax fraud and evasion and strengthen taxpayers'
compliance.’

‘8. Portugal shall adopt the following
measures during 2014, in line with specifications in the Memorandum of
Understanding:

(a) 
The general government deficit shall not exceed
4 percent of GDP in 2014. For the calculation of this
deficit, the possible budgetary costs of bank support measures in the context
of the Government's financial sector strategy shall not be taken into account.
To achieve this objective Portugal shall deliver consolidation measures worth
2.3 percent of GDP, primarily through the 2014 Budget Law. Measures shall be
mainly of permanent nature and titlted towards the expenditure savings side;

(b) 
The consolidation package shall build on the expenditure-reducing
measures that were prepared in the framework of the public expenditure review
(PER). Overall, the amount of these measures shall add up to 1.8 percent of GDP
in 2014 and shall include (1) limiting outlays on the public wage bill by
reducing the size of the public-sector work force while changing its
composition towards higher-skilled employees, notably through a requalification
programme and a voluntary redundancy scheme; further convergence of public and
private sector work rules (including the increase in working hours and
reduction in holiday entitlements) and the introduction of a single wage scale
as well as the streamlining of wage supplements. Beneficiaries' contributions
to the special health insurance schemes shall be increased and thereby
contribute to enhance the equity and efficiency of public spending; (2) reforms
of the pension system by an increase in the statutory retirement age via
changes to the sustainability factor; an alignment of the rules for pension
benefit calculations between the civil servants' pension regime (CGA) and the
general pension system, while protecting benefits below minimum thresholds; and
streamlining survivors' pensions of both CGA and the general pension regime, in
particular in cases where these accumulate with other pensions; (3) savings in
intermediate consumption and expenditure programmes across line ministries. In
view of political and legal risks, some of the measures may be partly or fully
replaced by others of equivalent size and quality;

(c) 
The PER package shall be completed with other
permanent revenue measures aiming at further improving the efficiency and
equity of the current tax and benefit structure (worth 0.4 percent of GDP). In
particular, the corporate tax rate on expenses related to company cars shall be
increased and environmental and health- related taxation shall be improved by
changing the taxation of passenger diesel cars and by increasing excises on
tobacco and on alcoholic beverages. Fiscal exemptions in property taxation for
pension funds and real estate funds shall be eliminated. The caps to the social
security contributions of members of statutory bodies shall be removed. A special
levy on the energy sector shall be imposed curbing excessive rents from the
energy sector. Part of the income generated by this levy shall be used to
reduce the tariff debt. Online gambling licences shall be sold with a view to
the regularisation of this market and this activity shall also be taxed. A
special fee on media spectrum shall be introduced and the levy on financial
institutions shall be increased. Moreover, a number of one-off measures shall
be implemented, more than offsetting the costs arising from the one-off upfront
payments related to the introduction of the mutual agreement redundancy scheme
in the public sector. These include the transfer of the CTT health fund to the
government sector, the sale of a port and silos concessions as well as special
dividends from the sale of excessive oil reserves from a public company;

(d) 
Portugal shall present a report with the
objectives (i) to identify overlaps of services and jurisdictions and other
sources of inefficiencies between the central and the local levels of
government; and (ii) to reorganise the network of decentralised services of ministries
mainly through the citizens' shops network and other approaches, encompassing
more efficient geographical areas and intensifying the use of shared services
and digital government;

(e) 
Portugal shall continue
the reorganisation and rationalisation of the hospital network through
specialisation, concentration and downsizing of hospital services, joint
management and joint operation of hospitals. Portugal shall ensure the
implementation of the multiyear action plan for hospital reorganisation;

(f) 
Portugal shall implement
the plan to create an independent gas and electricity logistics operator
company;

(g) 
Portugal shall implement
the measures enhancing the functioning of the transport system;

(h) 
Portugal shall assess
the impact of the optional VAT cash accounting regime;

(i) 
Portugal shall carry out
an inventory and an analysis of the costs of regulations that are likely to
have a higher impact on economic activity.’

‘9. With a view to restoring confidence in
the financial sector, Portugal shall aim to maintain an adequate level of
capital in its banking sector and ensure an orderly deleveraging process in
compliance with the deadlines set in the Memorandum of Understanding. In that
regard, Portugal shall implement the strategy for the Portuguese banking sector
agreed with the Commission, the ECB and the IMF so that financial stability is
preserved. In particular, Portugal shall:

(a) 
monitor the banks' transition to the new capital
rules as laid down in the Capital Requirements Directive IV package (CRD IV)
and ensure that capital buffers remain commensurate with the challenging
operating environment;

(b) 
advise banks to strengthen their collateral
buffers on a sustainable basis;

(c) 
ensure a balanced and orderly deleveraging of
the banking sector, which remains critical in permanently eliminating funding
imbalances and reducing the reliance on Eurosystem funding in the medium-term.
Banks funding and capital plans shall be reviewed quarterly;

(d) 
encourage the diversification of financing
alternatives for the corporate sector and in particular the SMEs through an
array of measures aiming at improving their access to the capital markets;

(e) 
continue to streamline the state-owned CGD
group;

(f) 
outsource the management of the BPN credits
currently held by Parvalorem to the firms selected through the bidding process
with a mandate to gradually recover the assets. The Portuguese Government shall
ensure timely disposal of the subsidiaries and the assets in the other two
state-owned special purpose vehicles;

(g) 
on the basis of the presented proposals to encourage
the diversification of financing alternatives to the corporate sector, develop and implement solutions that provide financing alternatives
to traditional bank credit for the corporate sector.
The Portuguese Government shall assess the scope for improving the performance
and governance of the existing government-sponsored credit lines building on
the results of the recent external audit and the submitted roadmap;

(h) 
analyse banks' recovery plans and issue
guidelines to the system on recovery plans and prepare resolution plans on the
basis of the reports submitted by the banks. Submit to
Parliament the necessary amendments to the recapitalization law reflecting the
recent Communication from the European Commission on the application of the
state-aid rules to support measures in favour of banks in the context of the
financial crisis;

(i) 
implement the framework for financial
institutions to engage in out-of-court debt restructuring for households,
smoothen the application for restructuring of corporate debt and implement an
action plan to raise public awareness of the restructuring tools;

(j) 
prepare quarterly reports on the implementation
of the new restructuring tools. On the basis of the recently conducted survey
explore alternatives to increase the successful recovery of companies adhering
to the PER (the Special Revitalization Procedure for companies in serious
financial distress) and the SIREVE (the Companies’ Recovery System through
Extrajudicial Agreements for companies in difficult economic situation or
imminent or actual insolvency).’

Article 2

This Decision is addressed to Portugal.

Article 3

This Decision shall be published in the Official Journal of the European Union.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 118, 12.5.2010, p. 1.