# EUR-Lex - 52012PC0142 - EN

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# 52012PC0142

**Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2011/344/EU on granting Union financial assistance to Portugal /* COM/2012/0142 final - 2012/0071 (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(9) of Decision
2011/344/EU, the Commission, together with the IMF and in liaison with the ECB,
has conducted the third review 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 limited 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.

2012/0071 (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(9)
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 the third review of the authorities' progress on the
implementation of the agreed measures as well as of the effectiveness and
economic and social impact of the agreed measures.

(2)       The review has found that
compliance with the conditionality for the fourth quarter of 2011 was
satisfactory. In 2011, the general government deficit fell below the target of
5.9 per cent of GDP and it is now estimated at around 4 per cent of GDP, albeit
by exceptionally resorting to a transfer of the bank's pension funds to the
public social security system of about EUR 6 billion (about 31⁄2 per cent of
GDP). The 2012 budget is consistent with meeting the deficit target of 41⁄2 per
cent of GDP in line with the programme. Policy efforts to support financial
system stability continue. Portuguese banks work towards meeting the higher
capital requirements as required by the programme taking into account the
implications of the European Banking Authority's requirement of valuing
sovereign debt at market prices, the special on-site inspection programme and
the transfer of banks' pension funds to the social security system. Labour and
product market reforms are also progressing: an agreement was reached with
social partners on a broad and ambitious labour market reform and a significant
revision of the competition framework law has been submitted to Parliament
which will create conditions for an effective competition enforcement regime. The
privatisation programme is being implemented under the new framework law. The
sale of the energy company (EDP) and the energy network company (REN) are
concluded; a strategy to restructure state-owned enterprises is put in place. The
public procurement legal framework is being improved and the modernisation of
the housing market legal framework is underway. The reform of the judicial
system is making good progress.

HAS ADOPTED THIS DECISION:

Article 1

In Article 3

(1) paragraph 6 is replaced by the
following:

'6. Portugal shall adopt the following
measures during 2012, in line with specifications in the Memorandum of
Understanding:

(a) The measures defined in
points (b) and (c), amounting to at least EUR 9.8 billion, shall be included in
the 2012 budget. Further measures, notably on the expenditure side, shall be
taken to fill any possible gap arising from budgetary developments in 2012. The
government will adopt a supplementary budget in March which incorporates
various elements such as the implications of the banks' pension funds transfer
to the public social security, the agreement with the Autonomous Region of Madeira,
the fiscal impact of the deterioration in the economic outlook, lower interest
payments and the strategy for the settlement of arrears. The supplementary
budget will leave the target for the 2012 general government deficit (corresponding
to 41⁄2 per cent of GDP) unchanged.

(b) Portugal shall aim at a reduction
of expenditure in 2012 of at least EUR 6.8 billion including a reduction in
public sector wages and employment; cuts in pensions; a comprehensive
reorganisation of the central administration, eliminating redundancies and
other inefficiencies; reducing transfers to state-owned enterprises; reducing
the number of municipalities and parishes; cuts in education and health; lower
transfers to regional and local authorities; and reductions in capital
expenditure and in other expenditure as set out in the Programme.

(c) On the revenue side, Portugal
shall implement revenue measures totalling around EUR 3 billion, including
broadening VAT bases through reducing exemptions and rearranging the lists of
goods and services subject to reduced, intermediate and higher rates; an
increase in excise taxes; broadening the corporate and personal income tax
bases by reducing tax deductions and special regimes; ensuring the convergence
of personal income tax deductions applied to pensions and labour income; and
changes in property taxation by substantially reducing exemptions. These
measures shall be complemented by action to fight tax evasion, fraud and
informality.

(d) Portugal shall adopt
measures to reinforce public finance management. Portugal shall implement the measures
provided for in the new Budgetary Framework Law, including setting up a
medium-term budgetary framework and establishing an independent Fiscal Council.
The budgetary framework at local and regional levels shall be considerably
strengthened, in particular by putting forward the key options for the
alignment of the respective financing laws to the requirements of the Budgetary
Framework Law. Portugal shall step up reporting and monitoring of public
finances and reinforce budgetary execution rules and procedures. The Portuguese
Government shall prepare a strategy for the validation and settlement of arrears.
The strategy will lay out the prioritisation criteria for paying creditors, as
well as governance arrangements to ensure a fair and transparent settling
process across all sectors. Portugal shall put in place a strengthened legal
and institutional framework for assessing fiscal risks prior to engaging in a
PPP contract. Similarly, Portugal shall adopt a law to regulate the creation
and the functioning of state-owned enterprises (SOEs) at the central, regional
and local levels. Portugal shall not engage in any new PPP contract or create
an SOE until the reviews and the new legal structure are in place.

(e) Local government
administration in Portugal has currently 308 municipalities and 4259 parishes.
Portugal shall develop a consolidation plan to reorganise and significantly
reduce the number of such entities. These changes will come into effect by the
beginning of the next local election cycle.

(f) Portugal shall modernise the
revenue administration by creating a single entity, reducing the number of
municipal offices and addressing remaining bottlenecks in the tax appeal
system.

(g) Portugal shall implement the
financial arrangement with the Autonomous Region of Madeira.

(h) Portugal shall adopt
measures to improve the efficiency and sustainability of SOEs at central,
regional and local level. Portugal shall implement a strategy to restructure,
reduce the indebtedness of SOEs and to ensure improved conditions for market
financing. Portugal shall implement this strategy to reach operational balance
at sector level by end-2012.

(i) Portugal shall continue implementing
the privatisation programme. In particular, in 2012 the public sector shares in
GALP, TAP and ANA shall be sold and the privatisation of the freight branch of
Comboios de Portugal, Correios de Portugal as well as a number of smaller firms
shall be launched. A strategy for 'Parpublica' shall be prepared, considering its
winding down or consolidation with the general government.

(j) Portugal shall implement
legislation to reform the unemployment insurance system, including a reduction
of the maximum duration of unemployment insurance benefits, a cap on
unemployment benefits to 2.5 times the social support index, a reduction in
benefits over the unemployment spell, a reduction of the minimum contributory
period, and an extension to certain categories of self-employed.

(k) The government shall prepare
a proposal to align the system for severance payments to reduce its level to
the EU average of 8-12 days per year of work and create a compensation fund for
severance payments.

(l) Regulations on overtime pay
shall be eased and increased flexibility of working time arrangements.

(m) 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. Measures
shall be taken to address weaknesses in the current wage bargaining schemes,
including legislation to redefine the criteria and modalities of the extension
of collective agreements and to facilitate firm-level agreements. Until then,
the application of extensions shall be suspended.

(n) Active labour market
policies shall be strengthened after a review of current practices and an
agreed action plan.

(o) An action plan shall be
prepared to improve the quality of secondary and vocational education and
training.

(p) The functioning of the
judicial system shall be improved by implementing the measures proposed under
the Judicial Reform Map and by conducting and auditing of the backlog cases in
order to target measures to eliminate court backlog and foster alternative
dispute settlements.

(q) Portugal shall continue
opening up the economy to competition. The Portuguese Government shall take the
necessary measures to ensure that obstacles to free movement of capital will
not be created by their action and in particular, that the Portuguese State or
any public body does not conclude, in a shareholder capacity, agreements which
may hinder the free movement of capital or influence the management control of
companies. Professional services shall be liberalised by improving the
professional qualification framework and by eliminating restrictions on
regulated professions. In construction and real estate activities, Portugal
shall make the requirements for cross border providers less burdensome and
review obstacles to the establishment of services providers.

(r) The competition and
regulatory framework shall be improved. Portugal shall reinforce the
independence and resources of the main national regulator authorities; implement
the draft competition law with a view to improving the speed and effectiveness
of enforcement of competition rules; and make operational the specialised court
for Competition, Regulation and Supervision.

(s) In the energy sector,
Portugal shall take measures to facilitate entry, promote the establishment of
the Iberian gas market and shall take further steps towards the full
transposition of the Third EU Energy Package. Portugal shall take measures to review the support and compensation
schemes for the production of electricity. Portugal
shall take measures to reduce excessive rents and eliminate the tariff debt
('defice tarifário') by 2020, focusing on compensation schemes for power
guarantee, special regime (renewables - excluding those granted under tender
mechanisms - and cogeneration), and the ordinary regime ('CMECs' and 'CAEs').

(t) In other network industries,
in particular transport, telecommunications and postal services, Portugal shall
adopt additional measures to promote competition and flexibility.

(u) Portugal shall adopt the
revised public procurement code thereby contributing to a more competitive
business environment and to more efficient public spending.

(v) Portugal shall implement
legislation on housing rental market to further balance obligations of tenants
and landlords, to increase incentives for renovation and to make the market
more flexible and dynamic.'

(2) paragraph 8, point (b) is replaced by the
following:

'(b) follow closely the plans
presented by the banks to reach a core Tier 1 ratio of 10 % at the latest by
end-2012. The capital requirements stemming from valuing sovereign debt based
on market prices according to the European Banking Authority shall be met in
June 2012 together with the capital implications from the special on-site
inspections programme and the transfer of the banks’ pension funds to the State
social security system. If banks cannot reach the capital requirement
thresholds on time, they might temporarily require public provision of capital,
which for privately owned banks shall be available through the EUR 12 billion
bank solvency support facility established under the Programme.'

(3) paragraph 8, point (c) is replaced
by the following:

'(c) ensure a balanced and orderly deleveraging
of the banking sector, which remains critical to eliminating funding imbalances
on a permanent basis. Banks’ funding plans aim at a reduction in the
loan-to-deposit ratio to an indicative value of around 120 % by the end of the
Programme and a eventually reduction of the reliance on Eurosystem funding
during the duration of the Programme. These funding plans shall be reviewed
quarterly.'

(4) paragraph 8, point (e) is replaced
by the following:

'(e) ensure that the state-owned Caixa Geral de
Depósitos (CGD) is streamlined to increase the capital base of its core banking
arm as needed. The sale of its insurance arm is expected to take place in 2012
directly to a final buyer and to contribute to meeting that year’s additional
capital needs, while CGD will continue efforts to divest non-strategic assets.
Insofar as these needs cannot be met from internal group sources by end-June
2012, CGD shall be provided with government capital support from cash buffers outside
the bank solvency support facility.'

(5) paragraph 8, point (f) is replaced
by the following:

'(f) ensure that the proceeds associated with
the partial transfer of the banks’ pension funds to the State social security
system will be used respecting Union State aid rules. Carry out, under strict
eligibility criteria, a credit assignment of up to EUR 3 billion from the banks
to the general government, while maintaining the contractual obligations of the
debtor.'

(6) paragraph 8, point (g) is replaced
by the following:

'(g) develop and
implement a more effective strategy for the recovery of
the distressed assets of the special purpose vehicles with the objective to
maximise returns for the tax payer within a reasonable timeframe.'

(7) paragraph 8, point (i) is replaced
by the following:

'(i) ensure that banks have incorporated the
available results of the special on-site inspections programme in the stress
test exercise with a 6 % Core Tier 1 threshold.'

(8) paragraph 8, point (j) is deleted.

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.