Bloomberg Businessweek on Madeira

Madeira’s Missing Yachts Turn Into Lesson on Europe Debt Crisis - January 18, 2012

By Henrique Almeida

On the western shores of Madeira, waves crash onto the walls of the Marina do Lugar de Baixo, sending white spray into the air above the dock built for 291 of the world’s finest yachts. All the berths are empty eight years after the boat landing opened.

The European Union, which gives Portugal more handouts for development than Greece, partly funded the 44 million-euro ($56.1 million) marina. The site is currently closed and under further construction as the Atlantic surf on the Portuguese island has proved to be too dangerous for the yachts.

“This marina is probably the single-biggest white elephant project on the island and a hallmark of the government’s overspending spree,” Edgar Silva, leader of Madeira’s Coligacao Democratica Unitaria opposition party, said in a Jan. 4 interview. “A complete waste of everyone’s money.”

For politicians, policy makers and investors looking for a place that encapsulates the European debt crisis, few do it better than Madeira, where loans and subsidies turned the island into one of Portugal’s richest regions from its poorest. The local government spent money it didn’t have to build the trappings of an economic boom that never was.

Madeira’s debt was 6.33 billion euros as of June 30, or 123 percent of the island’s economy in 2009, according to the Ministry of Finance in Lisbon. While that ratio was less than Greece’s 162 percent, it compared with Portugal’s nationwide figure of 100 percent.

Glut of Money

Madeira received 323 million euros of EU funds and money transfers from the government in 2010, said a report by the court of auditors. The amount was more than three times the average of the country’s municipalities on the mainland.

Portugal is due to get 21.5 billion euros from the EU between 2007 and 2013, making it the biggest euro-region recipient after Germany and Italy, according to a list of pre- allocated EU Structural and Cohesion Funds compiled by Bruegel, a Brussels-based research company.

“It seemed there was no bottom to the EU funds coming in,” said Michael Blandy, chairman of the 200-year-old Blandy Group, a Madeira-based company with interests ranging from hotels to shipping and wine. “There was no plan in the work that was done to make the island sustainable.”

The Portuguese government said Sept. 30 that Madeira’s debt had ballooned to an unsustainable level and that the island’s semi-autonomous administration had hidden part of the debt from the government in Lisbon.

Deficit Revision

As a result, Portugal’s National Statistics Institute revised the country’s 2010 budget deficit to 9.8 percent of gross domestic product from 9.1 percent. Shut out by financial markets, Portugal, whose economy has grown by an average of less than 1 percent a year for the past decade, last year followed Greece and Ireland in asking for a bailout.

Prime Minister Pedro Passos Coelho is now cutting state salaries, increasing taxes and selling government-owned companies to comply with terms agreed in May of the 78 billion- euro rescue from the EU and the International Monetary Fund.

The government is pushing for similar measures on Madeira. It has also signaled an end to a series of tax incentives for the island’s International Business Center, a kind of tax haven that has for decades attracted thousands of companies.

Hundreds of them left last year, according to Francisco Costa, president of Sociedade de Desenvolvimento da Madeira, the company that runs the business center. A subsidiary of Swatch Group was among the companies to leave the island, Beatrice Howald, a spokesman for the Swiss watchmaker said on Dec. 9.

Errant Behavior

In November, the IMF said in a report that the adjustment program for the “troubled autonomous region of Madeira will provide an opportunity to signal that errant fiscal behavior at the regional and local levels will no longer be tolerated.”

Madeira is run by Alberto Joao Jardim, the 68-year-old president of the semi-autonomous government since 1978, who said in an interview last month that hiding Madeira’s debt was necessary to develop the island.

“Madeira today is completely different,” said Jardim, speaking Dec. 6 on the sidelines of a parliamentary session in Madeira to discuss the region’s 2012 budget. “If I hadn’t done things during this period, they would never get done.”

Asked if he had any regrets about the state of Madeira’s finances, he said: “none.” Three weeks later, under threat from the government in Lisbon to come up with an austerity plan for Madeira or lose regional subsidies, Jardim announced a plan to cut public workers salaries and raise taxes in what he said was the only way “possible” to guarantee the future of the island’s autonomy from the mainland.

Madeira, known for its fortified wine and as the birth place for Real Madrid soccer star Cristiano Ronaldo, runs an independent budget and has its own government and parliament, though the region cannot override the authority of the government in Lisbon.

Jardim, a populist who has often clashed with the government, has transformed Madeira into the second-wealthiest region after Lisbon in terms of GDP per capita from one of the poorest, according to the National Statistics Institute. He used the island’s ultra-peripheral status within the EU to tap into billions of euros in EU funds and subsidies from Lisbon.

Jardim’s Tenacity

“In some ways, one has to admire the tenacity of Alberto Joao Jardim in that he has known how to access those funds,” said Blandy, whose company was founded by his forebear John Blandy in 1811.

In addition to the marina, the so-called white elephants on Madeira include an abandoned heliport, deemed too dangerous for landings, shopping malls and industrial parks, according to Silva, 49, who wrote a report in 2011 on spending on the island. He estimates the Marina do Lugar de Baixo cost 100 million euros, more than twice the sum claimed by Jardim’s government.

While locals can see the fruits of Madeira’s development, they are also aware of the consequences as Portugal grapples with its part in Europe’s debt crisis.

“Austerity is a very risky recipe, but the alternative is not sustainable and puts the country’s credibility into question,” said Jose Berardo, 67, who left Madeira at the age of 18 to work in South Africa. He later set up an office in Lisbon to buy stakes in some of Portugal’s biggest publicly traded companies, including Banco Comercial Portugues.

Island Roads

When Portugal joined the European Community in 1986, a trip from Madeira’s airport to the island’s capital of Funchal took almost an hour through a narrow and winding road, said Tito Cantado, 62, a taxi driver for the past three decades. Drivers now cover the 12-kilometer stretch of modern highway that cuts through a handful of hills through an extensive network of tunnels in less than 15 minutes.

“The road was so narrow that traffic would come to a standstill if a truck happened to come in the opposite direction,” Cantado said. “We have lived above our means ever since we joined the EU. Now we must pay the price.”

Tourism accounts for about 30 percent of the island’s GDP, while the Madeira International Business Center makes up 20 percent, according to Miguel Albuquerque, the mayor of Funchal.

A few miles up the coast from the capital, a handful of poles in the water is all that remains of the docking system designed to accommodate yachts that stop in Madeira on their way from Europe to America, or vice versa. The regional government is planning to spend another 20 million euros on the failed marina, Diario de Noticias da Madeira, which is partly owned by the Blandy Group, reported on Dec. 30.

“Madeira clearly shows that despite the fact that Portugal is a unitary and small state, it still has a tough time controlling costs,” said Antonio Barroso, an analyst at New York-based Eurasia Group. “In the end, this is about regaining investor credibility.”