Top Portuguese Economists Say “No Thanks” to High Speed Train and other Government Projects in Manifesto

Call for major review of Public Investment

Click here for the Original Manifesto (in Portuguese)

The Portuguese economy has worsened in the last decade its structural imbalances, including:

(i) the potential rate of economic growth fell from an annual average value of 3%  to 1% before the current international crisis;

(ii) the external deficit (current + capital) stood on average, at 8% of GDP since 1999  reaching 10.5% in 2008;

(iii) the net foreign debt rose from 14% of GDP in 1999 to about 100% in 2008;

(iv) direct public debt increased from 56% of GDP in 1999 to 67% in 2008;

(v) indirect public debt rose sharply, being already 10% of GDP in public sector  of transports, with a tendency to increase, in public-private partnerships (PPP).

(vi) low efficiency of investment and continued falling of internal gross domestic savings;

(vii) the insistence on large public investments, low or zero return, and with  weak job creation in Portugal, not is the way to fight economic crisis.
These mega-projects require the mobilization of substantial resources, with high impact in foreign debt, and debt, and with significant opportunity costs that will prevent us from attacking to our real structural weaknesses and the growth of the economy. Therefore we advocate, as economists, that the national interest requires an in-depth reassessment of the mega-public projects in the transport sector, its priorities and timetables.

1. In the last decade the Portuguese economy had the worst performance for the past 80 years, effectively diverging from the rest of the European Union economies. The depletion of financial resources of the country is creating a situation of social malaise, stagnation of living standards and increased unemployment. It is imperative to find solutions, by beginning to understand the structural component of our crisis, beyond the current international economic difficulties. The weight of investment in the Portuguese economy in proportion to national income has been high, but the impact on national product (marginal efficiency of capital spending) has been lowering since 1999, in a downward trend in relation to the rest of the EU.

2. The new international crisis initiated the end of the era of easy borrowing. Since the Portuguese economy has a rate of investment that is twice the rate of gross national savings, in a context of an annual high external deficit and a growing external debt, it would be even more irresponsible not to apply the financial resources available in the next years in investment priorities for improving national competitiveness, to increase the national income and to control external debt. Improving the quality of investment is imperative.

3. From the identification of our structural vulnerabilities follows, the criteria for the choice of public investment, according to strategic objectives, including the following priorities:

(i) strengthening public policies that promote increased productivity and competitiveness, such as reform of the justice system, reform of public administration, improving the quality of education, and promote innovation;
(ii) expected impacts in national income in foreign debt and in the public debt directly and indirectly;
(iii) improving the competitiveness of enterprises, especially small and medium enterprises, which represent the largest share of the productive outcome of the country and employment;

4. The mega-projects for transportation provided by Government funds should be reassessed in light of the strategic priorities of the Portuguese economy for the next decade. Only after that review, based on studies of cost-effective techniques with recognized quality and made with realistic assumptions, should final decisions be taken towards its implementation. And only after a reassessment of the model of public private partnerships, according to the charges and future risks to taxpayers. In light of the needs of the coming years, it is very doubtful that the large investment projects public may be considered urgent.We must also consider the cost of opportunity, because the funds that would absorb the failure to make alternative investments with more positive results, the recovery of the current economic crisis, and improving employment and competitiveness of the Portuguese economy. Accordingly, we believe that the Portuguese Government should reconsider the following investments:

a) Motorways :

In light of the substantial investments made in the last two decades, Portugal has now a network of competitive and efficient roads, which justify doubts about the strategic direction of the projected (or ongoing) of heavy investments, both on motorways and on the national road network. It is clear that the returns are diminishing in this type of public investment.

b) Projects of high speed train network (TGV):

The available studies on its partial economic and social efficiency (even if based on optimistic assumptions) show that the expected contribution to the economic efficiency of the country is very small, and may even be largely negative in terms of National Income. And that the development of this project has a high opportunity cost in terms of public funding to support EU and financing (debt) of national banks and the European Investment Bank.

Moreover, these studies also show that at least for the first decade of operation, there is not sufficient demand for the economic and social return of such heavy investments. This will lead, therefore, to significant operating losses, paid by to be borne taxpayers.
Are the three projects planned (Lisbon-Madrid, Lisbon and Porto, Porto-Vigo) a priority strategy for the coming years? We think not. The priority should be given to the conventional rail transport of goods, both domestic and especially across international borders.

c) New Lisbon airport (NAL)

The international crisis has led to a sharp decline in demand for air transport.  It is clear that the cyclical fluctuations in demand may not, by itself, justify a decision to postpone future of increased airport capacity in the region of Lisbon. But they can give us four or five years in terms of predicting the saturation of installed capacity. What should be used for the preparation of projects more accurately, including rail connections, and to ensure us that the New Lisbon airport can be financed without recourse to state funds (directly or indirectly).

5. But in addition to analyzing a project, we believe that the program of public investments must be assessed globally, which has not yet been done, given its large amount and its concentration on a decade that is critical for the Portuguese economy. The consolidated impact, economy and business, of all the mega-transport projects and other Public Private Partnerships, increases the debt, and certainly makes the model of economic and financial global consolidation impracticable, making it a high risk to taxpayers and to the financial sustainability of the Portuguese State.

6. The options for public investment must meet a key issue in the context of limited resources: where to invest the next ten years, primarily to address the real structural bottlenecks of the Portuguese economy and thereby increase the potential rate of economic growth?

We believe that the national interest requires a thorough reassessment of priorities for public investment.
For this reason, using the support of an advisory panel of economists, managers and engineers, Portuguese and foreign, of recognized competence and independence of the political and economic interests in discussion.
In this sense, one could take the opportunity given by “political gap” in coming months to start this work [due to general elections for the government, next Autumn]  so that the new government, could have a set of recommendations on priorities for public investment (including in PPP) for the next decade.  Given the large public investments significant implications in the standard of living of Portuguese for the next generations, it is imperative that a broad debate and a broad national consensus before policy decisions and investments before the final move. If we do that, not only the Portuguese are more informed about the projects in question, as the national interest will also be better safeguarded.

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