PORTUGAL: PROBLEMS AT THE LUSO-AMERICAN FOUNDATION

C O N F I D E N T I A L LISBON 002780

SIPDIS

E.O. 12958: DECL: 12/05/2018
TAGS: PGOV AMGT EAID OEXC SCUL PO
SUBJECT: PORTUGAL: PROBLEMS AT THE LUSO-AMERICAN FOUNDATION

Classified By: AMBASSADOR THOMAS STEPHENSON, FOR REASONS 1.4B AND D.


1. (C) SUMMARY: In 1985, with the USAID mission to Portugal
closing its doors, the U.S. and Portuguese governments
created the Luso-American Development Foundation (FLAD) in
Lisbon to address Portugal's development challenges and to
promote U.S.-Portuguese cooperation. The USG subsequently
contributed some $111 million to FLAD, but during the past
two decades the Embassy's efforts to exercise responsible
oversight over FLAD's financial management have been thwarted
by the foundation's leadership, creating deep and continuous
friction between FLAD and the Embassy. We propose to wage
another campaign to change FLAD's direction, but failing
that, we must consider whether our continued participation in
this institution is in the USG's interest. End Summary.

FLAD'S EARLY YEARS
--------------

2. (U) In 1983, Portuguese PM Balsemao and President Reagan
announced the creation of the Luso-American Development
Foundation (FLAD) in Lisbon. The announcement grew out of
the imminent closure of the USAID mission in Portugal and the
recognition of the importance of carrying on development and
bilateral cooperation projects. In 1985 FLAD opened its
doors as the USG provided an initial endowment of $38
million. USG contributions to FLAD eventually totaled $111
million, much of which was in the form of Economic Support
Funds (ESF) that the U.S. provided to Portugal through 1992.
When ESF funding ended in 1992, FLAD no longer received any
external financing and its revenue then derived solely from
its endowment and investments.


3. (SBU) FLAD's stated mission is to contribute "to the
economic and social development of Portugal through the
promotion of scientific, technical, cultural, educational,
commercial, and business cooperation between Portugal and the
United States." It was envisioned as a short-term program to
help boost Portugal to a development level commensurate with
the rest of the EU, which Portugal joined in 1986. Thus,
FLAD's goal was to spend 75 percent of its available funds
each year on grants for development, education and science
projects.


4. (C) In 1987, then-Prime Minister (and now President)
Cavaco Silva reorganized the foundation in a move likely
aimed at tightening GOP control over its programming and
budget. Key authorities were moved from the Board of
Directors (where the U.S. Ambassador has a seat) to the
day-to-day executive council (where he does not). U.S.
Ambassador Rowell objected to this and other decisions and
suspended his participation on the Board. According to our
files, the foundation stopped holding Board meetings
altogether in the late 1980s, effectively shielding itself
from all oversight.


5. (C) In 1990, U.S. Ambassador Briggs tried a different
approach. Although it was largely a symbolic gesture since
the Board had not met in years, Briggs formally resigned from
the Board because of his role in negotiating the new
bilateral agreement regarding U.S. use of Lajes Air Base in
the Azores (which he viewed as presenting a conflict with his
FLAD duties). Shortly after, a member of the U.S. Congress
contacted the Embassy requesting information about FLAD's
management and oversight, but FLAD Director Rui Machete
refused to respond, saying FLAD operations were "none of your
business."


6. (C) The tension came to a head in 1992 when the Embassy
directly approached Prime Minister Cavaco Silva seeking
clarification of reports that FLAD Director Rui Machete had
offered FLAD business to companies in which he had a stake.
Machete admitted no wrongdoing but did terminate one key
contract. Separately in 1992, the USG's sunsetting of
Portugal's ESF program ended all U.S. funding to FLAD. While
the decision to cut off ESF funding was objectively based on
Portugal's national development levels, the GOP evidently
believed it was a response to allegations of mismanagement.
Shortly after the dustup over the Congressional inquiry and a
separate independent study of FLAD's management, the
foundation resumed its semi-annual Board meetings, and the
U.S. Ambassador returned to the Board of Directors. On the
nine-member Board, the U.S. ambassador holds one seat and the
right to nominate a second director.

THE LAST MAN STANDING
--------------

7. (C) Rui Machete, a lawyer and politician who held cabinet
positions in the 1983-85 Portuguese government (including
Minister of Justice and Deputy Prime Minister) has been
FLAD's director since 1988, getting the job as a consolation
prize after he lost his cabinet post in the change of
government in 1985. Machete has long been critical of the
U.S. and has resisted embassy participation at every turn.
He is wired into both major political parties and is
suspected of disbursing FLAD grants to curry political favor
and maintain his sinecure. Machete has historically opposed
all efforts at independent oversight, professional accounting
practices, and transparent review of FLAD's programs. Since
the early 1990s, nearly every U.S. ambassador has urged
Machete to carry out his fiduciary duties or step aside, but
to no avail:

- (C) In 1992, Ambassador Briggs reported that, "As long as
Machete is there, FLAD can only be marginally useful to us."
The foundation's overhead then was 60% of revenue, leaving
only 40% for actual programming. Today, this figure is only
somewhat better as FLAD continues to spend 46% of its budget
on overhead for its luxurious art-adorned offices, bloated
staff, fleet of chauffeured BMWs, and on "personnel and
administrative costs" that has included at times wardrobe
allowances, low-interest loans to staff, and honoraria for
staffers participating in FLAD's own programs.

- (C) The Boris Report, a 1993 independent review conducted
in the U.S., noted that the Board of Directors was excluded
from planning and was given inadequate briefing materials
before their semi-annual meetings. (Comment: this is a
favorite Machete tactic and continues to this day: key
documents for the Board's consideration are distributed by
Machete only days, and in some cases hours, before Board
meetings to avoid informed discussions that might run counter
to his objectives.) The Boris Report also recommended that
FLAD develop investment goals and restructure its endowment
portfolio to guarantee its long-term viability; this has not
been done.

- (C) In June 2006, in response to Ambassador Hoffman's
criticisms, Machete suddenly announced that he had approached
Prime Minister Socrates with proposed changes to FLAD's
bylaws that would grant the GOP full control over the
foundation and wholly eliminate the U.S. ambassador from the
Board. Ambassador Hoffman protested to then-Foreign Minister
Amaral, who was our designated GOP contact on the issue.
Serendipitously, FM Amaral resigned a week later for
unrelated health reasons and Machete's plan was quietly
shelved.

- (C) Since late 2007, in Board meetings and in private
discussions Ambassador Stephenson has repeatedly called on
FLAD to reform itself and cut overhead, pointing out that the
2008 and 2009 budgets were unrealistic and unsustainable,
given difficult market conditions, and would result in a
diminished endowment. Both budgets were approved by the
Board over the Ambassador's objections. Another Board
member, who shares our concerns, points out that not only is
the budget built on excessive overhead and unrealistic
forecasts for the endowment, but Machete's promises to
improve the accounting and transparency underlying the budget
process have not been met.


8. (C) In 2008, beyond its overhead costs, FLAD spent 1.5
million euros on actual grants to fund projects such as:
10,000 euros for an Innovation Seminar held at FLAD's
offices; 89,000 euros for a conference about Franklin
Roosevelt in the Azores; and 15,000 euros per quarter to a
politically-connected public relations firm. Previous
foundation boondoggles have included a conference in South
Africa with no discernable connection to the United States or
bilateral relations.


9. (C) Ambassador Stephenson had a frank conversation last
week with FLAD Director Rui Machete, who appeared to accept
the Ambassador's grim diagnosis of the foundation's ills,
even speculating aloud about the challenge of cutting staff
under Portuguese labor laws. Machete confided that he is
stepping down in 2010, on FLAD's 25th anniversary, and would
like to make progress on reforms before then. Machete said
that the issue should be first raised privately with Prime
Minister Socrates, who could provide political cover and
possibly assistance in addressing labor and other vexing
issues. Ambassador Stephenson tentatively agreed to
participate in a meeting with the Prime Minister --if the
Ambassador is still here after January 20.

COMMENT: TIME FOR MACHETE TO GET THE AXE
--------------

10. (C) FLAD's portfolio in November 2007 was 122 million
euro. By November 2008 this had shrunk to 106 million euro.
At this pace, FLAD could burn through the entire endowment by
about 2014. While this money is no longer on the USG's
books, it originally came from the U.S. taxpayer with the
goal of strengthening bilateral cooperation and supporting
development projects. In spite of our long-running and
high-level best efforts, we believe the current FLAD
management is unable and unwilling to face economic reality
and will fritter away the endowment -- preferring to go over
a cliff with the status quo rather than make the wrenching
reforms necessary to put the foundation on the path to
solvency and responsible planning. Two decades of the
current leadership have not been good for FLAD, and its
alienation from the US Embassy is both a cause and a symptom
of the disease.


11. (C) The Embassy proposes to wage one more campaign to
change FLAD's direction via pressure on Machete and
discussions with the highest level of the GOP. We are
somewhat encouraged by Machete's acceptance at last week's
meeting of the need for deep, immediate reforms, but he has
made many empty promises to many U.S. Ambassadors over the
years. We will believe in changes at the foundation only
when we see them, and failing that, we must consider whether
our continued participation in this institution remains in
the USG's interest.
STEPHENSON