This is the story of how Portuguese bankers used China as a threat, using their close connection to ministers in the right-wing coalition government. The bank menaced the Prime Minister, both directly and through some of his closest friends, with the threat that China could stop diplomatic relations with Portugal. Investigate Europe spoke to key stakeholders and discovered privatisation from behind the scenes.

Also read Paulo’s introductory op-ed on the hypocrisy of the EU governments – first endorsing and now condemning Chinese investment: The smart, the stupid and the gamblers

Context: The Troika arrived in Lisbon in May 2011. Seven months later, Portugal sold two of its most important energy companies: EDP (Energias de Portugal), the main producer, and REN (Redes Energéticas Nacionais), the grid. Both were bought by Chinese companies (China Three Gorges and State Grid) that were advised by the same investment bank, the Portuguese BESI (Banco Espírito Santo Investimento).

José Maria Ricciardi used at least four cell phones. And on that last

day of January 2012, they didn ‘t stop ringing. The situation was

critical. There were doubts within the government as to whether the

privatisation of REN should proceed, feared the banker of the Espírito

Santo group. What’s more, its own customers, the powerful Chinese State

Grid, which is now the fifth largest company in the world, according to

the Fortune ranking, were feeling harmed by the rules of the game.

Ricciardi who was CEO of BESI , one of the two major investment banks

in Portugal at the time, received message after message from its

closest employees, telling him to call the Prime Minister, Pedro Passos

Coelho. Ricciardi tried, but Passos Coelho, with whom he was a long-time

friend, didn’t answer right away.

Friends in government

This is the story of how an investment bank’s strategy can be based

on its proximity to policy-makers, and a group of people close to them

who moved at ease between both groups. The bankers commented on the

unpreparedness and ignorance of the cabinet members. Ricciardi had a

list of allies in the government, to whom he addressed with bullet

pointed arguments, and another of enemies, of whom he complained. And at

the decisive moment, he raised the stakes and made a threat.

After trying to talk to Passos Coelho, Ricciardi called Miguel

Relvas, a deputy minister. If the government decided to stop

privatisation, he argued, China could cut diplomatic relations with

Portugal and stop all investments (besides EDP and REN, Chinese

companies would buy part of BCP, Fidelidade and important sectors of the

Espírito Santo group, such as health or BESI itself).

Seven years later, Miguel Relvas told IE what he remembers of those

events. Of the various contacts he had with José Maria Ricciardi at the

time, Relvas minimises the apparent diplomatic threat posed by BESI.

“They never pushed me, and if they had pushed me, they’d have the right

answer.” For the former minister, the idea that there could be a cut in

relations with China is nothing more than “excessive zeal”. “They never

told me that. Would China ever say such a thing?”

“Threats” from China?

But the banker’s pressure didn’t stop at Miguel Relvas. The same day,

Ricciardi made another attempt to get the Prime Minister’s attention.

He called Angelo Correia, a friend and former boss of the Prime

Minister, at Fomentinvest, and used exactly the same arguments he had

used with Relvas.

We contacted Ângelo Correia who remembers Ricciardi’s phone call

perfectly. “It’s true. They told me that. And I warned the Prime

Minister of that.” The argument used was clear: “China may not invest

and sever the relationship.” So Ângelo Correia explains that he called

Passos Coelho to warn him of the problem. “I thought the seriousness of

what they were telling me was so great that I suggested that someone

should tell the Portuguese Government. They told me that in a serious

way.”

Passos Coelho, according to Ângelo Correia, did not react: “He did

not ask me anything. He just listened.” But the threat referred to by

Ricciardi was made. “If they had a mandate from the Chinese, I don’t

know,” warns Ângelo Correia. “But they told me that with a serious

look.”

Diplomatic sources, contacted by IE, reject any possibility that

there has been any kind of threat of diplomatic retaliation from State

Grid, or China. “That would be blackmail. It never happened. It doesn’t

make sense.”

But throughout the day of January 31, 2012, Ricciardi again used the

same threat with other cabinet members. After talking to Relvas and

Correia, he called Carlos Moedas, who at the time was the Deputy

Secretary of State to the Prime Minister and the person responsible for

monitoring the Troika, in the Council of Ministers. Moedas was in London

with Finance minister Vitor Gaspar and his secretary of state, Maria

Luís Albuquerque, when he received Ricciardi’s call. Carlos Moedas does

not remember the exact content of the conversations, but he remembers

that: “One of my duties was to receive every day a large number of

entities, representatives of the real economy and of civil society, who

wanted to convey complaints or opinions, thus preventing them from

disturbing the Prime Minister.”

Any “threats” would be ineffective

Ricciardi had tried to arrange a lunch with Carlos Moedas for the

following day, February 1, the eve of the Council of Ministers, which

would finally decide whether and how privatisation would proceed. Carlos

Moedas doesn’t remember if that lunch happened, but denies having been

pressured: “I don’t remember the specific lunch you mentioned with José

Maria Ricciardi. But I’d certainly remember if I’d felt any kind of

pressure, which wasn’t the case.”

The next day, February 1, Passos Coelho returned the call to

Ricciardi. Today, the then Prime Minister assures IE that Ricciardi’s

approaches to the government would have had “zero weight” in the way

REN’s privatisation was decided. “Privatisation went ahead without any

political calculation by the government,” he says. “None of the

privatisation processes had any political-diplomatic evaluation. The

decisions were not taken on the basis of such criteria.” For Pedro

Passos Coelho, José Maria Ricciardi’s contacts are explained in another

context, that of “negotiating tactics”, but they did not influence

either the calendar or the executive’s decision. “I’ve never felt any

pressure,” he says.

As for the content of the threat made by Ricciardi, and also

communicated to Passos Coelho by Ângelo Correia, he attests that he has

no memory. “I don’t remember, honestly. If it happened, I didn’t give it

any credibility.”

IE also contacted José Maria Ricciardi, who asked not to be quoted in

this article. The former banker is now on trial in a case opened in

2013 by the Public Prosecutor’s Office, and has been under investigation

for more than six years by the Central Department of Investigation and

Criminal Action (DCIAP) in Lisbon. Passos Coelho and Miguel Relvas have

already testified in this case. Through the services of the Attorney

General’s Office of the Republic, we have tried to find out what stage

the judicial investigation is at, and who are the defendants, in

addition to Ricciardi, suspected of having committed the crimes of

“influence peddling, improper use of secrecy and abuse of information”.

The response from the Public Prosecutor’s Office (OPG) was brief: “The

inquiry is under investigation and is subject to judicial secrecy”.

Inside information

It was through telephone tapping that DCIAP researchers learned that

BESI’s banker knew in advance the offers of the candidates competing for

the purchase of part of EDP and REN. In the case of EDP, where BESI

provided financial advice to China Three Gorges, Ricciardi was heard

telling his cousin, Ricardo Salgado, that he knew “inside” the value of

the opponents’ proposals, on the last day of the competition (December

9, 2011). With this, the prosecutors believe, he was able to lower the

price proposed by his client, from €3.60 per share to €3.45. This

decrease has the exact value of €117,095,067.30. These were the millions

that the state lost to China Three Gorges original, higher offer.

In the case of REN, the judicial investigators also suspect a fall of

10 cents per share in the offer of State Grid, managed by BESI. To

corroborate this suspicion is a message sent by the chairman of Caixa

BI, the other major Portuguese investment bank at the time, and a rival

of BESI, that was then the advisor to the State. In this message, Jorge

Tomé speaks, in coded words, about the price of shares with Ricciardi:

“The other corridor is closer to 2.6 meters, but it would be good if the

main corridor reached 3 meters. Hug.”

However, in this case, the information given by Jorge Tomé does not

seem to have been confidential. It was sent on 24 January, when these

values were public and the competitors presented only non-binding

proposals. This is the argument put forward by Jorge Tomé, who is also

accused in the same case as Ricciardi. The former Caixa banker explains

that in the case of REN there was not even a competition between the

bids of the competitors. State Grid and Oman Oil were the only

candidates for the purchase, and did not dispute the same lot of shares.

The Chinese company applied for a larger percentage (25%), while Oman

Oil proposed to buy another 15%. In the end, both were chosen for direct

selling, and the values per share are close to those of the non-binding

proposals. State Grid paid €2.9 for each share, while Oman Oil paid

less, €2.56 per share.

Conflict of interest

Banking sources also explain that there is another factor to be taken

into account. With that message, Jorge Tomé could only be suggesting

that BESI’s clients’ offer should be higher, which is justified given

his role as financial advisor to the State, the seller.

For judicial investigators, this close relationship between rival

banks (Caixa and BES) is an indication that privatisation tenders were

subject to informal rules, when there should be more transparent

processes. And this story is full of signs of that excessive closeness.

To be chosen as State Grid’s financial advisor at REN’s

privatisation, Ricciardi had to knock on several doors. But before that,

he tried his hand as an adviser to the State, that is, to be on the

other side, in the same business. It sounds confusing – and then it gets

even more confusing. In a privatisation audit, the Court of Auditors

considered that BESI should never have been admitted as a consultant

because it had had previously had a role in the evaluation of REN that

was used in the privatisation, and this represented a ‘conflict of

interest’ situation.

This did not, however, prevent BESI from being an informal consultant

to the State – talking to ministers, giving them summaries of the

matter, regularly contacting all stakeholders on the other side of the

business, from Caixa to REN’s management, including its minority

shareholders.

The Chinese giant State Grid had not yet decided to hire BESI for the

business and Ricciardi was already asking Miguel Horta e Costa, his

number two at the bank, to meet with Paulo Portas, the Foreign Affairs

minister and leader of the CDS – People’s Party, the minor coalition

party in the government.

But there was another strategy to convince Paulo Portas, number two

in the government. Filipe de Botton, who refused to talk to IE about

this issue, was one of REN’s minority shareholders. On January 8, after a

long meeting with Portas, Botton gave Ricciardi a summary: the Minister

of Foreign Affairs was undecided about privatisation. Botton argued

with the minister that the situation was urgent. REN needed a capital

injection of €800 million, which the state did not have. Ricciardi and

Botton were convinced that the government was not at all well informed.

Therefore, Botton made a list of talking points to use with the

government.

And that was the strength of the strategy of those who wanted

privatisation. Even though the contract with State Grid was only

formalised days later, Ricciardi called journalists to explain the

advantage of the operation. It was necessary to show the strength of the

sale, because the risk was obvious: in 2011, EDP and REN had their

worst stock market performance of the last 10 years, with the price of

their shares reaching historic lows.

But the bankers’ information could also be flawed. The doubts of the

ministers never led to any debate inside the government on the

postponement or cancellation of the privatisation of REN. In fact, weeks

before this generated panic at BESI, Passos Coelho received an email,

sent by Vítor Gaspar, in which the Finance Minister detailed the process

and proposed keeping to the initial timetable.

Opponents to the deal

Based on this seemingly false doubt about the government’s intention,

BESI’s men began to identify who their opponents would be in the

executive branch. The first name to emerge is that of the former

Secretary of State for Energy, Henrique Gomes. BESI proposed to the

government his resignation, which happened after the privatisation, in

March 2012, two months after it was suggested by the bankers.

Henrique Gomes did not know this detail of his history, and reacts

with irony: “I am satisfied. That’s a good sign.” As for the

effectiveness of the bankers’ suggestion that he’d be dismissed, he

cannot assess whether it was decisive (Gomes resigned at his own

request, after having assessed the conditions he had to exercise his

mandate). Has BESI pressed for the government to accept the resignation?

“It’s very possible…”

What is strange about Henrique Gomes is the conviction of BES that he

would be an “enemy” of privatisation. “I was never against

privatisation. My conviction at the time, which was based on the wrong

premise, was that it’s not the ownership of assets that’s important, as

long as there’s strong regulation. But now I know that there are no

conditions in Portugal for a strong regulation and, therefore,

possession is important.”

While the bank justified its consultancy, sending State Grid detailed

information on all contacts it had with the Prime Minister, or Paulo

Portas, Ricciardi tried to find out from government sources what Maria

Luís Albuquerque, the cabinet member in charge of privatisations,

thought. The former Finance Minister responded to IE by email, stating

that he preferred not to not to comment on this case.

The afternoon of January 27, Ricciardi learned that Maria Luís

Albuquerque had asked the Chinese ambassador to go to the Finance

Ministry for a meeting. The banker’s went berserk. Why is that? What

would the meeting mean? Would that mean the business would stop? Or that

it was already won?

For answers, Ricciardi contacted Miguel Relvas. The former minister

has no memory of it, but says he didn’t give much weight to their

importance: “I would always consider it more illegitimate for the

government to give in than for the private sector to exert pressure”.

It was then, on the eve of the business decision, that the strongest

and most unusual pressure came to bear on the Government: the threats

that China might cut-off relations made by BESI officials, without any

diplomatic support or precedent in history. In fact, Beijing has never

severed relations with any country for economic or business reasons.

On 2 February, the Council of Ministers approved the direct sale of

REN’s shares to both the buyers that had made bids, Oman Oil and State

Grid (which did not respond to the questions sent by IE). As soon as he

heard the news, Ricciardi sent several thank-you messages. One for Jorge

Tomé, his rival at Caixa BI, another for Miguel Relvas and six for

Pedro Passos Coelho. In just under a month – BESI’s advisory contract

with State Grid was signed on January 10, 2012, and the sale was decided

at the Council of Ministers on February 2 of that year – the bank

received €14 million euros for its financial services.

Also read Paulo’s introductory op-ed on the hypocrisy of the

EU governments – first endorsing and now condemning Chinese investment: The smart, the stupid and the gamblers

And find out more about the team’s full investigation and see where we’ve published: China: Rescuer or Rival?