I live in Lisbon and I don't see how "downtown Lisbon started to look pretty badly recently". Street drug users, seemingly mostly/wholly homeless, seem to be concentrated in an area I wouldn't call downtown. I don't really know what they do to keep it that way though. Also Porto seems to be an entirely different story from what I've seen there.
In any case, Portugal's strategy was supposed to be diverting funds from the narcotics police to rehabilitation efforts. But those funds have steadily eroded over the years with cost-cutting measures such as the merger of the autonomous drug agency into the main healthcare service. It's not too surprising if it is falling short of its initial success.
Another thing to consider is the inseparability of homelessness and drug abuse issues. It doesn't seem to be possible address one without the other, rising homelessness will inevitably bring more drug abuse. (Still I see fewer homeless people in downtown Lisbon than in Barcelona that won't even let you have a beer in the park).