From the mid-1960s through the early 1980s Brazil's stateowned enterprises carried out an enormous program of capital formation. In retrospect, the mobilization of savings that this entailed was a remarkable achievement in the context of a developing economy with thin domestic capital markets. Further, the financing of public enterprise investment in Brazil affected in important ways the behavior and relative autonomy of public enterprise managers and the overall performance of the Brazilian economy.

The sources of public enterprise finance in Brazil

The potential sources of finance for Brazilian public enterprise may be classified as either internal or external according to whether financing arises from cash flows under the direct control of state-enterprise managers or of agents outside the enterprise, including the government. Internal sources include retained earnings, depreciation funds, and proceeds from the sale of assets. Receita vinculada (earmarked tax revenues) resulting from a tax on the ordinary selling price may be considered “quasi-internal.” The tax is imposed by the government and proceeds are, theoretically, at the disposition of government. But in most sectors where such earmarked taxes are important – telecommunications, petroleum, and electric power, among others – a large part of the proceeds may be considered as an increment to retained earnings since such funds support public enterprise investment and are exempt from ordinary budget review.

External sources of finance include state equity injections, equity raised directly from the public, and long-term borrow- ing from foreign and domestic credit institutions, both public and private. Several of these outside sources require brief comment.