Following the sweeping nationalizations of the mid-1970s, public enterprises became a major component of Portugal's consolidated public sector. Portugal's nationalized sector in 1980 included a core of fifty nonfinancial enterprises, entirely government owned. This so-called public nonfinancial enterprise group included the Institute of State Participation, a holding company with investments in some seventy subsidiary enterprises a number of state-owned entities manufacturing or selling goods and services grouped with nationalized enterprises for national accounts purposes (arms, agriculture, and public infrastructure, such as ports) and a large number of over 50-percent EPNF-owned subsidiaries operating under private law. Altogether these public enterprises accounted for 25 percent of VA in GDP, 52 percent of GFCF, and 12 percent of Portugal's total employment. In terms of VA and GFCF, the relative scale of Portugal's public entities exceeded that of the other West European economies, including the EC member countries.

Although the nationalizations broke up the concentration of economic power in the hands of the financial-industrial groups, the subsequent merger of several private firms into single publicly owned enterprises left domestic markets even more subject to monopoly. Apart from special cases, as in iron and steel, where the economies of scale are optimal for very large firms, there was some question as to the desirability of establishing national monopolies. The elimination of competition following the official takeover of such industries as cement, chemicals, and trucking probably reduced managerial incentives for cost reduction and technical advance.

As hybrid institutions, public enterprises find it difficult to separate market choices from political considerations. Their poorer economic performance may partially be explained by public management's frustration at attempting to reconcile impossible goals: on the one side, a concern for the "bottom line" on the other, coping with the distributional struggles of interest groups. Special interest groups that shape the policies of state-owned firms include "elite" public enterprise unions aspiring to guarantee employment and above-market wages consumer groups desiring goods and services at below user cost or market price oversight ministries intent upon expanding their authority and politicians, including chiefs of state, seeking to expand patronage opportunities. As a vehicle for redistribution, public enterprise often becomes the servant of special interest groups--those who are politically connected--rather than a guardian of the public or general interest.

It was not surprising that numerous nationalized enterprises experienced severe operating and financial difficulties. State operations faced considerable uncertainty as to the goals of public enterprises, with negative implications for decision making, often at odds with market criteria. In many instances, managers of public firms were less able than their private-sector counterparts to resist strong wage demands from militant unions. Furc94 urther, public firm managers were required for reasons of political expediency to maintain a redundant labor force and freeze prices or utility rates for long periods in the face of rising costs. Overstaffing was particularly flagrant at Petrogal, the national petroleum monopoly, and Estaleiros Navais de Setúbal (Setenave), the wholly state-owned shipbuilding and repairing enterprise. The failure of the public transportation firms to raise fares during a time of accelerating inflation resulted in substantial operating losses and even obsolescence of the sector's capital stock.

As a group, the public enterprises performed poorly financially and relied excessively on debt financing from both domestic and foreign commercial banks. The operating and financial problems of the public enterprise sector were revealed in a study by the Bank of Portugal covering the years 1978-80. Based upon a survey of fifty-one enterprises, which represented 92 percent of the sector's VA, the analysis confirmed the debilitated financial condition of the public enterprises, i.e., their inadequate equity and liquidity ratios. The consolidated losses of the firms included in the survey increased from 18.3 million contos (for value of the contos--see Glossary) in 1978 to 40.3 million contos in 1980, or 4.6 percent to 6.1 percent of net worth, respectively. Losses were concentrated in transportation and to a lesser extent in transport equipment and materials (principally shipbuilding and ship repair). The budgetary burden of the public enterprises as a result of their overall weak performance was substantial: enterprise transfers to the Portuguese government (mainly taxes) fell short of government receipts in the forms of subsidies and capital transfers. The largest nonfinancial state enterprises recorded (inflation-discounted) losses in the seven-year period from 1977 to 1983 equivalent to 11 percent on capital employed. Notwithstanding their substantial operating losses and weak capital structure, these large enterprises financed 86 percent of their capital investments from 1977 to 1983 through increases in debt, of which two-thirds was foreign. The rapid buildup of Portugal's external debt from 1978 to 1985 was largely associated with the public enterprises.

Data as of January 1993