This paper is divided into six sections. The first two sections provide the background, by discussing the changing international environment of regional integration and the role of State Enterprises in Latin American countries, in the light of the recent “privatization” drive. The third section addresses the role of the State in regional integration and the importance of State Enterprises in this process. The fourth section details the roles such Enterprises may or actually have played in regional integration , both as suppliers or purchasers of goods and services. The fifth section examines the factors – technical, economic, financial and institutional – that bear influence on their performance as regional actors. In the two latter sections the authors draw mainly from the experience of the energy sector, where integration has advanced considerably  and where State Enterprises are important actors throughout the American continent – a strong presence  which is likely to be maintained in the future. The last section sums up the analysis.

1. The context of regional integration

Latin-American integration has ancient roots, which may be traced back to the Bolivarian ideals. In this century, however, it began to bear fruits in the fifties only. Although it was attempted in different geographical areas and sectors, its lengthy negotiations and scant results seemed to have discredited the idea. Nonetheless, as the mythological Phoenix, in the recent past it resurrected out of the ashes, stronger than ever,  in the Treaty of Assunci¢n, which purports to establish a Common Market comprising Argentina, Brazil, Paraguay and Uruguay by 1995. Pan-American integration  ideas have also gained momentum from the creation of the North America Free Trade Agreement and the Initiative of the Americas, leading to proposals of a Western Hemisphere Free Trade Agreement.

Now, one may suggest that the intervening four decades were a period of learning for American countries, so that, at the begining,  integration was little more than an ideal and that partners’ interests were not clearly evaluated and neither were the necessary financial, technical and managerial means available. The crisis of the previous pattern of economic and financial development of Latin America, based upon import-substitution industrialization under strong State regulation and participation, and the attempt to overcome it by neo-liberal policies were undoubtedly powerful stimuli to regional integration. Nevertheless, other structural determinants seem to be at work at the international level : the interrelated processes of capital internationalization and centralization in the OECD area; the development of the Asian NICs and the increasing international marginality of Latin America; the creation of other international supra-national blocks such as the EEC and NAFTA  and, less formally, the Pacific group under Japanese leadership; the breakdown of the European socialist block and, finally, the intellectual hegemony of neo-liberalism, as expressed by the Washington Consensus.

During the early nineties this context seemed to pave the way to an extensive process of regional integration. However, at the end of 1992, the pendulum seems to have swung back, as expressed by the difficulties experienced in the process of European integration, the stalemate of GATT talks, the increse of protectionism in the OECD area and the economic and political changes in the U.S., which may lead to revisions of the NAFTA.

As a consequence, if integration in the Northern Hemisphere is to advance, it will have to rely more on deliberate State intervention to overcome its obstacles. The importance of industrial policies as means to facilitate European integration is widely recognized within the EEC, where there is a long tradition of State explicit intervention to promote industrial and technological development. Such tradition is also part of Asian history, as exemplified by the cases of Japan and the NICs. Actually, it is part of the American heritage too, albeit disguised under the mantle of defense policies. However, its aknowledgement by U.S. polity represents a major change, which will have repercussions in the process of regional integration in the Southern Hemisphere – at the very least by providing more legitimacy to a stronger action by the State to foster that process. For the same reasons it may facilitate Western Hemisphere integration,

This fast-changing environment, which  provides the backdrop to the analysis of the role of State Enterprises developed below, presents new challenges and opportunities to the process of Latin American integration, to the Initiative of the Americas and to an eventual WHAFTA.

2. The State and its Enterprises: Rise and Fall?

As it is well known, rooted upon a strong Iberic tradition, the State played a major role in the post-War  development of Latin America. The analysis of the deep-seated economic and political reasons underlying such involvement goes beyond the scope of this paper. For its purposes it is sufficient to note that, until the eighties, the State heavy participation in the economic realm enjoyed widespread social support. However, as the unsolved structural problems of the previous pattern of development, such as income distribution and the funding of investments, came to the fore and the Latin-American economies plunged into a crisis – now lasting more than a decade – such problems clustered around the State, turning support into hostility. As in ancient myths the former hero became a scapegoat. Nonetheless, as suggested above, the tide of anti-Statism seems to be receding. The new context presents strong indications that an active State, albeit with different roles, shall continue to be a major social actor in the region, as well as in other parts of the world.

During the heyday of direct State intervention, enterprises wholly- or partially-owned by the State were one of its main instruments. Until recently, State Enterprises played a major role in Latin-American national economies, since they supplied most public services, and a major share of infrastructure and intermediate industrial products. As a consequence,they were responsible for the major part of the demand for capital goods, civil works and consultancy services, mostly provided by private firms. Their purchasing power was often deliberately used as an instument of industrial policy, to promote local supply of such goods and services, within the scope of import-substituting industrialization. Hence, by virtue of their investments and their forward-  and backward-linkages, State Enterprises became one of the main actors in the process of industrialization, especially in the countries where such process advanced further, such as Argentina, Brazil and Mexico.

Political and economic reasons presided over the creation of State Enterprises. Thus, political reasons, such as the desire for greater national autonomy, often led to the establishment of such Enterprises, especially in sectors considered to be “strategic” for autonomy, as the provision of energy inputs or means of communication. Market failures, either of the international or the local market (and often of the two combined), led to the creation of many other  State Enterprises, such as those acting in sectors where the scale and time for recoupement of investments were incompatible with the financial and technical capabilities and objectives of local and foreign entrepreneurs.

Quite often both reasons were present and led to the creation of State Enterprises or to the absorption by the State of erstwhile privately-owned firms. Such is the case of the supply of goods and services (e.g. steel and electricity)  which were critical for the processes of capital accumulation and production in large sections of the economic system or served politically powerful groups but, at the same time, were also unnatractive to private investors, not only for the technical reasons above outlined but also because political presssure led to low prices of such goods and services. There are also some State Enterprises that were formerly State agencies, such as the postal, water supply and sewage services, that have been reorganized and transformed into State  companies in order to provide them with more flexibility so as to enable them to carry out their jobs more efficiently . Finally, in other cases, enterprises are State-controlled  simply because the government took over a formerly private company in order to rescue it from bankruptcy.

Macroeconomic conditions played an important role in the creation of State Enterprises, since expansionary periods increased the demand for their services and import-substituting industrialization put a premium on their backward- and forward-linkages and their contribution to foreign exchange savings. General political factors such as nationalism and the legitimacy of State intervention, as well as more particularistic reasons, such as the development of specific areas within the countries, also supported this process.

Nonetheless,  sectoral factors played a major role in the creation of State Enterprises and it is not a coincidence that in the energy sector ( oil, gas and electric power ) their presence is pervasive throughout the region, since in this sector there is a convergence of the most important technical, economic and political determinants of the establishment of State enterprises previously mentioned – scale of investments, critical backward- and forward-linkages in terms of quantity and price, limited tradability (in some cases), efficiency requirements and national sovereignity. In fact, direct State intervention as a provider of energy  goods and services is not limited to Latin America – it is widespread in Europe, carried out by national Enterprises, such as Electricit‚ de France, in Canada by provincial Enterprises (e.g. Hydro Quebec) and in the U.S. by  regional power Enterprises, as Tennessee Valley Authority. Even when the supply of such goods and services is provided by private enterprises it is normally subject to considerable State regulation.

A main feature of State Enterprises, explicit in their naming, is their “structural ambiguity” : as the Roman god Janus, they have two faces, being led simultaneously by  State and market rationales – often in conflict. The conflict becomes most highly visible in  Enterprises acting in sectors such as energy,  where, on one hand,  the large  scale of investments and their indivisibility requires either large profits or extensive third party funding but, on the other hand, their products are of general use and not easily substitutable or tradable, thus being under strong political pressure to be cheaply priced. If the State is unable to provide the funding and there are no foreign sources available, the conflict may lead to an impasse.

The conflicts inherent to State Enterprises have a strong sectoral determination. However, the conflicts tend to be heightened during periods of macroeconomic instability, when the overall distributive struggle becomes more acute. Under such conditions, the State often falls prey to the temptation to use its Enterprises as an instrument of short-term stabilization policy, depresssing their prices’ indexation below inflation levels, thus jeopardizing their long-term capability, vocation and role. If, as is often the case, the instability is associated with a fiscal crisis, which prevents the State from compensating its Enterprises for their income losses and by funding their investment, the usefullness of the Enterprises as an instrument of development is severely impaired.

International conditions, such as a foreign exchange scarcity, may fuel such contradictions. State Enterprises normally supply goods and services which are not directly tradable but often require heavy imports, especially for their investments. However, since their output is an input to tradable goods, the conflicts are present here too. In this context, the role of international financial agencies becomes critical. Such agencies have contributed by providing external funding and also by  strenghtening the State Enterprises capacity to finance their investment from internal sources, by applying pressure on the Governments to at least maintain stable real prices for their products and services  and by conditioning the external funding to  local counterparts.

It is not surprising that in many Latin American countries, during the eighties, when growth ceased, macroeconomic instability reached hyperinflation levels and external constraints became stringent, State Enterprises came under disrepute, since many of them were caught in the web of the contradictions outlined above and were unable to fulfill their economic and social roles. Such crisis of State Enterprises was part and parcel of a more general crisis of the State, of which the financial aspect, as expressed by the public indebtedness, is only the most apparent part. In fact, as already mentioned, what was ( and is ) at stake is the collapse of a whole pattern of development.

Under such conditions, and fuelled by the hegemony of the Washington Consensus ( and related pressures ), which proposed an overall reduction of State regulation in favour of market regulation, most countries of the region adopted “privatization”  policies, designed to close down some State Enterprises and, mostly, to transfer their control to private hands, especially those that were formerly private and those that have already fulfilled their former pioneering role, as large steel companies. Such policies, implemented under different procedures, have reduced the importance of State Enterprises significantly.

Nonetheless, in most countries, some of the economic and political reasons which led to the creation of State Enterprises persist in the different context. Thus, the State has retained control of companies which play a major role in the international insertion of the country and are important sources of revenues to the State, as in the case of oil  in Mexico and Brazil and of copper in Chile. In such cases, political reasons are added to economic motives, since such Enterprises are  national symbols of independence.

In other cases some State Enterprises will remain to deal with the tremendous social and regional inequalities that are a characteristic of Latin-American countries. These Enterprises will have to bridge the gap between resources and needs that the local market forces do not perceive as an opportunity, such as the provision of eletric power to remote areas. This type of action of State Enterprises reflects the perception of society, as expressed by the State, of important social benefits which the market will not provide for. At the same time, such action may  anticipate and pave the way to privately profitable activities. In the longer run, the cumulative nature of the latter shall render the investment of the State Enterprise profitable in strictly microeconomic terms, albeit under a long-term horizon. This rationale stems from the plurality of objectives of State Enterprises, combining their two sides : State and enterprise. The same rationale applies to regional integration projects and it is not a coincidence that in the energy sector the two elements often converge, with regional projects being developed by State Enterprises .

The sheer weight of the State Enterprises coupled to  the fragility of local entrepreneurs and lack of interest of foreign investors, plus political resistance  and legal hindrances to privatization, have retarded the process and maintained many other Enterprises under State control. Especially where natural monopolies coupled to indivisibilities are involved, as in electric power supply, not a minor cause of the slowness of the process of privatization can be ascribed to the difficulties of finding legal and institutional regulatory designs to establish an appropriate compromise between public and private interests.

As a consequence, in each country privatization has advanced at a different pace. In this respect, the two larger countries of the MERCOSUL, Argentina and Brazil, stand at the opposite extremes of the spectrum. In the former the scope of privatization was radical, the expectation being that by the end of 1993 no State Enterprise would be left. In Brazil, privatization was reined in by legal and political opposition and is proceeding at a much slower pace, often conditioned by concerns with the resulting supply structure and related market power of groups purchasing the State Enterprises. Such differences in the scope and attitude towards privatization seem to reflect deeply-seated differences in the national trajectories of development, especially as regards the role of industry in the latter.

Therefore, one may assume that, for some time at least ( probably not short ) , State Enterprises, especially in the energy sector, will continue to be important actors in the national economies of Latin America and one of the main instruments of State action. As a consequence, in the future as in the past, they will be one of the major participants and, quite likely, promoters of the process of regional integration. In fact, as argued below, regional integration broadens their scope of activity, strenghtening their economic and political importance.

3. Regional integration and the role of the State

In all processes of regional integration the State is a major actor. Such role is imposed by the political and economic characteristics of the process of integration. By definition, the latter is a collective process which relies on mutual confidence among partners, on their perception of common interests and of advantages to be obtained  as well as on the political will to carry out projects and sustain agreements, so that prospective advantages can materialize. On the other hand, integration poses threats, real and apparent, to many social actors, since it increases the intensity of competition, inclusive to the State, which must abdicate from some of its sovereign powers. Therefore, decision-makers, within the State as well as within civil society, must be convinced that what is to be gained by changes in the economic and political context compensates for the losses they may foresee as an effect of integration.

Although market forces may impart a strong rationale (e.g. via scale and scope economies) to a process of regional integration, they lack the cohesive power necessary to lead and implement such process. Moreover, the myopia and limited information intrinsic to market mechanisms, structured  around the  status quo ante, may hinder the process of integration by overemphasizing the risks and losses it may entail. Therefore, market failures are probably  one of the main causes of the limitations of regional integration .

In several Latin-American countries there is already a considerable experience regarding integration projects, acquired in a “learning by doing” process: it points out to the need of having a well defined and planned sequence of events and actors, from preliminary understandings, at a project conception stage, up to official signing of treaties and contracts and, further on, their implementation and supervision by the involved parties; the definition of responsibilities and benefits and their sharing among parties. In other words, integration operates in the realm of hierarchy, of negotiations, treaties and plans. A similar experience was gained in North America through the negotiation of NAFTA and through sectoral experiences as in the case of energy projects,  paving thus the way for a process of  hemispheric integration.

Since this process depends on the will and action of the region’s States, their governments cannot forsake the potential provided by their Enterprises. In fact, precisely because the State Enterprises are immersed in two worlds, the State and the market, they have a specific and unique role in regional integration – they can be used to overcome market failures (in the ways discussed below) following a strategic political design. In other words, they may be an instrument used by society to organize the market in order to better profit from the advantages of the latter.

4. State Enterprises and Regional Integration : Examples from the Energy Sector in the American Continent

The energy sector provides many successful  examples of regional integration, involving Governments, State Enterprises and private companies. In this sector State Enterprises have played a leading role in Latin American integration, acting as suppliers and purchasers  of goods and services, carrying out governmental agreements, joining efforts with other State Enterprises and identifying possibilities for collaboration with private enterprises. Integration of the North American economies has also been fostered by State Enterprises, but not so significantly as in the Southern continent. These situations are discussed in more detail below. However, the roles played by State Enterprises in regional integration can still be substantially expanded and the following analysis offers some suggestions of additional ways by which regional integration could be enhanced by State Enterprises.

4.1. State Enterprises As Suppliers of Goods and Services

As mentioned above, State Enterprises were usually established to act as suppliers of essential goods and services to their national economies. However, following their double rationale, driven by a combination of strictly microeconomic reasons and State determinations, they became active partners in regional integration under several forms, stemming from their forward linkages with the rest of the economy. Such types of regional projects, which range from trade to investment, are detailed below.

           a) Interchange of goods or services

State Enterprises are becoming active partners in regional trade, as shown by the purchases of oil by the Brazilian State Enterprise from its  Venezuelan counterpart, the sale of natural gas from the Bolivian State Enterprise  to its Argentinian and Brazilian sisters and the project of Brazilian-Argentinian electric interconnection near the border of the two countries through a 50 MW, 60/50 Hz converting station at Uruguaiana, , about to be commissioned, which is to be followed by another one of 900 MW, at Garabi.

Similarly, electricity trade across USA borders with Mexico and, in a much wider scale, with Canada, provides a major example of this type of integration in the energy sector, in which the participation of State Enterprises is outstanding in spite of the dominance of  private enterprises in the U.S. power sector. Thus, in the Mexico-U.S. interconnection cooperate the Comission Federal de Electricidad (CFE) and the the Western Systems Coordinating Council (WSCC) as well as the Electric Reliability Council of Texas (ERCOT), which coordinate the operation of Western and Texan utilities under NERC – North American Electric Reliability Council, a supra-national entity. Crossing the borders of Canada and the U.S. from the west to the east coast, there are many energy interconnections with widely different capacities, with the net flow going from Canada to the U.S.. A major example is the supply of energy to the States of New Jersey and New York, involving Ontario Hydro and the Power Authority of the State of New York, both of which are State Enterprises – a pattern often found in other interconnections between the two countries, such as the one linking  British Columbia Hydro to Bonneville Power Authority.

Regional trade can leverage a national project, prior to its construction,  providing the most economic scale, even if there is not a joint-venture . An example is the construction of the Acaray hydro power plant (190 MW) in Paraguay, by its State Enterprise, ANDE. Since at the time (in the seventies)  the appropriate installed capacity for that development was too large for ANDE’s market, this State Enterprise made a supply contract with a Brazilian counterpart, COPEL, controlled by the State of Paran . This contract provided the necessary demand in order to ensure the economic feasibility of the project and its financing by the Interamerican Development Bank – IDB, as well. A similar situation has been observed along the U.S.-Canada border, where American utilities have financed their Canadian counterparts’ hydroelectric expansion in order to be able to purchase part of the energy  the latter generate.

State Enterprises of different countries have also established agreements for the sale of their own  goods and services or for their purchases and related funding, entailing scale economies and enhancing the partners’ negotiation power.  Binational power generation projects, such as those mentioned below, have provided significant opportunities for such collaboration. Another example is the agreement established between Mexico and Venezuela to guarantee the supply of oil to countries of Central America and the Caribbean, coupled to credits to foster regional trade.

           b) Joint-ventures of State Enterprises for the production of goods or services,

Taking integration a step further, State Enterprises have formed joint-ventures, such as the binational hydropower plants of Itaipu (12600 MW), built and operated by a Brazilian-Paraguayan jointly-owned company and Yaciret  (2700 MW) developed by Argentina and Paraguay under a similar institutional framework, In the two cases above mentioned, the Federal Government State Enterprises of the two countries formed a new company, equally shared among them. In other cases, such as the Salto Grande Argentinian-Uruguayan project, the plant (1800 MW)  was built by the respective State Enterprises, operating together, through a joint commission. The same pattern was adopted for the development and operation of hydroelectric plants on the Rio Grande ( Falcon, of 63 MW and Amistad, of 132 MW ), at the Mexico-U.S. border, by the Comission Federal de Electricidad and the State Department-controlled IBWC – International Boundary and Water Commission.

In both types of joint-ventures described above, the main economic motivations are the possibilities of exploiting scale economies as well as complementarities  due to differences in terms of know-how, financial resources,  etc.. Natural resources coupled to political factors, such as national boundaries, strongly influence the cooperation. In cases such as the exploitation of an attractive hydro power site on the border between two countries, the collaboration of the respective Governments and, in particular, of their State Enterprises involved in electric power generation is practically mandatory, even if a private concern will carry out the plant construction and, eventually, its operation.

             c ) Technical Cooperation

State Enterprises collaborate in order to attain economies due to complementarities in their respective technical specializations or to achieve scale economies, in case a research project of common interest can be carried out by different countries’ State Enterprises, working together.

Regarding the first type of cooperation, a recent agreement signed between the Argentinian and Brazilian Governments has helped the State Enterprises of the two countries in the hydro and nuclear power areas to establish a useful  exchange of technical and managerial experiences, leading, among other benefits, to savings of hard currency. Governmental international sectoral organizations such as OLADE – Latin-American Energy Organization, or State Enterprises organizations such as ARPEL – Latin-American Petroleum State Enterprises Reciprocal Assistance, in the petroleum sector, or CIER – Electric Regional Integration Commission, in the electricity sector (in which also private utilities participate) provide an important ground for contact and for the exchange of information, from which collaboration may arise. This is the case of the cooperation between the the Brazilian and Venezuelan oil State Companies ( Petrobras and Petroven ) and the Mexican Instituto de Petroleo, facilitated by  ARPEL. Similarly, CIER has provided conditions for the identification of opportunities for cooperation, as the one established between Eletrobr s, from Brazil, and Venezuelan CADAFE, in which the former is providing the latter with  technical assistance.

In the second type of technical cooperation, a typical experience has been the association of Argentinian, Brazilian and Italian State Enterprises for the development of techniques for ultra-high voltage (1000 kV) transmission, involving research for the production of the materials and equipments required for the construction of such transmission systems and studies on their environmental impact. Another instance of a similar nature are cooperative projects in the petroleum sector, in which private companies, such as Marathon Oil, have shared technological development programmes with Latin-American State Enterprises.

            d) Support of clients

State Enterprises may assist regional integration by  enhancing the competitiveness of local products vis a vis extraregional sources.  Several instances of such forms of support to regional trade-creation, trade-diversion or entry in third markets are found in the energy sector,  exemplified by special power rates for energy-intensive industries or by the low prices for the naphta supplied to the petrochemical sector. The technical assistance provided by Eletrobr s and Petrobr s to their clients, leading to cost reductions and enhanced products, have the same effects, as had the external marketing support given by Petrobr s’ trading company  (Interbr s), closed down during the recent privatization drive. In the case of binational State Enterprises or projects, such as Itaipu and Salto Grande, such cooperation benefits the clients of both countries.

4.2. State Enterprises as Purchasers of Goods and Services

By virtue of their backward linkages, State Enterprises have played a major role in the industrial and technological development of Latin-American countries. Such purchasing power can be used for the purposes of regional integration too, if the appropriate political direction is given, eventually complemented by some economic measures. As we shall see below, in the past several initiatives along these lines were already undertaken by State Enterprises of the energy sector, often in  ad hoc  manner.

            a) Cooperation between State Enterprises and local suppliers, aiming at the regional market

The experience of State Enterprises in exporting and importing, as well as their knowledge about investments, may be useful to local suppliers of goods and services for their competitiveness abroad, increasing regional trade and investment. Probably such aid is more important to locally-owned suppliers than to subsidiaries of multinational companies, since the latter have more alternative sources of information and support. To give some examples, the  subsidiaries of of Petrobr s dealing with oil exploration and trading abroad played an important role in the exports of the latter’s suppliers of equipment and services. Similarly, Eletrobr s has recently given substantial technical support to regional exports of Brazilian consultants and contractors, as in the case of PARSEICA,  a project for the coordination of an integrated power system operation in Central America, and of hydroelectric projects in China.  Furnas, an Eletrobr s subsidiary, is giving significant on-site support to Brazilian contractors and to the local authorities in the constructionn of Kapanda hydroelectric project in Angola.

           b) Cooperation between State Enterprises to increase regional purchases

A major restriction facing regional suppliers to State Enterprises is the latters’ insufficient information about the former’s  technical and managerial capabilities and, consequently, about their delivery time and the performance, reliability and durability of their products. Such ignorance increases the risks perceived in regional purchases and is detrimental to regional integration.

To counteract such factors, the experience as a buyer of regional goods and services can be transferred between State Enterprises of different countries, as well as to the suppliers themselves. Sectoral fora, such as ARPEL and CIER as well as bilateral exchanges of information, very often done informally, have served this purpose, but this aspect of regional cooperation could be substantially strenghtened and extended.

            c) Cooperation of State Enterprises of various countries together with local suppliers

Potentially, the joint promotion of regional suppliers by State Enterprises could lead to scale economies, amplification of technical capabilities and earnings of strong currency by exports to third parties. As purchasers of such goods and services, State Enterprises would stand to benefit from the learning and scale economies accruing to their suppliers. However, this type of cooperation requires the coordination of well-defined industrial policies in the countries involved, as well as a strong commitment from the private sector which supplies the State Enterprises. Such policies should include appropriate funding procedures and compensations to national suppliers displaced by regional integration .

A coordination of State Enterprises purchasing policies was envisaged in the capital goods bilateral agreement signed between Argentina and Brazil in 1986, which stands at the origin of  MERCOSUL. However, this part of the agreement was never developed.

5. Factors Conditioning the Performance of State Enterprises as Agents for Regional Integration

5.1. Sectoral Factors

The sectoral dimension is a major determinant of the participation of State Enterprises in regional integration. As mentioned above, the very existence of State Enterprises is sector-conditioned, since the most important Enterprises are present in sectors which have specific characteristics in terms of investment, procurement, operation and marketing. Technical and economic characteristics, such as indivisibility and repayment period, may act as strong stimuli to regional integration – increasing the stimulus in proportion to the rigidity of the technical and economic features  of the sector. Conversely, some sectoral technical characteristics may go against the grain of regional integration, as in the case of sectors where  the technological development of suppliers depends on their experience and the requirements of State Enterprises tend to be highly specific and “customised”. Under such circumstances the customer/supplier relationship tends to be very stable. Such stability tends to hinder the diversification of procurement sources and, in consequence, to hamper regional integration.

The footlooseness of the sector is another major influence on regional integration projects. In sectors where there is a very strong geographical contingency and where best technical and economic solutions do not fit into national borders, regional integration may present a better alternative. When transportability of the products and services of the sector is low, the locational limitation is stronger. Thus, it is not surprising that regional integration has advanced considerably in sectors such as electric power generation, through projects designed to exploit sites located at the border of two countries, as in the case of Itaipu, Salto Grande and Yaciret .

5.2. Firm-specific and project-specific factors

Sectoral factors tend to define the scope and specialization of the State Enterprise and condition its relationship with clients, as well as to define  the complexity of its investments, operation and marketing, which entails technological and skilled labour requirements of the Enterprise and its links with suppliers.

State Enterprises, as living organisms, have learning capacities and memories. Besides stocking information and know-how, they may have physical assets that may also be useful for their performance in regard to regional integration. Hence, the selection of State Enterprises for a given activity usually takes into consideration their previous experience – in the sector in which they will act and with similar projects, both within the country or with similar enterprises in other countries. Care should be taken, however, not to simply extrapolate previous experience, without taking into account specific conditions of the project to be carried out and how such conditions apply to the resources availability of the Enterprise. Thus other relevant factors in the design or choice of a State Enterprise for a given regional integration task are the compatibility or adequacy of its resources to the project, e.g. in terms of  technical training of its staff, financial and managerial capabilities.

Project- and firm-specific factors also intersect in the motivation of the Enterprise to carry out the proposed regional project. Thus, the effects of the project on the development and consolidation of the Enterprise must be taken into account. In some cases, a  State Enterprise may be undergoing a low activity period and its involvement in regional integration may create better prospectives and leverage for hiring more experienced and qualified personnel, obtaining better salaries, acquiring new equipment, training and upgrading existing manpower and, last but not the least, obtaining political prestige. Therefore, a regional project may offer the scope for the use of slack resources and for additions to such resources – a crucial factor in institutions where resources-accretion is a major policy determinant. Alternatively, a State Enterprise may oppose a regional project, often using technical arguments, if it perceives it will hinder other projects, of a national scope, which show higher payoffs in economic, technical, financial and political terms. In other words, atuning the regional project to the Enterprise life-cycle is of paramount importance to the project’s success.

5.3.  Institutional Factors

The institutional framework of the regional integration action of State Enterprises is significantly affected by the technical and economic factors that characterize  the sector and the project, such as the interdependence of decisions, size of investments, maturation period, volume and kind of inputs to be purchased, , etc.

Thus, in sectors in which individual decisions have reciprocal influence coordination of the economic activities may result more effective than competition, and the extension of that coordination to a supra-national scale provides a sound basis to the effectiveness of regional integration. A good example of this coordination is provided by NERC ( North American Electric Reliability Council ) which brings together U.S. and Canadian power generation utilities .

The larger the projects are, more likely it will be that a project-specific institutional form will be adopted, as in the case of the binational companies formed by Brazil and Paraguay and by the latter and Argentina to build the hydropower plants of Itaipu and Yaciret . When the project is smaller or more divisible, it can be often implemented through the direct cooperation of national Enterprises, as in the case of the electric interconnections across the Argentinian-Brazilian and Mexican-U.S. borders or the two  relatively small Rio Grande power plants at the Mexico-U.S. border previosuly mentioned (Falcon and Amistad).

Vice-versa, political and strategic concerns also influence the technical solution that may be adopted  It is now hoped that, thanks to a better political relationship among American countries and a more realistic outlook regarding regional integration projects and their strategic influence, the basic design of such projects will give higher priority to economic factors than to national security and similar strategic considerations.

A good instance of this situation is the Garabi Hydro Power Plant. Started in the mid-seventies, the original engineering project was developed by a joint Argentinian-Brazilian team, under the two countries’ Federal State Enterprises supervision. The design considered two symetrical power-houses, one on each margin of the Uruguay River, which is the natural frontier between Argentina and Brazil in that area. Each power-house would be exploited by the respective national power utility and compensations regarding unequal water utilization by each party were foreseen in the agreement between the two countries. Presently, this scheme tends to be superseded by what is expected to be a more economical layout, with a single power-house. This major modification of the project reflects a change in attitude in both countries, marked by increased mutual confidence, as well as the desire to make the project more cost-effective, so as to involve private investors in its construction and exploitation. In this case one may note the interplay of economical, technical, institutional, political and strategic factors. In another project on the same river, named Roncador, economic and environmental components are being, at present, a major consideration, so that it is being completely redesigned in order to reduce major agricultural area flooding.

Nonetheless, institutional factors play an autonomous role too. Thus, a State Enterprise’s  regional performance is affected by its institutional origin,  scope and subordination. As discussed above, the double nature of State Enterprises makes them a specific social actor, driven by a mix of motives, which may vary along time and which sets them apart from both private enterprises and Government agencies. As a consequence, projects carried out by two or more State Enterprises are probably facilitated by their belonging to the same species of social actors. Although sectoral factors certainly play a major role, it is probably not a coincidence that most of the examples of regional integration above mentioned  involve State Enterprises on the two sides.

This feature poses questions about the role State Enterprises shall play in the future, when integration leads them to partnerships with private enterprises, as a result of privatization in Latin America and of an eventual WHAFTA.  As suppliers and purchasers of goods and services State Enterprises have a long experience of dealing with private enterprises but cooperation in regional projects will probably lead to a much closer relationship. This new type of relationship will require, at the very least, a period of learning on the two sides, so that motives and operations of the two types of social actors are reciprocally understood and a common basis of trust can be built so as to support the integration projects.

Even when they are dealing with other State Enterprises, institutional constraints play an important role in the regional activities of such Enterprises, as exemplified by their charters. The social and political reasons for the creation of a State Enterprise as well as the scope of its activities are usually embedded  in its charter and into the subordination of the Enterprise to the political authorities.

Once a charter of a State Enterprise has been approved by the political authorities to which it is subordinated, it stands as a proof of legitimacy and political support to the activities described therein, as well as a mandate for their implementation. In a sense, the charter is restrictive for a State Enterprise, since it cannot operate beyond the scope defined by this document. Moreover, since State Enterprises are created by some legal act, only chartered activities are admitted. Hence, performing other activities tends to be considered unlawful and the State Enterprise management is subject to legal amends it it does so. On the other hand, a State Enterprise charter bears the effect of a mission, since the State Enterprise is not supposed to abstain from performing its chartered activities, which may be regarded as duties.  Since the scope of the State Enterprise is usually quite well defined, the diversification of its activities, directly or through  the creation of subsidiaries, may require specific legislation wich may consume time and political resources.

Charters of State Enterprises tend to stress performance of some activities rather than profits. Hence, a State Enterprise is likely to be progressive, in the sense that it will take up the risk of carrying out  projects with the characteristics above mentioned and which may hold an uncertain microeconomic profitability. However, it will tend to be conservative in the way it carries out the project, since it will usually employ the most proven technologies, as its management may be criticized if it takes high technical risks ( real or apparent ). The first aspect may help regional integration, since it stimulates State Enterprises to undertake projects of regional scope but the second facet hinders the regionalisation of suppliers of goods and services to the State Enterprise.

Furthermore, the State Enterprise subordination either to Federal, State or Municipal authorities defines and restricts its political, economic and geographical scope . Thus, State Enterprises involved in regional integration are usually controlled by the Federal government or subject to its specific orientation, since regional integration legally belongs to the scope of Federal government action and also because it normally responds to a national policy,  even though in some cases such Enterprises may act in association with other enterprises under control of provincial authorities or privately-owned.

Finally, the development of regional activities by State Enterprises is also conditioned by international institutional factors. Thus, treaties between governments, such as NAFTA and the Treaty of Assunci¢n, provide a general framework for such projects. However, special institutional arrangements are normally necessary to implement such projects, as in the case of State Enterprises which are created specifically for such purpose. Therefore, it is often necessary to pass  complementary specific legislation at the national level to implement the international agreements. Some aspects that usually require definition in regional integration projects are related to the currency in which accounts will be held, labor legislation to be applied ( since there may be citizens of two or more countries involved ), operative procedures, both technical and commercial, protection to the facilities that support or constitute the regional integration project and the definition of representatives of each party and their decision-making procedures.

Other international treaties, signed by the governments of the regions and international agencies, financial and regulatory (e.g. of trade and environment), may also intervene in the definition and implementation of the project. In the recent past, due to the increasing concern with environmental problems, especially in the energy sector, another type of international ( and national ) actor has come to the fore : non-governmental organizations.

As mentioned above, international sectoral organizations, such as OLADE, ARPEL and CIER in the energy sector, facilitate the integration process by providing a forum where enterprises and regulatory agencies can  exchange experiences, identify opportunities and establish the channels of communication   (often informal) for joint projects. Probably, additional benefits could be obtained if such sectoral institutions could establish a sustained dialogue with NGOs which may influence the development of the energy sector, such as those concerned with the environmental issues. International technical organizations, such as the Panamerican Union of Engineers, the Institute of Electrical and Electronic Engineers, the International Conference on Large Dams and the World Energy Council have played the same roles, facilitating regional integration.

Binational electric power generation projects provide some typical features to be found in the agreements to their implementation :

• preliminary understandings, at the technical, diplomatic and political level, defining the objectives, characteristics and scope of the project, and the nature and the organization responsible for its implementation and exploitation;
• evaluation of the project feasibility or the definition of the studies that will provide it;
• a complete definition of the physical components of the project, and of each party’s responsibilities for implementing it;
• definition of the funding of the project;
• definition of operational responsibilities;
• preservation of the sovereignity of each party, which is fundamental to the feasibility of agreements between countries that are very different in terms of size of their economy, population or territory;
• preservation of sovereignity is also necessary to reduce concerns regarding the political and strategic issues arising from the committement to the project, since for each party the project will be a source of supply to local demand and it will be implemented instead of internal alternative sources, on whose construction and operation the country would have full control;
• definition, as precise as possible, of the role of institutions not related to the project and to the power sector;
• understandings with third party countries, when affected by the project or interested in its implementation;

5.4. Financial Factors

Financial factors play a major role in regional integration projects, especially in sectors characterized by large scale and bulky indivisibilities, such as in the electric power sector or gas transportation systems. In the Latin American experience, such factors have often led State Enterprises to adopt a conservative attitude towards regional integration projects, since the financial agencies often consider the regional integration benefits only at the margin, as an extra bonus that will provide political support, but for which nobody is directly paying. In such cases, regional projects are compared to local alternatives without conferring to the former any specific and quantified advantages.  This is the case of the Brazilian interconnection with Argentina (Uruguaiana-Paso de los Libres), which Centrais El‚tricas do Sul do Brasil S.A. – ELETROSUL and Agua y Energ¡a El‚ctrica – AyE, are about to complete. No particular credits were extended to the former, which bears the major part of the investment. Although, besides regional integration gains, the project yielded benefits to Eletrosul in terms of technical capability, such results are not financially tangible.

Integration projects carried out by new State Enterprises must count on third party financing, since the Enterprise earns no revenue during their inception. Under such circumstances, that were present, for instance, in the Itaipu binational project, the States sponsoring the project are obliged to provide appropriate funding – a feature which may explain why already existing Enterprises may prefer establish a joint-venture consisting of a new company, which can rely on diplomatic pressures to get the funding it needs.

Finally, projects or activities are also committed to State Enterprises accordingly to their firm-specific capability of raising funds from international institutions such as IBRD and IDB, as well as getting the support of non-financial organizations, like OLADE, OAS or specific UN agencies .

6. Conclusions

It was argued above that State intervention is necessary for regional integration and that State Enterprises, a lasting feature of American economies, have important and specific roles to play as instruments of their States’ regional strategy, as illustrated by the examples from the energy sector. If regional integration is extended to an hemispheric scale, the role to be played by State Enterprises  is commensurately expanded too, but the widening of integration will pose new challenges to such Enterprises, involving a renewal of the learning process they have been recently through.

To conclude, it is worthwhile to stress the complexity of the relationship between the State and its Enterprises, deriving from the nature of the latter – their “structural ambiguity”, which obliges them to straddle over two realms : the market and the polity. Such ambiguity is strenghtened in the case of regional integration, where, for the reasons above outlined, the two logics often conflict.

Thus, the State participation in regional integration through State Enterprises is not limited to the creation of such Enterprises or the adaptation of already existing ones to perform the tasks required for regional integration. As shown above, the State must deploy a full panoplia of policy instruments to support the regional projects of its Enterprises – ranging from financial support to the design of appropriate institutional devices, both nationally and internationally.   As a consequence, State Enterprises will be fully  effective instruments of regional integration only if their activities are part of wider strategy of development, in which integration is an important feature. Such strategy requires more than market mechanisms – it involves political decisions which may converge on the State but must be democratically supported by the rest of society, which should be enabled to pass a judgement on the importance and validity of this policy and on the costs and benefits of its major projects.

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This paper was prepared for the project on Hemispheric Trade Liberalization jointly sponsored by the Inter-American Development Bank  and by the United Nations Economic Commission for Latin America and the Caribbean. It was presented at the Sixth Colloquium of the project, held in Washington, D.C. in December 1992. The authors benefited from the comments of the participants of the Colloquium and of the technical staff in charge of the project, especially Ron Sprout, but they retain the responsibility for the opinions here conveyed, which do not necessarily represent those of the institutions to which they are attached.

Fabio Erber is BNDES (Banco Nacional do Desenvolvimento Econômico e Social)’s Director

Pietro Erber is ELETROBRAS (Centrais Elétricas Brasileiras S.A)’s Assistant to Director