US embassy cable - 03SANTODOMINGO7346

UNCLAS SECTION 01 OF 02 SANTO DOMINGO 007346 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR WHA, WHA/CAR, WHA/EPSC, EB/OMA, EB/IFD; TREASURY 
FOR NLEE, RTOLOUI, LLAMONICA 
 
E.O. 12958: N/A 
TAGS: DR, ECON, ENRG 
SUBJECT: DOMINICAN AUTHORITIES REQUEST USG BRIDGE LOAN FOR 
ELECTRICITY SECTOR 
 
 
1.  Following is the unofficial Embassy translation of the 
text of a letter from the Dominican authorities to Treasury 
Under Secretary Taylor dated December 5, requested a bridge 
loan of USDOLS 60 million for the energy sector.  Copy was 
faxed to Treasury on December 5; original follows by pouch. 
 
(begin text of unofficial translation) 
 
Technical Secretariat of the Presidency 
 
No. 1832           December 5, 2003 
 
Mr 
John B Taylor 
Under Secretary for International Affairs 
Treasury Department 
Washington DC 
 
Dear Mr. Taylor: 
 
During your recent visit to our country, we had the 
opportunity to indicate to you the delicate liquidity 
situation we face in the electricity sector and the 
possibility that exists that it could produce a true crisis 
in the generation of electricity, if the recourses we await 
from the multi-lateral organizations aren,t disbursed in an 
opportune manner. 
 
As you had the opportunity to learn, the difficult electrical 
situation that our country endures is attributable to two 
fundamental problems:  first, the accumulation of various 
decades of inefficiency in the sector, whose principal 
component has been the signing of onerous generating 
contracts with private companies.  These contracts made the 
electrical energy produced in the country among the most 
expensive of the continent.  We faced this problem by 
renegotiating all of the generating contracts that the 
country had with the private companies, and we are only 
waiting for the disbursement of the $151 million form the 
World Bank, which would be used exclusively to cancel the 
said contracts through payment of stranded costs and as such 
enable the price for the sale of energy to be based on the 
spot market, as established in our Electricity Law. 
 
The second adverse factor is the impact that the high 
international petroleum prices and the strong devaluation of 
the currency (125 percent in the past 16 months) have had on 
the high cost of energy production.  We have not been able to 
entirely transfer these higher production costs to the 
consumers, especially not to those with the lowest levels of 
income.  The social effect of doing so would be devastating. 
We should remember, that from September 2002 to December 
2003, there has been a 96 percent increase in the electricity 
tariff.  Besides, the Government has established a constant 
incremental increase of four percent monthly until the tariff 
reaches the market level. 
 
Meanwhile, and to help sustain the system, the Government 
maintains a subsidy equivalent to 0.8 percent of GDP, which 
is covered by resources from the national budget. 
Nevertheless, this effort has not been sufficient, and there 
has accumulated a debt with the generators of around $200 
million this year, which has caused them to be without 
liquidity and without credit facilities to maintain their 
plants in operation. 
 
Calculations done taking a constant price of no. 6 fuel oil 
of $26 per barrel and an exchange rate of 40 pesos per dollar 
show the following shortfall between the total amount billed, 
including the Government,s subsidization and the cost of 
production of the energy service to the user.  The values are 
expressed in millions of United States dollars. 
 
                Total Cost      Total Income      Shortfall 
 
December 03       75.0        57.3              17.7 
January 04              76.3        57.2              19.1 
February 04       78.3        57.2              21.1 
March 04                80.4        57.2              23.2 
April 04                80.5        57.2              23.3 
May 04                  80.6        57.2              23.4 
June 04                 80.7        57.2              23.5 
 
Finally, we inform you that the stocks of fuel oil will run 
out around December 20 and coal supplies around December 10. 
Both combustibles generate more than 60 percent of the 
country,s electricity production.  Similarly, liquid natural 
gas (20 percent of production) will run out around January 10 
of next year. 
 
As you will be able to appreciate, it is urgent for us to 
receive a bridge loan of around $60 million dollars before 
the disbursements of the World Bank (Structural Adjustment 
Loan - $80 million) and the Inter-American Development Bank 
(Emergency Loan - $200 million), which we estimate will be 
available around the month of February, for they require not 
only the approval of the IMF, but also the approval by the 
National Congress.  Part of the resources of both loans, 
especially the first of them, would be utilized to cover the 
deficit that we have in the electrical sector. 
 
Sincerely, 
 
(signed) 
 
Rafael Calderon M.                      Carlos Despradel 
Secretary of State for Finance      Technical Secretary of 
 
SIPDIS 
the Presidency 
HERTELL