US embassy cable - 04SANTODOMINGO2297

UNCLAS SECTION 01 OF 02 SANTO DOMINGO 002297 
 
SIPDIS 
 
SENSITIVE 
 
DEPT PASS DOE FOR SECRETARY OF ENERGY SPENCER ABRAHAM FROM 
AMBASSADOR HANS HERTELL 
 
E.O. 12958: N/A 
TAGS: DR, ENRG, OVIP 
SUBJECT: SCENESETTER FOR SECRETARY OF ENERGY SPENCER 
ABRAHAM'S UPCOMING VISIT TO THE DOMINICAN REPUBLIC, APRIL 
15 - 16 
 
REF: SANTO DOMINGO 01606 
 
1.  (SBU) The Country Team and I look forward to your April 
15 visit.  The last twelve months has in many aspects been 
the most difficult time for the country in at least twenty 
years.  Dominicans are distrustful of their politicians and 
their institutions, are suffering from the prolonged effects 
of a severe financial adjustment, and are deeply concerned 
about problems in the electricity sector. 
 
2.  (SBU) Dominicans understand that the USG is keenly 
interested in their plight.  On November 21-22 Treasury Under 
Secretary John Taylor visited for discussions with many 
 
SIPDIS 
sectors; in December Assistant Secretary of State for the 
Western Hemisphere Roger Noriega addressed both houses of the 
Dominican Congress and undertook similarly wide 
consultations, discussing the same themes and stressing the 
need for clean elections, strengthened institutions and 
judicial prosecution of banking fraud.  USTR Amb. Zoellick 
opened this dialogue further on January 14, stressing the 
positive perspectives of bilateral and multilateral free 
trade. 
 
3.   (SBU) Your visit will further USG priorities in the 
sector by sending a message that focuses on key elements: 
 
- - the importance of developing a national plan for a 
sustainable system; 
 
- - the need to create strong, independent, and capable 
institutions; 
 
- - respecting the law; 
 
- - the need for impartial treatment and respect for 
contracts; and, fundamental to all of these, 
 
- - transparency in government. 
 
Political outlook 
 
4.   (U) President Hipolito Mejia is strongly 
pro-United-States.  He supported the United States initiative 
in Iraq, and the Dominican Republic is providing a 300-troop 
battalion for Iraq reconstruction from August 2003 to August 
2004.  His government has strongly supported U.S. positions 
in the UN and other international organizations. 
 
5.   (SBU) Mejia is running for re-election in May, 2004. His 
style is that of a populist gentleman farmer.  His campaign 
started at a great disadvantage at around 20 percent, largely 
due to inflation and economic discontent, and he has made a 
slow climb back up through the polls. 
 
5.  (U)  Remaining well ahead of Mejia is former president 
(1996-2000) Leonel Fernandez of the Dominican Liberation 
Party (PLD), on the center left. Fernandez presided during 
the boom of the 1990,s stimulated by tourism and free zone 
exports. 
 
6.   (U) The USG has donated $325,000 to fund a team of 
international observers from the Organization of American 
States for the elections. 
 
Economy 
 
7.   (SBU) The attacks of September 11 and the U.S. economic 
slow-down directly affected Dominican exports and tourism 
receipts.  Massive bank frauds revealed in early 2003 left 
the banking system with a gap equivalent to about 15 percent 
of GDP.  The government decided to guarantee all deposits and 
had to obtain an IMF standby.  The standby quickly fell apart 
when Mejia decided without consultation to incur new debt to 
buy out Spanish interests in the electricity sector.  The 
standby was not renewed until February 2004. 
 
8.   (U) The peso has fallen in value over the last year from 
18 to the dollar to about 45.  Inflation in 2003 reached 
about 40 percent, following years of single digits.  The 
Dominican public has proven relatively reserved and resilient 
in these difficult circumstances. 
 
Electricity Sector 
 
9.   (U) The electricity sector of the Dominican Republic is 
in crisis.  The sector has accumulated US $400 million in 
arrears.  The government's portion of the debt stems from 
subsidy arrears, stranded costs on renegotiated contracts, 
and cost associated with the purchase of two distributors. 
Recent rate adjustments have brought collections and 
expenditure roughly in line but have not reduced outstanding 
debt. 
 
10.  (U) The sector has a theoretical generation capacity of 
almost 3000 MW to meet an average daily peak demand of 1600 - 
1800 MW. Peak production is running now at around 1000 - 1200 
MW. 
 
11.  (U) "Keeping the lights on" is vital for the economy and 
is crucial for President Mejia's re-election prospects. 
 
12.  (SBU) Persistent arrears in servicing debt to generator 
COGENTRIX (owned by Goldman Sachs) almost resulted in a call 
on sovereign guarantees of $400 million that would have 
collapsed the IMF standby and blocked other lending, but the 
govermment has managed with great effort to get current on 
that account. 
 
13. (SBU) U.S.-owned AES is the single largest U.S. investor 
in the Dominican Republic.  It owns a principal generator and 
is seeking to divest itself of its 50% share in a regional 
distribution company.  Dominican officials have failed to 
make payments to AES, in contravention to a February 
sector-wide agreement between the government and operators. 
 
14. (SBU)  The World Bank is providing significant interim 
financing for the electricity sector; the second $25 million 
tranche is contingent on the government delivering a chart 
demonstrating that the first $30 million was spent 
exclusively on fuel and paid to the most efficient 
generators.  The government failed to provide this 
information in the required format, and time-consuming World 
Bank analysis of its voluminous submission is blocking 
release of funds. 
 
HERTELL