US embassy cable - 04SANTODOMINGO4418

UNCLAS SECTION 01 OF 07 SANTO DOMINGO 004418 
 
SIPDIS 
 
STATE FOR WHA/CAR, WHA/EPSC,DRL:AWILSON,EB, 
EB/CBA,EB/IFD/OIA AND EB/IFD/OIA/ATBRYAN 
STATE PASS TO USTR; TREASURY FOR OASIA:LLAMONICA 
 
E.O. 12958: N/A 
TAGS: DR, ECON, KIDE, EINV, EFIN, ELAB, KTDB, PGOV 
SUBJECT: DOMINICAN REPUBLIC: 2004 INVESTMENT CLIMATE MID 
YEAR UPDATE 
 
REF: STATE 141379 
 
1. This cable provides the 2004 Investment Climate Mid Year 
Update for the Dominican Republic tasked reftel 
 
2. (begin text) 
 
CHAPTER 7: Investment Climate 
 
Investment Climate 
 
The following is the (preliminary) 2005 Investment Climate 
Report for the Dominican Republic.(as of July 2004) 
 
A.1.  Openness to foreign investment 
 
The Dominican government welcomes foreign investment. 
However, some laws exist that apply to specific sectors of 
the economy (e.g., insurance) that may discriminate between 
domestic and foreign investments.  Regulations implementing 
the 1995 foreign investment law were enacted in September 
1996. 
 
Under the Foreign Investment Law (No. 16-95), unlimited 
foreign investment is permitted in all sectors, with the 
exception of the disposal and storage of toxic, hazardous or 
radioactive waste not produced in the country; activities 
negatively impacting public health and the environment of the 
country; and production of materials and equipment directly 
linked to national security without authorization from the 
president.  There are no limits on foreign control, or 
screening of foreign investment in the open sectors.  Foreign 
investors have fully participated at every stage in the 
capitalization of state enterprises such as the electric 
company, airport management and sugar mills.  In 1997, the 
government also established the Office for Investment 
Promotion (OPI), which has proven to be an important contact 
for potential investors. 
 
In 2003, foreign direct investment in the Dominican Republic 
was $607 million dollars less than in 2002, according to 
preliminary data available from the Central Bank. United 
States investment shrank to $214.8 million dollars, according 
to the same preliminary data. 
 
A.2.  Conversion and Transfer Policies 
 
The Dominican exchange system is divided between the private 
sector, controlled by commercial banks and exchange houses, 
and the public sector, operated by the Central Bank.  A 
private sector exchange rate system exists for most 
commercial bank transactions.  The Central Bank uses the 
average of the market-determined rate of exchange to set its 
own rate for operations, such as selling foreign currency to 
the government to pay foreign debt or purchasing currency 
from those economic entities required to exchange their 
currency.  In addition, the Central Bank purchases foreign 
currency from the market.  Importers may obtain hard currency 
directly from commercial banks and exchange houses, as well 
as from the Central Bank.  Foreign currency generated from 
international credit card companies, international telephone 
traffic, public sector loan payments, and the sale of oil to 
foreign flagged carriers must be exchanged at the Central 
Bank. 
 
A.3. Expropriation and Compensation 
 
Dominican expropriation standards have historically been at 
variance with international norms.  A number of U.S. 
investors have outstanding disputes with the Dominican 
government concerning expropriated land.  Property claims 
make up the majority of expropriation cases.  Most, but not 
all seizures have been for purposes of infrastructure, or 
commercial development.  In some cases, claims have existed 
for many years.  Investors and lenders often do not receive 
prompt or adequate payment for their losses, and payment has 
been difficult to obtain even when a Dominican court has 
ordered compensation or the government has recognized a claim. 
 
The most recent Dominican governments have expropriated fewer 
properties than their predecessors and have generally paid 
compensation in those cases.  A law passed in 1999 authorized 
the issuance of bonds to settle claims against the Dominican 
government that arose prior to August 16, 1996, including 
claims for expropriated property.  The Mejia administration 
is working with a USAID-sponsored expert to resolve 
outstanding claims.  The United States Government is 
presently aware of 13 claims of US persons that may be 
outstanding against the Dominican government, down from 22 
claims a year ago. 
 
The GODR has not entirely resolved arrears owed to several 
independent power producers (IPPs) in connection with the 
partial privatization of the energy sector and faces 
additional difficulty meeting payment obligations in the 
short term.  This has contributed to cash flow and credit 
problems for the IPPs and widespread sporadic blackouts. 
While the GODR has made some partial payments, significant 
arrears remain outstanding and are a cause of ongoing 
concern.  The 2002 "Madrid Agreement" between the government 
and most IPPS stipulated that participating IPPs would lower 
electricity tariffs, if the government made a large one-time 
payment. The government has not been able to secure financing 
to put this change into effect. 
 
A.4. Dispute Settlement 
 
The Dominican Republic is a civil law country.  A number of 
U.S. investors, ranging from large firms to private 
individuals, have payment-related, expropriation, or 
contractual disputes with the Dominican government and its 
government-owned enterprises.  Both free trade zone and 
non-free trade zone companies face dispute resolution 
problems.  U.S. firms, obliged to respect the U.S. Foreign 
Corrupt Practices Act, have had particular difficulty 
accessing justice within the Dominican system and defending 
their interests in court.  Recent judicial reforms have 
somewhat improved the administration of justice in the 
country, but judicial procedures are of uneven quality.  In 
mid-2003, the Senate passed a law creating a special, 
independent, anti-corruption prosecutor with national 
jurisdiction.   Also in 2003, the government passed a law 
reforming the process for hiring prosecutors and making them 
less susceptible to political influence.  In 2002, the 
government passed a new penal process code that defines legal 
judicial procedures and makes them more transparent. 
Nevertheless, the judicial system is often unable to enforce 
decisions in favor of foreign investors. 
 
In April 2002, the Dominican Republic became a member of the 
International Center for the Settlement of Investment 
Disputes ("ICSID," also known as the "Washington 
Convention").  In August 2002, the Dominican Republic 
ratified the 1958 New York Convention on Arbitral Awards, 
thereby recognizing the right of companies to pursue 
international arbitration.  The Embassy estimates the total 
value of U.S. investor claims as at least US $500 million, 
much of which is owed to energy sector companies. 
 
A.5.  Performance Requirements/Incentives 
 
There are no special investment incentives or other types of 
favored treatment given to foreign investors, nor are there 
requirements for investors to export a certain percentage of 
their production.  Foreign companies are unrestricted in 
their access to foreign exchange.  Law 69 requires local 
sourcing when components are of approximately equal cost and 
quality compared to imports, but this law has not appeared to 
hinder investors.  In addition, there are no requirements 
that foreign equity be reduced over time or that technology 
be transferred according to certain terms.  The government 
imposes no location, local ownership, local content, or 
export requirements or conditions on foreign investors.  The 
Dominican labor code establishes that 80 percent of the labor 
force of a foreign company, including free trade zone 
companies, be composed of Dominican nationals (although the 
management or administrative staff of a foreign company is 
exempt from this regulation). The Foreign Investment Law 
provides that licensing contracts for the use of patents or 
trademarks, the leasing of machinery and equipment, and the 
provision of technical know-how must be registered with the 
Central Bank's Directorate of Foreign Investment. 
A.6.  Right to Private Ownership and Establishment 
The Dominican Constitution guarantees the freedom to own 
private property and to establish businesses.  The Foreign 
Investment Law grants foreign investors the same rights as 
domestic investors.  Public enterprises are not given 
preference over private enterprises. 
 
A.7.  Property Rights 
 
Secured interests in both movable and real property are 
recognized and generally respected.  Mortgages on real 
property must be registered in the Registry of Titles where 
the property is located.  Real property rights registered 
under the Dominican Republic's Torrens system of real 
property registration are binding on third parties. 
Provision in the law is also made for registration of liens 
on personal property.  Some United States citizens have 
reported problems with fraudulent deeds or claims against 
their properties and difficulties enforcing property rights. 
 
Protection of intellectual property rights has improved in 
recent years, but is notably deficient in some areas.  In 
2003, the Office of the U.S. Trade Representative changed the 
Dominican Republic's status from "Section 301 Priority Watch 
List," (where it had been from 1998 through 2002), to 
"Section 301 Watch List."  Pirated software, video and audio 
recordings, as well as unauthorized broadcast and 
distribution of copyrighted material remain concerns despite 
increased government efforts to crack down on these 
violations.  In March 2003, the GODR made regulatory changes 
to the patent law that appears to bring the law into 
compliance with TRIPS. 
 
A.8.  Transparency of the Regulatory System 
 
During the last few years, the Dominican government has 
carried out a major reform effort aimed at improving the 
transparency and effectiveness of laws affecting competition. 
 
 
On November 20, 2002, Congress passed the Financial Monetary 
Law (Law 183-02) to regulate banks and other key players in 
the financial sector.  The 2003 IMF standby agreement, which 
is not currently in effect, requires additional regulation 
and supervision of the banking sector.  The primary sections 
of the Market Regulation Code have all been approved, 
including legislation in critical areas of the patent and 
trademark law, telecommunications, copyright, and trade 
practices and safeguards.  The lone exception is in the area 
of consumer protection.  As in many developing countries, 
however, red tape and differences between law and actual 
practice are problems.  Enforcement efforts are sporadic. 
 
A.9.  Efficient Capital Markets and Portfolio Investment 
 
Despite strong GDP growth and largely successful reform 
efforts that, until 2003, combined to produce a relatively 
healthy financial sector, Dominican authorities failed to 
detect years of large-scale fraud and mismanagement at 
Baninter, the country,s third largest bank.  Failure of 
Baninter and two other banks cost the GODR in excess of $3 
billion dollars, severely destabilized the country,s 
finances and shook business confidence.  Inflation in nominal 
terms was approximately 30 percent over the first six months 
of 2004 and is likely to reach 40 percent for 2004. 
 
The Dominican stock market, the Bolsa de Valores de Santo 
Domingo, was founded in 1991.  Since beginning operations, 
the Bolsa has handled initial offerings of commercial paper. 
The private sector has access to a variety of credit 
instruments.  Foreign investors are able to obtain credit on 
the local market, but tend to prefer less expensive offshore 
sources.  There are 14 multi-service banks, 15 development 
banks, 18 savings and loan associations, 1 mortgage bank, 69 
finance companies, 23 loan houses, and 1 national housing 
bank.  Portfolio investment grew 370.5 percent in 2003 - an 
increase largely explained by the issuance of Central Bank 
certificates to compensate depositors in failed banks.  Other 
CentralBank certificates have been placed with financial 
entities and individuals at high interest rates to reduce the 
monetary base.  Fixed assets grew 11.4 percent, while other 
assets -- such as confiscated assets, deferred credits, 
deferred taxes, and anticipated payments -- increased 51.5 
percent. 
 
 
A.10.  Political Violence 
 
There have been sporadic outbreaks of protest in some of the 
poorer areas of the Dominican Republic over spiraling 
electricity costs and lengthy rolling blackouts.  The murder 
of PRD Senator Dario Gomez in 2001, a chief architect of the 
Dominican legislation against money laundering, has not been 
resolved.  Occasional labor protests are generally peaceful. 
In November 2003 and January 2004 a coalition of 
organizations sponsored successful national work stoppages in 
protest to economic conditions. 
 
A.11 Corruption 
 
Corruption remains a pervasive problem in government and 
within law enforcement agencies nationwide.  Corruption and 
the need for reform efforts are openly and widely discussed. 
 
B.  Bilateral Investment Agreements and Tax Agreements 
 
In March 2004, the Dominican Republic completed negotiating a 
comprehensive free trade agreement with the United States, 
which will associate the country with the Central American 
Free Trade Agreement (CAFTA).  As of July 1, 2004, the 
agreement had not been signed. The Dominican Republic has a 
Bilateral Investment Treaty with Spain and numerous bilateral 
trade agreements with Central American countries, but these 
do not provide the level of protection to investors generally 
offered by U.S. bilateral investment treaties.  An Agreement 
for the Exchange of Tax Information between the United States 
and Dominican Republic has been in effect since 1989. 
 
C.  OPIC and other Investment Insurance Programs 
 
The Overseas Private Investment Corporation has been active 
in the Dominican Republic with both insurance and loan 
programs.  The Dominican government is a party to the 
Multilateral Investment Guarantee Agency (MIGA) Agreement. 
 
D.  Labor 
 
The Dominican Constitution provides for the right of workers 
to strike (and for private sector employers to lock out 
workers).  The Dominican Labor Code, which became law in June 
1992, is a comprehensive piece of legislation which 
establishes policies and procedures for many aspects of 
employer/employee relationships, ranging from minimum wage 
levels, hours of work, overtime and vacation pay, to 
severance pay, causes for termination, and union 
registration.  The labor code also requires that 80 percent 
of non-management workers of a company be Dominican 
nationals.  The standard workweek is 44 hours.  Most jobs pay 
salaries based on the minimum wage.  Some labor shortages 
exist in professions requiring lengthy education or technical 
certification. 
 
An ample labor supply is available, although there is a 
scarcity of skilled workers and technical supervisors.  Most 
employers have found the local work force competent, 
trainable, and cooperative.  Foreign employers are not 
singled out when labor complaints are made.  About 10 percent 
of the nation's work force is unionized.  The labor code 
specifies that 20 percent or more workers in a company may 
form a union.  Before a union may enter into a collective 
bargaining agreement or officially call a strike, however, it 
must have the support of an absolute majority of all company 
workers, whether unionized or not; have previously attempted 
to resolve the conflict through mediation; provided written 
notification to the Ministry of Labor of the intent to 
strike; and waited 10 days from that notification before 
striking.  Due to these stringent requirements, brief work 
stoppages are more common than lengthy strikes.  For example, 
early in 2003, members of several major transportation unions 
briefly walked off the job to protest the rising cost of fuel. 
Collective bargaining is legal and may take place in firms in 
which a union has gained the support of an absolute majority 
of the workers.  Very few companies have collective 
bargaining pacts.  The Dominican labor code stipulates that 
workers cannot be dismissed because of trade union membership 
or union activities; however, in practice, it appears workers 
are sometimes fired because of union activities.   The 
Dominican labor code establishes a system of labor courts for 
dealing with disputes.  While cases do make their way through 
the labor courts, enforcement of judgments is not 100 percent 
reliable. 
 
Many of the major manufacturers in the free trade zones 
(FTZs) have voluntary "codes of conduct" that include 
workers, rights protection clauses, but it is not clear 
whether these incorporate the ILO,s Fundamental Principles 
and Rights at Work.  In general, workers are rarely familiar 
with such codes or the principles they set out, and no 
independent monitoring system exists to ensure that these 
codes are respected. 
 
E.  Foreign Trade Zones/Free Ports 
 
The Dominican Republic's free trade zones (FTZs) are 
regulated by Law 8-90, which provides for 100 percent 
exemption from all taxes, duties, charges and fees affecting 
production and export activities in the zones.  These 
incentives are for 25 years for zones located near the 
Dominican-Haitian border, and 15 years for those located 
throughout the rest of the country.  This legislation is 
managed by the Free Trade Zone National Council (CNZF), a 
joint private sector/government body which, among its other 
powers, has discretionary authority to extend the time limits 
on these incentives. 
 
Hard currency flows from the free trade zones are handled via 
the free foreign exchange market.  Foreign and Dominican 
firms are afforded the same investment opportunities both by 
law and in practice. The CNZF's Annual Statistical Report for 
2002 noted a Free Zone Sector with a total of 53 free zone 
parks and 520 operating companies.  Of those companies, 254, 
or 49 percent are from the United States.  The total 
cumulative investment in Free Trade Zones is approximately 
US$ 1.3 billion at year-end 2003, of which nearly 74 percent 
represents foreign investment.  Over 61.3 percent of foreign 
investment came from the U.S., followed by companies 
registered in Korea, Netherlands, and Switzerland.  In 
general, firms operating in the free trade zones experience 
far fewer bureaucratic and legal problems than do firms 
operating outside the zones. 
 
  Exporters/investors seeking further information from the 
CNZF may contact: 
 
Consejo Nacional de Zonas Francas 
Leopoldo Navarro No. 61 
Edif.  San Rafael, piso no. 5 
Santo Domingo, D.R. 
Phone: (809) 686-8077 
Fax: (809) 686-8079 and 688-0236 
Web-site Address:  www.cnzfe.gov.do 
 
F.  Foreign Direct Investment Statistics 
 
Foreign direct investment in the last few years has been 
largely concentrated in tourism, free trade zone activity, 
electricity generation and communications.  The Dominican 
government has made a concerted effort to attract new 
investment, taking advantage of the new foreign investment 
law and of the country's natural and human resources. The 
decision to privatize or "capitalize" ailing state 
enterprises (electricity, airport management, sugar) has 
attracted substantial foreign capital to these sectors. 
 
Foreign Investment Data (US$ millions) 
Central Bank of the Dominican Republic 
2003 Numbers 
FDI Stocks 7520.4 
FDI Stock /GDP 45.0% 
FDI Flows 310.0 
*  Preliminary data from the Central Bank 
 
FDI flows by source country 
YEAR 2003* (in millions) 
United States 214.8 
Canada 170.0 
Spain -300.8 
UK -0.2 
France 51.5 
Netherlands 70.0 
Italy 15.2 
Bahamas 8.9 
Colombia 32.6 
Others 48 
Total 310.0 
*  Preliminary Data for 2003, from the Central Bank of the 
Dominican Republic 
 
 
FDI by Sector 
2003* 
Tourism 163.2 
Trade 12.4 
Communications 184.9 
Electricity -241.5 
Finance 86.3 
Free Zones 56.1 
Others 48.5 
Total 310.0 
 
Major Foreign Investors: 
 
Following are some of the largest companies registered as 
foreign businesses by the Central Bank of the Dominican 
Republic: 
 
1. Compania Dominicana de Telefonos (CODETEL) owned by 
Verizon (U.S.): the main telephone service provider, which 
has operated in the Dominican Republic for more than 70 
years.  In 2004 the firm changed its name in the Dominican 
Republic to Verizon, 
 
2.  Central Romana Corporation (U.S.): A diversified 
operation that includes a hotel, sugar plantations, a mill 
and real estate businesses, among other activities. 
 
3.  E. Leon Jimenes, C. por A. (a local partner of Phillip 
Morris, of the U.S.): this company produces cigarettes, 
cigars and beer. 
 
4.  Falconbridge Dominicana (Canada): produces ferro nickel 
for mining export in the Dominican Republic. 
 
5.  Shell Company (Netherlands/England): shares ownership 
with the Dominican government of the only petroleum refinery 
in the country (50% each) and is a distributor of petroleum 
by-products. 
 
6.  Citibank (U.S.): the bank has operated in the Dominican 
Republic for many years. 
 
7.  Esso Standard Oil (U.S.): Esso is a long-time distributor 
of petroleum by-products. 
 
8.  Texaco Caribbean (U.S.): Another long-time distributor of 
petroleum by-products. 
 
9.    Colgate Palmolive, Inc. (U.S.): a leading manufacturer 
in the Dominican Republic of soaps and toothpaste. 
 
10.  Bank of Nova Scotia (Canada): One of the oldest foreign 
commercial banks in the Dominican Republic.  Known as 
Scotiabank. 
 
11.  AES (U.S.): Through local subsidiaries, AES operates the 
electricity distribution network in the eastern half of the 
country, as well as electricity generation plants. 
 
12.  Prisma Energy (U.S.): In partnership with other 
companies, operates an electricity generating plant Puerto 
Plata. 
13.  Coastal (U.S.): A major investor in electricity 
generation. 
 
14.  Seaboard (U.S.): A major investor in electricity 
generation. 
 
15.  Tricom (40% owned by Motorola - U.S.): Second largest 
provider of long distance and cellular telephone services in 
the Dominican Republic. 
 
16.  Cogentrix (U.S.) An independent power producer with 300 
MW capacity. 
 
 
 
 
 
HERTELL