US embassy cable - 05SANTODOMINGO923

UNCLAS SECTION 01 OF 08 SANTO DOMINGO 000923 
 
SIPDIS 
 
DEPT FOR EB/IFD/OIA, WHA/CAR, WHA/EPSC, EB/TPP/BTA, 
EB/IFD/OMA; TREASURY FOR OASIA-LCARTER; DEPT PASS USTR FOR 
VARGO, RYCKMAN, MALITO, CRONIN; 
USDOC FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION; 
USDOC FOR 3134/ITA/USFCS/RD/WH 
 
E.O. 12958: N/A 
TAGS: DR, KTDB, EINV, ETRD 
SUBJECT: 2005 INVESTMENT CLIMATE STATEMENT- DOMINICAN 
REPUBLIC 
 
REF: 04 STATE 250356 
 
1.  Following is the Investment Climate Statement for the 
Dominican Republic, chapter 6 of the Country Commercial Guide. 
 
(begin text) 
DOMINICAN REPUBLIC: 2005 INVESTMENT CLIMATE UPDATE 
 
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.   An important 
point of contact for potential investors is the Center for 
Investments for Exports of the Dominican Republic (CEI-RD). 
 
In 2003, foreign direct investment in the Dominican Republic 
totaled $1.01 billion, according to International Monetary 
Fund (IMF) figures. Projected 2004 foreign direct investment 
totaled $654 million. 
 
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.  .  As of December 2004, of 
the 22 previously outstanding pre-1996 cases being considered 
under a special bond issue authorized in 1999 by the 
Dominican Congress, 16 had been approved and paid, five were 
dismissed as not resolvable under the bond mechanism, and one 
was confirmed to have been a duplicate submission.  The 
Fernandez administration has not yet published its 2004 
report on expropriations.  Future expropriation cases will 
focus on imminent domain actions associated with three new 
highway projects: the highway between San Cristobal and Bani, 
the new ring highway around Santiago and the new road between 
the central Cibao Valley and the Samana Peninsula. 
 
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.  The "Madrid Agreement", 
which was to be funded with US$ 150 million in World Bank 
funds, was put on hold once the IMF suspended its stand-by 
agreement with the Dominican Government in early 2004.  The 
Dominican Government has developed with the assistance of the 
World Bank, the Inter-American Development Bank and USAID a 
comprehensive plan to stabilize the energy sector by the end 
of 2005, envisaging some electricity rationing, improving 
collections, better targeting of subsidies, improving 
regulation of the sector, achieving greater efficiencies, and 
rolling over arrears 
 
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 bill creating a special, 
independent, anti-corruption prosecutor with national 
jurisdiction but the bill never passed the lower house and 
has now expired.  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 $600 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.  Upon 
ratification of the CAFTA free trade agreement, nationals of 
all parties to the agreement will receive "fair and equitable 
treatment" along with "full protection and security" with 
respect to their investments.  A complete text of the CAFTA 
agreement and its investment provisions can be found at 
WWW.USTR.GOV. 
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 provides foreign investors the same rights to 
own property as are guaranteed by the Dominican Constitution 
to Dominican 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. 
 
Although the Dominican Republic has strong legislation to 
protect copyrights and has improved the regulatory framework 
for patent and trademark protection, United States industry 
representatives continue to cite lack of intellectual 
property rights (IPR) enforcement as a major concern.  Under 
Special 301 provisions, the Dominican Republic remained on 
the Watch List for 2004.  The government has taken some steps 
to prosecute violators but has provided few resources for 
enforcement. The judicial process moves very slowly. While 
the Dominican Republic has ratified the WIPO Copyright Treaty 
and the WIPO Performances and Phonograms Treaty, as of 
January 17, 2005 the World Intellectual Property Organization 
as treaty registrar had not recorded the deposit by the 
Dominican Republic of its instruments of ratification for 
these two treaties. 
 
CAFTA commitments require strengthening the Dominican IPR 
protection regime to conform with, and in many areas to 
exceed WTO norms.  This will include criminalizing end-user 
piracy, which will provide strong deterrence against piracy 
and counterfeiting. The CAFTA will require the Dominican 
Republic to authorize the seizure, forfeiture, and 
destruction of counterfeit and pirated goods and the 
equipment used to produce them. The CAFTA requires measures 
authorizing both statutory and actual damages for copyright 
infringement and for trademark piracy. 
 
Patents and Trademarks 
 
The United States government has continued to urge the 
Dominican Republic to bring the Industrial Property Law fully 
into line with its TRIPS Agreement obligations. Existing law 
and regulations have not yet been applied in legal 
proceedings, so the effectiveness of those measures has not 
been tested. The CAFTA will require that test data and trade 
secrets submitted to the Dominican government for the purpose 
 
SIPDIS 
of product approval be protected against unfair commercial 
use for a period of 5 years for pharmaceuticals and 10 years 
for agricultural chemicals. 
 
Copyrights 
 
Despite a strong copyright law passed in 2000 and some 
improvement in enforcement activity, piracy of copyrighted 
materials is common. Audio recordings and software are copied 
without authorization despite government efforts to seize and 
destroy such pirated goods. The U.S. Government continues to 
receive reports of television and cable operators 
re-broadcasting signals without authorization or payment and 
broadcasting video recordings licensed only for home use. 
U.S. industry representatives point to extended delays in the 
judicial process and to the relatively modest penalties for 
convicted offenders. 
 
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 IMF standby agreement requires 
additional regulation and improved 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.  In February 
2005, the lower house of the Dominican Congress passed a 
consumer protection bill that would authorize the 
establishment of a consumer protection institute.  The 
Dominican Senate has not yet considered this bill. 
 
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 Government in excess of 
US$ 3 billion, severely destabilized the country,s finances 
and shook business confidence.   After the victory of Leonel 
Fernandez in the May 2004 presidential election, business 
confidence returned to the country, but effects of the 
2003-2004 economic crisis still linger.  The Central Bank 
estimates nominal inflation for 2004 to have finished at 
28.75 percent. 
 
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 
Central Bank 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 in 2003. 
 
 
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. 
On May 16, 2004, for the first time in Dominican history, 
presidential elections were not mired in violence.  To his 
credit,  losing candidate President Hipolito Mejia conceded 
early, thus helping forestall election-related violence. 
 
A.11 Corruption 
 
Corruption remains a pervasive problem in government, in the 
private sector, 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).  On August 5, 2004, the 
agreement was signed. Both the U.S .Congress and the 
Dominican Congress are expected to debate ratification in 
2005.  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 hours of work 
and overtime and vacation pay to severance pay, causes for 
termination, and union registration.  The Labor Code requires 
that 80 percent of non-management workers of a company be 
Dominican nationals.  The standard workweek is 44 hours. 
Some labor shortages exist in professions requiring lengthy 
education or technical certification.  An ample labor supply 
is otherwise 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.  Less than 10 percent of the 
nation's work force is unionized.  The Labor Code specifies 
that 20 or more workers in a company may form a union. 
Before a union may officially call a strike, however, it must 
have the support of an absolute majority of all company 
workers, unionized or not; it must have previously attempted 
to resolve the conflict through mediation; it must have 
provided written notification to the Ministry of Labor of the 
intent to strike; and it must have waited 10 days from that 
notification before striking.  In part 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.  Few companies have collective bargaining 
pacts.  The Labor Code stipulates that workers cannot be 
dismissed because of trade union membership or union 
activities; however, in practice, it appears that some firms 
have fired workers associated with 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 was sometimes 
unreliable. 
 
Many of the major manufacturers in the Free Trade Zones had 
voluntary codes of conduct that included worker rights 
protection clauses generally aligned with the ILO Declaration 
on Fundamental Principles and Rights at Work.  Workers were 
not always aware of such codes or the principles they 
contained. 
 
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 with 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 
2003 noted a Free Zone Sector with a total of 54 free zone 
parks and 531 operating companies.  Of those companies, 250, 
or 47 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 South 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 (in millions of U.S. dollars) 
Source: preliminary data from Central Bank of the Dominican 
Republic 
 
2003 Numbers 
- - - - - - - - - - - 
FDI Stocks 7,520.4 
FDI Stock /GDP 45.0 percent 
FDI Net Flows 310.0 
 
YEAR 2003 FDI flows by source country 
 (in millions of U.S. dollars) 
- - - - - - - - - - - - - - - - - - - 
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 
 
** In 2003 the Spanish company Union Fenosa sold its 50 
percent ownership in the electric distribution companies 
EDESUR and EDENORTE back to the Dominican Government. 
 
FDI by Sector  (in millions of U.S. dollars) 
January to September 2004 
Preliminary data from Dominican Central Bank 
- - - - - - - - - - - - - - 
Tourism 96.5 
Trade 35.7 
Communications 44.8 
Electricity 24.8 
Finance 27.3 
Free Zones 40.9 
Others 193.2 
- - - - - - - - - 
Total 463.2 
 
Major Foreign Investors 
- - - - - - - - - - - - - - - - - 
Following are some of the largest companies registered as 
foreign businesses by the Central Bank of the Dominican 
Republic: 
 
1. Verizon, formerly known as Compania Dominicana de 
Telefonos (CODETEL), the main telephone service provider, 
which has operated in the Dominican Republic for more than 70 
years. 
 
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.  The Trust 
Company of the West (U.S.) is an equity partner with AES in 
EDESTE. 
 
12.  Prisma Energy (U.S.): In partnership with other 
companies, operates an electricity generating plant Puerto 
Plata. (Formerly known as Smith-Enron) 
 
13.  Coastal (U.S.): A major investor in electricity 
generation. 
 
14.  Seaboard (U.S.): A major investor in electricity 
generation. 
 
15.  Tricom (40 percent owned by Motorola - U.S.): Second 
largest provider of long distance and cellular telephone 
services in the Dominican Republic. Citigroup of New York 
owns a sizable share of Tricom's debt. 
 
16.  Cogentrix (U.S.) An independent power producer with 300 
MW capacity. 
 
Note: the Central Bank has not updated its published FDI 
statistics since 2003.  Marriot Corporation entered the 
Dominican hotel market in 2004 but is not reflected in the 
Central Bank,s figures. 
 
(end text of Investment Climate Statement) 
HERTELL