DOMINICAN AUTHORITIES REQUEST USG BRIDGE LOAN FOR

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