SCENESETTER FOR SECRETARY OF ENERGY SPENCER

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