DOMINICAN REPUBLIC: 2004 INVESTMENT CLIMATE MID

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