2005 INVESTMENT CLIMATE STATEMENT- DOMINICAN

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