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