A shortfall in power leads to almost daily blackouts in the Dominican Republic. It is not unusual in some communities to be left without electricity for up to 24 hours. The crisis is obviously a negative factor for investors, local or foreign, who are weighing up the country’s business opportunities. The 1999 privatisation of the state electric company has clearly failed to resolve the problem of inadequate infrastructure. Foreign private producers have continued to add new capacity, but soaring demand, poor maintenance of transmission facilities and the lack of energy conservation have kept capacity at well below peak levels of demand.

A culture of non-payment for electricity supply, including by the former Dominican government which is the largest single user, has sometimes caused plants to go off-line as they are unable to pay their fuel suppliers and other creditors. Load shedding is a common practice and virtually all industrial enterprises have their own back-up power. Some large firms maintain completely independent electricity supplies.

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Demand and crisis

The Corporación Dominicana de Empresas Eléctricas Estatales (CDEEE) operated the electricity system as a state monopoly until six years ago, when six distribution and generation companies were set up, with the CDEEE retaining 50% ownership of the electricity generation, as well as the hydropower sector and the grid company. The rate structure was modified, with prices being set on a monthly index basis according to the variation in the consumer price index, exchange rate and other factors. The previous government moved to subsidise fuel supplies to generators and the resulting arrears in payment started a supply crisis.

“This situation is the result of some 30 years of mismanagement, a lack of investment, corruption and a financial and technical collapse of the system,” says Eduardo Tejera, a former financial adviser to the executive and currently the Dominican Republic’s ambassador in Canada. “The system is now on the verge of collapse, with private sector generator and distribution companies run down due to non-payment, the government owing large sums of money thanks to the subsidy, and nearly $27m a month in negative cash-flow, depending on the price of crude oil.”

Attempted solutions

The government attempted to resolve the crisis in the early period of the Mejía administration with the so-called Madrid Agreement of 2002 that basically modified the energy purchasing contracts devised in the wake of the 1999 privatisation process. However, within a few months of signing the accord, the power companies managed to pocket $81.6m that should have been passed on to consumers in power rate reductions. The cost of power in the Dominican Republic is now one of the highest in the world.

High levels of energy loss are a result of technical failures due to deficiencies in substations and transmission lines, fraud committed in connection services, and direct theft of power supply. Energy losses now amount to up to 40% of total generation. The Inter-American Development Bank [IDB] is calling for a replacement of the current “regressive, inefficient and costly” energy subsidies by a new regime aimed at benefiting low-income families. The IDB is also calling for changes in the subsidies applied to liquified natural gas.

“We are now facing a major problem with regard to our sources of power,” says Rubén Jiménez Bichara, general manager of EDESUR, the main power supplier to the Santo Domingo area. “We need to find a way to improve the balance of energy supplies, which is now 70% reliant on fuel oil, with all the high cost and price volatility that this implies. It is also just as urgent to reduce the amount of energy lost for various reasons. A 40% rate cannot be tolerated for very long. We have managed to cut our loss rate to 22% as of last March and boost our income to 1.3bn pesos (about £26m), the highest figure for the past five years. This was achieved by improving our customer collection system, as a result of which the company’s 3.2bn peso (£64m) loss in the first half of 2004 was turned round to a 200,000 peso (£4000) profit as of last March.”

Mr Bichara does not rule out the eventual sell-off of the government holding in EDESUR, although he stresses that much remains to be done before the company can be presented as an attractive investment.

The government is making strides to ensure a reliable and cost-effective electricity supply system. The recent IMF agreement calls for cutting energy transmission losses to a maximum of 30% and increasing rates by 90% during the current year. The IMF also wants to see improvement in the subsidy system, a more effective regulatory framework and payment of arrears with private operators.

Transport network

The country’s road network also needs updating as many of the main roads are considered to be in a poor and even dangerous condition, posing a serious obstacle to commercial traffic. To this must be added the political problem caused by the lorry drivers’ union, which frequently sends its members out on strike to block roads. The union also has the power to regulate and increase the price of haulage.

Traffic can pose a major problem in Santo Domingo, the capital, whose population accounts for nearly one-third of the country’s 8.5 million population. Transport Secretary Diandino Pérez has recently submitted a proposal for a $327m metro system for the city, a project that will require substantial foreign investment.

However, the airport system is adequate by Latin American standards. The country has seven international airports, mainly serving the tourism industry. Four of these – Santo Domingo, Puerto Plata, Barahona and Samaná – are operated by a foreign consortium. The government recently completed construction of a new international airport in Santiago. The Dominican Republic is connected by daily flights to New York and Miami, as well as several other US cities, and there are regular connections with major European destinations and Latin American capitals.

The most promising new infrastructure venture is the $300m megaport facility of Caucedo, located in the Santo Domingo area, two miles from the international airport. Dubai Ports International (DPI) acquired a 35% equity share and management control of Caucedo Marine Terminal last February, its first port in the Caribbean region. The Dominican Republic has half a dozen ports in operation, but they lack sufficient draft to accommodate large cargo vessels, as well as adequate security systems. “Caucedo is a privately funded project owned by local investors and the Spanish construction group Dragados and DPI Terminals,” says Robert Valdez, the company’s commercial manager. “We see this as a regional trans-shipment hub for the Caribbean and south American region.”

Caucedo is being funded by Scotiabank and the IFC, along with some European bank investors and shareholders’ capital. The first phase of the project is a 2000ft berth with a 46ft draft that will be followed six to 18 months later by a second berth of approximately 1800ft. Given the unreliability of power supplies, the project has four two-megawatt back-up generators. The port will have a four-lane access road to the main motorway as well as 12 inbound and four outbound gate lanes. The facility has a 124-acre container yard, five state-of-the-art Post Panamex gantry cranes, 13 RTG units (container handling equipment), 336 reefer plugs and 24-hour security operations in the yard. Several ocean carriers have already established service to Caucedo,

including CP Ships, Maersk Sealand, Evergreen, Zim and MSC. The port has nine local shipping agents on site.

“There are other trans-shipment ports in the region. However, Freeport is operating at capacity, Kingston is in need of expansion and there are also plans to upgrade Panama’s facilities,” says Mr Valdez. “The demand for international container facilities now exceeds supply. We offer world-class equipment and a high rate of crane productivity of 26-27 per hour, which is close to the world average. Our target is to increase this to up to 35 containers per hour in the near future. This port will help to develop the Dominican Republic’s export market.” BMW has expressed interest in a spare parts logistics centre at Caucedo for distribution throughout the Caribbean region. Daimler Chrysler plans to use Caucedo as a distribution centre for commercial vehicles, while Toyota, Nestlé, Wal-Mart and Frito Lay are some of the other multinationals now considering Caucedo as a regional hub.

Levels of success

The Dominican Republic operates a network of duty-free zones providing a full support system for businesses wishing to avail themselves of lucrative tax incentives to set up in the country. Its network of duty-free zones has been one of the most successful in the Caribbean region, due to a number of factors. On a local level, the country offers a comparatively high level of political and social stability, a plentiful supply of qualified labour and an attractive investment incentive scheme.

On the international level, the Dominican Republic is a beneficiary of the Caribbean Basin Recovery Act and the 2000 Convention of Cotonou. The country enjoys a strategic position that allows it privileged access to the US and EU markets. Businesses can enjoy 100% tax-free income or a very much reduced rate of taxation when operating inside a duty-free zone for a period of time linked to location.

Business parks close to Santo Domingo or Santiago offer a 20-year exemption on income tax, while those in rural areas, where the government wishes to encourage investment, can apply for an exemption of 25 years or longer. Land prices range from $7.00 and up per square foot per year, although costs come down in relation to the amount of space required. The list of companies that have chosen to set up in the country’s duty-free zones include Hanes, Levi Strauss, Verizon, Tonka Footwear, Timberland, Abott Hospital Supply and Tyco.

“We have 550 manufacturing and export companies operating in our 55 duty-free zones, employing some 185,000 workers,” says Arturo Peguero, chairman of the Adozona, the duty-free zone association.

“About half of these are US firms, another 30% are local and the rest are Asian and European customers. In all, their exports amount to about $4bn a year.” Mr Peguero says that trade agreements with the US and Latin America provide a unique export opportunity. The country now has one agreement with the US, with another expected to come into force at the end of the year. It has signed another agreement with the Caribbean region, talks are under way with the Andean bloc and it enjoys observer status with Mercosur.

“While textiles still account for 50% of business operations in the duty-free zones, in recent years we have been shifting the emphasis,” says Mr Peguero. In the 2000-2004 period, there was a dramatic shift from traditional products like footwear, textiles and tobacco, to high value-added products, in particular electronics, surgical equipment and electrical goods.

“I would say that the opportunities lie in manufacturing for export to the US market, in view of the reduction in import duties,” Mr Peguero continues. “In Europe, with its higher rate of duties, companies are acquiring raw materials in China, manufacturing their goods in the Dominican Republic and exporting the finished product to the US.”