Bolstering Local Business

The Dominican Republic prides itself on having one of the most open economies in Latin America. Demolishing trade barriers does have its risks, but the Dominican Republic continues to attract high rates of foreign investment at a difficult time in Latin America. Foreign companies say the country’s recent history of strong economic growth, a transparent business environment and an improving judicial system make the Dominican Republic a good place to invest. Low trade barriers and the low cost of doing business make the country one of the most popular places to invest in the Caribbean.

The Dominican Republic attracted strong foreign investment flows in the mid-1990s after it enacted a foreign direct investment law in 1995, which dismantled nearly all trade barriers and gave foreign investors same legal rights as locals. Foreign direct investment has since grown from $96.5 million in 1996 to a high of $1.33 billion in 1999. Foreign direct investment flows rose 8% in the first six months of 2002 to $441.7 million, up from $409.3 million in the first six months of 2001. Foreign companies, mainly those from the United States, Canada and Spain have been attracted to the still underdeveloped telecommunications and energy sectors, where demand far outstrips supply.

The telecommunications sector has attracted the most attention this year, drawing in investments worth $106.5 million in the first six months of this year, up from just $26.1 million in the first six months of 2001. Investments in the tourism industry rose 57% to $113.3 million through June this year and investment in the electricity sector grew a more modest 18% to $88.9 million. “Foreign direct investment is crucial for us,” says Andrés Dauhajre, executive director of the Foundation for Economy and Development and economic advisor to President Hipólito Mejía. The country lacks other sources of long-term financing for growth, although it is attempting to revamp its financial system and develop a capital market (see article Progress, But Not Enough).

Richard Gasink, executive vice president of Caribbean operations for Centennial, a telecommunications company, says, “We were attracted to the solid economic growth rate and [growth] in telecommunications. It is a lot easier to succeed if the whole market is growing. Good economic growth and a good legal system are great indicators of low risk. Those countries that have solid economic growth tend to avoid the instability that has befallen some of our neighbors.” Centennial is one of the largest independent wireless telecommunications service providers in the United States and the Caribbean. It invested $25 million in the Dominican Republic in 2000 to buy 70% of All America Cables&Radio (AACR), a local telecommunications company. AACR is an international long distance provider that also holds a 30-megahertz PCS license, a local multipoint distribution system license and a certificate to provide a broad range of telecommunications services in the Dominican Republic.

Ignacio Jasminoy, head of Citibank’s corporate business in the Dominican Republic, says that foreign companies are now more willing to invest in the country because the regulatory environment has become so much more transparent and reliable. “In the past, it seemed that if you were a player here it was very easy to defeat a newcomer,” says Jasminoy. “Now the rights of people entering the market are regulated and defended, and that is one of the reasons that foreign investment is more eager to come here now than five years ago.”

The government privatized the electricity industry in 1999 and the sector has since received steady flows of foreign direct investment to increase generating capacity to meet a surge in demand as the economy grows. The Dominican Republic still suffers blackouts, but outages are waning. In 1999, the power industry attracted $631.4 million, or nearly half of all foreign direct investment. In 2000, foreign investment in the industry fell to $281.9 million or 30% of total foreign direct investment. Mejía’s recent proposal to settle the government’s debts with the private sector (see article page 25) and new electricity legislation could trigger another burst in foreign direct investment, especially if the government decides to privatize the transmission sector.

But the country’s electricity shortages have made foreign companies think twice about investing in the Dominican Republic. José Tomás Letelier, head of governmental affairs and sustainable development for Latin America at Placer Dome, the Canadian gold mining company, says, “There is a problem with electric power, but the government is making a big effort to solve those problems. The cost is very high and an important aspect of the negotiations of the contract for the rates of electric power at the mine, but we are looking to negotiate a reasonable rate and there is also the possibility of installing our own power generation in the mine.” Most companies have had to set up their own generators at considerable extra cost, to ensure reliable power supplies. But Kevin Manning, general manager of generation company Itabo, is optimistic that the country’s energy problems will soon be a thing of the past. “We have the generation [capacity] and once we have the transmission, we will see demand increase rapidly once the service becomes reliable,” he says.

Stable Environment
Investors appreciate the reforms that have taken place in the last few years and foreign companies consider the country’s macroeconomic and political environment as one of the most stable in Latin America. This is one of the reasons that Placer Dome signed an agreement in July with the Republic government to invest $10 million over 40 months in a feasibility study on the Sulfuros de Pueblo Viejo open-pit gold mine in the central Dominican Republic. Placer Dome had previously suffered a bitter reverse in Venezuela in a dispute over a gold mine it was developing in association with a state-owned company, and shifted its attentions to the Dominican Republic because of its more stable, pro-business environment. Rosario Dominicana, a government-owned mining company, operated the Pueblo Viejo mine until 1999. Between 1975 and 1999, the mine produced 5 million ounces of gold and 22 million ounces of silver. “We looked at the investment environment in the DR and it is a very good growth story,” says William Hayes, vice president of the US and Latin America for Placer Dome. “The democratic institutions there work. [Approvals] may take longer, but we recognize the democratic process does work,” he says.

Policy continuity is another attraction. Placer Dome’s Letelier says, “[The government] took structural economic reforms enacted under the previous government and continued those reforms. It has been very stable politically.” In fact, Letelier says this is one of the reasons the company would like to develop a processing plant attached to the mine that involves implementing new technology. “We have not tried this in any other gold production in other countries,” says Letelier. Until now, another Canadian company, Falconbridge, was the only other foreign company to have invested in the Dominican Republic’s mining industry. It operates a nickel mine and smelter, in which the government has a 10% stake, at Bonae and has 65 million tons of proven and probable 1.16% grade nickel reserves. The smelter employs 1,300 workers producing around 30,000 tons of nickel annually. The government has been trying to revive the mining sector for years and Letelier says Placer Dome’s commitment should attract the interest of other mining companies. “I think it reinforces the image of the DR as mining country, especially in the Caribbean,” says Letelier. If Placer decides to develop the Pueblo Viejo mine, it will have to invest a further $300 million and the government will receive around 25% of the mine’s earnings.

Some Weakness
But the country is struggling to maintain foreign direct investment in other areas of the economy. The duty free zones for manufacturing exporters were the second-most important contributor to the country’s growth in the 1990s and also the sector most severely affected by the downturn in the global economy. More than 500 companies employing hundreds of thousands of Dominicans operate in these free zones, producing goods ranging from textiles, shoes and cigars to electronic components, hospital supplies and marine equipment. But the zones posted a sharp decline in foreign direct investment in the first half of this year, with volumes dropping to $15.3 million against $36.5 million for the same period last year. The government recently amended legislation to revive interest in free trade zones. The legislation entitles companies in selected industries that operate in new zones to a full exemption on taxes, customs duties on raw materials, equipment, and machinery for 20 years. The new Caucedo Port Development near Santo Domingo (see article Opening a Gateway) is intended to become a major transshipment center in the Caribbean.

However, the Dominican Republic, like its neighbors in Central America and the Caribbean, faces stiff competition for investment in light manufacturing from Asian countries with their large, low-cost work forces. Labor costs in the Dominican Republic are rising, offsetting the country’s advantage of geographical proximity to the US.