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AmericasSeptember 2 2007

A foreign magnet

The republic’s open inward investment programme has attracted huge FDI inflows into tourism, telecoms, mining and manufacturing in free trade zones. Jules Stewart explains.
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The Dominican Republic’s economy has benefited greatly from foreign participation, but as PricewaterhouseCoopers partner Ivelisse Mieses points out: “There are still a few areas in which investors encounter difficulties. These include company registration, property ownership and the legal framework, which means that one has to do more research than in other markets.”

Tourism and the free trade zones are the obvious candidates for attracting investment from abroad. However, Standard & Poor’s analyst Richard Francis notes that investors are also taking an interest in a broader spectrum of sectors. “The most dynamic sectors of the economy have generally been propelled by export-orientated industries, or by increased foreign participation though foreign direct investment (FDI) in sectors such as telecoms,” he says. “FDI is likely to remain high because of continued expansion in the telecoms, tourism and financial services sectors.”

Open door policy

The Dominican Republic offers one of the most liberal and attractive legal frameworks for foreign investment in the Caribbean region. The law underwent a major overhaul 12 years ago to ensure equal treatment for foreign investors, establishing and defining three categories of foreign investment, as well as the concepts of foreign investor and national investment. These categories are direct foreign investment, foreign re-investment (investment made in whole or part from operating profits) and new foreign investment.

For the purposes of legal identification, a foreign investor is the owner of a duly registered foreign investment, while national investment refers to that made by the state, municipalities and national enterprises domiciled or registered in the national territory. The law places no restriction on repatriation of capital and dividends. Investors have free access to foreign currency through the Central Bank of the Dominican Republic and local banks.

The country’s revitalised economy and political stability have triggered a wave of investment from abroad, some of it on a massive scale. Last year saw the biggest single foreign acquisition in the Dominican Republic’s history, when Mexican Carlos Slim, owner of América Móvil and the world’s richest man, paid $2.1bn to acquire telecoms operator Verizon’s local operations.

Technology and telecoms offer promising opportunities to foreign investors in the Dominican Republic, whose per capita consumption of telecoms is higher than that of the US. Three years ago, the Dominican Republic overtook Costa Rica as Microsoft’s second largest customer in the Central American and Caribbean region, surpassed only by Puerto Rico with its natural outlet to the US market (Puerto Rico is an incorporated territory of the US). Microsoft is investing an average of $2.5m a year in the Dominican Republic.

Trans-shipment hub

Another mega-project in foreign hands is Puerto Caucedo, a $300m port facility located in the Santo Domingo area, three kilometres from the international airport. Dubai Ports International (DPI) has acquired a 35% equity share and management control of Caucedo Marine Terminal. Caucedo is a privately funded project owned by local investors and the Spanish construction group Dragados, along with DPI Terminals. It is expected to become a major regional trans-shipment hub for the Caribbean and South American region.

The Caucedo project is being funded by Scotiabank and the International Finance Corporation (IFC), with some European bank investors.

Mining, the Dominican Republic’s major export industry, has been attracting significant investor interest from abroad. The mining industry, which accounts for more than 1.6% of the country’s gross domestic product (GDP), is focused on gold, nickel and silver. The government is carrying out several initiatives to promote foreign investment in this sector through the Corporate Mining Unit. This agency’s aim is to represent the state in all joint ventures with foreign operators and to ensure transparency and sustainability in its dealings with foreign companies.

Canadian mining companies Falconbridge and Barrick Gold Corp operate large mining concessions in the country. Falconbridge has been operating in the Dominican Republic since 1971. The company has a production capacity of 25,000 tonnes of nickel contained in ferro-nickel per year, with plans to expand its output by 1800 tonnes within the next three years.

Mine manager Alex Butler says the group has not experienced any significant bureaucratic problems with the current government, having gone through all the major hurdles 10 years ago. “There is a certain lack of continuity as the government changes every four years and we have to deal with a new team with each incoming administration,” he says. “This entails the need to explain once again the details of our operation.”

About 70% of the company’s costs are energy-related, a critical issue that Falconbridge has addressed by installing its own back-up system. Falconbridge took precautions to provide itself with its own 200-megawatt power plant to avoid the frequent electricity outages that plague many industries. “We also have three 66.6-megawatt generators and a small refinery producing fuel oil,” he says.

The operations are highly profitable thanks to soaring demand from China and India, which last year pushed world nickel prices up to $13.25 a pound from $8 in 2005. As a result, Falconbridge expects to report a $481m profit this year, up sharply from $85m in 2006.

Barrick Gold Corp’s mining concession is located in Pueblo Viejo, some 100 kilometres north west of Santo Domingo, with proven and probable reserves of 312,000 kilograms of gold. Barrick acquired the project through its $10.4bn takeover of Placer Dome. The company is now in discussions with the government to secure a low-cost source of power and will notify the authorities by February 2008 of its final plans for the project, which is taking shape on a colossal scale. “We are moving in 2000 to 3000 containers, as well as huge pieces of heavy equipment,” says Robert Valdez, logistics adviser at Dominican International Forwarding.

“To give an idea of the magnitude, one of these is a milling machine 40 metres in length and 9 metres wide. This is going to have a major positive impact on the local economy. Mr Barrick envisages providing jobs for 3500 people.” The company’s outlay on the project is estimated to be in the $2.1bn to $2.3bn range, for a 25-year concession.

One of the FDI options most favoured by the government is the export free zones, since they are a major source of employment, foreign currency and technology transfer. The country’s network of export free zones has been one of the most successful in the Caribbean region, thanks to a comparative high level of political and social stability, a plentiful supply of qualified labour and an attractive investment incentive scheme.

The Dominican Republic has been developing its duty free zones since 1969, and the network now ranks fourth worldwide, with 58 industrial parks, of which half are under private ownership. About half of these are US firms, another 30% are local and the rest are Asian and European customers. In total, their exports amount to about $4bn a year. “We account for 75% of the country’s exports,” says José Manuel Torres, executive vice-president of Adozona, the Dominican Association of Free Zones. “We have nearly 600 companies operating around the country and Adozona currently provides employment for 184,000 people.”

Mr Torres says that the country’s network of free zones is one of the most advanced in the Western Hemisphere. “We are even well placed to deal with competition from Asia. Our workforce is highly skilled and well above the Caribbean average. We are now attracting investment in new areas like healthcare a nd medical equipment, with companies such as Johnson & Johnson and Cardinal Health, as well as call centres.”

Customs frictions

Proximity to the US and the recent free trade agreement with it offer a significant incentive to setting up in one of the country’s export free zones. As in other areas of investment, the export free zones face the issue of a top heavy and quasi-autonomous bureaucracy. One particular bugbear for all exporters and importers is Dominican customs. “At present, about 70% of all shipments are inspected, compared with a 5% to 10% worldwide average,” says one frustrated importer of capital goods. This causes a bottleneck at shipping and airports, but little has been done to tackle the problem.

“Customs accounts for about 30% all government revenues so there is no easy fix,” says the importer. Most of the news coming out of the Dominican Republic is positive, but the customs issue symbolises the need for vigorous action to ensure the sustainability of investor confidence.

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