• TABLE OF CONTENTS
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 Title Page
 List of acronyms and abbreviat...
 Table of Contents
 Executive summary
 Introduction
 Free zones - An overview
 Regional environment
 Free zone contributions to the...
 Factors affecting zone performance...
 Identifying an optimal zone development...
 Recommendations for zone development...
 Appendix A: Dominican IFZ political...
 Appendix B: Case studies of operational...
 Appendix C: Enterprise zone...
 Appendix D: Proposed investor feedback...














Title: Strategy for free zone development in the Dominican Republic
CITATION THUMBNAILS PAGE IMAGE ZOOMABLE
Full Citation
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/UF00078133/00001
 Material Information
Title: Strategy for free zone development in the Dominican Republic
Physical Description: 68, 28 l. : ;
Language: English
Creator: Free Zone Authority
Publisher: Free Zone Authority, Ltd.
Place of Publication: Arlington VA
Publication Date: 1986
 Subjects
Subject: Free ports and zones -- Dominican Republic   ( lcsh )
Free ports and zones -- Law and legislation -- Dominican Republic   ( lcsh )
Economic conditions -- Dominican Republic   ( lcsh )
Genre: non-fiction   ( marcgt )
Spatial Coverage: Dominican Republic
 Notes
Statement of Responsibility: Free Zone Authority.
General Note: "Draft final."
General Note: "July 1986."
 Record Information
Bibliographic ID: UF00078133
Volume ID: VID00001
Source Institution: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: oclc - 14988877

Table of Contents
    Title Page
        Title Page
    List of acronyms and abbreviations
        Page i
    Table of Contents
        Page ii
    Executive summary
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
    Introduction
        Page 6
    Free zones - An overview
        Page 7
        Page 8
        Page 9
    Regional environment
        Page 10
        Overview of Caribbean basin economic development
            Page 10
        Overview of regional free zone development
            Page 11
            Page 12
            Page 13
    Free zone contributions to the national economy
        Page 14
        General economic performance
            Page 14
            Page 15
        Status of industrial free zones in the Dominican Republic
            Page 16
            Legal, political, and institutional framework
                Page 16
                Page 17
                Page 18
                Page 19
                Page 20
                Page 21
            Recent developments
                Page 22
        Impacts of free zone development upon the Dominican economy
            Page 23
            Aggregate contributions
                Page 23
                Page 24
                Page 25
            Individual industrial free zone performance
                Page 26
        Historic demand trends for Dominican free zone space
            Page 27
            Page 28
            Page 29
    Factors affecting zone performance and development potentials
        Page 30
        Policy related contraints affecting Dominican free zone performance
            Page 30
            Page 31
            Page 32
            Page 33
            Page 34
            Page 35
        External factors influencing zone performance
            Page 36
            Page 37
            Page 38
        Projections of user demand
            Page 39
            Page 40
            Page 41
            Page 42
        Regional free zone sites analysis
            Page 43
            Page 44
            Page 45
            Page 46
            Page 47
            Page 48
    Identifying an optimal zone development paradigm
        Page 49
        Criteria for assessing free zone success
            Page 49
        Defining paradigms of zone development
            Page 50
            Page 51
            Page 52
        Paradigms correlated with zone success
            Page 53
            User satisfaction
                Page 53
                Page 54
                Page 55
            Zone financial performance
                Page 56
            Zone linkages to surrounding economy
                Page 57
        Suggested paradigm for the Dominican Republic
            Page 58
            Page 59
    Recommendations for zone development strategy
        Page 60
        Overview
            Page 60
            Page 61
        Proposed institutional responsibilities
            Page 62
            Page 63
        Implementation steps
            Page 64
            Page 65
            Page 66
            Page 67
            Page 68
    Appendix A: Dominican IFZ political and institutional framework
        Page 69
        Page 70
        Page 71
        Page 72
        Page 73
        Page 74
        Page 75
    Appendix B: Case studies of operational Dominican industrial free zones
        Page 76
        Page 77
        Page 78
        Page 79
        Page 80
        Page 81
        Page 82
        Page 83
        Page 84
        Page 85
        Page 86
        Page 87
        Page 88
        Page 89
        Page 90
        Page 91
        Page 92
    Appendix C: Enterprise zone background
        Page 93
        Page 94
    Appendix D: Proposed investor feedback form
        Page 95
        Page 96
Full Text













STRATEGY FOR FREE ZONE DEVELOPMENT IN THE DOMINICAN REPUBLIC


Draft Final


July, 1986



July, 1986


Free Zone Authority, Ltd.
1815 North Lynn Street
Suite 200
Arlington, Virginia 22209
U.S.A.
Tel: 703/528-7444
Telex: 292072 /FZAS UR


J' 6


[pfr: / :;--A 2,4ej?









LIST OF ACRONYMS AND ABBREVIATIONS


BID Board of Industrial Development
CACM Central American Common Market
CAD/CAM Computer Aided Design/Computer Aided Manufacture
CBI Caribbean Basin Initiative
CDE Corporacion Dominicana de Electricidad
(Dominican Electricity Corporation)
CEDOPkX Centro Dominicano de Promocion de Exportaciones
(Dominican Export Promotion Center)
CFI Corporacion de Fomento Industrial
(Industrial Development Corporation)
CPI Consejo Promoter de Inversiones Extranjeras
(Investment Promotion Council)
CODETEL Corporacion Dominicana Telefonos
(Dominican Telephone Corporation)
CZF Corporacion Zona Franca
(Free Zone Corporation)
EPZ Export Processing Zone
FIDE Fondo Industrial de Desarollo Economico
(Fund for Industrial and Economic Development)
FOMENTO Industrial Development Corporation
FZA / Free Zone Authority, Ltd.
GATT General Agreement of Trade and Tariffs
GDP Gross Domestic Product
GNP Gross National Product
GSP United States Generalized System of Preferences
GODR Government of the Dominican Republic
IFZ Industrial Free Zone
IMF International Monetary Fund
IPC Investment Promotion Council
I-TD Industrial-Technical Board
ITT International Telephone and Telegraph
LDC Less Developed Country
LIBOR London Inter-Bank Offer Rate
MFA Multi Fiber Arrangement
OECD Organization of Economic Cooperation and Development
RCA Radio Corporation of America
TSUS Tariff Schedules of the United States
UNCTAD United Nations Conference on Trade and Development
US AID United States Agency for International Development


CURRENCY EQUIVALENTS

1980: US$1.00 = RD$1.00
1981: US$1,00 = RD$1.00
1982: US$1.00 = RD$1.00
1983: US$1.00 = RD$1.00
1984: US$1.00 = RD$1.00
1985: US$1.00 = RD$3.22
July, 1986: US$1.00 = RD$3.39

h10t1- 19 A sI 7th ;f-u3-2113









TABLE OF CONTENTS


Page
I. Executive Summary 1

II. Introduction 6

III. Free Zones -- An Overview 7

IV. Regional Environment 10
A. Overview of Caribbean Basin Economic Development 10
B. Overview of Regional Free Zone Development 11

V. Free Zone Contributions to National Economy 14
A. General Economic Performance 14
B., Status of Industrial Free Zones in the Dominican Republic 16
1. Legal, Political, and Institutional Framework 16
2. Recent Developments 22
C. Impacts of Free Zone Development 23
1. Aggregate Contributions 23
2. Individual Industrial Free Zone Performance 26
D. Historic Demand Trends for Zone Space 27

VI. Factors Affecting Zone Performance and Development Potentials 30
A. Policy Related Constraints Affecting Dominican Free Zone 30
Performance
B. External Factors Influencing Dominican Zones 36
C. Projection of User Demand 39
D. Regional Site Analysis 43

VII. Identifying An Optimal Zone Development Paradigm 49
A. Criteria for Assessing Free Zone Success 49
B. Defining Paradigms of Zone Development 50
C. Paradigms Correlated With Zone Success 53
1. User Satisfaction 53
2. Zone Financial Performance 56
3. Zone Linkages to Surrounding Economy 57
D. Suggested Paradigm for the Dominican Republic 58

VIII. Strategy Recommendations 60
A. Overview 60
B. Proposed Institutional Responsibilities 62
C. Implementation Steps 64

--------------------

APPENDICES:

A. Legal, Political and Institutional Framework Regulating IFZs
B. Case Studies of Operational IFZs in the Dominican Republic
C. Enterprise Zones
D. Proposed "Investor Feedbacku Form









I. EXECUTIVE SUMMARY


1.01 Purpose. This report presents a strategy for the Dominican Republic to
meet the needs of export industries desiring free zone operations, and to
stimulate new zone contributions to development. It is based upon a research
effort conducted by Free Zone Authority in cooperation with Melvin Manon &
Associates and the law firm of Kaplan, Russin, Vecchi, and Heredia Bonetti.

1.02 Free Zone Context. The Dominican Republic strategy assessment has
been undertaken amidst a world-wide proliferation of free zones, both in
numbers and in kind. Newly Industrialized Countries have employed export
processing zones with particular success as a means of promoting jobs and
reorienting their manufacturing sectors away from import-substitution
regimes.. Other countries, such as Jamaica, are now applying free zone
incentives as a means of attracting information industries, giving birth to
data services zones. Developed countries such as the U.S. and Great Britain
are utilizing "enterprise zones" for revitalizing distressed areas by means
of removing barriers to small, indigenous entrepreneurs. Despite variations
in emphasis, all free zones work to create favorable policy climates for
business development, in which firms have the certainty of minimal tax,
regulatory, and/or tariff constraints.

1.03 Regional Trends. Within the Caribbean Basin, free zones are now
making contributions to national development that are surpassed in magnitude
only by the freeports and export processing zones of the Far East.
Caribbean Basin countries with existing zones such as Jamaica, Costa Rica
and Bahamas are rapidly expanding those existing facilities and removing
supply bottlenecks for the construction of others. New sectors for
investment are being stressed under the CBI, for example, agro-industrial
plants are increasingly being developed within zones. Lastly, governments
are encouraging private sector participation in zone development, as well as
the private provision of zone services.

1.04 Dominican Economic Conditions and Zone Contributions. The Dominican
Republic has been at the forefront of successful export processing zone
sponsors in the Caribbean area. To date, more than 36,000 jobs have been
created at the four operational zones (La Romana, Santiago, San Pedro de
Macoris, and Puerto Plata), and the zone workforce should surpass 40,000 by
the end of 1986 with the activation of new zones at San Cristobal/Haina,
Bani, and San Isidro. The Dominican Republic also has at present the
greatest pent-up demand for free zone space of any country in the Caribbean.
Foreign investors often wait 12-24 months for factory space, or pay in
advance more than 50 percent of the construction cost for buildings that
they have no prospect to own. If free zone space were available, four dozen
firms would be installed in short order. Assuming an average workforce of
250 per zone firm, the failure of the country's free zones to provide needed
space is today costing the economy approximately 12,000 jobs.

1.05 Foreign investors are clearly responding positively to the Dominican
Republic's favorable investment climate, production cost factors, political
stability, quality of life, and access to markets. As intensified
marketing/ promotional efforts get underway, the number of firms desiring to
begin operations in the Dominican Republic can be expected to increase
significantly. Demand estimates indicate that between 3 and 6 million









square feet of new free zone factory space must be provided within 6 years
simply to accommodate historic growth trends. An active investment promotion
effort may well create need for an additional 0.5-1.5 million square feet of
space beyond this extrapolation of current demand.

1.06 Constraints To Be Overcome. Given the likely upsurge in demand for
zone space as the country activates its investment promotion campaign, there
appears to be a critical need for new free zone development. The present
project has identified nine principal constraints to be overcome if the
present shortage of factory space is to be alliviated and if nation's free
zone potential is to be fully realized. The constraints are:

1. Lack of a Businesslike Approach by Zones to Development;

2. Difficulties in Gaining Access to Financial Resources;

3. Insufficient Targeting of and Marketing to New Industry Growth
Sectors;

4. Uncertainties Over Government Policies and Procedures;

5. Archaic Regulatory Constraints;

. 6. Constraints on Self-Provision of Infrastructure and Services;

/. Restrictions on Air Freight Service Providers;

8. Underdeveloped Channels by Which Free Zones Can Interact
Constructively with Government; and

9. Problems Faced in Mounting Large Scale Standard Factory Building
Construction Projects.

Other factors influencing zone performance--less susceptible to Dominican
control--include the changing access to developed country markets
(protectionism); modifications in the provisions and thrust of major
preferential trading agreements such as the CBI, GSP, and TSUS provisions
806.3/807; and the aggregate effect of changing world demand for free zones
precipitated by the automation of production processes.

1.09 Sensitivity of Zone User Demand. In the opinion of the project team, a
concerted Government effort to ameliorate the constraints above could pay
substantial dividends in increasing demand for free zone space. Reduction of
constraints restricting the supply of free zone space, simplification of
complex and inconsistent Customs and immigration policies, and lowering of
telecommunications costs with the United States, among other actions, would
be especially beneficial.

1.10 Experience of free zone projects in other countries suggests that the
upper limit for employment per zone should be 15,000 to 20,000 (approximately
1.5-2.5 million square feet under roof), because of strains upon transport
infrastructure, property management personnel, and labor/management
relations. Accordingly, the Dominican Republic should encourage new zone
projects in a geographically dispersed pattern.








1.11 High-Potential Sites. By strictly economic criteria, attractive areas
for new zone projects include Las Americas Airport, Los Minas, Barahona, and
La Vega. The Government should take into account, however, the adverse
effects of population inflow pressures upon the National District from
potential zone projects at Las Americas Airport and Los Minas. A key factor
in zone success potential--outweighing many handicaps in a community's
economic endowment--consists of the caliber and commitment of local project
leadership.

1.12 A Paradigm for Overcoming Constraints. To identify the most
appropriate response to the above constraints, it is useful to examine
frameworks for zone development that have proven most successful in other
countries. FZA's survey of free zone paradigms in the region and around the
world indicates the following:

zone users respond best to free zones that offer predictable,
uncomplicated and flexible tax and regulatory environments; have
efficient Customs and immigration procedures; have a productive low-
cost labor force; provide adequate utilities; have responsive
property management; and have efficient access to world markets.

zone developers are most likely to be financially successful when
they rely upon private sector resources at an early stage; when their
development organizations operate with a minimum of politicization;
and when market-rate lease prices are set;
/
domestic producers are most likely to participate in zone success
when governments extend tax, tariff, and/or regulatory advantages
outside the zone, as a means of encouraging supply linkages between
zone occupants and the surrounding economy.

1.13 The present de facto Dominican Republic paradigm for zone development
scores well along most of the above dimensions. Zone designation is open to
local initiative, private zone financing and ownership are not discouraged,
and users enjoy a relatively liberal and stable climate of zone incentives.

1.14 The present Dominican zone paradigm, nevertheless, suffers from the
the following deficiencies:

ambiguities and gaps in legislation which limit the interest of
private zone developers and zone users;

fragmented institutional responsibility for free zones, including
difficulties in facilitating finance for zone development; and

lack of incentives to encourage backward linkages between zone firms
and domestic suppliers.

To overcome fundamental problems in the zone development framework, the
project suggests a three-part strategy.

1.15 Proposed Strategy. First, the study recommends consolidation of
industrial free zone incentives into a coherent and more powerful legislative
Package. The legislation should stimulate private financing of zone
development projects by creating incentives such as the tax-free debt









Instruments that are now available only to hotel/resort developers. The
consolidated law should also provide clear Central Bank policies for
debt/equity conversions, and allow zone developers to build, at their own
expense, power generation and/or telecommunications systems for zone users.
In addition, the new legislation should assist zone users by formalizing
explicit, simplified Customs and immigration procedures, removing present
advance approval requirements for import listings, abolishing taxes on
interest/dividend payments by zone-based firms, and amending existing air
freight service regulations to encourage greater competition.

1.16 Second, the project team recommends creation of a Corporacion Zona
=<'*t Frana to serve as a none-stop" free zone organization under predominantly
private sector guidance. To relieve bottlenecks in supply of zone space,;the
Corporacion should adopt a policy of automatically approving new zone
developments financed entirely by private (unsubsidized) capital. For
'J projects seeking subsidized construction loans, the Corporacion should direct
Sany available USAID resources to those projects demonstrating a businesslike
.. approach (i.e. private financing commitments, for-profit status, and market-
S '.. rate lease pricing strategies), and to those projects ensuring strong zone
- user associations (through automatic membership provisions for zone--
S 'occupants)... Oni a parallel track, the Corporacion should also accelerate and
streamline the present investment approval process for zone users. The
annual budget of the Corporacion could be tied to its success in generating
Quantifiable outcomes such as direct zone employment and/or occupied square
footage of space in Dominican free zones.

1.17 Third, the study recommends creation of "enterprise zone" incentives
to foster strong supply linkages by local firms to industrial free zones,
thereby helping to reorient elements of the Dominican economy away from
dependence on import substitution policy protection. These incentives would
Reduce tax, regulatory, and bureaucratic barriers facing indigenous
entrepreneurs in targeted areas, and encourage foreign firms in Dominican
industrial free zones to foster subcontracting/technical assistance linkages
to local firms.

1.18 Recommended Near-Term Implementation Actions. Within the above
framework, the following specific actions are proposed for implementation in
the near term:

`AID; support drafting of comprehensive new free zone legislation;
research debt/equity swaps as a means of privately financing
Zone development;.,. ---
work-with FIDE to direct existing financing toward the most
businesslike zone developers, and to remove prohibitions on
early sale of properties that now constrain developers'
liquidity;
support the design of "enterprise zone" incentives to facilitate
further zone linkages with surrounding economies; and
provide marketing resources to IPC, especially for
mobilizing private developers to meet near term demand for zone
space.

IPC: create a task force to develop new free zone legislation and to
i--launch the Corporacion Zona Franca;, --...
develop a comprehensive-reform package of existing zone









legislation reflecting inputs from all relevant parties,
oriented not only towards traditional foreign investors but
towards users/developers of enterprise zones;
publish information on zone development opportunities and
approach overseas private developers; and
embark on a targeted marketing/promotion program oriented toward
new sectors including data entry and information processing.

CUSTOMS: visit other free zones to learn of less onerous, sophisticated
techniques for control;
adopt clear policies to avoid double-inspection of goods;
establish a training program to update practices and procedures.

1.19 The results of timely implementation of the above actions will be to
position the Dominican Republic for exceptional growth in zone employment
during the balance of the decade, and to highlight the effectiveness of
market-oriented policies in reorienting the economy toward world markets.








II. INTRODUCTION


2.01 This report has been prepared by Free Zone Authority, Ltd. (FZA) in
accordance with a technical assistance grant from the United States Agency
for International Development (USAID), under Terms of Reference issued by
Consejo Promotor de Inversiones Extranjeras (CPI) of the Dominican Republic.
The effective date of contract was May 26, 1986.

2.02 The study was carried out in the United States and the Dominican
Republic. The project team conducted an extensive field survey in June,
1986. A second visit to Santa Domingo was made in early July, 1986, for the
presentation of preliminary findings to the executives of CPI and USAID.

2.03 The objective of this study is to assist the Government of the
Dominican Republic (GODR) in the formulation of an effective and
comprehensive strategy for the creation and development of new free zones and
the expansion of existing free zones, in accordance with national development
objectives.

2.04 The main tasks of this project involved background research, analysis,
and policy recommendations for zone development strategy. FZA began by
examining the past experience and current status of the existing industrial
.free zone (IFZ) projects in the Dominican Republic including a review of the
legal, political and institutional framework, preparation of profiles of the
individual zones, and an assessment of the aggregate impact of the zones upon
the economy (i.e. employment generation, export performance, technology
transfer, etc.). Both internal policy-related factors (zone approval
guidelines, taxation, tariff and trade barriers, regulations, zone
management, infrastructure and assistance programs), and other external
factors (world market trends, access to markets, the anticipated effects of
automation, regional competition, etc.) were examined to determine their
influence upon zone performance and prospects for future zone development.
Based on the information gathered in the field research, an analysis of the
success of Dominican free zones relative to regional competitors was
undertaken to determine the optimal zone development and management
paradigms, and to recommend high-potential regions for future IFZ
development. Finally, policy guidelines for an effective zone development
strategy in the Dominican Republic were formulated, including specific
recommendations regarding project approval procedures, organizational
structure, administration, initial tenant selection, operational management,
pricing policy and international promotion.

2.05 This report has been compiled with the invaluable assistance of Luis
Heredia Bonetti of KaDlan Russin, Vecchi. Jand Heredia Bonetti .La
Associates, and Melvin Manon of Melvin anon And Associates. We wish to
express our appreciation to Jose Ceron Pena and Arelis M. Rodriguez of the
Consejo Promotor de Inversiones Extranjeras, and Ken Lanza, Bob Brown, and
Peter Bittner of the United States Agency for International Development for
their assistance and support to the project team while in the Dominican
Republic. Finally, we wish to thank all the officials and businessmen
connected with the Free Zone projects and institutions whom we interviewed
for their patience and cooperation in assisting the consulting team.








III. FREE ZONES -- AN OVERVIEW


3.01 Throughout the world, free zones have been created as a means of
initiating or accelerating the process of reorienting a nation's domestic
economy to the world market. Typically, in the early stages of industrial
development in the third world, governments tend to adopt strategies and
incentives strongly biased in favor of indigenous industries producing for
the local market, most often at higher prices and of lower quality when
compared to world market standards. While there may be justification for
this early import-substitution phase of industrial sector growth, it
generally creates a network of special interest groups which later frustrate
attempts to reorient policy in favor of more efficient export-oriented
industries able to compete internationally, penetrate the large markets of
the industrial world, and contribute more strongly to economic growth.

3.02 Pending basic changes in government policy affecting the entire
industrial sector, free zones are a proven opening gambit. The special
environment of free zones tends to offset the economic distortions arising
from excessively protectionist governmental policies that restrict the flow
of resources into the export sector. Free zones, in effect, provide the
cutting edge for export-led economic growth by packaging and promoting a
country's existing "inventory" of comparative advantages to, primarily,
foreign investors who are then permitted to operate with special incentives
and minimum regulatory intervention after qualifying as free zone export
industries.

3.03 Free zones can take a number of different forms, including:

export processing zones (also referred to as industrial free zones)
dedicated to manufacture, i.e., transformation of raw and
intermediate materials into finished products;

commercial free zones, i.e., the traditional storage and transshipment
zones found in almost all ports of entry (in its simplptt form,
often referred to as "bonded warehouses");

enterprise zones, where tax and regulatory incentives are targeted
upon indigenous firms in areas of high economic distress; and

specialized zones catering to specific sectors such as Data
Processing and Information Services, Agro-processing, Duty-Free
Shopping, Financial Services.

3.04 A free zone is a physically or administratively defined area offering
liberalized tax, tariff, and/or regulatory conditions for business. Export
Processing Zones (EPZs) provide buildings and services appropriate for
manufacturing, usually for export but sometimes partly for domestic sale
subject to the normal duty. Physically, in all essentials, the EPZ is an
industrial estate, which can be defined as: an area of land selected and
developed under the control of an operating agency, subdivided and managed
according to a comprehensive plan for the use of a community of industries.
Improved land and/or buildings can be rented, leased with option to purchase,
or sold. Services can be of a wide variety, ranging from basic
infrastructure of roads, electric power, gas, water, sewerage and









telecommunications to canteens and restaurants, vocational training and
business incubation/support centers. The physical facilities --land,
buildings and services -- are often referred to as the hardwareu of the
estate or EPZ as opposed to the enabling legislation and rules and
regulations, or "software," governing the operations of the project.

3.05 Beyond duty-free movement of goods, the "software" of the EPZ often
includes tax and regulatory relief measures designed to attract foreign
direct investment. Firms operating in EPZs are generally offered tax
holidays of from five to 25 years, and exemption from foreign exchange
controls and restrictions on repatriation of capital and profits. In
countries such as the People's Republic of China, free zones have also been
used as proving grounds for liberalization of restrictive labor codes.

3.06 The above definition applies to the classic enclave EPZ projects as
exemplified by the Kingston Free Zone (Jamaica) or the Bataan Export
Processing Zone (Philippines). These zones cater to assembly type
industries (such as garments and electronics) for export markets, primarily
the United States. In most instances, the fundamental comparative advantage
of EPZs has been the availability of a low cost, productive labor force.
In recent years, however, the concept of the EPZ has been expanded and
adapted to include numerous other activities not necessarily dependent on
low-cost labor. Some countries such as Brazil, Bahamas and the People's
Republic of China have implemented projects catering to sectors other than
assembly-type export industries. In Freeport, Grand Bahama Island, a
private corporation has developed a US$2 billion free zone complex under
terms of a 99 year concession granted in 1958. By 1985, the project had
installed the largest man-made harbor in the world, an oil refinery,
industrial parks for light industry, tourist facilities and hotels, agro-
industries, and residential housing and beach properties. Another example
is the People's Republic of China where private Hong Kong capital as well as
government funds have been invested in infrastructure development in the
Special Economic Zones. For some projects, low cost labor has been a key
incentive, but access to raw materials and the prospect of selling to the
domestic market have also motivated private investors. Finally, in Brazil,
a free zone project has been established in Manaus (an area in the heart of
the Amazon) for the manufacture of goods based on domestic raw materials.
Numerous companies, including U.S. and Japanese investors have established
facilities there and the majority of products are sold in the domestic
market. The Manaus project exemplifies the role that can be played by free
zones as a tool for regional development.

3.07 The numerous "variations on a theme" discussed above are indicative of
the broad developmental potential of free zones. One of the critical
determinants of success of any free zone is the identification of a specific
market niche based on the country's comparative advantages. Indeed, as the
number of free zones have increased worldwide, competition for foreign
investment has risen dramatically, a development that has important
implications for future zone performance. It has become increasingly clear
that it is no longer sufficient for a zone to offer liberal incentives and
adequate infrastructure; such selling points are increasingly available at
competitive zones. Rather, it appears that successful zones will be those
that offer a package composed of the following elements:

stable political and economic climate;








competitive factors of production;
simple, blanket incentive programs;
minimal regulatory controls;
aggressive marketing and promotional strategy including the
identification of a distinctive zone marketing "theme";
effective internal control systems in the areas of worker
and vehicular traffic flows and zone security;
provision of zone business support services such as worker training
programs and export promotion mechanisms; and
effective management information systems.

3.08 In the coming years, it is evident that free zones offering a
comprehensively attractive environment for international business --
operating within a defined but flexible national free zone strategy -- will
be at the forefront of development.








IV. REGIONAL ENVIRONMENT


4.01 This chapter examines the regional context for Dominican Republic free
zone development by reviewing overall economic trends in the Caribbean Basin,
and subsequently surveying regional patterns of zone development.


A. OVERVIEW OF CARIBBEAN BASIN ECONOMIC DEVELOPMENT


4.02 The Caribbean Basin economies in aggregate, have faced an unusually
difficult period since 1980. As a result of the world recession of 1980-
1983, the area suffered a contraction in markets for its traditional exports
and a reduction in intra-regional trade. Simultaneously, the dramatic
increase in the price of oil exacerbated already severe balance-of-payments
problems. Since 1984, however, most of the region's economies have been
recovering, albeit at a modest rate. El Salvador, for example, one of the
hardest hit showed evidence of a turnaround in 1984 when GDP growth exceeded
1.5 percent. Jamaica and Haiti, in contrast, are still paying a price
related to past political and social instability.

4.03 The Dominican Republic experienced a severe recession from 1980 to
1985. Although tourism earnings increased,.the combination of rapidly
declining prices for commodity exports, rising consumer prices, growing
unemployment and large debt service payments contributed to a disappointing
0.6 percent real GDP growth in 1984. Conditions have since deteriorated, as
growth faltered, (-1.4 to -2 percent) and high unemployment continued to
increase to 24.8 percent in 1985.

4.04 Despite signs of recovery in most countries, serious unemployment and
balance-of-payments problems continue to plague the Caribbean Basin.
Structural change to increase export earnings remains an important goal for
the region. Fiscal austerity measures induced by the IMF and the World Bank
have helped to stabilize Caribbean Basin finances. Typical of the region's
strained economies, El Salvador's export performance in 1984 failed to keep
pace with growing imports. Traditional exports, such as coffee, sugar and
cotton faced weak markets, and manufactured exports met with depressed
conditions in other countries forming the Central American Common Market
(CACM), traditionally El Salvador's major export market. As a result, the
country's balance of payments dropped to a negative US$264.2 million.

4.05 Jamaica, however, has been making some progress since 1983. The
central government's budget deficit dropped from 17.7 percent of GDP in
1983-84 to 7.2 percent in 1985, while the balance of payments deficit
declined from US$289.2 million in 1983 to US$224.3 million in 1984.

4.06 Caribbean Basin countries rely principally on the markets of the
western industrial countries, especially that of the United States, which is
the major trading partner for most of the Caribbean. The primary exports of
the region are agricultural -- sugar, coffee, bananas, cotton and tobacco
products; meat in Costa Rica and cocoa in the Dominican Republic. In
addition, mineral products such as bauxite and alumina in Jamaica, and gold,
silver and ferronickel in the Dominican Republic are important sources of
income.








IV. REGIONAL ENVIRONMENT


4.01 This chapter examines the regional context for Dominican Republic free
zone development by reviewing overall economic trends in the Caribbean Basin,
and subsequently surveying regional patterns of zone development.


A. OVERVIEW OF CARIBBEAN BASIN ECONOMIC DEVELOPMENT


4.02 The Caribbean Basin economies in aggregate, have faced an unusually
difficult period since 1980. As a result of the world recession of 1980-
1983, the area suffered a contraction in markets for its traditional exports
and a reduction in intra-regional trade. Simultaneously, the dramatic
increase in the price of oil exacerbated already severe balance-of-payments
problems. Since 1984, however, most of the region's economies have been
recovering, albeit at a modest rate. El Salvador, for example, one of the
hardest hit showed evidence of a turnaround in 1984 when GDP growth exceeded
1.5 percent. Jamaica and Haiti, in contrast, are still paying a price
related to past political and social instability.

4.03 The Dominican Republic experienced a severe recession from 1980 to
1985. Although tourism earnings increased,.the combination of rapidly
declining prices for commodity exports, rising consumer prices, growing
unemployment and large debt service payments contributed to a disappointing
0.6 percent real GDP growth in 1984. Conditions have since deteriorated, as
growth faltered, (-1.4 to -2 percent) and high unemployment continued to
increase to 24.8 percent in 1985.

4.04 Despite signs of recovery in most countries, serious unemployment and
balance-of-payments problems continue to plague the Caribbean Basin.
Structural change to increase export earnings remains an important goal for
the region. Fiscal austerity measures induced by the IMF and the World Bank
have helped to stabilize Caribbean Basin finances. Typical of the region's
strained economies, El Salvador's export performance in 1984 failed to keep
pace with growing imports. Traditional exports, such as coffee, sugar and
cotton faced weak markets, and manufactured exports met with depressed
conditions in other countries forming the Central American Common Market
(CACM), traditionally El Salvador's major export market. As a result, the
country's balance of payments dropped to a negative US$264.2 million.

4.05 Jamaica, however, has been making some progress since 1983. The
central government's budget deficit dropped from 17.7 percent of GDP in
1983-84 to 7.2 percent in 1985, while the balance of payments deficit
declined from US$289.2 million in 1983 to US$224.3 million in 1984.

4.06 Caribbean Basin countries rely principally on the markets of the
western industrial countries, especially that of the United States, which is
the major trading partner for most of the Caribbean. The primary exports of
the region are agricultural -- sugar, coffee, bananas, cotton and tobacco
products; meat in Costa Rica and cocoa in the Dominican Republic. In
addition, mineral products such as bauxite and alumina in Jamaica, and gold,
silver and ferronickel in the Dominican Republic are important sources of
income.










4.07 By restructuring and diversifying their economies, Caribbean countries
may decrease their dependence on traditional exports tied to the vagaries of
world commodity markets and restrictions in U.S. import quotas. For
example, a program launched in the Dominican Republic under the Caribbean
Basin Initiative (CBI) to improve its agro-industry, specifically citrus
production and processing.

4.08 One of the solutions to the problem of over-dependence on traditional
exports is manufacturing for export, a sector which has contributed to a
significant and increasing share of GDP in Caribbean Basin countries. For
example, in Barbados, manufactured exports increased at a rate of about 20
percent per annum between 1981-84. In Jamaica, exports of manufactured
goods in the first six months of 1985 totalled US$86 million, up from US$70
million for the first half of 1984. The Puerto Rico government encourages
companies to set up "twin plants" under the Caribbean Basin Initiative to
finish products made elsewhere in the region. For example, Westinghouse
Electric Corporation plans to manufacture printed circuit boards in the
Dominican Republic for finishing in Puerto Rico.

4.09 Petroleum is a major component of the region's import bill. Lower
fuel bills combined with higher coffee prices and strict controls on imports
are expected to improve the economic outlook for a number of countries, even
with continued low sugar prices and a reduced U.S. sugar quota. An improved
coffee market was expected to contribute to a lower trade deficit in Costa
Rica, from US$170 million in 1984 to US$25 million in 1985. Guatemala is
hoping for a trade surplus of between US$150 million and US$200 million, to
reduce its current account deficit to US$150 million in 1985.

4.10 Currently, the Caribbean region is making steady, if plodding,
progress toward economic recovery. Fiscal austerity and stronger markets
for some traditional products have improved the financial outlook, A larger
share of GDP by the industrial sector in most countries has also contributed
to growth. But, Caribbean Basin countries in general continue to experience
high unemployment and balance-of-payments troubles which are likely to
persist over the near term. These almost endemic conditions point to the
need for a redoubling of efforts to attract increasing flows of investment
capital to the region with a large share in the manufactured export sector.


B. OVERVIEW OF REGIONAL FREE ZONE DEVELOPMENT


4.11 Since their start in the 1960's, a total of 31 export processing zones
have been established in 16 of the 27 countries comprising the Caribbean/
Central American region to date. In response to the sagging economic
conditions experienced in the 1970's, a general policy shift has been
evident in the region -- one of moving away from import-substitution
industrialization, to that of export-led growth, with specific emphasis on
the development of non-traditional sectors. It is within that context that
free zones have increasingly been relied upon as an important tool within
the government's portfolio of development alternatives.









4.12 In 1985, Caribbean/Central American free zones were estimated to have
directly employed some 165,000 people, as well as generating as much as
125,000 jobs indirectly. /1 Cumulative annual exports from these zones,
conservatively assuming $6000/year in sales per worker, amount to US$990
million.

4.13 On an individual national level, however, the performance of free
zones has varied greatly. As of 1984, for example, major free zone
employment centers in the Caribbean included: Haiti (48,000); Dominican
Republic (22,000); and Barbados (20,000). Similarly, in terms of
contribution to gross export earnings, zones have differed: in the
Dominican Republic, free zone exports account for well over 25 percent of
total export earnings, while in Guatemala, with over US$15 million expended
in the construction of a free zone, and only two occupants, the export
impact has been minimal.

4.14 Manufacturing activity in the region's free zones is dominated by the
garment/apparel industry. The experience of zones in the Far East has shown
that, historically, garment manufacturing is the first industry to emerge in
the development of a light manufacturing sector for export. As other
products begin to take hold for example, electronic assemblies, toys,
machinery, household goods, etc. -- the importance of the garment sector
decreases relatively while the gross export value in aggregate continues to
grow. In Hong Kong, during the 1960s, garment exports accounted for 60
percent of total exports; by 1984, this figure had declined dramatically to
35 percent. The experience to date in the Caribbean has been similar, and
the reasons, straightforward: the industry requires little start-up capital
and utilizes almost 100 percent imported material inputs. More important is
the fact that, due to the protectionist measures placed on the major Far
East producers by the U.S., investment has recently concentrated in the
Caribbean/Central American region which remains largely quota-free. /2

4.15 Unlike many free zones in the Far East however, Caribbean and Central
American free zones have extremely limited backward linkages, and as a
result, reduced net foreign exchange earnings. Research has shown that the
primary reason for the current practice of free zone companies in sourcing
almost 100 percent of raw material inputs from outside the region is the
pronounced lack of goods available from indigenous suppliers at
internationally-competitive prices, quality and delivery schedules.

4.16 This inability to purchase locally has adversely affected foreign
exchange earnings. Although foreign exchange earnings have exceeded US$475
million annually in countries like Haiti, in terms of net foreign exchange,
they are dwarfed in comparison to the foreign exchange earnings of Taiwan --
some US$800 million in 1984 -- where more than 40 percent of inputs are
manufactured locally. Foreign exchange earnings in the Caribbean and

------------------------
/1 Not including Mexican border zones which are estimated to directly
employ in excess of 250,000 workers.

/2 As of July, 1986, the only countries in the region operating under
"voluntary" export restrictions under the Multi Fiber Arrangement (MFA)
were: Costa Rica, Dominican Republic, Guatemala, Haiti, Mexico and
Panama.










Central American free zones are limited to payments on such "low ticket"
items as rent, labor, freight, utilities and the like, rather than "high
ticket" items as locally produced raw materials and manufactured inputs.

4.17 Although economic benefits from free zones in the region have proved
to be considerable, few free zones sponsored by the public sector have been
successful financially. Prices charged for the use of land, buildings and
services are not commensurate with the need to meet debt service
obligations, cover operating costs, and earn a reasonable return on invested
capital. Most public-sector zone rents reflect varying degrees of subsidy.
This tendency reflects the expectation that uneconomic pricing is needed to
attract foreign investment, which will incrementally stimulate economic
activity over the long term, exceeding short term financial costs.

4.18 The validity of this argument, however, is debatable: the price of
factory space is but one factor among many considered by foreign investors,
and generally accounts for less than three to four percent of total
operating costs. Moreover, the relative performance of privately
owned/operated zones compared to public sector ones is clear: private zones
charging market prices for their facilities consistently out-perform their
public counterparts in almost a dozen developing countries to date. Users
readily pay the higher rental rates to be assured of responsive property
management, higher aesthetic standards, better maintenance of
infrastructure, and fewer building construction delays.
/
4.19 Some countries in the Caribbean have become more responsive to the
issue of economic pricing of infrastructure in particular, and a greater
role for the private sector in free zone development and operations in
general. Through the provision of a US AID-funded long-term, low-interest
financing facility, private developers are implementing industrial
estate/EPZ projects in several countries of the Eastern Caribbean. In
Jamaica, the Government has recently announced the privatization of a key
aspect of its free zone infrastructure -- international telecommunications
links -- as a means of attracting labor-intensive information industries, as
well as initiated operations in its first privately-owned EPZ. And in Costa
Rica, the privately owned EPZ at Cartago continues to expand rapidly,
charging market rates, while the public sector projects at Moin and Punta
Renas are languishing despite the "attraction" of subsidized pricing.

4.20 The near-term outlook for free zone development in the
Caribbean/Central American region is encouraging. Most countries are
rapidly expanding the size and number of existing facilities, as well as
removing supply-bottlenecks for the construction of others. Countries like
El Salvador, Costa Rica, Belize, Guatemala, and Bahamas are reviewing
various free zone options in order to formulate national strategies to guide
future zone development. Countries are increasingly attracting new and
diverse sources of foreign investment, including the Newly Industrialized
Countries of the Far East. Finally, in response to changes in developed
country market-access, new sectors of opportunity are arising. Because of
the duty-free access given to agricultural products under the CBI, for
example, many countries are diversifying agricultural production and
encouraging foreign investment in agro-processing industries.









V. FREE ZONE CONTRIBUTIONS TO THE NATIONAL ECONOMY


5.01 The following discussion presents an overview of the historical
development, the legal, political and institutional framework, and economic
impact of the industrial free zone program of the Dominican Republic to date.
Individual contributions of presently operational IFZs are described, and
their aggregate contributions assessed. After reviewing the status of
Dominican free zones, reviews historic demand trends for Dominican free
zones,


A. GENERAL ECONOMIC PERFORMANCE


5.02 The Dominican Republic has historically been one of the more
successful economies in Latin America as evidenced by a real GDP average
annual rate of growth of approximately 6.1 percent from independence in 1966
to 1970, accelerating to 9.2 percent by 1975. Between 1975 and 1982,
however, growth slowed to an average of 4.0 percent per annum, remaining
largely stagnant to date. In 1985, the economy experienced for the first
time a negative growth rate of 1.2 percent; real GDP was estimated at
US$4,974 million, an actual contraction in real terms of 2 percent over the
previous year, reflecting the continuing economic and financial crisis
experienced by the country in recent years.

5.03 There are two distinct periods in the country's recent economic
history: the first period, from 1968 to 1974, was characterized by superior
economic performance overall, reflecting, in large part, the then buoyant
conditions of the world economy. Export earnings grew, for example, by an
average rate of 23 percent per annum in real terms, never falling below 10
percent per year, while export volume grew rapidly by 9 percent per annum.
Most important, however, was the performance of the world market: prices
for the country's traditional exports (sugar, ferronickel, coffee, cocoa,
tobacco, gold) were increasing by an estimated 15 percent per annum.
Accordingly, a dual strategy of expansion of traditional exports on the one
hand, and import-substitution industrialization on the other, was ardently
followed.

5.04 During the second period 1975-1981, external economic conditions
changed drastically; prices of traditional exports, which had been stable
for many years, grew increasingly volatile. The price of sugar, for
example, after peaking in 1975, fell by 30 percent by 1979, peaked again in
1981, and lost 42 percent of its value in the following year. Foreign
exchange reserves were further exacerbated by the oil price shocks of 1974
and 1979, which cumulatively increased the country's fuel bill ten-fold.

5.05 The combined results of these exogenous factors were threefold. First,
the country's terms of trade deteriorated significantly; in 1977, the fuel
bill accounted for only 60 percent of foreign exchange earnings from sugar
exports whereas by 1982, it had jumped dramatically to 132 percent.
Secondly, and concomitantly, the Dominican Republic's traditional exports
experienced a precipitous drop in volume due largely to the recurring
recessionary conditions of the OECD countries; from 1978 to 1982, the
overall volume of exports declined by 20 percent. Lastly, and most









V. FREE ZONE CONTRIBUTIONS TO THE NATIONAL ECONOMY


5.01 The following discussion presents an overview of the historical
development, the legal, political and institutional framework, and economic
impact of the industrial free zone program of the Dominican Republic to date.
Individual contributions of presently operational IFZs are described, and
their aggregate contributions assessed. After reviewing the status of
Dominican free zones, reviews historic demand trends for Dominican free
zones,


A. GENERAL ECONOMIC PERFORMANCE


5.02 The Dominican Republic has historically been one of the more
successful economies in Latin America as evidenced by a real GDP average
annual rate of growth of approximately 6.1 percent from independence in 1966
to 1970, accelerating to 9.2 percent by 1975. Between 1975 and 1982,
however, growth slowed to an average of 4.0 percent per annum, remaining
largely stagnant to date. In 1985, the economy experienced for the first
time a negative growth rate of 1.2 percent; real GDP was estimated at
US$4,974 million, an actual contraction in real terms of 2 percent over the
previous year, reflecting the continuing economic and financial crisis
experienced by the country in recent years.

5.03 There are two distinct periods in the country's recent economic
history: the first period, from 1968 to 1974, was characterized by superior
economic performance overall, reflecting, in large part, the then buoyant
conditions of the world economy. Export earnings grew, for example, by an
average rate of 23 percent per annum in real terms, never falling below 10
percent per year, while export volume grew rapidly by 9 percent per annum.
Most important, however, was the performance of the world market: prices
for the country's traditional exports (sugar, ferronickel, coffee, cocoa,
tobacco, gold) were increasing by an estimated 15 percent per annum.
Accordingly, a dual strategy of expansion of traditional exports on the one
hand, and import-substitution industrialization on the other, was ardently
followed.

5.04 During the second period 1975-1981, external economic conditions
changed drastically; prices of traditional exports, which had been stable
for many years, grew increasingly volatile. The price of sugar, for
example, after peaking in 1975, fell by 30 percent by 1979, peaked again in
1981, and lost 42 percent of its value in the following year. Foreign
exchange reserves were further exacerbated by the oil price shocks of 1974
and 1979, which cumulatively increased the country's fuel bill ten-fold.

5.05 The combined results of these exogenous factors were threefold. First,
the country's terms of trade deteriorated significantly; in 1977, the fuel
bill accounted for only 60 percent of foreign exchange earnings from sugar
exports whereas by 1982, it had jumped dramatically to 132 percent.
Secondly, and concomitantly, the Dominican Republic's traditional exports
experienced a precipitous drop in volume due largely to the recurring
recessionary conditions of the OECD countries; from 1978 to 1982, the
overall volume of exports declined by 20 percent. Lastly, and most









importantly, has been the rapid worsening in the country's external debt
situation. Due to an abrupt rise in international LIBOR interest rates, the
cost of the country's foreign borrowing increased sharply. Debt service
payments rose from US$87 million in 1978 to US$250 million by 1982, an
increase, in nominal terms, of over 187 percent. /1

5.06 Unfortunately, these external shocks occurred at a time when long-term
structural problems in the economy were beginning to surface, among them:

o slowing of growth of inefficient, capital-intensive, import-
substitution industries, with diminishing job creation;
o inefficient structure of the agricultural sector in terms of
price disincentives, poor management of public lands, and non-
support of domestic market;
o poor management in, and fiscal deterioration of the public
sector generally, and state owned enterprises in particular.

5.07 However, when faced with the cyclical shocks of the external market,
and an the stagnation of the domestic economy, GODR's policy response was
quite inadequate. For example, fueled by an artificially pegged exchange
rate, imports grew at a rate faster than GDP. From 1975-80, capital goods
and raw materials imports grew at an estimated 8 percent per year in real
terms, (financed by inflows of private and public external borrowing,)or
about double the GDP rate of growth. As a result, balance of trade and
payments deficits increased rapidly: between 1981 and 1983, the trade
deficit increased from US$480 million to US$685.8 million, and current
account deficits from US$406 million to US$421 million.

5.08 In early 1984, responding to pressure from the IMF, GODR initiated a
multi-pronged economic initiative (agreed to in 1983, but aborted due to
domestic pressures) to redress the aforementioned problems of stagnant
export growth, growing debt service burdens, serious foreign exchange and
liquidity problems, surging domestic price levels and endemic unemployment.
Pertinent actions included:

o transfer of virtually all non-petroleum import payments to the
parallel exchange market. (ie, from the officially 'pegged'
rate of US$1.00 = RD$1.00 to the market determined parallel
rate, at that time about US$1.00 = RD$2.80);
o creation of a new foreign exchange "incentive" for traditional
exports. (For every US$1.00 surrendered to the Central Bank,
exporters were authorized to receive RD$1.48.);
o limits on GODR spending and Central Bank credit to the public
sector.
o elimination of price subsidies on basic foodstuffs.

5.09 As a result of these actions, exports of non-traditional items
(including exports of light manufactures from the country's free zones)
accelerated, growing by 30 percent in 1984 and contributing to an 11 percent

-------------------------- _
/1 According to estimates of the World Bank, (Dominican Republic: Economic
aProseots and Policies o Aenew Growth, July, 1985), the combination of
these three factors caused GNP to be 8.8 percent lower in 1979-81 than
would have been the case in their absence.










increase in overall in total exports. Imports, on the other hand, fell
slightly by 2.5 percent. Yet, serious problems plagued the economy.
Inflation, which usually stood at about 7 percent, increased by 252 percent
to 24 percent at year-end. Unemployment, too, officially estimated at about
25 percent, increased to about 40 percent. Finally, although increased
foreign inflows and tourism receipts eased the foreign exchange situation,
by early 1985, net foreign exchange reserves of the Central Bank stood at a
iLgtive US$940 million.

5.10 In early 1985, GODR announced a further series of economic measures,
including:

:o total exchange rate 'unification', where henceforth, all
foreign exchange transactions would be at freely-floating
market rates;
o an increase in retail prices of petroleum products;
o temporary surcharges on most services and exports;
o further limits on Central Bank public sector credits;
o higher interest rates on saving deposits (where negative real
rates of interest were experienced).
o successfully renegotiated external debt with the Paris Club of
international creditors.

5.11 These major structural economic measures resulted, as might be
expected, in a temporary deterioration in the economic performance:
production levels slumped, GDP growth actually contracted, unemployment
worsened further, inflation increased to 39 percent per year, and the
balance of payments deficits increased by 42 percent, totalling a negative
US$320 million by year-end. At the same time however, the trade deficit
decreased marginally, reflecting a 26 percent decrease in imports, and net
foreign exchange reserves improved dramatically through increased capital
inflows. In addition, GODR has moved to stress non-traditional exports in
the areas of agro-industry, light manufacturing, and minerals.

5.12 Prospects for renewed growth in economic activity in 1986 are very
strong. Through the el mination of the export surcharges and an improved
market for non-traditiohal exports and services (especially tourism), total
exports are projected ftoq nprease and reducethe_trade deficit. by some
\S$150 million. Falling global oil prices have revatilized the economy, and
savings are expected _t o exceedS n100illion in the mport biU As a
result, it appears likely that inflation will fall rapidly to the target
-level 210Q_15 _Lerent L-yearmend-.r-oloae.t-_it Finally, through the
combination of successful debt rescheduling and reduced interest rates, the
debt service burden is expected to diminish.


B. STATUS OF INDUSTRIAL FREE ZONES IN THE DOMINICAN REPUBLIC


a. Lenal. Political a nd Institutional Framework.

5.13 This section presents an overview of the historical development of
IFZs in the Dominican Republic. First, the IFZ-enabling Laws, Presidential
Decrees and other regulations are summarized and analyzed in order to
identify operating benefits, problems and constraints to free zone










increase in overall in total exports. Imports, on the other hand, fell
slightly by 2.5 percent. Yet, serious problems plagued the economy.
Inflation, which usually stood at about 7 percent, increased by 252 percent
to 24 percent at year-end. Unemployment, too, officially estimated at about
25 percent, increased to about 40 percent. Finally, although increased
foreign inflows and tourism receipts eased the foreign exchange situation,
by early 1985, net foreign exchange reserves of the Central Bank stood at a
iLgtive US$940 million.

5.10 In early 1985, GODR announced a further series of economic measures,
including:

:o total exchange rate 'unification', where henceforth, all
foreign exchange transactions would be at freely-floating
market rates;
o an increase in retail prices of petroleum products;
o temporary surcharges on most services and exports;
o further limits on Central Bank public sector credits;
o higher interest rates on saving deposits (where negative real
rates of interest were experienced).
o successfully renegotiated external debt with the Paris Club of
international creditors.

5.11 These major structural economic measures resulted, as might be
expected, in a temporary deterioration in the economic performance:
production levels slumped, GDP growth actually contracted, unemployment
worsened further, inflation increased to 39 percent per year, and the
balance of payments deficits increased by 42 percent, totalling a negative
US$320 million by year-end. At the same time however, the trade deficit
decreased marginally, reflecting a 26 percent decrease in imports, and net
foreign exchange reserves improved dramatically through increased capital
inflows. In addition, GODR has moved to stress non-traditional exports in
the areas of agro-industry, light manufacturing, and minerals.

5.12 Prospects for renewed growth in economic activity in 1986 are very
strong. Through the el mination of the export surcharges and an improved
market for non-traditiohal exports and services (especially tourism), total
exports are projected ftoq nprease and reducethe_trade deficit. by some
\S$150 million. Falling global oil prices have revatilized the economy, and
savings are expected _t o exceedS n100illion in the mport biU As a
result, it appears likely that inflation will fall rapidly to the target
-level 210Q_15 _Lerent L-yearmend-.r-oloae.t-_it Finally, through the
combination of successful debt rescheduling and reduced interest rates, the
debt service burden is expected to diminish.


B. STATUS OF INDUSTRIAL FREE ZONES IN THE DOMINICAN REPUBLIC


a. Lenal. Political a nd Institutional Framework.

5.13 This section presents an overview of the historical development of
IFZs in the Dominican Republic. First, the IFZ-enabling Laws, Presidential
Decrees and other regulations are summarized and analyzed in order to
identify operating benefits, problems and constraints to free zone









enterprises as well as developers. Second, the political and institutional
framework overseeing free zone operations is examined, with specific
emphases on the relative influence of various public and private sector
institutions on both free zone users and developers. The section ends with
suggestions for near-term policy and institutional reform.


A. Legal Evolution.

5.14 Unlike some other countries (e.g., Jamaica), there is no single
comprehensive law directed at free zones in the Dominican Republic.- Rather,
as discussed below, Dominican free zones are governed by a number of laws,:
-President4al decrees, resolutions, and the like, each dealing with-a-----
,Apaclfiarea such as ree zone d~Yelop-ent, incentives, finance, and labor,
%.among others.

L(, Laws:

5.15 The first law relating to IFZs, Law No. 4315, was passed by the
National Congress in 1955. It was originally intended to regulate the
operations of duty-free shops in international airports, but has been
adapted for the authorization of the administration and creation of IFZs.
Although the Law provided that zones would be free of duty, and established
GODR authority over their establishment and administration, there have been
no subsequent modifications to tailor it to the specific requirements of
IFZs.

5.16 In 1968, the National Congress passed Law No. 299, on "Industrial
Incentives and Protection", which provided the framework of incentives
offered to IFZ tenants, and also established a procedure for firms
registering for free zone benefits. Law No. 299's primary objective was to
promote and stimulate new and existing industries, both domestic and
foreign. It is quite complex in that it covers both "import-substituting"
as well as "export-oriented" industries -- referred to as class "C" and
class "A" enterprises respectively. While class "A" enterprises are given
an explicit set of incentives /1, the Law is mainly directed at class "C"


/1 Class "A" companies receive 100 percent exoneration from the following
duties and taxes under Law No. 299: corporate income tax; import duties
on machinery, plant, equipment; import duties and taxes on raw
materials, semifinished products, and materials used in composition or
processing of product container or packing materials; municipal,
business, production, sales, franchise taxes; export duties.
(Manufacturers may sell up to 20 percent of their production on the
local market, and pay 90 percent of normal duties if product is not
manufactured locally.)









companies, and some of the legal provisions unfairly encumber class "A"
enterprises with irrelevant requirements. /1

5.17 In 1969, Law No. 432 was passed in order to modify Law 4315.
Essentially, it provided that Class "A" enterprises were not required to
repatriate and convert into pesos hard currency earned from free zone
exports. It also provided, however, that the operating expenses of these
enterprises such as salaries, services and rents were to be paid in pesos.

5.18 Finally, in 1983, the National Congress passed Law No. 145. This law
modified several provisions of Law No...99. Perhaps the most significant
modification is that Class "A" enterprises which are incorporated as
- DominicanxRepublio corporations also enjoy total exoneration from corporate
\income tax. Previously, this had been limited to companies incorporated---
outside the country;.

(ii). Presidential Decrees.

5.19 Starting with the La Romana Free Zone in 1969, all presently
operational and designated IFZs have been established by Presidential
decree. One of the great criticisms of this practice is that the decrees
often appear to be the result of local community lobbying, with no attempt
at determining financial or economic feasibility of the project. Moreover,
the entire process appears to be ad hoc; ie, there are no standards or
criteria to guide the evaluation and designation of potential IFZs. /2
/
5.20 A few of the more significant decrees are: No. 3641 (establishing the
La Romana free zone in 1969); No. 1547 (San Pedro de Macoris free zone --
1971); No. 3615 (Santiago free zone -- 1973); and No. 1969 (Puerto Plata
free zone -- 1980). Additionally, Presidential Decrees nos. 507 and 895 in
1978 and 1983 respectively, established and regulated the activities of the
National Council of Free Zones, as will be further discussed below.


/1 For example, the law establishes a requirement that notice be published
upon the receipt of an application for classification so that competing
firms have the opportunity to object to proposed classifications. Both
of these features make sense for domestic import substitution class "C"
companies. An additional competitor entering an already overcrowded
field (such as exists in the domestic cosmetic and pharmaceutical areas)
should be closely evaluated and comments from local competitors should
be part of the evaluation process. This is not true, however, for IFZ
companies: they are not competing in the national market, and yet the
Law subjects them to the same regulatory requirements. The process could
be streamlined by eliminating this and similar requirements not
expressly applicable to IFZ companies.

/2 Recent presidential decrees have authorized the establishment of
industrial free zones in the Haina and San Isidro areas in metropolitan
Santo Domingo. Other decrees have authorized the establishment of IFZ's
in a variety of disparate communities, without an attempt to analyze the
economic feasibility of locating zones in these areas. Although both
the Itabo and San Isidro IFZ's are economically feasible, their
authorization has been criticized by some experts as wrongly encouraging
the increased migration from rural areas to the capital city.









J., Political And Institutional Framework.


5.21 Depending on the specific nature of the foreign investment, a
potential zone user faces a bewildering array of government, private and
parastatal agencies that regulate, govern and otherwise affect both zone
users and developers. In the case of the former, information, coordination
and/or permission must be obtained from at least five government agencies,
and sometimes as many as twelve institutions are involved. In the case of
the potential zone developer, the process is even more bureaucratic and
constrained.

5.22 The following discussion provides an overview of the procedures,
jurisdictions and influence of main institutions and actors as they affect
both the foreign investor and developer of IFZs in the Dominican Republic,
in order to identify problems and bottlenecks in the planning, development,
management and regulation of the country's free zones. (Appendix A presents
a more detailed discussion of the institutional framework.)

5.23 The various agencies involved can be grouped into two general
categories: those involved in the approval of the original application for
a class "A" enterprise, and those involved on a continuous basis overseeing
free zone user operations. Each group will be discussed in turn.

(. Institutions Affectin ZFree Zone Usr Aplication

5.24 The following steps are required in the application for a
classification "A" (free zone) status:

o file a detailed application with the Industrial-Technical Department
accompanied with supporting documentation. The I-TD publishes a
notice of the application for public notification and solicitation of
objections. This step generally takes 15 to 30 days.

o The I-TD then proceeds to study the document over a period of 30
days; extendable to 60 days at.the maximum.

o Moreover, any enterprise applying for a class A status, must provide
a detailed form to the General Directorate pf Customs outlining all
raw materials, equipment and machinery required to be allowed to
import duty free. Customs then gives "Administrative Approval", and
forwards the application for Presidential ApDroval in the form of a
Presidential Decree. In general, this stage of the application
process alone takes several months. /1

o While an official role was not provided for the National Council Jo
Free Zones by Law, generally, the findings of the Industrial-
Technical Department are submitted to it for informal approval.



/1 Due to the vigorous efforts of the National Council of Free Zones and
other institutions however, this process has been relaxed somewhat:
,Customs will admit items listed in the application duty-free under bond
pending Presidential approval ~ ...










o The findings of the I-TD are forwarded to the Board of Industrial
Development for a decision on the application. Within 15 days, BID
issues a resolution approving or disapproving the I-TDs findings,
which is then sent for Presidential Approval.

o Once a decision has been made, a Presidential Decree is sent to
relevant government agencies for implementation.

5.25 It must be noted that the above is the official process -- ie, the
procedure stipulated by law. In practice, however, other institutions play
important roles; the foreign investor will likely contact the private
Association of Free Zones, for detailed information on individual IFZs as
well as space availability; the Investment Promotion Council for general and
promotional information, etc. Lastly, it is well known that effective legal
representation is a prerequisite for expedited approval.

5.26 The procedure outlined above is estimated to take as much as 3-7
months officially, subject to wide actual variation depending on the scope,
amount of original investment, reputation of individual applicant, the
particular industry sector involved, etc. Perhaps the most striking aspect
of the exercise is the frequency with which Presidential Approval is used.
All important decisions seem to be highly centralized in the office of the
President, decisions that could possibly be made more effectively and simply
at a lower administrative level.
/
ii). Institutions Affecting Free Zone Us Oerations:

5.27 All class "A" enterprises have continuous obligations to GODR as
defined in various parts of Laws 299 and 432, /1 that include the
maintenance of accounting and inventory records; sealed logs of imports and
exports; a monthly report documenting all conversions of hard currencies
into Dominican pesos; reporting and withholding taxes on dividends and
interest, etc. Additionally, class "A" enterprises are required to follow
Dominican labor law practices.

5.28 As such, the following institutions affect free zone operations on a
continuous or periodic basis: CEDOPEX (Dominican Center fr Export
Promotion): by Law, all exporters (including those in free zones) must
obtain export licenses from CEDOPEX; Tfl Central Bank: as noted above, all
continuous filing records must be submitted to the Central Bank; /2 The
General Directorate of Customs: frequently, items that have to be imported
free of duty by class "A" enterprises are inadvertently omitted from the
original application submitted to Customs as explained in paragraph 5.24
above. In this case the same procedure again applies. Ministry JL Labor:
as a Dominican employer, all free zone companies are subject to the
country's laws, and fall under the jurisdiction of the Ministry of Labor. /3


/1 Refer to Appendix A for detailed requirements.
/2 Before class "A" enterprises were allowed to exchange U.S. dollars to
Dominican pesos at free market rates, the Central Bank was responsible
for monitoring the exchange.
/3 Interestingly, though IFZs and free zone companies have been allowed to
have employee unions since 1969, none have been formed to date.









5.29 Finally, free zone users are part of two non-governmental, but
officially recognized and sanctioned institutions: Association Sf Free
Zones, a private body consisting of representatives of all operational IFZs;
and the National Council = Free Zones, a private/public entity that acts as
an advocate for free zone user interests, as well as regulating important
operational issues of the community. /1

5.30 Perhaps the most constraining aspect of the institutional framework
overall is the sheer number of agencies responsible for overseeing both free
zone application and operations. Many countries have significantly reduced
regulatory procedures and the number of regulatory agencies, by centralizing
all relevant functions in one specific agency, i.e., a "one-stop" service
office. As will be reviewed in detail later in this report, this strategy
can have many benefits in the Dominican context.

(iii). Institutions Affecting J.Z Developers.

5.31 A most interesting and telling aspect of Dominican law is the way in
which it treats free zone developers. Unlike developers in the
agroindustrial or tourism sectors, there is no comprehensive legislative
package of incentives, procedures, etc, that is specifically targeted at the
free zone developer -- both domestic and foreign. Instead, as is the case
with any developer of real estate in the Dominican Republic, the potential
free zone developer is subject to a vast number of bureaucratic requirements
and administrative procedures, overseen by a diverse number of
organizations. /2

5.32 Essentially, these institutions can be grouped into two general
categories: those that affect any real estate developer (in fact, any
organization doing business in the Dominican Republic), and those that
specifically impact free zone developers.

5.33 The institutions specifically affecting free zone development are as
follows: national Council n Free Zones: one of the enumerated functions
of the Council is to informally review applications for the establishment of
free zones and to make recommendations to the Office of the President.
Office of JtU President: the key administrative requirement necessary to
establish an IFZ is presidential decree approval. However, as mentioned,
there is no formal application or review process established to regulate the
issuance of presidential decrees, and as such, time delays are frequent.

5.34 Secondly, as a developer of real estate, the free zone developer is
subject to the jurisdiction and purview of a number of governmental bodies,
the Central Bank in order to convert foreign currency; Office fi
th President for waiver on restrictions on acquisition of land by


/1 Due, in large measure to the lobbying actions of the organization,
several important issues have been resolved with GODR, including: the
permission for free zone enterprises to convert US dollars at market
rates, as well as streamlining Customs procedures. The National Council
is also responsible for allocating U.S. garment import quotas among free
zone producers.

/2 Please refer to Appendix A for details.









foreigners; and all the national, municipal and local agencies for provision
of electrical power, water, sewerage, telephone, and telex services. In
addition, the developer is subject to all of the applicable tax, labor and
social security laws of the Dominican Republic, as embodied in the relevant
Laws and statutes, regulated by the Ministries .f Labor and of Finance. /1

5.35 Free zone developers are not exempt from Customs duties as are class
"A" enterprises, and as such, are subject to the normal duties and
bureaucratic procedures affecting the importation of needed inputs,
including: duties charged per kilogram plus ad valoreum charges; internal
taxes based on f.o.b. value plus a surcharge of 4 percent. Most
constraining, however, is the archaic requirement that copies of consular
and commercial invoices, bills of lading, etc, are notarized by Dominican
consulates in the country of origin prior to shipment, a process that is
time-consuming and largely discontinued by other major trading countries.


2. Recent Developments

5.36 In recent years, substantial progress has been made by GODR in
resolving some of the problems and constraints affecting implementation of
the legal, institutional, and regulatory structure overseeing industrial
free zone development and operations. The following summarizes key areas of
progress as well as developments giving rise to concern.

S~.I Tax haven subsidiary no longer needed.

5.37 Because of Dominican tax reforms, American corporations seeking to
defer U.S. taxes are no longer obliged to establish a tax haven subsidiary to
protect their free zones-based operations from Dominican taxes. Until the
passage of Law 145 in 1983, zone-based Dominican corporations--including US
companies--were not wholly exempt from local corporate income taxes. (Under
US tax law, the profits on sales from a subsidiary to a parent corporation
are not taxed as income to the parent as long as: a) the subsidiary is in
fact doing business separately from the parent, and b) the profits are not
declared as dividends from the subsidiary to the parent.) It was therefore
advantageous to a US company engaged in the manufacturing of goods in the
Dominican Republic to establish an offshore subsidiary which would then buy
the resultant production. US corporations would establish foreign
subsidiaries in such tax havens as Panama or Bermuda, which in turn would
establish branches in the Dominican Republic. The Dominican branch of a tax
haven subsidiary would then ship products manufactured in the Dominican
Republic to the parent corporation in the United States, thus avoiding
Dominican corporate income tax. Profits from these sales were accumulated in
the tax haven subsidiary. Accumulated profits from the process would then be
declared as dividends by the mother company only when advantageous as a tax
liability.

--------------------------------
/1 A detailed discussion of these agencies, Laws and procedures is beyond
the scope of this report. For additional details, however, please refer
to Appendix A.










5.38 After Passage of Law 145, all Dominican Class "A" corporations became
exempt from Dominican corporate tax. An American corporation may, therefore,
establish a Dominican subsidiary, set up operations in a Dominican free zone
and open a bank account in the United States for the Dominican subsidiary.
The American corporation may then purchase from the Dominican subsidiary the
products manufactured in the free zone. This procedure has eliminated the
need for the creation of a tax haven subsidiary outside of the Dominican
Republic. However, dividends of US subsidiaries are still taxed by both the
Dominican Republic and the U.S. /1

fii) Restrictions _n Availability of Local Financing

.5.39-A__a result of the Dominican Monetary Board Resolution 30 in 1982 and
Law No. 96 of 1983, local financing is available only to free zone -
~nterprises that are majority (90%) Dominican-owned, -While the -intent of
these measures was to force free zoine-enterprises to seek foreign financing,
the overall result has been to reduce the number of potential free zone
enterprises which have been able to obtain financing.

(iii) Local Taxes on Interest Payments on Foreign Loans

5.40 Companies operating in industrial free zones have financed their
operations from borrowing through off-shore banks. :hile the IFZ company
itself/is exempt from the payment of Dominican income taxes, interest earned
Sby foreign lenders on loans to such companies is subject to Dominican income
\ tax. ~Until-recentl-y7, however, -Dorminincaniauthorities- have either not- pursued--
collection of such taxes or have granted formal waivers of the tax.
(Dominican income tax law contains an express provision authorizing the
Secretary of State for Finance to grant waivers in appropriate cases).

5.41 The present Secretary of State for Finance, however, has refused to
grant such waivers in a recent loan to an IFZ company by a Puerto Rican
lender. The prospect for increased lending by Puerto Rican banks has
improved as a result of the Government of Puerto Rico's program to encourage
twin plant operations between Puerto Rican based plants and plants in
Caribbean Basin Initiative countries. It is expected that the cost of such
financing will be less than from other sources. If the Dominican Republic
implements a program to impose income taxes on the interest repayment for
such loans, however, the cost advantages of locating in the Dominican
Republic will be reduced.


C. IMPACTS OF FREE ZONE DEVEL/ENT UPON THE DOMINICAN ECONOMY /


.. Agregate Free Zone Contributions

5.42 In June 1986, there were four established free zones in the Dominican
Republic and (three soon to become operational), housing some 140 firms and
employing approximately 37,000 people. The jobs created in the free zones


/1 As of July, 1986, there was no double taxation treaty with the U.S.










5.38 After Passage of Law 145, all Dominican Class "A" corporations became
exempt from Dominican corporate tax. An American corporation may, therefore,
establish a Dominican subsidiary, set up operations in a Dominican free zone
and open a bank account in the United States for the Dominican subsidiary.
The American corporation may then purchase from the Dominican subsidiary the
products manufactured in the free zone. This procedure has eliminated the
need for the creation of a tax haven subsidiary outside of the Dominican
Republic. However, dividends of US subsidiaries are still taxed by both the
Dominican Republic and the U.S. /1

fii) Restrictions _n Availability of Local Financing

.5.39-A__a result of the Dominican Monetary Board Resolution 30 in 1982 and
Law No. 96 of 1983, local financing is available only to free zone -
~nterprises that are majority (90%) Dominican-owned, -While the -intent of
these measures was to force free zoine-enterprises to seek foreign financing,
the overall result has been to reduce the number of potential free zone
enterprises which have been able to obtain financing.

(iii) Local Taxes on Interest Payments on Foreign Loans

5.40 Companies operating in industrial free zones have financed their
operations from borrowing through off-shore banks. :hile the IFZ company
itself/is exempt from the payment of Dominican income taxes, interest earned
Sby foreign lenders on loans to such companies is subject to Dominican income
\ tax. ~Until-recentl-y7, however, -Dorminincaniauthorities- have either not- pursued--
collection of such taxes or have granted formal waivers of the tax.
(Dominican income tax law contains an express provision authorizing the
Secretary of State for Finance to grant waivers in appropriate cases).

5.41 The present Secretary of State for Finance, however, has refused to
grant such waivers in a recent loan to an IFZ company by a Puerto Rican
lender. The prospect for increased lending by Puerto Rican banks has
improved as a result of the Government of Puerto Rico's program to encourage
twin plant operations between Puerto Rican based plants and plants in
Caribbean Basin Initiative countries. It is expected that the cost of such
financing will be less than from other sources. If the Dominican Republic
implements a program to impose income taxes on the interest repayment for
such loans, however, the cost advantages of locating in the Dominican
Republic will be reduced.


C. IMPACTS OF FREE ZONE DEVEL/ENT UPON THE DOMINICAN ECONOMY /


.. Agregate Free Zone Contributions

5.42 In June 1986, there were four established free zones in the Dominican
Republic and (three soon to become operational), housing some 140 firms and
employing approximately 37,000 people. The jobs created in the free zones


/1 As of July, 1986, there was no double taxation treaty with the U.S.









represented 3 percent of total national employment and 15 percent of
manufacturing sector employment.

5.43 In addition to the jobs created by the firms located in the free
zones, additional employment has been generated directly in the form of
support services (transport, canteen service, day care, etc.) for zone
employees. .A reasonable estimate is that for every ten people employed /~ f
within a free zone, three people are employed outside of it in direct
support .services, Indirectly, as many as four or five additional jobs (per_ J
ten zone workers) can be attributed to the incremental economic impact of
ithe zone payroll, which may be assumed to be almost entirely spent for --
generia, AYin_ l sts _ah. kod,_ housing, clothing, recreation, etc.'

5.44 In examining employment gains, it must be noted that the vast majority
of zone employees are women. In 1981, the most recent year for which data is
available, nearly 75_ percent _all zone employees were women.. The reasons
given for this predominance of women employees were their acceptance of lower
salaries, 'higher productivity in jobs requiring manual dexterity and
presumed ability to function better than men when subjected to the monotony
of repetitive operations.

-5.45 The employment of women in the zones may be a factor in a reported
reduction of the birthrate in surrounding communities. Although precise
'statistics were not readily available, comments from local business-people
.and community leaders indicated that the women took their jobs seriously,
-were making a major contribution to their families' subsistence and,
generally, preferred the role of wage earner to that of full-time homemaker.
(This trend has been noted in other LDC's, emulating, it seems, the long,.- _
established social restructuring of the industrial countries.) Economic
growth and expanding job opportunities for women go hand-in-hand, -
historically, with lowering-the birthrate, a goal that most countries
consider_ desirables.

5.46 Indications are, however, that more men are beginning to accept zone
employment. As of March, 1986, for example, an estimated 40 percent of
those employed by Santiago's free zone were men.

5.47 In addition to employment benefits, the IFZs generate increased
exports and net foreign exchange earnings for the GODR. In 1982, for
example, free zones produced exports worth US$150 million dollars, nearly
one.fifth of the country's total exports of US$788 million. For 1986,-
exports an4 foreign exchange earnings may be double the 1982 figures.-

5.48 While industrial activity in the IFZs has historically been
concentrated in garment manufacture, the situation appears to be changing:
In 1980-82 garments comprised more than 60 percent of free zone exports.
However, the June, 1986 mission interviews with zone administrators and
tenants indicated an increased interest among electronics assembly firms in
locating in the Dominican Republic. As the proportion of electronics
assembly firms in the zones grows, net foreign exchange earnings should
increase rapidly relative to total exports (which of course, will also
increase), with a concomitant positive effect on the trade balance and the
balance of payments. This benefit is a result of the fact that electronics
assembly involves a higher proportion of local value added than garment










assembly -- 40 percent of export value is locally added, as opposed to 15
percent for garments, according to CEDOPEX.

5.49 In addition to increasing total exports, diversification of the export
base has always been a goal of free zones. Measured according to this
criterion, the free zones have had a large degree of success: in 1983, they
produced a full three-quarters of all Dominican non-traditional exports.

5.50 Beyond the creation of employment, exports and foreign exchange
%\ benefits, the free zones have stimulated economic growth in less developed
.regions within the country, None of the zones operating in June, 1986 were
located-in-the-National District, the country's most populous district that
includes the national capital, Santo Domingo, a metropolitan area of some 1.5
million people. Two of the zones, La Romana and Puerto Plata, were located
in fairly small towns, and the other two, Santiago and San Pedro de Macoris,
were located in medium to large towns. Most observers believe that the free
zones in these outlying towns have reduced migration to the already--- *.
overcrowded capital city by.proyidng. job opportunities elsewhere in the
country.--The IFZa have clearly contributed to industrial decentralization,
through the creation of regional growth poles.- .-l --

5.51 Nevertheless, the free zone program has not yielded all the benefits
that the GODR had hoped for. First, few, if any, economic linkages between.
firms in the free zones and Dominican industry have materialized. Virtually
100 percent-bf manufacturing-inputs are imported with the exception of
tobacco processing where local raw material is utilized. Zone operators
reported that generally,-local inputs are uncompetitive in price and
\quality. In those few sectors that are more or less competitive, such as
office and construction materials and services, zone industries do procure-
locally12 -

5.52 This situation is not so much a condemnation of the free zones pe.r e
as a reflection of erroneous government policy vis-a-vis the industrial
sector and long-range development strategy. Domestic industries in.the;
Dominican Republic have evolved behind protective barriers favoring small,
local, usually inefficient, industries serving the internal market
exclusively. The policies -- fiscal, monetary, tariff, exchange rate, and
so forth that provide excessive levels of protection for domestic -..
manufacturers are characteristic of the import-substitution phase of
industrial development in most LDC's but are totally inappropriate and
-counter-productive when moving into the export-oriented phase, i.e., the ,
'frrentlstrategy. n the Dominican Republio. .Countries such as South Korea,
\Ireland, Taiwan and Singapore have conclusively shown that a policy shift in.
\support of an open export-oriented economy based on eliminating artificial ~
barrier' to free trade and unusual subsidies (open or disguised) to domestic
1produoeres.can gradually transform the industrial sector into any
-.internationally competitive source of goods and services. Under these .
\-onditions, economic linkages between free zone and domestic industries
Develop spontaneously and rapidly. This scenario can occur in the Dominican
!Republic only at such time as the GODR makes the hard policy decisions.-
f~eede i f .e feo the reorientation of the industrial sector as a whole.

5.53 A second area in which expected benefits have not been realized is
technology transfer.-, Zone tenants conduct their research and development as.
.well as marketing, in the home country; the facilities established in the
Ci- rL-~~ ___y~~__~_Li- -- ..-- -- -..-- -------------









Dominican Republic are limited to production. Therefore, virtually the only
technology transfer that has taken place is in the learning of production
and maintenance techniques by employees. However, zone tenants emphasized
that these skills are very beneficial to the employees, pointing out that
many workers, among them seamstresses and mechanics, are able to augment
their incomes, making use of their factory-acquired skills, by
"moonlighting."

5.54 From another point of view, however, any modern factory established in
an LDC may be considered a technology transfer "delivery system," even when
limited to production and maintenance, with none of the more esoteric
activities such as R&D, marketing, quality control, long-range strategic
planning, etc. If supervisory positions are made available to local people,
they gain competence in production, planning and control, preventive
maintenance, budgeting, information systems, cash management and many other
skills -- all needed to manage and operate an efficient factory, and all
encompassed under the broad concept of "technology transfer."


2. Individual Industrial Free Zone Performance. /1

5.55 -Four free zones, located in La Romana, San Pedro de Macoris, Santiago ,
\ and Puero Plata, are currently operating in the Dominican Republic. Three,
Others, j Bani,_Haina and-San Isidro, will become operational shortly.

-5.56 LIa Romana: La Romana, the Dominican Republic's first free zone, was
established by the U.S. multinational Gulf + Western in 1969. It is located
80 miles east of Santo Domingo and has a total area of 1,000,000 square
meters, of which one-third is already developed. The zone presently has
86,989 square meters of covered factory space, and employs 10,621 people.

5.57 The La Romana zone was operated by, Gulf + Western for nearly 20 years,
basically as a non-profit activity. Zone tenants praise the zone management
as efficient and effective: the level of services such as trash pick-up and
maintenance is high, and the zone maintains extremely good relations with
Customs. The current lease rate is US$0.25 per square foot per month. There -
is presently no unoccupied factory space inthej La. -omana-Zone,-which has a:
wating list of some 20 firms;a

5.58 The La Romana zone was recently sold, and in the future will be
operated on a for-profit basis.- The new owners are constructing a second
tree zone, La Romana II, on 750,000 square meters of land close by. As a-
-first stage they will prepare 120,000 square meters of .land for occupancy.

\AJ559--.A ha. dro.I Maooris: The industrial free zone in San Pedro de Macoris
began operating in 1973 under-the auspices of the governmental Industrial -'~-
Development Corporation (CFI) on land donated by the city of San Pedro. Some
12,000 employees work in 62 firms in the zone's 1,880,000 square feet of
covered factory space.


/1 For a more detailed analysis of individual zone performance, please
refer to the case studies in Appendix B.








\5.60 The lease rate is US$0.08 per square foot per month, and the full .
amount of the lease, which can last for up to 4 years, must be paid in
+advance.- According to the zone administrator, there were no shells available
in June, 1986, although some zone tenants believed one shell.was avai-lable.
".The zone administrator reported a waiting list of 10-15 firms.

5.61 Santiago:- The Santiago free zone, which opened in 1974, was the
Dominican Republic's first experience with a mixed public/private zone
management corporation. The zone has received a total of RD$7,000,000 from
'the government for zone construction, and has generated an operating surplus,"
which it reinvests, in every year except its first year of operations. The~
zone tenants expressed satisfaction with the level of services provided.

5.62 The lease rate in the Santiago zone is currently US$0.08 per square
foot per month, and tenants are required to pay a deposit equalling 39 months
of rent in advance. No factory space is currently available, nor has it been
for-several years. .The administration is financing the construction of 3
shells, but they have already been leased to fnrms now located in the zone
-that plan to-expand. Some 10 firms areawaiting available space in the zone.

5.63 Puerto Plata: Puerto Plata is the Dominican Republic's newest
operational zone, and its smallest, employing about 1000 people in 10 firms
located in 8 shells of approximately 14,300 square feet each. The zone was
constructed in9.183 with-a-grant of RD$2,100,000 from the government and
RD$2,300 from community leaders. The zone is.owned and operated by a mixed/
public-private-corporation modeled on the Santiago zone.

5.64 Zone growth has been slow, limited by a lack of funds to finance shell
construction. The administrator reported that some 25 firms are seriously
interested in locating in the zone. The lease rate is presently US$0.08 per
square foot per month.


D. HISTORIC DEMAND TRENDS FOR DOMINICAN FREE ZONE SPACE


5.65 Over the past 10 years-(1977-1986), according to FOMENTO, the increase
in the number of new companies locating in the Dominican zones averaged 12
per annum. Since the early 1970's,- however, the growth in absolute demand
for zone space has been nearly exponential. From 1969 to 1977, an average of
3 new companies located in Dominican zones each year. By 1983, this average
more than tripled to 10; and from 1984 on, it has very nearly doubled again
to 18,._-Using an average of 12,000 square feet of industrial space per..
company, it is evident that an average of nearly 200,000 square feet of.
industrial free zone space-Jas._been-abaor-ba k annually in the last two andone
half year 1983- mid 1986.
--. '.










Table V-1
Free Zone Occupancy Growth, 1969 1986

=ear I &ew Business Starts Ue=r j Sl Business Starts

1969 1 1978 10
1970 0 1979 10
1971 3 1980 12
1972 1 1981 7
1973 5 1982 11
1974 5 1983 12
1975 3 1984 14
1976 3 1985 16
1977 7 1986 24
-------------------------------- -------------------------------
Source: Estudio De Las Zonas Francas Industriales De La Romana, San Pelro'
De Macoris, Santiago Puerto Plata, May 1986, Gerold Janka.
-------------------------------------------------------- -------

5.66 As illustrated in Table V-2, employment increased sixfold to 36,000
from 1975 to the present. During this same period the number of companies
"operating in the zones increased 265 percent-- an increase of about 35
percent-annually, on average. Since 1983, employment has rebounded to an
'annual-rate of increase of 22 percent, compared to the. depressed 8__percent..-
.of the previous three-year period,

5.67 _Average-employment perfirm increased from 151 in 1975 to 291 in 1986,
a trend that can be attributed to internal growth of earlier zone industries;
as well as to the generally larger size of new zone industries in recent
years. Two examples illustrate this long-term trend: (i) in the Santiago
zone, three firms are expanding and have contracted for the full 105,000
sq.ft. of factory shells under construction (leaving no space available for
new applicants); and (ii) at the San Cristobal zone, the Westinghouse
corporation will shortly install its operations with a work force expected to
;reach 1_000 within a year,, ------

--------------------------------------------------------

Table V-2
Growth of Employment and Number of Firms
-- ---In Dominican Free Zones

Employees Increase Firms Increase

April 1986 __ 36,054 78 __... 124 25%
1983- 20,242 ~ 23 99 30%
1980 16,404 219% 76 124%
1975 5,144 34 -
------------------------------------------------------
Source: Estudio Ie JL Zonas Ferancas Industriales D& La Romana. Sa Pedro De
Macoris Santiago Puerto P1ta, May 1986, Gerold Janka
--------------------- m---------------------------------------- m------









5.68 Based on information collected for the period 1970 through 1982, 126
(71 percent) of the 177 firms which received Classification "A" designation
actually installed operations. The remaining 51 firms (29 percent) either
definitely dropped out, or claimed to be delayed for various reasons.

5.69 Of the 126 firms that did install, 33 percent, or 42 companies,
subsequently closed operations. Taken a step further, in looking at,
individual zone performance, La Romana has had the highest percentage of
company closings (43 percent). This may be attributable to the.fact that Lt
-is the country's oldest operating zone, and would naturally have a larger
'number of closures for this reason. La Romana and Santiago have had nearly.
equal rates of new installations (76 and 77 percent respectively) whereas San
%Pedro De Macoris is somewhat lower at 62 percent. Overall, these differences_
are not too significant; all three zones appear' to-be doing quite well,

5.70 It is likely that this trend will change. In years past, companies
were only required to leave a three month security deposit for factory space,
generally amounting to no more than a few thousand dollars. For the last few
years, however, companies are being requested to advance 50 percent of the
\cost of a new facility, which is closer to US$100,000. As advance funding of
,._ this size implies a serious long-term commitment by the company, it is,
'therefore,-reasonable-to conclude that the closure rate in the future should
be much lower than in the past.









VI._ FACTORS-AFFECTING -ZONE PERFORMANCE AD DEVELOPMENT POTENTIALS


6.01 This chapter begins by reviewing the general constraints upon Dominican
free zone performance that are of internal origin and, therefore, subject to
the control of institutions within the country, as well as external
constraints less subject to their control. The discussion then presents
demand projections under scenarios of inactive and active promotional
efforts, as well as of concerted Government efforts to ease the respective
constraints. The chapter concludes with an analysis and ranking of
regions/communities in the Dominican Republic with the potential to
successfully sponsor new zones.


A. POLICY-RELATED FACTORS AFFECTING DOMINICAN FREE ZONE PERFORMANCE


6.02 Nine principal constraints have been identified which impair the
performance of free zones in the Dominican Republic. Each of them is
susceptible to remedial action under the terms of the optimal zone
development paradigm and the proposed national strategy presented later in
this report.

6.03 The primary constraints are discussed below:

1. Lack of a business-like approach by zones to development. Although
Dominican zones have an overall growth record since 1981 that is second to
none in the hemisphere, they have not been able to fully respond to the
demands created by their success. Specifically, zones have not developed an
Sufficient business-like approach to planning, financing, and executing the'
\ development of new factory space and supporting infrastructure on a basis
that comes close__to_ matching demand.-

The problem is multifaceted, but can be summarized under three headings:

Reluctance J4 explore .andarranae private financing a1 construction
The prospect of eventual grant funding for factory construction has'
apparently reduced the initiative of zone managers to secure short-
to'medium-term (2 yr. to 10 yr.) financing from commercial lending
\ sources to accommodate immediate building needs. Indeed, in some
"pases prospective tenants wait more than two years for factory space,
when approaches to commerci.a..lender.socould.have resulted in a far
faster response.
\--_-----e
Settin below-market rents. Many zones have also expressed an un-
businesslike reluctance to charge lease rates approaching market
\ levels, out of a concern that'they might lose potential clients, and
hence'neeaed jobs for the country. The breadth and depth of unmet
%demand for zone space makes this an unfounded concern for the -....
Foreseeable future. Indeed, the increased cash flow that could be-'
-generatedby'market pricing of zone leases could itself help finance
pew factory construction, thereby generating more employment than'
possible through the current discounted lease policy. The experience
-of zones in many countries -- including Mexico, The Bahamas, and Costa
-Rica,-among others---indicates that users willingly pay higher rents'









VI._ FACTORS-AFFECTING -ZONE PERFORMANCE AD DEVELOPMENT POTENTIALS


6.01 This chapter begins by reviewing the general constraints upon Dominican
free zone performance that are of internal origin and, therefore, subject to
the control of institutions within the country, as well as external
constraints less subject to their control. The discussion then presents
demand projections under scenarios of inactive and active promotional
efforts, as well as of concerted Government efforts to ease the respective
constraints. The chapter concludes with an analysis and ranking of
regions/communities in the Dominican Republic with the potential to
successfully sponsor new zones.


A. POLICY-RELATED FACTORS AFFECTING DOMINICAN FREE ZONE PERFORMANCE


6.02 Nine principal constraints have been identified which impair the
performance of free zones in the Dominican Republic. Each of them is
susceptible to remedial action under the terms of the optimal zone
development paradigm and the proposed national strategy presented later in
this report.

6.03 The primary constraints are discussed below:

1. Lack of a business-like approach by zones to development. Although
Dominican zones have an overall growth record since 1981 that is second to
none in the hemisphere, they have not been able to fully respond to the
demands created by their success. Specifically, zones have not developed an
Sufficient business-like approach to planning, financing, and executing the'
\ development of new factory space and supporting infrastructure on a basis
that comes close__to_ matching demand.-

The problem is multifaceted, but can be summarized under three headings:

Reluctance J4 explore .andarranae private financing a1 construction
The prospect of eventual grant funding for factory construction has'
apparently reduced the initiative of zone managers to secure short-
to'medium-term (2 yr. to 10 yr.) financing from commercial lending
\ sources to accommodate immediate building needs. Indeed, in some
"pases prospective tenants wait more than two years for factory space,
when approaches to commerci.a..lender.socould.have resulted in a far
faster response.
\--_-----e
Settin below-market rents. Many zones have also expressed an un-
businesslike reluctance to charge lease rates approaching market
\ levels, out of a concern that'they might lose potential clients, and
hence'neeaed jobs for the country. The breadth and depth of unmet
%demand for zone space makes this an unfounded concern for the -....
Foreseeable future. Indeed, the increased cash flow that could be-'
-generatedby'market pricing of zone leases could itself help finance
pew factory construction, thereby generating more employment than'
possible through the current discounted lease policy. The experience
-of zones in many countries -- including Mexico, The Bahamas, and Costa
-Rica,-among others---indicates that users willingly pay higher rents'








when they are likely to receive higher standards of service from zone
managements.

Absence sf Performance-based incentives rS zone managers. The
nonprofit structure of the existing free zones--public and private--
permits no formal reward system to zone managers commensurate with
their success in effectively marketing and developing their respective
zones. Under such conditions, top-caliber talent is hard to hold and
project performance will suffer.

2. Difficulties in gaining access to financial resources. The following
problems have arisen in mobilizing financial and other resources for
immediate zone construction programs:

A lck f inducements or private financing. In contrast to its
'-treatment of the hotel and resort-center industry, the Government of
the Dominican Republic offers no special tax incentives for private
financing of free zone development projects. Lenders to hotel
development projects may receive interest on their loans tax-free;
lenders to zone development projects must pay the normal tax. As a
result, flows of private finance to zone developers are restricted.

A lA exectation .& future grant funding. Despite a decision by US AID
\ .in recent years to emphasize low-interest loans rather than grants for-
/ .~zone development, the original availability of grant money for zone.,
.'projects appears to have created expectations on the part of some zone
*managers and developers that further funds may be forthcoming of this
S \ k sort, if appropriate solicitations are made. This prospect appears to
bave diYerie _attention from agigresive pursuit .of construction loans
Y)r n from established financial- institutions -

Disincentives.t-utilize;-subsidized loans. The Government has
S offered financing to free zone projects in the form of subsidized
"-loans through FIDE. Although these funds have resulted in the
construction of considerable factory space since the early 1970s,
"--they do not appear to have been offered on a sufficiently attractive
-. sia-in-recent months; RD$10 million in FIDE finance has been
earmarked for free zone projects but only RD$2 million has been
drawn-down as-of-early-June, "despite the evident need for new factory
construction. Pr blems in disbursing FIDE loans include the,.
following:

o a lengthy application and negotiation process, involving first
a FIDE-affiliated commercial bank and then FIDE itself;

o a lack of experience on the part of zone managers and
developers in preparing feasibility studies and loan documents;
and

o the narrowing of the discount between FIDE interest rates and
those available through normal banking channels.

FIDE also discourages borrowing by prohibiting recipients of its
subsidized loans from selling any part of their development during
the life of the loan. In contrast to mortgage bank.fipance for ,








residential property developers, this policy prevents developers of
free zones from achieving substantial liquidity early in their
project, and subsequently investing their early profits in subsequent
zone expansion.

A shortage s. internallyv-enerated funds. A further problem, noted
earlier in another context, has been the decision by zone management
-organizations to under-price their product. While possibly
justifiable to attract investors in the early years of a zone's
s. operations, this policy has had the effect of diminishing the ability
-.-_..f zones to finance needed infrastructure and building construction
through internal cash generation .. --.--..- --- -.

3. Insufficient targeting of and marketing to new industry growth sectors.
A further limitation on zone performance to date has been the shortage of
systematic efforts by the Government to attract what is likely to become a
major growth sector for the Dominican Republic:. the data entry/data
Processing market. ,In Barbados and Jamaica, employment-in-this-sector'has
increased tenfold since 1980, as labor-intensive service bureau operations in
the U.S. have shifted to take advantage of the lower wage costs overseas.
The Dominican Republic, with its highly productive and educated labor force,
is in an excellent position to capture a sizeable share of this clean, and
high-paying, new industry sector. Already; the private San Isidro zone
developer has decided to design office facilities for tenants engaged in
"back office" computer keyboarding work. To achieve full potential in these
emerging-sectors, however,-the Government of the Dominican Republic-should-
-,work tjovercome. the-follo9wing constraints:

-- igh telecommunications costs. If monthly lease rates for dedicated
private telephone lines to the U.S. can be lowered from their present
US$6,000 to US$1,000 or less, tens of thousands of new jobs could be
-created for Dominicans in such operations as remote secretarial
Services (including word processing and desktop typesetting), 8Q0..
number answering services, telemarketing, transcription and
"translation services, and fast-turnaround data entry services. The
Sadvent of Group III facsimile machines (now costing less than
US$3,000) makes possible 20-second per page transmission of copy from
'the U.S. to the Dominican Republic for immediate keyboarding. -
SAlthough the international telephone services from the Dominican
.,Republic-are of exceptionally high quality, the country does not yet-
Soffer private line leases at prices competitive with other locations.
Codetel,-however, recognizes the excellent growth prospects for
information industries, and has expressed its willingness to work
aggressively to lower communications costs where suitable volumes
of dedicated line leases can be assured over time,

delays in Customs clearance. .For data entry "hard copy" arriving in the
country by air freight, even minor delays in Customs clearance can
wreak havoc with production schedules and turnaround periods for time-
sensitive material. The lack of expedited Customs procedures at ports
of entry may be a significant deterrent to location of service bureau
Soperationo., -- -- -- ------ --. -.- -.. ......

obsolete training -rograms. Architecture and engineering schools
throughout North America are now adopting Computer Assisted Design









systems on a wholesale basis. To the degree that Dominican
educational institutions fail to familiarize students with micro-
computer or minicomputer workstations in these fields, the country's
ability to attract "high end" design work to the country is likely to
be limited.

4. Uncertainties over Government policies and procedures. Several areas of
confusion and uncertainty exist for.companies engaged in zone development or
contemplating zone-based operations.

Ambiguities regarding Customs policies agd procedures. In recent
months, Customs has apparently made progress in simplifying the
system for moving goods into and out of zones. These changes,
however, have not yet been given the status of official policy.
Accordingly, it is unclear whether future Customs administrations
will continue the de facto process of inspecting containers only at
the zone site, rather than also inspecting the same containers at the.
port of entry (as was reportedly the case until four or five months
ago). The lack of an automatic clearance policy at the port of entry
raises concerns by zone users about a return to a system under which
containers are subject to major delays, careless repacking, and
occasional pilferage during port inspections.

La1k ofDprocedures .fo extending incentives. There is a great degree
of uncertainty created by the present system of time limits on free
/zone benefits, with no established procedure under which to apply for
extension of benefits.

Exchange rate police uncertainties. Although free zone enterprises
are allowed to exchange hard currency at free market rates,
substantial uncertainty remains whether this practice will be allowed
to continue.

Potential uncertainty regarding garment uota allocations. At
present, the National Council on Free Zones shares with other
Government bodies the responsibility of negotiating Dominican quotas
with the United States, and of allocating quota rights among both
zone- and nonzone-based garment exporters in the country. Although
the National Council has adopted internal guidelines to award quota
rights on the basis of prior export performance, this policy has not
been formalized and hence may be overturned in the event of future
management changes.

Concerns .over immigration policies .an practices. Notwithstanding
legislation that permits up to 30 percent of a zone user's skilled
workers to consist of expatriates, some zone firms report that
Government reluctance to issue work permits has prevented them for
more than 14 months from importing needed skilled workers. The lack
of clearly defined policies can by this means hamper expansion by
zone-based firms.

Contradictions between the la an long-standing ax collection
policies. Legal counsel to the present study has concluded that
Dominican statutes require tax payments on such financial
transactions as dividends and interest payments from zone-based









firms. Until recently, this provision has not been enforced. During
the past six months, however, the act has been invoked against a
major electronics manufacturing company desiring to establish
operations in the Dominican Republic. As noted in Chapter V, the
intermittent and possibly arbitrary application of this law is likely
to deter prospective zone developers and users in the future.

Delays "j National Congress follow-through. The present study has
identified another instance in which uncertainty over Government
policy has held back the private sector from undertaking a needed zone
expansion effort. The Government of the Dominican Republic has
concluded a property transfer agreement with a Taiwanese based firm to
open a sizeable, privately owned site near to the existing San Pedro
Free Zone. Because the Dominican Congress to date has failed to
ratify the project, however, there is some risk that the Taiwanese
investors will withdraw within the next six to eight weeks.

Difficulties In obtaining all needed aprovals fr new private free
zone Pro.ects. Although the Government has been responsive in
granting startup decrees for both non-profit and for-profit zone
development projects, for-profit developers have experienced
substantial delays in concluding final arrangements with the
Government as required in their designation decrees.

5. Archaic regulatory constraints. Other governmental policies--while
clearly defined-have onerous effects upon free zone users. Three notable
examples have been identified in import/export requirements:

Advance approvals 9f imports. An important deterrent to zone
business expansion consists of the product-by-product listing of
import needs that each company must present to the Industrial
Technical Department as part of its request to operate in Dominican
free zones. .Firms seeking the advantages of Law 299 incentives must
-specify in advance the exact nature of the components used in their
production processes, and wait. for three to four weeks or longer
before the item is approved. Industries with rapidly changing
production processes are legally obliged to go through a cumbersome
import approval process each time a new type of import is needed.
The effects- of the law are particularly destructive in the case of
production plants engaged in short-run subcontracting operations.
Although operations of that type have enjoyed success in Haiti, they
are impractical for the Dominican Republic because of the prior import
approval requirement.

Consular invoicina. The Dominican Republic is one of a handful of
countries that retains a system of consular invoicing, in which
invoices originating outside of the country must be ratified by
consular representatives of the Government in the foreign country.
This can represent a sizeable inconvenience for firms, without a
clear benefit to the country because of the essentially tax-free
status of zone-based enterprises.

Controls Jlimitin local finance for zone occupants. Current
Dominican statutes prevent firms with less than 90 percent Dominican
ownership from. borrowing in the .country's financial markets" This "









policy can hold back expansion of firms, especially joint venture
operations.

6. Constraints on self-provision of infrastructure and services. At
present, Dominican laws discourage private developers from financing and
providing many of the basic infrastructure and service needs of free zone
tenants.

Powr generation. Although individual firms within free zones are
permitted to operate standby generators for their own needs,
zone developers are unable to generate power for sale to zone
S__tenants. Many zone users' reported great frustration with the
stability, quality, and price of power provided by the national grid.
The reliability and quality of service provided by the national power
system is due to be greatly upgraded by the end of 1986. But a
number of firms, particularly in the La Romana zone, have had bitter
experience with bills received from the power company. It appears
questionable whether capricious billing practices to zone users will
,._mprove as long as theyrepresen. .captive market .....- ---- .---... -

Telecommunications. Provision of low-cost international
"-telecommunications links appears to be within financial reach of
Private free zone developers. It is unclear, however, whether
Dominican statutes and regulations governing privately-provided,
Competitive services will allow them to operate.

Basic services. In contrast to frequent practice in North American
industrial parks, free zones in the Dominican Republic have yet to
establish automatic-membership associations in which all zone-based
firms participate. Consequently, the zone users associations that
have sprung up tend to be limited in membership and in their ability
to raise significant revenues via membership dues. The San Pedro
zone association in particular, reports a significant gap between-
the resources it can raise via the present system of moral suasion,t
,and the funds it needs to upgrade amenities for this under-serviced
zone. Needs are especially evident in Dominican free zones for child
.care, medical dispensary, and counselling services catering to the
Seeds of the _yerwwelmin~glyyoung and female workforce.

7. Restrictions on air freight service providers. Because of the
Government's desire to protect Dominicana Airlines from competitive
pressures, highly-regarded air..freight service providers have been blocked
-from establishing regular operations. Considerable doubts exist among zone
-_users as to whether Dominicana will be able to provide adequate freight
Services in the face of rapidly-increasing demand.

8. Under-developed channels by which free zones can influence Government.
Although they now account for more than 36,000 direct jobs, the free zones
of the Dominican Republic have had few formal channels through which to
express their views and to work for better coordination among public
institutions affecting their tenants. Consequently, misunderstandings and
complications have been slow to be resolved. The National Council on Free
Zones, for example, reports that it has virtually no relationship with FIDE,
'the principal public, sector financing vehicle for zone startups and
Expansions. Although associations _o zone users over the past year have









begun asserting their interests more vigorously, more effective advocacy on
behalf of zones and their users will be increasingly needed as their role in
the Dominican economy increases.

9. Problems faced in mounting large-scale standard factory building
construction projects. Another constraint limiting the ability of zones to
meet demand for factory space consists of the difficulty in undertaking major
construction programs. In particular, the managers of the Santiago zone
expansion area appear to be straining to construct an additional 105,000
square feet of factory shells. (All of this space is committed to expansions
of existing zone-based firms, rather than to new tenants.) Developers of the .-
Santiago zone have experienced this constraint because of their decision to
establish-'an in-house construction-department, rather than to work through a
general contractor. Because of the limited size of the in-house construction
staff, the zone cannot accommodate building demand. Building programs at
other zones are also held back by the reluctance of prospective occupants to
make the exceptionally large up-front payments being demanded for factory
space.


B. EXTERNAL FACTORS INFLUENCING ZONE PERFORMANCE


6.04 In order to realistically assess the potential for the Dominican free
zones, it is critical to also recognize the impacts of global factors largely
outside the country's control.

1. General U.S. Economic Performance. As noted, the majority of foreign
investment in the Caribbean/Central American region in general, and in the
Dominican free zones in particular, originates in the United States. As
such, any vagaries in the overall economic performance of the U.S. directly
affect the flow of investment capital into the IFZs. During the U.S.
recessionary period of 1981-82, for example, both the volume and average
size of U.S. direct foreign investments in the region dropped precipitously.
Accordingly, a serious economic downturn in the U.S. could retard demand for
Dominican free zone space. /1

2. Regional Cost Competitiveness. Historically, faced with worldwide
competition and increasing costs of production on the one hand, and


/1 On the other hand, the degree to which free zone exports are affected by
U.S. recessions is debateable: evidence has shown that much depends on
the specific product in question. In electronic components assembly, for
example, exports to the U.S. under the 806.3/807 program actually
increased as a proportion of total manufactured exports to the U.S.
during recessionary periods in most low-cost locations including the
Dominican Republic. It appears that, in response to plummeting demand
experienced in recessionary periods, producers tend to shift output to
low-cost locations at the expense of higher-cost ones, in order to cut
variable costs. This approach, then, tends to benefit locations such as
Dominican free zones at the expense of higher-cost Asian zones. Assembly
operations' exports then, may be more resistant to economic downturns
than other exports.








dramatically reduced international transportation and communication costs on
the other, many U.S. producers have moved to lower-cost locations overseas.
Although this investment traditionally has been concentrated in the Far East,
the cost competitiveness of many Asian locations has been decreasing, and
many labor-intensive operations are moving to alternate sites. Hong Kong,
for example, once an efficient, low-cost labor location, is losing many of
its assembly industries to lower-cost locations in the Caribbean, South Asia
and China, where labor rates are halved. As this trend continues, it may
benefit countries like the Dominican Republic.

3. Changing Technologies of Production. With the advent of highly
sophisticated machines and modes of production, much of the comparative
advantage of manufacturing and assembly in low-cost labor locations appears
to be at risk. It is increasingly recognized among some circles that
technologies like Roboticization, CAD//CAM, etc, are making it economically
feasible and rewarding to reestablish certain production processes in
industrial countries once again. However, much depends on the specific
nature of the product considered, /1 which sometimes precludes automation.
For example, short-production run assembly operations are seldom candidates
for automation, which requires a relatively large fixed capital investment,
and as such, is dependent on a stable design, production process, and fixed
parameters. In the final analysis, automation as an alternative to manual
assembly depends on the relative costs of capital and labor; and the size of
the production flows that can repay the capital charges.

It is likely, moreover, that evolving production technologies will create
opportunities in other sectors for free zones. The decline in minicomputer
and telecommunications costs seems likely to stimulate offshore "data entry"
operations on a wider scale than has occurred to date in the Caribbean Basin.
A number of companies have already begun to locate key-punching, word
processing, and other data entry functions offshore, to capitalize on labor
costs that are less than 25 percent of such costs in the United States. Free
zones that offer low cost international telecommunications links, as well as
trained data entry/processing personnel, can expect major gains in employment
over the next decade.

4. Actions of Competitors. Another set of factors influencing the future
development potential of Dominican free zones consists of actions being taken
by competitive countries. A growing trend is the expansion of the free zone
concept by granting incentives on a factory-specific basis. The Bahamas,
Haiti, Jamaica, Puerto Rico, el Salvador and Mexico regularly grant duty
and/or tax concessions to individual enterprises, whether or not they are
located inside a zone. This growth of factory-specific incentives will not
make traditional free zones obsolete; industrial park-type zones conserve
infrastructure costs and can ensure more aesthetically attractive and

----------------------
/1 In most cases, goods that most typically benefit from offshore assembly
share a number of distinct characteristics: exhibit high value-to-
weight ratios and low transport costs; can usually be manufactured in
sequential operations that can be separated in time and space without
affecting product quality; are goods with relatively short life cycles,
therefore requiring minimal startup time or investment; require
extensive routine assembly operations that can be performed by low-cost
labor. As such, these goods are typically not candidates for automation.








economically efficient patterns of development. Decentralized application of
incentives, however, will increasingly offer a viable alternative to locating
in traditional free zones, if that happens to be the preference of the
investor or is dictated by other considerations. (Agro-industries and other
natural resource based activities are usually located close to the major raw
materialss; these industries operate best as single-factory free zones.)

Similarly, both the quality and quantity of aggregate free zone space in the
Caribbean region is certain to increase in the near-term as more countries
seek to move toward export-directed as well as private sector-oriented
strategies. As the supply of space increases, and competition between zones
spirals, only the most sophisticated and well-managed zones will remain
financially viable.

5. Industrial Country-Market Access. A critical determinant of both the
demand for Dominican free zones, and their consequent performance, is the
degree to which the vast markets of the United States remain open to
Dominican exports. Even more important are the preferential trade agreements
that currently allow the great majority of Dominican exports (wholly or
partly) duty free entry, providing a great incentive for foreign investors
wishing convenient and preferential access to the U.S. market, namely, the
GSP, TSUS trade provisions 806.3/807, and the CBI. /1 Perhaps the most
debilitating to the country is the GATT agreement regulating the access of
textile and apparel producers, i.e., the Multi-Fiber Agreement (MFA). /2


/1 Under the United States Generalized System f Preferences, about 2,850
product categories can enter duty-free into the U.S. when exported from
any of over 140 countries, subject to, among other requirements, a 35% '
.domestic value-added requirement. TSUS items 806./8Q7 offer duty-relief
proportional to the percentage of US components comprising the imported
product. %In other words, duty is assessed upon the local (non-US) value-
added during processing. Almost all U.S. components are eligible for the.-
program. --The -CaribbeansL i IIitiative is an Act of Congress allowing
for the duty-free entry of a wide number of goods from designated, bene-
ficiary countries. ,Ineligible items are: textiles and apparel; canned
-. tuna; petroleum and petroleum products; footwear; certain leather,.----
rubber, and plastic gloves; luggage, handbags, and flat goods; and
certain leather apparel, In addition, special CBI rules limit the eligi-
'bility of sugar, beef and veal products for duty-free treatment. Duties
are waived on eligible kprodtacwith.at.1least 25% local value-added.

/2 Some evidence indicates that the MFA discriminates against the least
developed developing countries, and those in the Caribbean Basin.
Although export quotas from these countries are allowed to grow at an
annual rate of 7 percent (in comparison to the 0.5 percent allowed
Korea, Taiwan and Hong Kong), the quota allocations vis-a-vis Far East
competitors are very small. In the MFA, the size of the quota granted
depends on past performance, and as such, earlier producers (e.g, Far
Eastern countries) are granted larger quotas than more recent producers
(e.g., Caribbean Basin countries). This has had an inhibiting effect on
the expansion of the sector: for example, a potential U.S. garments
investor in the Caribbean must not only take into account economic
factors such as the costs of labor, transport, etc, but also whether his
target country has a quota to accommodate his output.










Any changes to, or modifications of these programs in terms of product
coverage/eligibility; local value-added requirements, etc, will have a
significant impact on the free zones of the region, and Dominican zones in
particular. Of late, the United States has introduced strict "country-of-
origin" rules that have limited product eligibility under the GSP.
Specifically impacted were garments and textile products, the main exports of
the region, whose components were being made in the Far East and assembled
and shipped to the U.S. via Caribbean Basin free zones. On the other hand,
following a recent visit to Grenada, President Reagan announced new
developments targeted at encouraging Caribbean Basin textile and apparel
exports to the U.S. through the CBI. Henceforth, bilateral agreements with
individual CBI beneficiary countries will be undertaken, that will include
provisions for a significant increase in the current size of garment and
textile export quotas. At present, Haiti, Mexico, Costa Rica, Guatemala,
Panama and the Dominican Republic are the only CBI countries with such
bilateral arrangements with the United States, and therefore, are most likely
to benefit from this development. /1


C, PROJECTIOqS_ OVH SER DEMAND


6.05 This section begins with a review of current levels of demand for free
zone space in the Dominican Republic. It then extrapolates from historic
experience to make future free zone demand projections-under two-scenarios:
(a)-assuming no-change in current level of promotion activities, and (b) .
assuming a promotional effort of the magnitude envisaged by US AID and the
Investment Promotion Council._ Fnally, this section reviews the effects upon.
demand of a concerted governmental effort to remove critical constraints
summarized in part A of this chapter.--- -

6.06 The projections are based upon a detailed analysis of historical
activity in the Dominican zones since 1969 (summarized in Chapter V), paying
particular attention to the following factors: number of firms visiting the
zones, those making an application to install operations, the number which
actually began operations, expansions by existing companies, and the number
of companies which eventually closed down.

,. Survey f Current Demand.

6.07 Demand for industrial space in the Dominican Republic today has never
been stronger. Interviews with zone managers indicate that on average, one
prospective tenant visits each zone each week. Data collected by the field
mission indicate that, historically, of 100 investor visits to a Dominican
zone,-about 20 actually result in actual commitments. Of those making a

-----_--------------

/1 Note that this development concerns only U.S.-made textile A~g apparel
Qomponents entering the country under the 806.3/807 provisions. Non-U.S.
components are not eligible and are still subject to the machinations of
the MFA. The MFA itself is currently in the process of renegotiation
under the UNCTAD and GATT umbrella.










commitment, moreover, a "dropout rate" of about another 25 percent occurs;
i.e. companies who have gone through the process of receiving a
classification, making an application for space and leaving a deposit for a
building, will, in some cases, still decide not to locate in the country. As
such. the "effective demand" or "actual capture rate" is about 15 percent. -

6.08 Applying the historical parameters, it is estimated (Table VI-1) that
approximately 390,000 square feet of industrial free zone space is necessary
to meet new demand at the existing, active free zones in 1986. In addition
to the operational zones, construction is underway at the soon-to-be activated
zones in Bani, approximately 50,000 sq.ft., and at San Cristobal,
approximately 110,000 sq.ft. Expansions of existing zone tenants have been
considerable and need to be taken into account in projecting total future
demand. Based on recent field work, approximately 150,000 sq.ft. of new
building space will be leased annually to companies already in business in
the Dominican Republic. In sum, these projections indicate that a total of
approximately 700,000 sq. ft. of industrial free zone space is currently in
demand in the Dominican Republic. Given that approximately three million
square feet of factory space exists at the four operational zones in the
Dominican Republic, the estimated requirement for 1986 represents an increase
of about 25 percent in the national inventory of free zone industrial space.
(Note: this is slightly above the average 22 percent for the preceding three
years.)

/ ------------------------------------------------------------------------------
Table VI-1
Baseline Investment Projections 1986

Company Investments Av. Size Total
Zone Visits Committed Realized Facility Sq. Ft.


La Romana 40 10 9 11,000 99,000
Santiago 40 5 5 25,000 125,000
Puerto Pl 75 4 3 12,000 36,000
San Pe.dra- 50. 15. ...L. 13,400 134,Q000

Totals 205 34 26 394,000

Source: Field Interviews during June, 1986
-------------------------------- w------------------------- ---------

2w6 Extrapolatln of Future IFZ Demand.

6.09 Basic demand projections for the free zones in the Dominican Republic
are presented below for two scenarios. The first scenario assumes a
continuation of the historic demand trends outlined above, without any formal
promotion effort as planned by US AID and the Investment Promotion Council.
The second scenario adjusts the first projections to take into account the
likely effects of a first-class international marketing/promotional campaign.


____










a. Zone Demand Assuming No Expanded Promotional Efforts.


6.10 Based on the foregoing analysis, Table VI-2 below summarizes five-year
expected demand levels for free zone space corresponding to three levels of
"optimism": low, medium and high.

---------------------------------------------------------
Table VI-2

Dominican Free Zone Demand Projections
(Sq.Ft.)

.Lo Absorption/I Medium Absorption/2 Igh Absorption /3

1986 700,000 700,000 700,000

1987 370,000 740,000 925,000

1988 400,000 800,000 1,000,000

1989 450,000 900,000 1,100,000

1990 500,000 1,000,000 1,250,000

1991 / 550,000 1,100,000 1,400,000

5 Year
TOTAL: 2,970,000 5,240,000, 6,375,000
----------------------------------------------------------------------
/1 Low rate 10 percent annually. (Base is total inventory of million
sq.ft. as of end-1986) Even with a mild recession, or other external
factors, it is unlikely that demand would drop below this level.
/2 Medium rate -- 25 percent; a reasonable projection given the recent
growth rates;
/3 High rate -- 30 percent. Under the best conditions, it is quite unlikely
that effective demand will exceed this rate of growth significantly over
an extended period unless intensive and sustained promotion is
undertaken.
------------- ----------------------------------- m--------

JL _Zone Demand Assuming Effective Promotional Efforts.

6.11 It is clearly apparent that the Dominican Republic's free zone program
Entered a period of growth in the late 1970s which has accelerated since
.1983. Compared to the performance__of competing locations in the Caribbean
.Basin, the Dominican Republic ranks very high and may, in fact, be the
regional leader in terms of employment, investment and foreign exchange
earnings rates of growth. It may be concluded that, the Dominican Republic
is,. inherently, a strong _magnetW for .foreign manufacturers seeking offshore
free zone locations. This is all the more noteworthy since international
marketing and promotion has never been undertaken in the form of a organized,
adequately financed, carefully-planned and sustained program.--------... "

6.12 Quantifying the relationships between resources invested in marketing/
promotion and the results derived therefrom, with any reasonable degree of
~~~-----------------~'~^-~~ ---------. -........









.credibility, is a difficult task. There is historical evidence, based on
data collected-in-other zones worldwide, that increased promotion -- suitably
planned and executed generally yields incremental investment plus all the
other related benefits. Cost/benefit ratios, i.e., promotion dollars/job
created (one standard measure of success) vary from about US$500:1, up to
as high as US$5,000:1. For the Dominican Republic, given the established
--buoyant-trends, resources invested in marketing/promotion should yield --
results at a lower than normal cost/benefit ratio. Although it is difficult
to quantify this judgment precisely in advance of implementation, it can
nonetheless be stated categorically, based on numerous experiences elsewhere,
that resources invested effectively in promotion will yield incremental
benefits, i.e., additional investment, jobs, etc, over and above what would
have happened in the absence of the promotional effort. Results will vary
with the effectiveness of the promotional tools used and the efficiency of
execution. In the worst case, limited results are achieved at great cost and
thi, effort becomes financially senseless.

6.13 For purposes of projecting results in the Dominican Republic, it has
been assumed that, given an effective, sustained (over several years, at
least) promotional effort of the type envisaged in the US AID financed
project currently being tendered, a minimum increment of 10 percent over the
projections given in Table VI-1 can be realistically expected. Incremental -
. growth of as much as 20 25 percent would not be unreasonably optimistic
giyen the strongly positive investment climate in the Dominican Republic.

6.14 In summary, assuming no investment promotion effort of the type
discussed above is undertaken, an extrapolation of historic demand indicates
that between 3.0 and 6.5 million square feet of new free zone factory space
must be provided within six years to accommodate growth. An active
investment promotion effort may well create need for an additional 0.5 1.5
million square feet of space beyond this extrapolation of current demand.

3. Sensitivity of User Demand To Removal of Constraints

6.15 It is self-evident that if the constraints on performance discussed in
Section A above were entirely or substantially removed through GODR policy
an procedural changes, while all other factors affecting free zone
development remain the same, the rate of new investment would accelerate. A
large body of supporting data (derived from studies of the most successful
zones) confirms that free zone performance can be improved to the extent
that unnecessary government red tape can be eliminated and the minimum level
of necessary procedures streamlined while enhancing flexibility and close
coordination and cooperation between public institutions and the private
sector.

6.16 '.ast attempts to quantify the overall impact on zone.performance of
'policy reform, however, have produced little of credible value. This is not
surprising, given the plethora of other variables that impinge directly and
indirectly on zone project performance, including inter alia external
(international) conditions, the ebb and flow of protectionist forces in the
developed countries, regional political and social unrest, etc. What can be
said with confidence is that GODR actions to mitigate the identified
policy/procedural constraints would significantly improve the odds of
exceeding the performance projections presented in Table VI-2.









D. REGIONAL FREE ZONE SITES ANALYSIS


6.17 Many governments perceive free zones as an effective tool in directing
industrial investment to depressed outlying areas, away from the congested
urban centers to which investment capital normally tends to gravitate. Such
a policy of decentralized development, however, should not be rigidly
enforced. Throughout the world, examples can be cited to illustrate the
risks involved. In Costa Rica, for example, two government free zone
projects were deliberately located in depressed coastal areas with the hope
that they would rapdily evolve into "growth poles" capable of spearheading
the economic development of the surrounding regions. These two ill-conceived
projects are languishing while a private industrial state/export processing
zone near the capital (San Jose) is growing rapidly and operating profitably.
Critical analysis of the Costa Rican program, conducted recently by FZA,
identified the reasons for the disparity in performance. In summation, the
coastal sites had little in their favor compared to the upland location near
the international airport and the capital; infrastructure was seriously
deficient; the climate discouraging; labor availability low; and grass-roots
community support lacking, among other negatives. In addition, management
was weak and promotion non-existent.

6.18 Only where the economic factors of production are propitious and basic
physical infrastructure exists, or can be developed rapidly at reasonable
cost, should outlying (regional) sites be considered for free zones. In
general, however, such locations will still be at some competitive
disadvantage vis-a-vis zones in closer proximity to ports (air and/or
maritime) and major cities with well-developed infrastructure, large pools
of available labor, and adequate international business services such as
banking, insurance, freight-forwarding, etc.

6.19 Decentralization and regional development are, nonetheless,
economically and socially justifiable objectives and should be pursued to
the extent possible. However, in assessing outlying locations, where demand
is unlikely to be as bouyant as at the better-endowed prime locations,
project size and economy of scale concepts must enter the equation. There
is evidence that zones operate most efficiently within a certain optimal
size range. At the lower end, a project can be too small to support
adequate management and generate revenues to cover minimum operating costs
and debt service. At the upper end, a project may often attain a size
(above 15,000 to 20,000 workers, according to some investigators) that
begins to contribute to the congestion it may have originally been designed
to help alleviate. There are no hard and fast rules regarding the upper
bound on optimum size; much depends on location (distance from urban cores),
the stage of development of the host country, the adequacy of planning and
implementation of social infrastructure (housing, recreation facilities,
community support services), roads, bus service, etc. Intuitively, however,
it is recognized that oversized projects that place too great a strain on
local infrastructure should be avoided in favor of multi-site zone programs
aimed at decentralized development, provided that each of the dispersed
projects can realistically be expected to achieve economies of scale and,
ultimately, profitable operations.

6.20 While outlying sites near secondary towns are, in general, inherently









comparative disadvantages. The special incentives available to free zone
industries can be tailored to favor the "less attractive" locations. Mexico,
for example, has divided the entire country into three "zones" (A, B, and C)
for purposes of granting incentives; the less attractive the zone, the
greater the incentives offered to investors.

6.21 In the light of the foregoing discussion, it may be concluded that the
de facto policy of the GODR of encouraging decentralized free zone
development is a sound approach in principle, but that efficient
implementation of the policy is essential to safeguard scarce public
resources and to ensure an absolute minimum of poor project performers. This
means that publicly-subsidized zone projects should be approved only after
careful pre-investment analysis of technical, commercial and financial
feasibility.

6.22 Currently, a total of 16 sites have been designated by the GODR or are
considered by the project team as candidates for the operation of Industrial
Free Zones (IFZs):



Table VI-3
IFZ-Designated and Potential Sites


La Romana
San Pedro de Macoris
Santiago
Puerto Plata
Bani
Haina
San Isidro
Azua
Barahona
Higuey
La Vega
San Fransisco de Macoris
Manzanillo
Las Americas Airport
Los Minas
Moca


Operating
Operating
Operating
Operating
Construction
Construction
Construction
Designated
Designated
Designated
Designated
Designated
Designated
Potential
Potential
Potential


Source: Mission data, June, 1986.
-------M--------------------------- M----------------- M---------------

6.23 Technically, 'site location analysis' entails a number of distinct,
sequential steps:

(1) Identification of eligible communities or locations; this first
screening will, generally, designate all major cities and
secondary towns (population 50,000 and above, although in special
cases, a town with as little as 20,000 population may be feasible)
as potential free zone sites in an order of priority linked to the
government's perception of regional (geographic) priorities;










(2) Evaluation at each site of availability of the economic factors of
production and essential infrastructure (roads, power, water,
sewerage, etc.) either existing or capable of development at
reasonable costs;

(3) Assessment of special requirements for industry mix already
identified in market survey/analysis as most promising for the
Dominican Republic;

(4) Matching of special requirements grid with site-specific resource
grid to identify most viable locations, i.e., where growth and
performance potential is highest.

6.24 Project experience has repeatedly demonstrated however, that a number
of non-economic and non-quantifiable factors are equally important, and
arguably, the most critical in the actual selection of sites in a third
world context. Accordingly, a number of social, political and cultural
variables were introduced in the analytic calculus as shown in Table VI-4.

6.25 A critical requirement for most types of free zones and industrial
estates, is the provision of adequate internal and external infrastructure.
Of particular importance are road networks, rail links, and easy access to
air and sea ports. For all locations surveyed, the primary and secondary
road networks are more than adequate. Port and airport installations,
however, are missing in most locations: for example, Manzanillo, and Azua
lack airports whereas Higuey can use the international airport presently

----------------------------------------------------------------
Table VI-4
Factors Considered In Locational Analysis

-. Re ionl -Factors.

Gov't Priority for Regions
Foreign Investor Perceptions of Region
Quality of Infrastructure/Capital Stock
Distance to Major Distribution/Transportation Hubs

,UL Local Factors,

Quality of Leadership
Community Attitude to Foreign Investment
Quality, Availability, Cost of Labor Force
Freight Services -- quality, availability, cost, types
Business Support Services
Utilities -- cost, availability, reliability
Overall Living Conditions/Amenities
Overall Population Size/Growth Rate
Quality and Availability of Educational/Technical Institutions
Overall Conditions of Labor Union Activity
Extent of Local Control Ordinances (zoning, building, environmental
protection, etc)









servicing tourists at nearby beach resorts. In the cases of La Vega and
Moca, Santiago airport is within 30 miles from each location, and Barahona
can be expected to use its own airport which is to be built in the near term.

6.26 Another important consideration is the availability, quality, and cost
of the surrounding workforce. Experience has demonstrated that it is usually
more efficient economically to locate zones close to population centers,
rather than expect labor to migrate towards a distant zone. Labor costs in
the Dominican Republic vary somewhat through the country. While the official
minimum wage for unskilled labor is $0.47/hour ($0.62/hour with normal fringe
benefits), unskilled labor in some areas is available for less than minimum
wage. Similarly, direct wage rates for skilled labor and middle-management
tend to vary: in more economically developed areas like the Capital, and in
agricultural areas like Moca and La Vega, salaries are reportedly higher than
in other locations.

6.27 Obviously, the real cost of labor to the industrialist will vary with
the degree of absenteeism, productivity and the like. The quality of
management, the extent of labor union activity, and overall political
conditions also influence these variables. According to reports, the
populations of areas such as La Vega, Moca, Cibao (with strong tradition of
agricultural production), or already industrialized areas like La Romana,
Santiago, and San Pedro de Macoris, tend to be more disciplined in comparison
to workers in places like Higuey or Azua.

6.28 A final category relates to the availability of offsite support
services, as well as overall living conditions. In this case, locations such
as Las Americas Airport and Los Minas tend to be highly-rated in comparison
to Azua and Manzanillo where almost every physical amenity is lacking. All
else being equal, domestic and foreign capital tend to flow into areas where
basic infrastructure already exists, and living conditions are adequate to
good, rather than to areas that lack these advantages.

6.29 Accordingly, the comparative analysis of the various locations, based
solely on economic and other objective data available indicates that areas
-such as Moca,_La_Yega,. Barahona and Higuey are the highest-potential
locations for near-term free zone development. These centers all tend to
have, on average, better amenities and support services than others, economic
factors of production tend to be of-better quality and in abundance, and
.__ living conditions appear. favorable. In particular, Moca and La Vega appear.,.-
to be well-suited for basic light manufacturing industries such as
'electronics and garments assembly, and data processing; while Barahona and
.Higuey may be better suited for zones oriented towards tourism (duty-free
shopping, exhibition centers, etc).

6.30 The above analysis, however, neglects to factor in the subjective
variables which, experience has shown, strongly influence site selection and
ultimate project success. Among these, the competence and tenacity of local
leadership as well as the political interplay affecting GODR priorities and
decisionmaking must be ranked as two of the most important factors. Indeed,
past experience of free zone development in the Dominican Republic
demonstrates that the designation and actual establishment of free zone










locations depends as much on local leadership and political leverage, as on
comparative economic advantages. /1

6.31 Taking into account all the objective and subjective factors relevant
to the process of comparative locational analysis, the nine zone areas
(designated and/or potential) not yet under construction (Table VI-5) are
ranked as shown below:
------------------------------ m----------- -------------
Table VI-5
Priority Ranking of Designated IFZ Projects
------------ m----- m----------------- --------------

Location Priority Salient Features
La Vega la Well-organized, vigorous
Hoca la local leadership;

Las Americas lb Comparable to Priority la
Las Minas lb Group, but in National
District

Barahona 2 Less developed local
Higuey 2 leadership and/or
San Francisco de Macoris 2 infrastructure

Azua 3 Least developed
Manzanillo 3 community leadership/
political leverage;
deficient infrastructure


6.22 It is important to understand that any one of these locations--as well
as others not yet designated-are potentially feasible sites for free zones.
The priority breakdown given in Table VI-3 points, essentially, to those
projects which could be developed at a more rapid pace given their community
leadership/political environment, and at somewhat lower cost given their
existing inventories of infrastructure. Locations of lower ranking could, of
course, jump of the forefront of the list should conditions change. For
example, a resurgent community leadership coupled with enhanced central
government political support and private capital/management could generate
sufficient momentum to achieve free zone development objectives in even the
lowest-ranked locations listed in Table VI-5.

_----- m--- -m----------
/1 Every one of the four existing EPZs is, in a way, a testimony to the
capacity of local leadership: La Romana was started by Gulf & Western,
which developed the zone in a region where local leadership was limited.
,San Pedro de Macoris IFZ was brought about by the efforts of the Hazim
f amilywho-also -started the Universidad Central de Este .project.. In.-- -
-.Santiago, where local leadership was crucially responsible for the
successful implementation of the free zone program, the business group
responsible is widely reputed to be highly respected and capable. In
vivid contrast is the experience of the Puerto Plata IFZ, where the
magnitude of their current problems can be attributed, in large measure,
to the lack of local leadership and adequate planning.










6.33 Possibly, the most constructive use of the (so-called) priority listing
is in allocating scarce public resources. Since, realistically, available
public resources will be unable to meet demand over the near- to medium-term,
it is essential to screen and select among competing projects to assure
optimum use of funds. On the other hand, it may well happen that private
investment groups will wish to establish projects at locations that do not
necessarily rank high on the list. This, of course, should be encouraged by
the GODR regardless of its own perception of priority in allocating public
resources. In such a case, the feasibility of the privately financed project
is the responsibility of the investors as is the risk-and it is exactly
under such conditions of business-like local initiative that any of the Table
VI-5 low priority locations can become workable.











/









VII. IDENTIFYING AN OPTIMAL ZONE DEVELOPMENT PARADIGM _


7.01 This chapter details optimal paradigms for free zone development, based
upon analysis by the project team of successful free zones worldwide. The
chapter begins by examining criteria for assessing successful zones, from the
perspective of zone users, developers, and the surrounding community. It
then investigates the factors correlated with the success of zones along each
of the above dimensions. Finally, the chapter proposes specific ways in
which the overall zone development paradigm for the Dominican Republic can be
improved.


A. CRITERIA FOR ASSESSING FREE ZONE SUCCESS


7.02 In order to adequately assess international free zone performance, it
is important to define what successful free zone performance means, i.e.,
to delineate the set of variables that distinguish "superior", "average" and
"inferior" performing free zones. As shown in Table VII-1, the factors used
to define successful performance can be subsumed under three general
categories:. Use Satisfaction, Financial Performance and Extent QL Zone
. Linkages -o Surround nJ R QEcomy. Each is examined in turn. _

L User Satisfaction.

7.03 "User Satisfaction" is a category that attempts to group specific zone
performance variables in a way analytically useful for the free zone user.
Specifically, overall zone user satisfaction is approximated by: the overall
rate of investment absorption; the total factory space built related to that
* actually cu p ad; the gross and net export volume of the particular zone;
the gross number of jobs created and the overall level of existing tenant
satisfaction.

2. Financial Performance.g

7.04 A second set of variables has been selected to quantify the overall
financial return of free zones. In particular, as shown in Table VII-1, the
following variables are important: operating budgetary surpluses or
deficits; the payback period for invested capital in real terms; and the
financial return on investment. These factors are especially critical from
the view of free zone developers -- both public and private.

Zon Z Linkaes j2t Surroundig .Economy.

7.05 From the point of view of the host country in general, and the
surrounding economy in particular, a profoundly important measure of success
consists of the degree and extent of backward economic linkages forged by a
free zone. Approximators of that relationship are as follows: indirect
employment generated in domestic activities linked to free zone operations;
the nature and extent of technology transfer, including skills diffusion
into the domestic economy; and the social impact of free zone development.









VII. IDENTIFYING AN OPTIMAL ZONE DEVELOPMENT PARADIGM _


7.01 This chapter details optimal paradigms for free zone development, based
upon analysis by the project team of successful free zones worldwide. The
chapter begins by examining criteria for assessing successful zones, from the
perspective of zone users, developers, and the surrounding community. It
then investigates the factors correlated with the success of zones along each
of the above dimensions. Finally, the chapter proposes specific ways in
which the overall zone development paradigm for the Dominican Republic can be
improved.


A. CRITERIA FOR ASSESSING FREE ZONE SUCCESS


7.02 In order to adequately assess international free zone performance, it
is important to define what successful free zone performance means, i.e.,
to delineate the set of variables that distinguish "superior", "average" and
"inferior" performing free zones. As shown in Table VII-1, the factors used
to define successful performance can be subsumed under three general
categories:. Use Satisfaction, Financial Performance and Extent QL Zone
. Linkages -o Surround nJ R QEcomy. Each is examined in turn. _

L User Satisfaction.

7.03 "User Satisfaction" is a category that attempts to group specific zone
performance variables in a way analytically useful for the free zone user.
Specifically, overall zone user satisfaction is approximated by: the overall
rate of investment absorption; the total factory space built related to that
* actually cu p ad; the gross and net export volume of the particular zone;
the gross number of jobs created and the overall level of existing tenant
satisfaction.

2. Financial Performance.g

7.04 A second set of variables has been selected to quantify the overall
financial return of free zones. In particular, as shown in Table VII-1, the
following variables are important: operating budgetary surpluses or
deficits; the payback period for invested capital in real terms; and the
financial return on investment. These factors are especially critical from
the view of free zone developers -- both public and private.

Zon Z Linkaes j2t Surroundig .Economy.

7.05 From the point of view of the host country in general, and the
surrounding economy in particular, a profoundly important measure of success
consists of the degree and extent of backward economic linkages forged by a
free zone. Approximators of that relationship are as follows: indirect
employment generated in domestic activities linked to free zone operations;
the nature and extent of technology transfer, including skills diffusion
into the domestic economy; and the social impact of free zone development.









Table VII-1

Criteria Defining Successful Zone Performance -- --
S ------------ -----------.. . . . . . . . .


!
j- I


I-
t-


r Satisfaction.


Historical Investment Absorption Rate
Total Under-Roof Space Built/Occupied to Date
Export Sales and Net Foreign Exchange Earnings
Direct Job Creation
Expressed Tenant Satisfaction


2 Financial Performance.

Size of Operational Surplus/Deficits
Investment Payback Period
Return on Total Capitalization (Debt Plus Equity)

. zone Linkaes.


Indierct Job Creation(i.e., Offsite Employment Generated Through
Backward Linkages
Extent of Technology Transfer and Skills Diffusion
\ Social Impact

------------------------------------------------------------------


B. DEFINING PARADIGMS OF ZONE DEVELOPMENT


7.06 Since the first modern free zone opened at Shannon Airport, Ireland in
1959, free zone development has proliferated worldwide at a continually
accelerating pace. Only recently, however, has a systematic analytic frame-
work been developed regarding the start-up, development and operations of
free zones in general, and IFZs (or EPZs) specifically. This section out-
lines such a framework.

7.07 The development of free zones has been criticized by some as a distor-
tion of world trade through inclusion of these areas of special freedom.
This is not the case. Free zones do not distort world trade; rather, world
trade is already distorted, hardly resembling a free market. As such, the
:development of free zones do not in themselves create comparative advantage
for'the sponsoring country; rather, they exploit existing advantages. In
the final analysis, then, free zones are merely a tool, albeit a very
important one, in the country's portfolio of development alternatives. It
is with this background that one must view EPZ development. EPZs are not a
-panacea for all-varieties of economic malaise; they do not therefore, "work".
in.every. setting much depends on external, internal, geographic, politi-
oal and social factors, as emphasized throughout this report. On the other
hand, it is equally true that, all else being equal, there are a number of
salient characteristics shared by the "successful" EPZa, characteristics
-that can be generalized to point out an


'



r

',









Table VII-2


Fraaework for Identifying Zone Success Causal Factors
-------------------------------------- ---------------------------

I. Zone Start-Up/Finanoing,

A, Initial Impetus.
Local/Community/Government
Effective Local Leadership Present?
L Sourceg Amount Ad Structure a f SeeCapital.
Gov't/Private; Foreign/Domestic; Multi/Bilateral
c- Debt:Equity; Grants as Percentage of Total Capitalization
Real-and In-Kind Contributions
^ .Initial Feasibility Analysis.
How/Why Was Site Selected? Political/Economic/Social Reasons
Objectives for Zone Creation: To Be Financially Successful?
J Initial Ownership Structure.
Private/Public; Mixed
Non-Profit/For-Profit; Autonomous Parastatal
Foreign/Domestic
S. Zone= Developer.
Public/Private
Prior Experience/Knowledge of Developer
/ Foreign/Domestic
L. Zone ODerator/Management.
Public/Private; Same as Owner?
Prior Experience/Knowledge of Developer
Foreign/Domestic
Local Leadership Present?
GL. Land Building Development.
Phased Development in Pace with Demand?
Domestic/Foreign Inputs
iL. Jol&e J 2Z&e Promotion.
Autonomous Unit in Management?
Well Funded? Adequate Manpower?
Preceding (In Pace With) Zone Development?

II. Zone Operations and Economic Factors.

AL Source, Amount and Structure of Operating Funds.
Gov't/Private; Foreign/Domestic; Multi/Bilateral
Debt:Equity; Grants as Percentage of Total Capitalization
Real and In-Kind Contributions
Ratio of Public:Private Follow-on Capital
Internally Generated Funds
&. ManaLement/Ownershio/Operator Type/Structure.
Any Changes Over Time?
Presence of Strong Local Leadership?
f.2 Z2o Promotion.
Well-Coordinated with National Efforts?
Adequate Funding/Staffing?
Direct Representation Overseas?
Good/Updated Informational/Promotional Materials?


__









Table VII-2 (continued)


Framework for Identifying Zone Success Causal Factors

S n S -------ecurity.
Private/Gov't (Police, Army, Others); Individual Companies
Security Methods
Autonomous? Adequately Funded? Well-Equipped?
Role/Coordination of/with Customs
E. lo Services.
Waste Collection; Landscaping; Lands, Buildings and Roads
Maintenance; Transportation
Others: Canteens; Infirmary; Kresh; Worker Housing; etc.
Zone Management/Public/Private/Individual Companies
Adequate Funding?
L. Zone Infrastructure.
Quality, Reliability, Adequacy, Coverage of Power, Water,
Sewerage, Telecommunications Facilities
Private/Public; Contracted? Foreign/Domestic?
Quality, Accessibility,.Distance of Seaport; Airports; Rail
lines; Road Network
L. Zone Incentives.
Ease in Application/Receipt; Automatic Coverage; Consistency and
/ stability of Tax, Tariff Incentives.
Types, Coverage, Accessibility of Regulatory Relief Incentives
Including Provision of One-Stop Administrative Center
L. Zone-Users Association.
Recognized, Legitimate Role?
Empowered with Jurisdiction/Responsibility?
Coordinates with Gov't/Management?
. Quality of Life/Investment Climate.
Proximity, Availability of good schools, supermarkets; pleasant
surroundings, etc.
Stable business climate, strong support for foreign investment,
simple, consistent application of Laws, etc.
L. Labor Force.
Cost, Availibility, Productivity
Absenteeism, Turn-over, Trainability, Work Ethic
Union Activity/Union Relations
Availibility of Unskilled/Semi-Skilled/Skilled/Middle-Management
J. Capital/Financing.
Cost, Availibility, Accessibility
Foreign/Domestic
Special Restrictions/Incentives
I. Land jU Building Contracts.
Purchase/Lease Option?
Cost, Terms, Conditions
Up-front Payment Required?
Escalator Clause Present?
Economic (Market) Pricing?









optimal path of free zone development. This analytical process leads, in
turn, to a structure or"paradigm" of zone development with better-than-
average potential for success.

7.08 In order to be able to identify the salient factors responsible for
successful zone performance, a framework of potentially "causal" factors is
the first requirement. Table VII-2 presents a check-list of factors that
have been, from experience, the most important in determining zone
performance. The factors chosen reflect two basic criteria: first, it must
be recognized that zones, as with any institution, grow and evolve over
time. As such, the framework is divided into two sections; one outlining
factors involved in zone start-up and financing, and the other those
pertinent to zone operations. Secondly, it must be noted that zone success
is predicated not only on the set of zone-specific factors outlined, but
rather on a macro-economic level as well. Accordingly, basic economic
factors of production, as well as the broad investment climate and other
variables have been included.

7.09 The following analysis focuses on the successful zones selected below
(Table VII-3), in order to identify shared groupings of "success factors",
These factors are then correlated or related in an analytically significant
way to the "successful performance variables" outlined in the previous
subsection.

/
C. PARADIGMS CORRELATED WITH ZONE SUCCESS


7.10 A selection of leading sponsors of IFZs (EPZs) is listed in Table
VII-3. In the interest of simplicity, the numerous measures discussed
previously are clustered under general headings.

7.11 As Table VII-3 indicates, none of the world's free zones scores
well in all of the three main areas of success criteria. Zones in
Taiwan and South Korea, leaders in terms of user satisfaction and backward
linkages, have not proven profitable financially. Mauritian and Mexican,
Zones have fared well in terms of user satisfaction and financial-
'-performane,_butn..ot .on_pkags to domestic producers,. -

7.12 A closer look at zone development paradigms is needed to determine
whether success along any dimension is incompatible with success along any
other-in other words, whether an opportunity exists for Dominican
Republic free zones to be successful in all three of the measures of
performance.

Paragdi4s1= Associated JWith Jer Satisfaction

7.13 The most successful zones in terms of user satisfaction internationally
are in Taiwan, South Korea, Mauritius and Malaysia. When the performance of
private free zones alone are considered, EPZs in Mexico also score well. As
''-noted previously,-the key performance -indicators for user satisfaction are as"
, follows; high expressions of tenant satisfaction, high levels of direct job
_creation, high export sales, high ratios of occupied to available space, and
high historical investment absorption rates. ----









optimal path of free zone development. This analytical process leads, in
turn, to a structure or"paradigm" of zone development with better-than-
average potential for success.

7.08 In order to be able to identify the salient factors responsible for
successful zone performance, a framework of potentially "causal" factors is
the first requirement. Table VII-2 presents a check-list of factors that
have been, from experience, the most important in determining zone
performance. The factors chosen reflect two basic criteria: first, it must
be recognized that zones, as with any institution, grow and evolve over
time. As such, the framework is divided into two sections; one outlining
factors involved in zone start-up and financing, and the other those
pertinent to zone operations. Secondly, it must be noted that zone success
is predicated not only on the set of zone-specific factors outlined, but
rather on a macro-economic level as well. Accordingly, basic economic
factors of production, as well as the broad investment climate and other
variables have been included.

7.09 The following analysis focuses on the successful zones selected below
(Table VII-3), in order to identify shared groupings of "success factors",
These factors are then correlated or related in an analytically significant
way to the "successful performance variables" outlined in the previous
subsection.

/
C. PARADIGMS CORRELATED WITH ZONE SUCCESS


7.10 A selection of leading sponsors of IFZs (EPZs) is listed in Table
VII-3. In the interest of simplicity, the numerous measures discussed
previously are clustered under general headings.

7.11 As Table VII-3 indicates, none of the world's free zones scores
well in all of the three main areas of success criteria. Zones in
Taiwan and South Korea, leaders in terms of user satisfaction and backward
linkages, have not proven profitable financially. Mauritian and Mexican,
Zones have fared well in terms of user satisfaction and financial-
'-performane,_butn..ot .on_pkags to domestic producers,. -

7.12 A closer look at zone development paradigms is needed to determine
whether success along any dimension is incompatible with success along any
other-in other words, whether an opportunity exists for Dominican
Republic free zones to be successful in all three of the measures of
performance.

Paragdi4s1= Associated JWith Jer Satisfaction

7.13 The most successful zones in terms of user satisfaction internationally
are in Taiwan, South Korea, Mauritius and Malaysia. When the performance of
private free zones alone are considered, EPZs in Mexico also score well. As
''-noted previously,-the key performance -indicators for user satisfaction are as"
, follows; high expressions of tenant satisfaction, high levels of direct job
_creation, high export sales, high ratios of occupied to available space, and
high historical investment absorption rates. ----











Table VII-3
Successful Zone-Sponsoring Countries


USER SATISFACTION
(jobs created)


DEVELOPMENT
RETURN ($)


Bahamas
Govt zones


Costa Rica
Govt zones
Priv zones

Dominican Republic
Govt zones
iYC-Lvea^.-

Haiti
Govt zones
Priv zones

Jamaica
Govt zones
Priv zones

Mal aysia
Govt zones


Mauri tius
Govt zones
Priv zones

Mexico
Govt zones
Priv zones

Singapore
Govt zones

South Korea
Govt zones

Taiwan
Govt zones


low
hig.


none
low


moderate
moMh -de


moderate
moderate


moderate
startup


high


moderate.
high


low
high


high


high


high


BACKWARD
LINKAGES


negative



negative
marginal


negative
negative


none
few"


none
few


few
few.


none
none


few
startup


some


negative
n/a


negative
startup


marginal


negative
positive


negative
positive


marginal


n/a


negative


few
few


few
few


some


many


many










7.14 Free zones that are successful in satisfying users generally have the
following shared characteristics:

1 .,.. Simple, Automatic Incentives System (Tax,.Duty), Liberal .-
Regulatory -Environment (streamlined procedures)
2. User-Responsive Zone Managements
3. ,Proximity to (Non-militant) Labor Force
4. Proximity to Airports and/or Port Facilities
5. -. High-quality Zone Infrastructure:- Electricity, Water, Sewerage,
Telecommunications
6.- Economic Pricing of Land and Building Lease/Purchase Contracts
7. Zone Developer Provision of Services/Amenities (Zone Security,
Trash Collection, Grounds, Roads, and Buildings Maintenance;
Arrangement of Private Transportation Services)
8. Efficient, Streamlined Customs Clearance Procedures
9. High Quality of Life/Stable Investment Climate

7.15 Among the Caribbean islands, Dominican Republic zones must be ranked
high in user satisfaction. The following were key conclusions emanating
from an analysis of the varying approaches to free zone development within
the country.

7.16 Privately administered zones have higher levels fa user satisfaction.
Both the Santiago and San Pedro zones have been constructed with substantial
GODR grants, but the Santiago zone has a professional, private sector
management team, while San Pedro is managed by a CFI official. The Santiago
zone administration is highly rated by its tenants as effective and
efficient in all respects, particularly in the timeliness and quality of
maintenance and other services. In contrast, San Pedro zone occupants
complain of a lack of services. It is important to note that the government
need not own and operate a zone in order to reap benefits. By transferring
ownership and administration to the private sector, which does it more
efficiently, the public sector frees up scarce resources for investment in
alternate projects. Since private administration is more responsive to
tenant needs, the privately-run free zone quite possibly will create more
Jobs and net exports than the same zone would if operated publicly.

7.17 Business-like revision f basic services is correlated with use
satisfaction. A wide variance was noted in basic service delivery. In San
Pedro and Puerto Plata, zone users readily noted that roads and grounds
were inconsistently cared for. In contrast, the private La Romana
Corporation earns high praise from tenants for keeping the roads and grounds
in excellent condition. It is important to note that the private sector
often charges more to the tenants in order to defray the cost of higher-
quality service; the monthly rent in La Romana is now triple that in the
other three zones. Nevertheless, La Romana has a waiting list of some five
firms desiring to locate there.

7.18 rior industrial experience on the P art f zone developers appears t
be associated lith tenant satisfaction. Businesspeople experienced in
successfully financing, implementing and operating industrial projects have
a comparative advantage in developing a free zone over civil servants. The
examples of La Romana and San Pedro de Macoris illustrate this statement.
The La Romana Corporation was able to to draw upon a pool of talented,









experienced administrators when it created the free zone in La Romana. In
contrast, the GODR entered a completely new field when the San Pedro free
zone was organized. Relatively inexperienced civil servants were assigned
to what is, essentially, a business enterprise. Tenant satisfaction is
extremely high in La Romana and low in San Pedro. In addition, the San
Pedro zone requires an annual subsidy from the government to cover its
operating deficits, while the La Romana zone, although not operated for
profit, has nonetheless covered its operating costs.


2. Zone Financial Performance

7.19 As indicated by Table VII-3, the most financially successful zones are
found in the Bahamas, Mauritius and Mexico. The following factors appear to
be strongly associated with financial success:

1. Strong Private Sector Leadership In Planning Project,
2. Reliance On-Private Capital For Startup
3. Initial Feasibility Analysis Conducted site chosen for economic
reasons; objective of zone to be financially successful
4. For-Profit Management/Ownership
5. Prior Property Development Experience On Part Of Zone Owner
6. Phased Land and Building Development in Pace with Demand
7. Autonomous, Adequately Funded/Staffed Promotional Unit;
Professional, Up-to-Date Promotional Materials; Well-Coordinated
Efforts with National Promotion
8. Economic Pricing of Zone Space and Services
9. Private Funding of Follow-on Capital Needs
10. Private Provision or Zone Services/Infrastructure
11. Stable, Flexible, Accessible Incentives, Consistent Application
12. Flexible Options for Lease/Sale of Land and Buildings

7.20 More precisely, the private free zones in those countries have been
superior performers. Their public counterparts, on the other hand,
reflecting the general performance of publically owned/operated free zones
worldwide, have performed inadequately.

7.21 In the Dominican Republic, an analysis of factors correlated with zone
financial success yields similar conclusions. The Santiago zone has
generated an operating surplus in every year since its first, but the San
-Pedro zone, even after more than 10 years of operation, still requires a.
-subsidy each year from the GODR to cover its operating deficit. The
following conclusions are derived from a comparative assessment of the
-Dominican zones.-- s

7.22 Privately-run zos provide.~ lobs at ia power co toU state. La
Romana employs 12,000 people, yet has never required any government funds.
In Santiagot the government has spent an average of RD$6,000 per job
..created, and in SanPedro, .RD$10,000. When'the government defines its role
not ss zone developer but as facilitator of private zone initiatives, no
government resourcesare directly expended to create employment ----
ppportun4ties..

7.23 Economic pricing associated ith financial success. Zone
adminiAt4 tor. in both Puerto Plata and San Pedro expressed doubt that rents








'-an be increased and still attract tenants, but La Romana has done just
that. As long as the increased revenue is spent on better services for zone--
tenants and construction for zone expansion, and not on unnecessarily high
administrative expenses, the rent increase in unlikely to deter serious
investors. Indeed, it may elicit additional interest on the part of certain
"savvy" investors who are aware of the importance of high-quality services.
Puerto Plata and San Pedro may benefit from raising their rental rates and
upgrading their services, thereby attracting higher-end of the market firms.

7.24 Conclusion: Based on a review of international and Dominican zones,
it appears clear that free zone developers are most likely to be financially
successful when they rely upon experienced business managers and private
sector resources at an early stage; when their organizations operate with a
minimum of politicization; when they phase construction in step with demand;
when they offer users a variety of lease/purchase options; and when they
charge market prices for their facilities.


3 Z. IZne Linkages .1 Surrounding Economy

7.25 Far East free zones--especially in Taiwan and South Korea--have proven
the most successful in fostering ties with the local economy and surrounding
industry, as evidenced by their high value added through backward linkages,
their extensive technology transfer, and highly positive skills diffusion
effects. By contrast, Caribbean Basin zones have shown little progress in
this respect. Some, such as those in Haiti, appear to be classic
manifestations of enclave development.

7.26 The following factors appear-fto-be strongly associated with the extent_
Sof backward linkages formed; ....
i~--- ---~c----'
1., Reduction of Import-Substitution Barriers Protecting Domestic ..
'--- Producers
.2, Extension of Zone Incentives/Benefits to Non-Contiguous Sites
:3. Access to Local Markets for Zone Occupants (tied to proportion of
-'--local inputs used in production process of zone companies).

7.27 In the Dominican Republic, the research team found few examples of
backward zone linkages to the surrounding economy except in the cigar
industry. An incoming investor to the San Christobal free Zone, however, is
reportedly willing to donate equipment to local producers in the interest of
stimulating supply relationships.

,7.28 Conclusions Domestic producers are most likely to participate in zone
\success when governments discard import substitution policies in favor of
efficient, cost-competitive industrial development in general. Supply-
linkages between zone occupants and the surrounding economy also emerge when.
-governments extend tax, tariff, and/or regulatory advantages outside the
zone, and when they allow zone-based firms to send a portion of their
production into domestic markets in proportion to local procurement.





A;-

pD. SUGGESTED PARADIGM FOR THE DOMINICAN REPUBLIC


7.29 The optimal zone development framework for the Dominican Republic
appears to be one that builds upon the strengths of the country's past
practices, while incorporating new policy, institutional, and procedural
elements that have proven successful in free zone development programs
elsewhere.

7.30 Historically, distinguishing strengths of the country's approach have
included the Government's openness to locally-initiated projects, and its
receptivity to private as well as public financing and ownership of zones.
Toward zone users, the Government has proven willing to grant most
incentives on an essentially automatic basis, once the applicant has met
minimal tests and arranged for factory space in a zone. The GODR has
.thereby established a fundamentally favorable climate for zone development
initiatives.-.-- --- .......... .......... ....

7.31 The established operational model or paradigm for zone development has
served the country well, and should be preserved in its basic features. An
analysis of other free zone-sponsoring nations, however, indicates that the
economic contributions of the zones would increase if the zone development -
paradigm were updated to include several new elements. The following ---
: additional features appear to be needed to establish a more fully "user--
Ssensitive" and economically successful framework for zone development:


j.L Elements Benefiting Zone. UsersL ,

avoidance of heavy up-front charges (c.f. the Cartago Export
-Processing Zone in Costa Rica, the Kingston Free Zone in Jamaica, and
the freeport of Hong Kong)

minimal complexity and delays in Customs clearance (c.f, Mexican
'maquiladoras) .----... ..-.--.----- --- -. ... ...- -

-.use of covenants to ensure maintenance of land use standards and
-strengthening of zone user associations (o.f. the Bermudez Industrial
Park in Mexico and U.S. industrial parks and foreign-trade zones)

V -.provision of medical dispensaries, family planning, and child care
services (q.f, Nantze Export Processing Zone in Taiwan) "

linkages to training and technical institutions (c.f. the Hsinchu
Science-Based Industrial Park in Taiwan, the Cartago Free Zone in
Costa Rica, and the Masan Export Processing Zone in Korea)

the option of receiving factory-specific incentives outside of the
zone (o.f. Mexican.maquiladoras, Mauritian and Malaysian export. i
processing zones_ and U.S._foreign-trade subzones)

-, privatization/deregulation of key infrastructure and general service
.delivery responsibilities, (o.f. teleports in the Docklands
Enterprise Zone in Great Britai.n.and in.the Montego Bay Free Zone in.









Jamaica; and transportation facilities/services in the freeport of
Hong Kong).


2 Elementa Beneiting Zone Developers/ODerators


provision of special incentives for private financing of zone
development projects (o.f. Freeport in the Bahamas, and -
Shekou/Shenzben Special Economic Zone in the People's Republic of
"'China)' ""-.....

market-rate lease policies (c.f. the Bermudez Industrial Park in
Mexico,' export-oriented industrial_estates ~n Barbados, and Freeport
in the Bahamas)


.3 Elements Benefiting Surrounding Economy


progressive exposure of indigenous firms to world market forces (c.f.
Taiwan, Singapore, Malaysia, Ireland, and South Korea, where import
substitution policies have largely been dismantled);

/ incentives for zone occupants to sell production domestically, in
proportion to sourcing of local raw materials/intermediate goods; and

technical assistance to domestic producers seeking to orient
.themselves more to world markets/multinational clients.-"" ----

7.32 A paradigm incorporating these new features can reduce constraints
upon zone developers and users in virtually all aspects of their operations.
SThe result, based upon the experience of successful zones in other
countries, is likely to be a rapid increase in foreign investment, jobs, and
a export earnings. In addition, the free zones developed under this framework
may be used as proving grounds for policy reforms prior to their extension
nationwide.-..









VIII. RECOMMENDATIONS FOR ZONE DEVELOPMENT STRATEGY



8.01 This chapter highlights a national strategy to systematically remove
constraints on zone expansion, and suggests actions for US AID, the
Investment Promotion Council, and other relevant parties. -------


A. OVERVIEW


8.02 Three components are proposed for the national free zone strategy. The
first is oriented toward assisting zone developers, the second toward
improving the business climate for zone users, and the third toward building
linkages between the zone and institutions/entrepreneurs in the surrounding
community.

Assisting zone develoDers. At the most fundamental level, the
Strategy proposes to give full leeway for any local initiative that
is privately financed. Perhaps the most critical step in assisting
private zone developers will be to make tax incentives available to
their projects, at least equivalent to those incentives as they are
Snow available to hotel/resort projects in the Dominican Republic.
/ Alternatively, -Law 299 incentives could be extended to the developers
as well as occupants of free zones. Deregulation policies are also
needed to encourage private developers to augment basic public
infrastructure/service delivery systems, especially in rural areas.

At another level, the proposed strategy toward zone developers is
a proactive, catalytic program, directing special financial benefits
to zone projects with the following characteristics:

o a businesslike approach (e.g., demonstrated private sector
financing interest, market-rate lease pricing strategy,
contracting out of factory construction responsibilities, and
internal incentives within the zone development organization
to motivate improved performance)

o an orientation to high-growth potential new industry sectors
(through specialized infrastructure, training services, etc.),
and

o presence of a strong zone user association (such as that
created by universal membership lease or deed covenants)
responsible for some zone services and/or for constructive
interaction with zone management in resolving common problems
with security, waste disposal, general maintenance, and
health care, child care, family planning, and worker
counselling services.

',To the degree that subsidized loan finance is made available, it
shouldd be offered without the strings that presently prevent
A developers from gaining liquidity by selling off a portion of their
p project prior to loan maturity. .The finance should also be directed
4 I .. I I __ 1 1 *- .









VIII. RECOMMENDATIONS FOR ZONE DEVELOPMENT STRATEGY



8.01 This chapter highlights a national strategy to systematically remove
constraints on zone expansion, and suggests actions for US AID, the
Investment Promotion Council, and other relevant parties. -------


A. OVERVIEW


8.02 Three components are proposed for the national free zone strategy. The
first is oriented toward assisting zone developers, the second toward
improving the business climate for zone users, and the third toward building
linkages between the zone and institutions/entrepreneurs in the surrounding
community.

Assisting zone develoDers. At the most fundamental level, the
Strategy proposes to give full leeway for any local initiative that
is privately financed. Perhaps the most critical step in assisting
private zone developers will be to make tax incentives available to
their projects, at least equivalent to those incentives as they are
Snow available to hotel/resort projects in the Dominican Republic.
/ Alternatively, -Law 299 incentives could be extended to the developers
as well as occupants of free zones. Deregulation policies are also
needed to encourage private developers to augment basic public
infrastructure/service delivery systems, especially in rural areas.

At another level, the proposed strategy toward zone developers is
a proactive, catalytic program, directing special financial benefits
to zone projects with the following characteristics:

o a businesslike approach (e.g., demonstrated private sector
financing interest, market-rate lease pricing strategy,
contracting out of factory construction responsibilities, and
internal incentives within the zone development organization
to motivate improved performance)

o an orientation to high-growth potential new industry sectors
(through specialized infrastructure, training services, etc.),
and

o presence of a strong zone user association (such as that
created by universal membership lease or deed covenants)
responsible for some zone services and/or for constructive
interaction with zone management in resolving common problems
with security, waste disposal, general maintenance, and
health care, child care, family planning, and worker
counselling services.

',To the degree that subsidized loan finance is made available, it
shouldd be offered without the strings that presently prevent
A developers from gaining liquidity by selling off a portion of their
p project prior to loan maturity. .The finance should also be directed
4 I .. I I __ 1 1 *- .









towards new projects in an area (rather than to expansion of existing
zones) once existing zones achieve "critical mass," i.e., have grown
to a point at which economies of scale assure financially self-
sustaining operations./1 This policy will avoid undue congestion,
prospects of labor unrest, and strains upon zone infrastructure and,
above all, inefficient use of scarce resources.

Improving the business climate for zone users. Strengthening the
capabilities of the zone developers will naturally benefit zone
users. In addition, however, the proposed strategy calls for the
following:

o adoption of explicit, simplified.proc dures, for Customs
.inspection of zone containers
o formalization of policies on quotas and immigration
procedures------- ....
o establishment of procedures by which free zone firms can apply
.- for extension of benefits'.
o legislative or Presidential commitment to safeguard free
currency exchange policies for zone users
-o elimination of product-by-product advance import approval
-.isting requirements
.o abolition of consular invoicing procedures
o removal of taxes on interest and dividend payments by zone-
/based firms
/ o liberalization of access to domestic financing for non-
majority-Dominican free zone companies
o liberalized access to local finance by joint venture zone
firms, and
o deregulation- of. air freight services.

These legislative and regulatory changes would remove the major
remaining barriers that hinder the productivity of zone-based firms.

Building linkaRes to entrepreneurs/institutions in the community.
'-.The most effective means of building backward linkages between zone
industries and the surrounding economy is to eliminate tariff and
-other barriers that tend to overprotect domestic industry. This
-requires, essentially, a basic restructuring of the domestic economy--
through government policy reform--to foster a more efficient,
internationally competitive industrial sector, Given the adversary
forces..in play, ..sUc..restructuring is a long-range proposition.
Pending the successful implementation of overall policy reform,
however, certain actions can be taken. Accordingly, the proposed
strategy for zone development calls for introducing market forces to
domestic producers--especially to those local firms capable of

-------------------------
/1. Economy of scale parameters vary from location to location but do lend
Themselves to analytic evaluation. Financially viable projects in some
'countries can be as small as 20 acres of developed land, employing only
t2-4,000 .workers. In others, a minimum of 50 acres (equivalent to 5-
10,000 workers) is needed. In any given case, competent professionals
can demonstrate size-viability in strictly cost-benefit terms.









supplying zone-based foreign firms. Local entrepreneurs might be
given the option of operating in new."enterprise zones" affiliated
and possibly contiguous with the industrial free zones. Within the
new zones, indigenous firms might relinquish their traditional
protections and subsidies in return for greater freedom from onerous
tax, tariff, and regulatory procedures. By making the enterprise zone
incentives essentially automatic and immediate for local firms
supplying the needs of export-oriented zones, the net employment and
foreign exchange earnings to the country from free zones could
substantially increase. The recommended strategy also calls for
creation of close working relationships between both industrial free
zones and enterprise zones and those training institutions in the
community capable of providing individuals with productive skills in
short supply.

8.03 Although the above changes could be implemented through incremental
reforms of existing legislation, this study recommends that a consolidated
and comprehensive free zone incentives package be developed and enacted.
Long-range, it is recommended that--probably with assistance from a
multilateral institution such as the World Bank-the GODR undertake a basic
reevaluation of monetary, tariff, fiscal, tax and investment policies with a
view to adopting changes aimed at developing a more efficient, market-
oriented economy.


B. /PROPOSED INSTITUTIONAL RESPONSIBILITIES


8.04 To accomplish the above objectives, a new, business-oriented autonomous
organization should be established to oversee zone development and expansion
in the Dominican Republic. The new body should operate as a "one-stop"
center for zone developers and users. It would consolidate under its "roof"
relevant free zone activities which are now scattered among several other
institutions and agencies.

8.05 The board of the proposed organization, referred to henceforth as the
S"Corporacion Zona Franca," should be composed of leading private sector
individuals, including the head of the Investment Promotion Council, zone
developers,- and representatives of zone user associations. Key Government
officials--such as the director of Customs and the ministers of Labor and
Commerce and Industry--should also be represented.

8.06 The Corporacion Zona Franca should operate in close cooperation with
the Investment Promotion Council, given the critical need to accommodate
interested zone investors. Promotional agencies in other Caribbean
:countries, such as Jamaica and the Bahamas, have frustrated many would-be
investors because of their inability to influence delivery of standard
factory building space to zone applicants.

8.07 Operations of the Corporacion Zone Franca should be insulated from
political pressures. It should also adopt clear-cut internal incentive
systems to conduct its activities in a business-like manner. One possible
means toward this end would be to tie the CZF's budget and/or compensation
arrangements to measurable outcomes, such as direct zone employment or the
number of occupied square feet of zone factory/office space under roof.









8.08 Five business units (divisions) should be established in the
Corporacion Zona Franca, each with clearly defined responsibilities:

--a one-stop Approvalsygnitboth for industrial free zones and for the
'-proposed new generation of enterprise zones. The functions to be
consolidated in this unit would include all national regulatory
approvals needed by zone users and developers, including export
licensing (now a function of CEDOPEX) and final investor application
approval (now shared by the National Council on Free Zones and the
Office of the President). This unit should supersede the cumbersome
advance approval requirement for importation of specific products,
adopting instead a Mexican-style policy of clearing without delay all
zone-bound products under seal. It should also formalize procedures
governing allocations of garment quotas to firms inside and outside of
free zones per se. An effective means for expediting regulatory
procedures consists of making approval automatic within two to four
weeks unless a specific action to the contrary is made.

a Services Unit. responsible for responding to technical assistance
Sneeas of zone developers, managers, and user associations, and for
pressuring government departments for the resolution of
administrative bottlenecks impinging upon zone operations. This unit
should provide a centralized source of technical assistance to zone
developers in locational analysis, physical planning, project
feasibility analysis, management and operations, utilizing Dominican
and foreign private consultants as the main delivery system. In
cooperation with the Investment Promotion Council, the Services Unit
can also conduct nuts and bolts meetings with potential developers in
the Dominican Republic, the United States and Europe about project
opportunities. It should also organize, sponsor and coordinate a
standing group of export zone operators and users to negotiate with
agencies (e.g. Customs) the resolution of any problems affecting zone
operations. Finally, the Services Unit should play active roles in
easing the bureaucratic obstacles faced by firms operating.in
enterprise zones, and in promoting supply relationships between such
firms and their larger counterparts in export free zones. A
particularly promising approach toward this end would be to promote
direct contacts by local entrepreneurs with firms expressing interest
in specific types of services, raw materials and intermediate goods.

an nformationjAd Communications UnJi. to monitor the performance of
zones on a quarterly basis and provide data in support of the.
Investment Promotion Council's marketing efforts. This unit should
receive mandatory, but short, written summaries from the zones
regarding the industry mix of tenants, square feet under roof, number
of zone employees, zone expansion plans, and other relevant items
(e.g., innovative social services). This information should be
circulated to all existing and identified potential future zone
developers. The information should also be used, in cooperation with
the IPC, for generating news articles and features about the success
of Dominican free zones in U.S., Europeans, and Far East
publications.









a Leal Units making available such instruments as sample zone lease
'--contracts and user association covenants to export zones, and basic
legal tools for indigenous small firms doing business in enterprise
zones. The Legal Unit should serve in addition as a source of new
tax, regulatory, and tariff reform proposals for development of
enterprise zones.

a Financing Unit, to facilitate direct access to preferential
.financing for construction needs. One way of bypassing present delays
in providing finance for zone development would be to implement a
program of building "vouchers." Any firm meeting basic criteria--most
notably, bringing to the Dominican Republic a third or more of the
building construction cost--might automatically receive a voucher for
the balance of the expense. The zone user would select the zone of
Sits choice, make the down payment out of its own resources, and
-transfer.the voucher to the developer. Upon completion of the
building and occupancy by the tenant, the voucher would be redeemable
directly or indirectly from USAID by the zone developer. USAID, in
turn, would collect a pro rate share of the rent paid by the tenant
_until the Voucher was repaid, or assign it to training or community
development organizations in a position to assist some aspect of the
zone's operations. USAID would hold the zone building as collateral
throughout the period. -The project team does not recommend that the
.Corporation Zona Franca be given a monopoly on discount financing for
Dominican free zones. The Financing Unit should also provide advice
on other financing sources,.including tax-free private debt
instruments, access to 936 loans for factories "twinned" with Puerto
.Rican operations, usage of blocked peso accounts, FIDE/AID loans, and
debt/equity conversion procedures.

8.09 As befits a private or quasi-private organization, the Corporacion Zona
Franca could become financially self-sufficient under the approach proposed
above. Interest collected by the Corporacion from the building vouchers
could be used to support the operations of the overall organization,
decreasing the need for Government subsidies over time.


* C, IMPLEMENTATION STEPS


8.10 A variety of actions should be taken in the near term to launch the
Corporacion Zona Franca. The steps presented below will require a close
working relationship between USAID and the Investment Promotion Council to
'implement the recommended strategy..

THE AGENCY FOR INTERNATIONAL DEVELOPMENT.

AID can facilitate free zone development in the Dominican Republic by
means of the following:

a) Legal/Legislative Actions

Support for drafting of comprehensive new free zone legislation.








*b) Zone Development Financing

Commissioning of a short guidebook/information kit for firms on
/ how to use blocked peso accounts and debt/equity conversions to
finance new free zone development.

--Development of basic criteria for AID finance to free zones,.
favoring zones that adopt a profit-oriented, efficient and
t business-like approach to their projects. Such criteria might
.include: past land development experience of the applicant;
-commitment of private risk capital on a matching basis to the
requested loan; commitments to sound economic pricing policies;
lease conditions that require membership by zone tenants in an
association; and zone owner/manager status as a for-profit
enterprise. AID should also broadly publicize that grant
funds will not henceforth be forthcoming.

v'\ ith FIDE, removal of the restrictions now preventing developers
S ..from gaining liquidity through sale of a portion of their zone
projects at an early stage.


- Creation of new lending channel for USAID's PL 480 Title I (108)
peso accounts through mortgage banks as well as commercial -
-banks, given the greater familiarity of the mortgage banks with
real estate development projects. A policy of directing-
discount finance for free zone projects through multiple
channels might encourage all intermediary institutions to be
more responsive and efficient in processing loan applications,
given the likelihood of an AID review of their performance
before the eventual choice of the best financing window.


d) Zone Development Linkages


~I ,




bvvr I,


N


identification of tax, regulatory, and trade constraints that
- hinder supply linkages between local enterprises and export zone
firms.

analysis of zone socio-economic impacts and worker needs, with
special emphasis upon strengthenng medical, cultural, and
recreational aspects of community,

identification of training systems most effective in
transferring productive skills, and of methods by which zones
--could reinforce these mechanisms.

e) Marketing/Promotion to Users
consultation with IPC on relative emphasis to be given on
mobilizing zone developers vs. attracting zone users in the
initial period of promotional project.


9









INVESTMENT-PROMOTION COUNCIL.--


The IPC should be the principal force behind the preparation of a
coherent free zone legislative package, and activation of the Zona
Franca Corporation.

a)- Organizational Actions

Formation of the initial Corporacion Zona Franca task force.

b) Legal/Legislative Actions


legislation, reflecting inputs from zone developers, legal
specialists, and representatives of user associations. The
following elements should be included:

o tax incentives for private zone developers

o incentives for augmentation of infrastructure by private
investors/developers

\ o elimination of Industrial Technical Department requirements for
advance import approval

o termination of consular invoicing procedures

o removal of taxes on dividends and interest payments from zone-
based firms, and

o increased availability of local financing for joint-venture
zone operations.

The legislative package should be oriented not only towards the needs
of traditional .foreign-Investor oriented free zones, but towards -
"enterprise zones strengthening the supply relationships of domestic
firms. Enterprise zones can offer relief from tax, regulatory, and
customs constraints that now keep local entrepreneurs from competing
successfully with suppliers from the Far East and other foreign
suppliers.

o) Zone Development Financing

preparation of an information kit on free zone investment/
development opportunities, including preliminary financial pro
formas for project.

K dissemination of a sample (hypothetical) loan application/
financing plan to FIDE-affiliated banks, illustrating exactly the
types of information needed by commercial banks and FIDE in their
review of loan requests.

negotiations with Puerto Rico regarding 936 financing for "twin
plant" building construction.








approach to U.S., European, and Dominican developers potentially
capable/interested in free zone projects. The IPC should hold
exploratory meetings to assess likelihood of investment.

) .Zone-Developmental Linkages

i approach to providers of targeted equipment for strengthening local
firms. The IPC should determine the types of supply linkages
-most likely to arise between Domip an enterprise zone firms and
Sexpor zone tenants, and solicit unused equipment from U.S. firms
in the targeted sectors along the lines of Westinghouse's
proposed contribution.

e) Marketing/Promotion to Zone Users

targeting of international investment promotion efforts toward
new sectors such as electronics and data entry, to diversify the
economic base of Dominican Republic free zones. The IPC should
J / v also direct foreign promotion efforts to support sectors
producing components needed by targeQidfirms.

followup of investment prospects to determine reasons for
interest/lack of interest. Upon completion of site visits, IPC
should ask prospective investors to fill out response forms
S indicating their perceptions of Dominican strengths/weaknesses as
a base for offshore operations. These findings can assist IPC in
removing bureaucratic bottlenecks and other deterrents.

-CUSTOMS SERVICE.

Customs should formalize and build upon its recent steps to minimize
delays for free zone users. Among the steps that should be taken toward
This end are:

a) ..rganizational-Actions

== -visiting of free zones in other countries to examine efficient,
expeditious clearance and inspection procedures.

b) Legal/Legislative Actions

S/- adoption of clear policies to avoid double inspection of inbound
hii goods at ports of entry as well as within the zones.

re-evaluation of the feasibility of special free zones (licensed
or bonded factories located outside IFZ-bounded areas), including
visits to one or more countries utilizing this free zone project
form.

) Financing

investigation of the feasibility of a system by which zones cover
the direct costs of Customs employees in return for offering 16 or
24 hour on-call Customs clearance i services,~rather than charging
prohibitively costly overtime rates. (A variant on this revenue-










sharing approach appears to have substantially reduced complaints
about Customs by users of the La Romana zone.)


*


8.11 The strategy set forth in this chapter assumes that the functions of
the National Council on Free Zones, of the Industrial Technical Board, and
other Government bodies will be subsumed within the Corporacion Zona Franca.
If the Government of the Dominican Republic wishes to preserve the present
functions of these bodies, the scope of Corporacion Zona Franca
responsibilities can be scaled back accordingly.

8.12 The Dominican Republic has exceptionally bright rrn.er n-p fn.ra ed
growth of its free zones in the near term. Adoption of the recommendations
presented here can mobilize new resources in meeting the critical need for
new factory space, while creating conditions conducive to business expansion
by zone users and entrepreneurs in the surrounding community.
















APPENDIX A



DOMINICAN IFZ POLITICAL AND INSTITUTIONAL FRAMEWORK










I. INSTITUTIONS OVERSEEING INDUSTRIAL FREE ZONE USERS


1.01 All four of the currently established zones (La Romana, San Pedro,
Santiago, and Puerto Plata) have seen the growth of associations of
companies operating in each zone. These associations are spontaneous
institutions which grew up as a result of the need for operating companies
to seek joint solutions to common problems. The zone associations ke been '"
effective in an number of areas, particularly in establishing rules for
hiring and employment practices, providing common transportation for
employees, and similar issues. The zone associations are now regarded by
the government as official spokesmen for their members as demonstrated by
the fact that each of these zones is represented on the National Council on
Free Zones.

Board of Industrial Development

1.02 This organization was created by Law 299. It is part of the
Secretariat of State for Industry and Commerce. It is presided over by the
Secretary of State for Industry and Commerce and consists of the heads of
several government agencies, including the Secretary of State for Finanace,
the Technical Secretary of the Presidency, the Director General of the
Corporation for Industrial Development and the Director of the Center for
Promotion and Exports (CEDOPEX). It meets periodically and makes decisions
upon classification requests submitted to it by the Technical-Industrial
Department.

Industrial-Technical Department

1.03 This is the organization created by Law 299 within the Department of
Industry and Commerce to which petitions for "A" classification are
submitted. It consists of, among others, technical, administrative and
financial experts capable of deciding upon petitions for "A" classification
and presenting their findings to the Board of Industrial Development for
approval.

Investment Promotion Council

1.04 This organization has no direct involvement anywhere in the chain of
approval necessary to obtain "A" classification. Its role is principally
informational, providing interested parties with data and promotional
materials on the free zones.

National Council n Fre ZonesL /

1.05 This was created as set forth in paragraph I A (vii) above as a
division of the Ministry of Commerce and Industry. Its functions are as
follows:

i. Approval. Under Law 299 the National Council on Free Zones has no
official role in granting approval for class A status. The
Industrial-Technical Department~-however,~passes -peitions to the
National council for informal approval before they are directed to










the Board of Industrial Development as set forth in paragraph I B
(6) below.

11. Advocacy. The National Council has acted as an advocate for free
zone users to governmental bodies. The following are examples
thereof:

a. Customs, Until recently, containers bound for the free zones
were opened and inspected by customs inspectors at the port of
arrival. This practice resulted in a great deal of pilferage and
damage. Containers are no longer opened and inspected by customs
officials until they arrive at the plant of the zone user. This
development was achieved, in part, as a result of advocacy by the
National Council to the customs authorities on behalf of the zone
users.

b. Exchange rate problem. The National Council successfully
argued on behalf of the zone users with respect to the exchange
rate problem discussed in paragraph I B 4 above.

iii. Allocation of Production Quotas.- The National Council allocates
among Class "A" enterprises import quotas set by US authorities.


Industrial Development Corporation (FOMENTO

1.06 This is a corporation wholly owned by the Dominican government. The
corporation owns and operates the San Pedro Free Zone. It has no connection
with the official approval process set forth in Law 299. In the event,
however, that a foreign enterprise wishes to operate in the San Pedro Free
Zone, it must lease the space from FOMENTO.

Dominican Center for Export Promotion (CEDPEX)

1.07 o The Director of CEDOPEX sits on the Board of Industrial Development.
o All exporters, including those in free zones, must obtain export
licenses from CEDOPEX.

Fund for Economic Development (FIDE)

1.08 This organization is a division of the Central Bank. It administers
funds provided by international organizations to ensure that loans made by
Dominican commercial banks with these funds comport with the requirements
placed thereupon by the international organizations. It currently oversees
funds which may be available for loans to zone developers.

=he Central Bank

1.09 o Before the free zone enterprises were allowed to exchange dollars
for pesos at the free market rateas-discussed-inl tem-_iLn ave,
te Central. Bank-administered the-exchange....of-dollars-forr-pesoz.
o Zone users must observe the filing requirement set forth in a
paragraph VI C (2) below.










o Original Applicationo;


1.10 An enterprise seeking approval for classification "A" must set forth
in its application the raw materials, equipment and machinery that it wishes
to import duty free. Following administrative approval of this application,
there must be Presidential approval. The wait for a Presidential decree
-often'results in a delay of several months. Once administrative approval
has been received, however, customs will admit items listed in the
application duty free under bond.

o Items Inadvertently Omitted from Application:

1.11 Duty free entry of items which have been inadvertently omitted from
the original application must be applied for under the same procedure
employed in the original application. Onob administrative approval is
received, however, customs will admit these items under bond pending
Presidential approval. The rigidity of this practice has been reduced -.
Recently, In some instances, Customs officials will perRny the duty-free
" entry-of items omitted-from the. original application of they are similar to
items which have been approved or if they are obviously part of the same
Industrial process.

-o9 Guarding Free Zones.
.. _-. -
1.12. It is the responsibility of the General Directorate of Customs to
Insure that there is no "leakage",of duty free.items from the free zones .
into the remainder of the economy. The customs authorities thus guard the
.rfee zones to insure_ tat hs, not..n happen.. ------

The Ministry os Finance

S1.13. Two issues precently-relate.tthe.Ministry of Finance to free zone
users:

.o Income to class "A" corporations is exempt from Dominican corporate ,
i income tax. Article 12 (d) of Law 299, however, provides that
dividendss to shareholders of these corporations are subject to
.4Dominican income tax. please refer to paragraph IV. B (1) below .

o The payment ofinterest to a foreign bank by a class "A"
a --corporation is taxable as income to the bank in the Dominican
Republic unless the Minister of Finance exercises his discretion to
S"waive these, Please refer to paragraphs IV B (.1).below.

. haMinistry U Labor

1.14 Enterprises doing business in free zones are subject to Dominican
.-labor laws. Please refer to paragraphs IV B (ix) (a) and (b), below.
.... .....- -









II. INSTITUTIONS AFFECTING IFZ DEVELOPERS


, 2.01 The institutions which affect the zones developers are as follows:

Office .Q uth President

2.02 The key administrative approval necessary to establish an industrial
free zone is presidential approval in the form of a presidential decree.
There is no formal application or review process established to regulate the
issuance of presidential decrees.

The National Council =n Free Zones

2.03 As stated above, the National Council on Free Zones was established by
Presidential decree. One of its enumerated functions is to review
applications for the establishment of free zones and make recommendations on
,the acceptance or rejection thereof to the President. Approval is then by
-Presidential decree. A potential free zone developer would, therefore, make
SPormal', application to the National Council that a free zone be established
atthe desired site.-

Orgahizations whih would affect an enterprise doing business in the
Dominican Republic

.2.04 There is no comprehensive legislative package of incentives which
apply to free zone developers such as those for agroindustry, tourism or
Class "A" enterprises, The following, therefore, are the institutions with
which any enterprise would deal with respect to the development of a real
estate-project in the Dominican Republic:

Central Bank

2.05 Foreign investment may be registered with the Central Bank pursuant to
Law No. 861 of 1983. Such registration grants a foreign investor the right
to exchange local currency for freely convertible foreign exchange. A copy
of Law No. 861 in English translation is attached herewith as Exhibit G.
The procedure for application is explained therein.

Landowner, governmental r private

2.Q6 The free zone developer must negotiate for the purchase or lease of
the land on which the development is to take place. Dominican law places
Limits on the acquisition of land by foreigners. These may be overcome by
" either : *- -..- '".- .

o Presidential Decree. These are liberally granted and can entitle a
foreigner to purchase any real property in the Dominican Republic.
'or, .
SPurchase of the land by a cooration in which at the time of
purchase at least 51% of the equity is owned by Dominicans. The
shares owned by Dominicans may later be transferred to foreigners.












2.07 The developer must arrange with this agency to obtain electricity for
the zone. It should be noted that under Dominican law, both within and
without free zones, CDE is a monopoly. Although a developer or Class "A"
enterprise may generate its own electricity, it may not sell electricity to
other enterprises within a free zone.

Water A-encies
2.08 There are several governmental water agencies. A developer must reach
agreement for water supply with the agency which provides water to the area
in which the proposed development is located.

Local Municipality.

2.09 The municipality in the area where the project is to take place will
be responsible for providing roads to the project, garbage collection and
sewer service.

CODETEL Rural Telephone Companies. oDireccion d Telecomunicaciones.

2.10 Depending on the location of the project, one of these organizations
must be arranged with to provide sufficient telephone lines to the project.

CA 1R ITT.

2.11 These companies must be contacted and negotiated with to provide
sufficient telex service to the project.

General Directorate of Customs.

2.12 o Import Duties and Procedure: Free zone developers are not exempt
from customs duties as are Class "A" enterprises. Those items which
the developer wishes to import into the country for the development
of the project would be subject to import duties and normal customs
procedures, including the following: Duties are changed per
kilogram plus ad valorem charges depending on the nature of the
goods imported. In addition to duties, internal taxes based upon
FOB value are payable at customs. A surcharge of 4 percent is
imposed on all of the above charges. Shippers are generally
required to direct the following documents to importers: Consular
invoice; Commercial invoice and Bill of lading. Copies of these
documents, notarized by the Dominican consulate at the place of
export, must be presented by the importer to the customs
authorities.

o Establishment at New Free Zone: As set forth in paragraph II I (3)
above, the customs authorities have responsibility for guarding and
inspecting shipments at free zones. The developer must, therefore,
reach agreement with the General Directorate of Customs to provide
facilities such as office space for the customs authorities at the
proposed free zone.


Corporacion Dominicana ae Electricidad (CDE)









Ministry f Labor and Ministry f Finance

2.13 A free zone developer is subject to all of the applicable tax, labor
and social security laws of the Dominican Republic. A full explanation of
these laws is beyond the scope of this letter.

















APPENDIX B


CASE STUDIES OF OPERATIONAL DOMINICAN INDUSTRIAL FREE ZONES









I.. LA ROMANA FREE ZONE


1.01 The country's first free zone, located in La Romana 80 miles east of
Santa Domingo, was established by the U.S firm, Gulf + Western, in 1969,
three years after Law 299 was passed by the National Congress. As the
pioneering developer, Gulf + Western's role in the development of free zones
in the Dominican Republic has been significant. The profit motive has
little to do with the investment decision. Given the high level of social
tension and unemployment in the community at that time, the company felt an
obligation to make a social contribution to the area. The La Romana zone
was extremely successful in terms of generating in terms of generating
employment, In 1970, the first year of operations, 126 people were
employed. By 1975, the number had grown to 1,780, and it now stands at
10,000.

1.02 Approximately two years ago, Gulf + Western sold the property to a
Dominican/U.S. joint venture group which is spearheading the development of
a non-contiguous site in the Villa Verde neighborhood, to the north of the
city of La Romana, referred to as Romana II. In contrast to the first phase
of zone development, the Romana II zone is a project whose investors are
motivated by the possibility of making a profit.

Ownership an Organizational Structure

1.03 The Zona Franca La Romana, as well as the Zona Franca Romana II, is
being promoted and managed by Zona Franca Romana, S.A., a Dominican company
with Dominican and U.S. capital (Cuban investors from Miami), which was
recently incorporated to take over the operations of the free zone. The
company has taken over Gulf + Western's original contract with the GODR
which entitled it to operate the zone for 30 years, at the end of which
time, the buildings and infrastructure revert to government ownership. It
was suggested that Romana II is being developed to: (1) meet demand for
additional industrial space, (2) reduce the congestion and overcrowding at
the original zone site, and (3) improve the appearance of the entrance into
Casa de Campo, a first-class resort adjacent to the original free zone.

Physical Description

1.04 The total area of the first zone is 1 million square meters, a third of
which is already developed with 89,000 square meters of factory space. The
non-contiguous second site, Romana II, was selected for expansion mainly
because of its location close to the workers' residences. It is located
north of the city, has 750,000 square meters of land, of which 375,000
square meters is already fenced. Water and electricity lines are presently
being installed and an electric substation is under construction to satisfy
demand in the zone. Industries in the zone will utilize the Boca Chica,
Haina and La Romana maritime ports and the international airports of Las
Americas and La Romana.


1.05 Steady growth was achieved by La Romana in terms of the number of









businesses locating in the zone from 1969 until 1974. Since that time, the
number has fluctuated between 17 and 22. Although the number of companies
may have leveled off, many of these companies have expanded and in some
cases doubled the number of square feet of space utilized. So, in fact,
there was really never a time when large amounts of space were available to
new tenants,

Industry =lx

1.06 The zone's 22 companies fall into the following categories:





-----Industry Mix----

--Auto Switches 1

--Electronic capacitors 1

--Disposable Medical Accessories 1

--Apparel 19

Total: 22 Companies



1.07 The majority of new firms interested in space in Romana II are in the
apparel sector, are U.S. companies and, on average, need approximately
14,000 sq. ft. of factory space. (A few apparel companies from the Far East
.have made visits.) A review of the industry mix over time indicates minimum
changes in the sectors occupying space.

General Services Provided I Zone Occupants

1.08 The zone operator provides security, customs services and maintenance of
'pomon facilities such as roads and grounds. The industries individually
orange for installation of electricity, telephone and telex services, and
are responsible for building maintenance. Due to low voltage and to
electrical interruptions, the zone operator recommends that tenants install
standby generators to guarantee the continuity of their industrial.
processes.

1.09 Customs Services have been streamlined over the years and there are few
complaints by the companies about the services rendered. On short notice,
customs will arrange to receive or discharge goods on a 24-hour basis.
Companies that have been in the zone for many years generally "know how the
system works". It is interesting to note that since the zone has been in
operation, five percent of the zone's revenue is paid to the customs, which
may account for the better-than-average customs efficiency and attitude.
Exceptionally high standards have been set in the La Romana zone in the
areas of road maintenance, landscaping/grounds upkeep, trash collection and
building maintenance.













1.10 In reviewing new tenant applications for space, management requires the
following documents: By-laws, Certificate of Incorporation, Minutes of
First Stockholders Meeting, Minutes of General Stockholders Meeting where
the present members of the Board of Directors were elected, and Minutes of
the Meeting authorizing the signing of the lease contract with the Zona
Franca Romana, S.A.; bank and commercial references, and evidence of moral
and financial solvency.

1.11 Additionally, the Dominican government requires full compliance with
Law No. 299 with respect to Classification A industries, fulfilling
requirements of the Central Bank in reference to receiving benefits of the
Unified Foreign Exchange Market; compliance with the rules and regulations
of the Dominican Customs Department, and all labor laws.

Financial Performance

1.12 Gulf + Western invested a total of US$9 million in infrastructure,
buildings and site improvements since 1969. After the initial five or six
years of operation, the zone recorded some improvement in the financial
performance resulting from increases in rental income and savings in general
administrative expenses. These savings were basically achieved by
controlling costs and cutting back on administrative overhead. Nevertheless,
the La Romana free zone has never broken even according to zone officials.
However, profits were never the prime objective.

I 1.13 Romana II's lease rates of US$0.25/sq.ft./month are substantially
higher than the original zone's rates of US$0.11/sq.ft./month. An option,
however, is offered to the leasee to reduce the rental rate to US$0.15/sq.
ft./month by depositing a minimum of two years' advance rental payment. The
reduction depends on the amount advanced, which in turn depends in part on
the size of the building required. In general, however, advances of 30 to
40 percent of total building construction costs are sought.

Zone Promotion

1.14 In La Romana's early years, the most valuable marketing tool was
simply to publicize Gulf + Western's involvement and commitment to the zone.
This went a long way towards attracting U.S. firms to invest in the Dominican
Republic. Gulf + Western even located two of its own companies in the zone,
ab action which strongly enhanced the zone's credibility abd suitability as
an offshore site for other companies.

1.15 The zone operator has never had a promotional budget of any
significance and any promotional or marketing activities were performed in
an ad-hoc fashion. Attracting new companies to Romana II is not a grave
concern of the new owners, who feel confident that demand will remain strong
over the near term. Between 30 and 40 companies have been visiting the zone
annually even though it was well publicized that there was no space
available.









1.16 Zone industries employ 10,260 people, as of June, 1986, of which 75
percent are women. These women appear to be very committed to their jobs
since the income allows them to more adequately care for their families. It
was also suggested that the women have a lower rate of pregnancy than
otherwise so as not to lose their jobs. so as not to lose their jobs. This
phenomenon has been noted in some other more industrially advanced LDCs.
Evidently, a fundamental change in traditional values and lifestyles can be
induced by increasing job opportunities for women.

1.17 The zone operator estimated that for every 10 jobs in the zone, another
three jobs are generated in the community. /1 Romana II is expected to
generate employment for more than 5,000 people over the next five to seven
year period, implying an additional indirect benefit of at least 1,500 and
possibly as high as 4,000.

1.18 Few linkages have been developed with domestic industries. The sole
example of a free zone industry utilizing Dominican raw materials is the
tobacco industry. There are no linkages in the apparel industry partly
because under 806.3/807 rules, all raw materials come from the U.S. and
partly because local sources are not competitive.

1.19 Management and key staff talent has apparently been developed locally.
Many of the older zone companies have very few expatriates in the country.

/























--------------
/1 References in the literature place the indirect job creation impact
as high as 8 to 10.









II. SAN PEDRO DE MACORIS


History and Obiectives

2.01 The industrial free zone in San Pedro de Macoris began operating in
1973 under the auspices of an agency of the GODR, the Industrial Development
Corporation (CFI) on land donated by the city. The San Pedro community had
petitioned the government for a zone after observing the employment
generating effect of the zone in the neighboring city of La Romana. The
zone's primary goal is job creation, a number 1 priority in a city with five
sugar mills, whose employment capacity varies with the world price of sugar,
and a University contributing 2,000 to 2,500 graduates each year to the job
market.

Ownershiand l Organizational Structure

2.02 The GODR, through the CFI, originally owned all the land and industrial
facilities in the zone, although recently it has sold one or two plots to
private developers. The government-owned shells are leased to zone users at
US$0.08/sq.ft./month for periods of up to four years. According to the
zone operator, all rental contracts must be completely prepaid, and cannot
last for more than four years. He urged that this policy be changed, noting
that some firms would not invest in the zone with only four years assurance
of a fixed rent. He gave as an example a multinational electronics firm
with two firms in Mexico that was supposedly interested in constructing a
US$1 million-plus building in the San Pedro zone. Allegedly, they decided
against locating in San Pedro because of the large uncertainty as to what
the government would charge for rent when the contract would be renegotiated
four years later. Thus, the zone was reported to have lost a client who
would have paid for valuable infrastructure improvements by not being able
to obtain a sufficiently long lease.

Physical Descriotion

2.03 The San Pedro zone is located 73 km from Santo Domingo, 44 km from the
airport and 5 km from the San Pedro port. The zone itself consists of 125
factory shells, each a one-story, 13,400 sq.ft. building, on 700,000 sq.m.
of land. A neighboring section of some 400,000 sq.m. has been sold to a Far
East/Dominican consortium for private development. This group is prepared
to begin construction as soon 9s the National Congress approves a petition
to allow the foreign investors to own the property.

Occupancy Level

2.04 The San Pedro zone opened in 1973 with two firms, and has attracted new
firms practically every year. Because of slipshod management and
unbusinesslike practices, the project has experienced one of the lowest
occupancy rates of all the free zones in the country, according to CFI
technical advisor Gerold Janka. Shells would be contracted to businesses
that never used them and never paid rent on them; the shells remained empty,
representing a serious loss of revenue for CFI.

2.05 In June 1986, however, the zone was nearly full after several years of
lackluster performance. (According to the zone administrator, the zone was









at 100 percent occupancy, although one occupant stated he knew of at least
one unused shell.) This recovery appears to be due to three factors: (1)
the La Romana Zone was fully leased and potential users turned to alternate
locations; (2) La Romana had raised its rental rates, making San Pedro's
lower rates an attractive alternative; (3) the U.S., importer of the vast
majority of the Zone's output, experienced economic growth.

2.06 The General Manager estimated that 10-15 firms are waiting for space
in the zone. Eight shells are under construction and firm lease commitments
have been negotiated for three or four of them. (On the near term, demand is
expected to remain high, since the General Manager reported that in an
average week, at least one company investigates the zone as a site for a new
export operation.)

Industry Mix

2.07 The vast majority, 73 percent, of the firms in the San Pedro zone
produces garments, although the General Manager has noted increasing
interest from electronics assembly firms. (One such firm reportedly
expressed a strong interest in relocating from Haiti into San Pedro, but the
lack of an available shell and stable electrical supply blocked a positive
decision.)

2.08 Of the 62 firms in the zone, 45 produce garments; the balance are
engaged ,n: cotton processing, jewelry, ceramics, fruit processing, men's
ties, plastic sunglasses, and suitcases.

General Services Provided to te Zln Occupants

2.09 According to Zone occupants, the quality of services available is
inadequate. All firms interviewed (June, 1986) regarded the electrical
supply to be deficient; every firm in the Zone has its own emergency
generator. Although half of the occupants were apparently satisfied with
the availability of water, a full quarter of the users characterized the
service as a serious problem, complaining specifically about frequent cut
offs in water flow of up to four hours. Remarks concerning telephone and
telex services ran the entire gamut from "very good" to "very bad". (One
zone operator reported being told he would have to wait three to four years
for a phone, but the time could be shortened if "he knew the right
people").

2.10 Roads in the zone are in poor condition; trash was littered throughout
the zone; there were no picnic tables or a cafeteria for the zone's 14,000
employees. There were bitter complaints from a zone tenant concerning
immigration office delays in providing visas to expatriate workers.
Apparently firms were required to "justify" the foreign personnel, even
though the law specifies that up to 15 percent of the total personnel can be
foreign. Customs service was rated as very good, however, especially now
that containers are opened at the factory rather than at the port or
airport. This change was reported to have been brought about as a result of
lobbying by the User's Association with the Customs officials in Santo
Domingo.









Financial Performance


2.11 The Zone General Manager could not provide any financial data. When
questioned, he replied, "The State does not have profit-making as its goal.
Our goal is services.

Contributions t. Development

2.12 The San Pedro zone employs some 14,000 people. Several linkages
between zone industries and the local economy have been formed. Office
supplies and construction services are.obtained locally. A small market of
some 25 stalls has arisen right outside the Free Zone gate, and there
vendors sell food, clothes, shoes and other items to zone employees.

2.13 The Zone Manager emphasized the training provided to the workers as
one of the zone's most significant benefits. In his words, "Youngsters with
uncertain futures are now trained individuals". He noted a decrease in
prostitution in the area now that more job opportunities are available for
women.

2.14 Local training institutions also have valuable links with the Free
Zone. A vocational school nearby, run by the armed forces, provides semi-
skilled workers to the Zone users and many Universidad Central del Este
students work in the Zone to cover educational expenses. Lastly, tourism
and the Free Zone have a symbiotic relationship, each assisting the other,
as General Manager Garcia explained, "Some tourists become our tenants, and
in turn our tenants bring people here as tourists," he explained in
reference to family members and business associates of zone users who come
to the Dominican Republic to visit.

Zone Promotion

2.15 According to the zone's General Manager, the Gulf and Western Free
Zone had served as one of the best promoters of the country's other free
zones. He explained, "The La Romana zone draws business people here, and if
La Romana is full or too expensive, they consider us." He noted commercial
attaches and Chambers of Commerce as other valuable sources of leads about
potential zone tenants.










III. PUERTO PLATA FREE ZONE


History and Ob.ectives

3.01 The Industrial Free Zone in Puerto Plata was created by Presidential
decree in 1963. For the next 15 years, nothing was done to develop the
zone, but by the late 1970's, the prospering industrial free zone in La
Romana reawakened the interest among the Puerto Plata community in
establishing their own zone. In particular, the founders of the Puerto
Plata industrial free zone saw the zone as a way to create Jobs in the
community, as well as reduce the area's dependency on tourism.

3.02 With funds from AID, 260,000 sq.m. of land were purchased and
construction began in 1979. Four years later, in 1983, then-President
Salvador Jorge Blanco officially turned over the facilities including
developed land and four completed industrial buildings to the newly-formed
Industrial Free Zone Corporation of Puerto Plata, a non-profit operating
entity.

Ownership and Organizational Structure

3.03 The Corporation's Board of Directors consists of 15 individuals,
representing both the public and private sectors. The Board meets
periodically and discharges the usual policy, budget, monitoring and
performance functions, leaving the actual day-to-day zone operations to be
managed by a General Manager and his staff of four, including an accountant,
an engineer, a secretary and a messenger.

3.04 Industrial shells are leased to the zone tenants, who must pay for any
remodeling done to meet specific requirements, such as partitions or air
conditioning. All tenants have bought and installed emergency generators to
produce power during the frequent blackouts.

3.05 There is no Association of Zone Operators as yet, although the Zone
administration said that one was in the process of being formed. The
General Manager was confident that an Association would facilitate
communication between the administration and the occupants, and result in
better services to the zone users.

Physical Description

3.06 The industrial free zone in Puerto Plata is located 3 km. from the
seaport and 15 km. from the airport. The land area totals 25.7 ha., on
which only 10 shells have been constructed, each approximately 14,000
sq.ft., for a total of 140,000 sq.ft..(13,000 sq.m.). Thus, only an
estimated 25,000 sq. m. or 10 percent of the available space land being
utilized. Only three of the empty lots are fully urbanized with roads, water
and electricity, further development of land and buildings is constrained
by lack of funds.

Occugancv Rates

3.07 According to the Zone's President, Puerto Plata has never had any
difficulties finding tenants for industrial space. Quite the contrary, he









emphasized that the small number of shells available has limited the zone's
development.

3.08 The five shells available in 1983 when the zone started operations
were rented quickly. Many interested firms from a total "prospective" list
of 55 located elsewhere in the country after being unable to rent space in
Puerto Plata. The years 1984 and 1985 each brought only one new firm to
Puerto Plata, but in 1986, four have been or will be established, bringing
to 10 the total number of firms in the zone. A complete list of the firms
located in the zone includes:


Yu Hwa Honduras, Ltd.
Ambar Clothing
Transcontinental Apparel
Yu Hwa Dominicano

International Vison, Ltd.
Mink America Corporation

Rope by Mario Dominicano


Antilles Shoes Enterprises
Saint Crispin Shoes Corporation

Tocbaccos Don Alvaro, S.A.


/Tobacco


Korea
Dominican Republic
U.S. *
Korea-

U.S.
U.S.

U.S.

Puerto Rico
U.S. *

Dominican Republic *


Unverified country of origin.


3.09 The zone presently has a waiting list of 25 firms and no available
shells. In addition, three or four firms visit the project each week, with
about half expressing interest in further considering the zone.

Industry i


----Industry Mix----

-Garments I


--Fur Coats

--Shoes

--Cigars

--Gold Chains


Total:


1

10 Companies











3.10 Increasing interest has been noted among firms that produce household
electrical appliances, in addition to increasing interest from Spanish and
Korean businesses, implying a significant potential for both product and
country of origin diversification over the near term provided funds became
available for expansion.

General Services Provided Lt Zone Occupants

3.11 The majority of Puerto Plata zone occupants were satisfied with the
phone, telex and water services, but complained vehemently about the
frequent electricity blackouts. Every firm interviewed commented that it
was impossible to maintain consistent production because of frequent
interruptions in the power supply. Although every single firm has installed
its own emergency generators, this is not an optimum solution to the problem
from the point of view of operating cost and conveniences.

3.12 In addition to utilities, the zone administration offered standard
support services to its occupants -- security and grounds maintenance-- as
well as a couple of "extras", including a cafeteria run at cost. A medical
dispensary is being planned, to be partially financed by zone tenants. The
zone has a fairly clean although spare appearance. Apart from several small
gardens located near the administration buildings, no landscaping has been
done.

3.13 On the whole, zone occupants rate the zone management as fair to good.

3.14 The zone tenants questioned about their experiences with the Customs
indicated no special problems; occasional hassels and delays seemed to be
accepted as normal routine. Materials were usually inspected at the port of
entry and shipped the same day to the zone. Only when goods arrived at
night would there be a delay, until the next day, unless the firm wished to
defray the cost of overtime for the customs inspector. The customs office
hours are 8:00a.m. to 12:00p.m. and 3:00p.m. to 5:00p.m. (One firm's
spokesperson characterized the overtime charge as "outrageous".) On the
other hand, it appears that some flexibility exists on the part of customs
officials who have worked during lunch-break when requested by a firm
awaiting urgently needed goods.

Financial Performance

3.15 The purchase of 260,000 sq.m. of land for the and initial site
preparation and shell construction were financed by a grant of RD$2,100,000
from the Dominican Government and a grant of RD$2,300 from community
leaders. In addition to this initial funding in 1983, the government makes
an annual contribution toward the zone's operating costs. In the fiscal
year ending March 31, 1984, this contribution was RD$46,248. and RD$69,372
the following year.

3.16 Zone management has identified four options for financing the
construction of additional facilities:

1) borrowing the money from a commercial bank without increasing
rents;
2) raising the rent (RD$0.25/sq.ft. or US$0.09/sq.ft. per month as










of June, 1986);
3) requiring the tenants to pay for the construction of their own
shell, discounting their investment from future rent payments, and;
4) asking for a grant from the government.

3.17 The first option, financing the construction at commercial interest
rates, is not feasible according to a study conducted by a local accounting
firm. The study estimated that the interest payments of 20 percent per year
on the loan of RD$350,000 needed to construct a typical 14,000 sq.ft.
shell, would exceed by more than 65 percent the annual rent collected on the
shell, to say nothing of amortizing the principal./1 The calculation simply
emphasizes once again the uneconomic price structure of this project and the
impossibility of ever achieving financial viability without rational priving
of facilities.

3.18 The second option, raising rents to finance construction, was also
rejected by the Zone Administration, for fear of losing customers. Many
successful public and private free zone projects worldwide, however, have
demonstrated that economic or market pricing of facilities has not
compromised growth and profitability, even though an occasional customer may
be lost to a competitive, cheaper location. This issue will be discussed in
a later section of this report.

3.19 In contrast, the third option was considered feasible. The zone
tenantthat had arrived most recently, Tabaco Don Alvaro, S.A., paid
RD$250,000 for the construction of its facility. Two other firms now
located in the zone that are seriously considering expansion in the next
two years, have expressed a willingness to finance the construction of
the necessary shells.

3.20 Regarding the fourth option, a government grant, zone President
Gilbert is firmly convinced that the zone administration should be involved
in the construction of facilities, and therefore he submitted a request for
RD$5 million to the Government of the Dominican Republic, RD$2 million to
provide roads, water and electricity, and RD$3 million to build 10 shells.
(Gilbert explained his request by likening a new free zone to a child, which
cannot be expected to fend for itself but which depends on outside support
until maturity. With 20 shells (10 existing plus 10 new shells) the free
zone would be viable and could support future growth for profit, Gilbert
believed.)

3.21 Although a government grant would indeed advance the development of
the Puerto Plata free zone, it is at the same time a perverse incentive, and
certainly a poor use of scarce resources. That is, as the zone management
becomes accustomed to subsidized funds, it has fewer incentives to seek out
alternative financing methods based on sound banking and business
principles. Judging from the performance of the four free zones in the
Dominican Republic, dependence on subsidized finance negatively affects
economically and financially sound zone development.


/1 (The calculation was as follows: Annual Interest Payment, at 20 percent
on DR$350,000 = $70,000. Annual rent collected on 14,000 sq. ft. at
DR$0.25/sq. ft./mth = $42,000. Ratio of interest to rent = 1.67.












3.22 Promotion is not a problem for the Puerto Plata free zone: available
space is. The zone administration reports that the zone's location near a
resort area allows it to practically promote itself to vacationing business
people. The country's other free zones are also very useful as promoters of
the Puerto Plata Zone, in that if they have no space, they direct interested
firms to Puerto Plata.

3.23 The political stability of the Dominican Republic is a prime
attraction for the many firms that choose to locate here; this point was
stressed repeatedly by zone tenants. Many firms with offshore facilities in
more unstable Caribbean locations, e.g. Haiti, Honduras, have expanded into
the Dominican Republic for that very reason.

3.24 The industrial free zone has never generated a net profit: it lost
RD$45,000 in its first operating year, (1983-1984), RD$7,000 in its second,
and will certainly to lose money in 1985-1986 unless rentals are increased.

Contribution "t Development

3.25 General opinion is that the Puerto Plata Zone is making a contribution
to the region's development. In addition to producing foreign exchange
earnings for the country, the zone has eased the problem of unemployment.
By the end of 1986, the free zone is expected to employ 2,200 local people,
as well as some 30-40 foreigners, without taking into account construction
labor on new investment.

3.26 A third benefit of the free zone, in addition to the foreign exchange
and jobs it generates, is the stimulus it provides to the local economy
through linkages. The Puerto Plata zone occupants buy several types of
goods and services locally. Specifically, the zone operators report using
local banks, insurance firms, construction companies, and cargo transport
services, while purchasing office furniture and supplies from varying
sources. However, the firms purchase no local raw materials used in the
production process, nor co they use local training facilities. They all
prefer, instead, to train their own people during the first three to six
months that they are employed. Improved collaboration between zone
industries and local institutions is an area requiring more attention. Such
cooperation could redound to the benefit of both groups.










IV. SANTIAGO FREE ZONE


History and Objectives

4.01 The zone in Santiago, established in 1974, has in 12 years become the
country's leading generator of employment, foreign exchange, and export
performance. The zone organizers have utilized the strengths of the private
sector, while recognizing the need for public financial assistance. The
zone's objectives have been to diversify the economy, create jobs, and
improve the technical capacity of its labor force.

4.02 The zone's success can be attributed to the competent management of
the Corporacion Zona Franca Industrial de Santiago, an autonomous non-profit
business-oriented entity, supported financially by the Dominican government
and Santiago's municipal government. The zone is owned by the Corporacion
and in the event of default" the property reverts to municipal ownership.
A Board of Directors makes policy decisions; day-to-day operations are the
responsibility of the General Manager who works in close cooperation with
the President and Chairman of the Board The founders of the free zone
included the Dominican Government, Santiago's Municipal Government, the
Association for Development, Inc., the Official Chamber of Commerce, Agri-
culture & Industry, Inc., the Association of Businessmen and Industrialist
of Santiago, Inc., and a group of private representatives of Santiago de los
Caballeros, a local business person's organization.

Physical Description

4.03 The zone is located in the principal agro-economic region of the
Dominican Republic, approximately 100 miles from the capital city. The
zone's rather remote location has not hampered its development and does not
appear to be an obstacle to attracting new companies. It has very well
developed infrastructure in terms of water, waste disposal,
telecommunications and electricity services. An electric substation has
been installed to helpinsure a constant supply of electricity from 6 a.m.
through 7 p.m. daily.

4.04 The original site comprised 20 ha. and now has installed a total of
130,000 sq.m. (1,400,000 sq.ft.) of factory shells. Land available for
expansion totals 203,000 sq.m. which when developed would double the size of
the zone. At least 50 buildings of 20,000 sq.ft. each can be constructed on
this site, and development work is in progress for approximately 645,600
sq.ft. of land and 105,000 sq.ft, of factory shells (three buildings of
40,000, 35,000, and 30,000 sq.ft.). Construction is about 50 percent
complete.

Occupancy Jate

4.05 The project has had a steady increase of between four and six new
companies each year since activation, as well as steady expansions of
existing companies. At present, the zone houses 45 companies with 5
applications approved for new companies. Unfortunately (in this sense), the
new space being erected has been allocated to the expansion of 3 existing
firms which will not be relinquishing their present space and new applicants
will be forced to wait. This situation, i.e. lack of facilities to




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