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Dominican El Crisis: What Next?

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How can the Dominican Republic's power sector finally get on track? Three experts share their insights.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue  

President Leonel Fernández of the Dominican Republic last month met with Inter-American Development Bank and World Bank representatives in Santo Domingo to analyze their proposal to improve the nation's electrical system. The $380 million allocated in the country's 2010 budget for electricity subsidies has already been depleted, according to media reports, and Fernández is facing a number of potentially unpopular decisions. Do the multilateral agencies have the right plan to put the Dominican Republic's power sector on solid footing? How could it be improved? What political, social or economic factors will shape Fernández's decisions moving ahead?

Bernardo Vega, president of Fundación Cultural Dominicana and former ambassador of the Dominican Republic to the United States: When a politician who aspired to be president ran the electrical sector there was no hope. With the appointment of a businessman to run it things have substantially improved. Payroll costs have gone down and collections have gone up. However, the main problem is still getting consumers to pay for their electricity, and the managers of the three distribution companies are still political appointees. This could improve if personnel with foreign expertise managed the distribution companies. The multilateral agencies have the right plan, but President Fernández does not have the political will to implement it. Disbursements from the Inter-American Development Bank and the World Bank have been delayed because of noncompliance with certain objectives. While in Washington last week, President Fernández discussed with the head of the World Bank precisely this issue. The existing International Monetary Fund agreement requires an increase in the tariff rate, but this has not happened. It also requires focalizing subsidies with the poor and not by areas of cities. This has started. Collections and identification of clients have also improved and the huge arrears in payments of subsidies to generators have practically disappeared. With this better scenario, a Latin American company is considering setting up a natural gas plant, which would reduce the dependency on expensive fuel oil. The gas and coal AES plants now provide around 40 percent of all energy. The much announced conversion of Cogentrix to natural gas is still being debated.

Elena Viyella de Paliza, president of Grupo Inter-Química in Santo Domingo: The Dominican Republic today is in a much better position to improve the nation's electrical system as many necessary and important decisions are being made under President Fernández's leadership, and the management of Celso Marranzini, a successful private sector business leader who since August 2009 is the minister heading the power sector. Having a private-sector businessman making decisions eases the path to taking unpopular political decisions that might otherwise be delayed or not taken at all. The proposed plan and timing of the Inter-American Development Bank working jointly with the World Bank efforts and the IMF's requirements is on the way to placing the Dominican power sector on solid footing, although many challenges still need to be met especially regarding the distribution companies to improve collections and reliable service. While the $380 million budget of allocated funds for the power sector has been depleted, there is sufficient additional funding within the plan from the multilateral agencies to be provided upon satisfying structural thresholds that are on the way to completion. A new program called 'Zero Debt Zero Fraud' was recently initiated and has the purpose of incorporating the power sector employees as well as the citizens of the Dominican Republic. This could be the beginning of the necessary involvement to resolve the collections problem which is the number-one problem of the sector. Improved collections together with the required structural changes to strengthen the rule of law will heighten confidence from investors, for further development of more efficient cost-reducing power generation projects which could pull the sector out of the vicious cycle where it has been for the last few years. We are moving in the right direction. Perseverance is the key to success.

Jeremy Martin, director of the energy program at the Institute of the Americas: In the last seven years, the Dominican government has spent more money on electric sector subsidies than on primary education. Celso Marranzini, the head of state energy holding company CDEEE, presented this remarkable statistic at a recent Institute of the Americas energy roundtable in Santo Domingo. Marranzini's broader point is the most critical: such a level of subsidies is not sustainable. Energy woes are not a new phenomenon in the Dominican Republic. Blackouts have occurred regularly since 1969 and enormous subsidies have been the norm for almost as long. Successive governments, many working in coordination with multilateral lenders, have worked to reverse years of inattention to the losses suffered by power companies. But the lack of payment across the country that has generated this annual drag on the nation's budget remains largely unchanged and unchallenged. Laws were passed making nonpayment of electric bills illegal. And some progress was made on system losses—2009 saw a decline to 38 percent from 43 percent in 2000. But the imbalance remains as indicated by this year's energy subsidy price tag. The international financial institutions can, and have, helped the Dominican Republic. But the answer to the subsidy issue lies not in external factors, but rather in creating a domestic culture of payment. This is not a pipedream. Dominicans willingly pay their cell phone bills, for instance. They understand that nonpayment results in service interruption. No one would suggest wide-scale cutting of electric power to any segment of the nation's population, but the political leadership of the country must take the hard steps toward reducing subsidies and encouraging citizen responsibility.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.

 

 

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