Cuba’s Foreign Investment Law Behind the Scenes

Cuba's Foreign Investment Law Behind the Scenes

April 25, 2014

Fernando Ravsberg*



HAVANA TIMES — PhD in Economics Omar Everleny Perez expounds on the

underpinnings of Cuba's new Foreign Investment Law, recently approved by

the island's parliament. Everleny is a respected researcher working at

the Center for the Study of the Cuban Economy, attached to the

University of Havana. Many of the studies conducted by this institution

have laid the theoretical groundwork for the country's current reforms.



Why a new foreign investment law?



Omar Everleny Perez: Because foreign investment is one of the mechanisms

that can help Cuba secure the resources it needs to grow. It's become

clear that it is impossible to head down the road to growth again on our

own efforts alone. The country's savings are not significant. Cuban

industries and services are so undercapitalized that we're caught in

real vicious circle. We have no resources to invest because we're

devoting them to consumption, because, owing to our inefficiency, we

can't manufacture many products and have to import them.



Without more investment in Cuba's economy, it will be impossible to

reach growth rates higher than 5 or 7 %, needed to double the country's

GDP in 5 years. With a growth rate of 2 %, like the one we have now,

we'll need 20 years to double our GDP.



Perhaps foreign investment will cease to be as important in 10 years.

Today, however, it is the only way to take in the additional US $ 2.5

billion this country needs. Bear in mind that Cuba does not belong to

international financial institutions (because of the US embargo),

remittances have already hit their limit and donations are not significant.



What does this new law offer the investor that's new and attractive?



OEP: To be able to attract investors in a world as competitive as ours,

you need to have as attractive a legislation as possible. There are tax

incentives: companies can operate for 8 years without paying taxes,

which is a significant change in comparison to the previous law. The new

law establishes a maximum term of 60 days for Cuban authorities to

respond to potential investors. Investments in professional services are

now authorized and mechanisms for the hiring of personnel at the Mariel

port have been made laxer. Those mechanisms used to be what

businesspeople complained most about.



However, the law preserves Cuba's employment agencies, which retain 70 %

of the worker's salary, if we consider the 20 % commission and the

application of a highly unfavorable exchange rate.



OEP: That's true, but workers in the Mariel Development Zone will still

earn more than what they did under the previous system.



Can cooperatives partner up with foreign investors?



OEP: The law says that a legally constituted Cuban company can enter

into such a partnership, and cooperatives qualify. Now, it remains to be

seen whether the Executive, which approves these agreements, will favor

these types of companies.



Foreign Investment and Independence



Which sectors require foreign investment the most?



OEP: One of the most important is the renewable energy sector. Cuba has

to change its energy infrastructure (95 % dependent on oil today). The

country is interested in making use of solar energy and there are

Chinese companies already working with us in this area. It is also

interested in wind power, an alternative that is bring interest from the

Nordic countries.



Biotechnology, conceived as a whole, from research, through production

to marketing, is also important. Cuba has made much progress in the area

through agreements with laboratories in Brazil, aimed at manufacturing

products for that market.



Agriculture is vital. We have to bolster full-cycle processes. For

instance, we have to produce our own fodder, raise cattle, produce milk

and establish a dairy product industry. We won't achieve much if we have

foreign investment for one part of the process and not the rest. Today,

we're producing Habana Club rum and we have to import the bottles and

boxes to sell it.



We need investment in real estate businesses, because Cuba doesn't have

the resources needed to invest in offices. I think this market will open

up in Mariel. Generally speaking, we also need investment in

infrastructure, in roads, railways and transportation systems.



How can Cuba maintain its independence with such levels of foreign

investment?



OEP: Things are very different now from what they were before 1959.

Today, companies operate for a contractually specified term. One of the

golden rules here is that agreements must have a limited term. In

Mariel, these can be as long as 50 years, but, generally speaking, they

are around 15 to 20 years. I believe this is a reasonable term, as

companies spend the first 8 years recovering their investments.



Also, the State does not transfer any property to foreigners. They are

usufruct or limited term contracts. In addition, foreign companies will

not invest anywhere they want but where the State needs them to.



No country can survive on its own resources alone in today's globalized

world – one way or another, they need foreign resources to achieve

development. China and Vietnam have demonstrated that one can make

massive use of foreign investment and achieve good economic results

without losing political control at home.



Source: Cuba's Foreign Investment Law Behind the Scenes - Havana

Times.org - http://www.havanatimes.org/?p=103249