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Cuba Opens Up To Foreign Money

Cuba Opens Up To Foreign Money

Posted by Miguel Ernesto on March 21, 2014

For decades, Direct Foreign Investment (IED, in Spanish) wasn't a priority for the Cuban government; but the deep changes of the world's geopolitics in the '90s, the disappearence of the Socialist Block and the desintegration of the Soviet Union affected the government is such a way that the then leader Fidel Castro assumed a more pragmatic position and started an opening to the foreign capital.

This process was welcomed with high interest by businessmen abroad in a first period; however, it met various obstacles that discouraged many potencial investors, or caused disenchantment to those who had already placed their money in the country. In a context of slow economic growth and the American embargo as an imperative mediation, now Havana could give a courageous step forward to what has been called an ''update of the economic model'' when discussing a new Law for Foreign Investments.

This legal mechanism will come in a complicated moment for Cuban economy. The economic results of 2013 were below the expected ones. The growth was only of 2.7% and this corroborated the worrying trend towards stagnation that not even the reforms have been able to stop. Since the ''guidelines for economic policies'' were approved in 2011, until late 2013 the average GDP annual growth rate has been a humble 2.8%, a very low figure if the government's predictions - an average growth of 4.4% until 2016- are considered.

The scenario does not look positive for 2014 either, and this has been publicly acknowledged by President Raúl Castro in several speeches. The government forecast expects a GDP growth rate of 2.2%, so this would be the worst year of the refomrs period, topped only by 2009, when the economy could barely increase the GDP growth rate in a 1.4%.

The government understands that professional service export, such as doctors - which remains being the main income for the island, with an annual rate of 11 billion dollars- is not strong enough to revive the GDP's growth. Reversing stagnation seems complicated; although Havana could now try a possible solution: boosting Direct Foreign Investment (DFI). This idea was reaffirmed in Raul Castro's speech at the closing of the 20th Central Workers Union Congress, when he stated '' we must consider the urgent need to encourage and attract foreign investment in order to invigorate the social and economic development of the country, purpose that is being consolidated with the creation of the Zone of Special Development in Mariel and the elaboration of a project of Law for Foreign Investments.''

The Direct Foreign Investment (DFI) in Cuba: rebuilding the legal mechanism

The DFI was legally approved in 1982, when the Decree - Law 50 authorized it as a complement to the national investment programmes; and, above all, to the projects that had been established in the old Council for Mutual Economic Assistance (CMEA) comprised by a number of socialist states.

In 1995 a significant modification was finally made, with the entry into force of the Law 77 of Foreign Investment. This legal mechanism contributed to the mitigation of the severe economic crisis, called 'The Special Period' because it allowed foreign investment in almost every sector.

At first, there was great interest from world-wide businessmen who entrusted their capital in tourism, oil production and, later on, in nickel, telecommunications, food industry and in the commercialization of tobacco and rum. Law 77 was complemented, in 2004, with the Agreement 5290 of the Council of Ministers' Excecutive Comittee which drafted the expansion of the new possible ways for investments.

The official figures depicted growth in the phase that goes from 1995 to 2002. In those seven years, 403 joint ventures were engaged and the investment commitment exceeded 5 billion dollars; yet, a serious decline started afterwards due to expiring contracts, breach of agreements, problems to repatriate profits and the disappointing results of those ventures (mixed companies). By 2012, only 206 of them remained, with an investment commitment of 4200 million dollars.

In 2011, the government resumed the idea of encouraging DFI, as a complement for the national investment effort, but the making of the new Law required almost three years.

Commitment to the Special Zone in Mariel (ZEDM)

According to Raúl Castro, the Zone of Special Development in Mariel (ZEDM), 45 kilometres away from Havana, ''is the most important task in order to accomplish the future we want''. With an investment that exceeded 957 million dollars - 85% of it coming from the Brazilian Bank for Economic and Social Development (BNDES, in Portuguese) - the ZEDM is a priority for a government that intends to present this project as an example of its new link to foreign companies.

Mariel has 465 square kilometres of coastal strip, and its advantages are an attractive geographic position and a deep-water bay that would enable work with larger merchant vessels - known as post- Panamax - and facilitate the passing through the Panama Canal from 2015 on, when the current enlargement works come to an end.

The first stage of the project contemplated the creation of a new container terminal that will have the capacity of dealing with 822 thousand containers every year. This will make of Mariel the most important port in the country, taking the pressure off Havana's - which could focus only on tourism - related activities.

ZEDM's development is regulated by the Decree - Law 313, of year 2013. This document, despite not being considered as a substantial transformation of Law 77, did include more taxation advantages, mainly with the tax exemption of the labour force, income taxes relief for ten years and sales tax exemption.

According to the Decree - Law, DFI's objectives in ZEDM include fund- raising and market expansion, as well as management capacity and job increase. The prioritised areas were biotechnology, the pharmaceutical industry, the agri-food industry, renewable energy and the real estate sector.

The Regulatory Office of ZEDM assured that, until late January this year, had received 72 investment applications and 66 requests of information from foreign countries. Of those applications, 38% were related to industry, 21% to agribusinesses and 13% to infraestructure services. In little time, 20 applications were rejected, because they were not in agreement with the Office's interests; while other 32 were approved and 17 of them are still under study. Proposals came from many nations, such as Spain, Italy, Russia, Brazil, China, Vietnam, Chile, Dominican Republic, Panama, Mexico and Canada.

Among the 35 companies that had the Office's approval, 23% is engaged to containers and packaging, 27% to light industry, 18% to chemical industry, another 18% to steel and heavy machinery and the last 14% is engaged to the construction field.

Successful investments.

In the past two years there have been many different investments with interesting economic results. One of them, is the Brazilian company Odebrecht involved in the building of Mariel's mega-port. In 2012 it signed an administration contract for 200 million dollars for sugar production in the central “5 de Septiembre” located in Cienfuegos. The idea is to multiply the production by five in a decade. Apart from that, Odebrecht has shown interest in the creation of monoclonal antibodies for anti-cancer vaccines that are being studied in the Centre of Molecular Immunology, as part of the Cuban Scientific Pole.

Another example is the creation of the Cuba Mountain Coffee Co. Ltd., a company dedicated to commercialize Cuban coffee in the United Kingdom. Britain's former Secretary of Treasure himself, Phillip Oppenheim, was the project driver and the company is valued at 4 million dollars that are planned to be used in the purchase of Arabica Coffee, performance improvement, nurseries perfectioning, windmills and dryhouses in the eastern zone. Although the investment isn't very high, it's a significant fact because for the first time a foreign company was able to cultivate coffee in Cuban soil.

Advantages and limitations.

Cuba presents a wide range of attractions for DFI like his favourable geographic position; the existence of important ore reserves and touristic conditions yet to be exploited. Besides, its population has a high educational degree and the country has achieved great standards of health, hygiene and citizen security.

Among the limitations for DFI in Cuba the American embargo that has lasted more than five decades is in the first place. It obstructs the access to a major global market and imposes costs and risks that complicate investments in Cuba or make them highly expensive.

According to the most recent report ''About the need of ending the economic, commercial and financial blockade imposed by the United States of America against Cuba'' presented to the UN General Assembly, in October 2013, the economic damage rises to 1 157 327 million dollars.Two other laws that make the embargo harder must be added: the Torricelli law (1992) and the Helms-Burton law (1996).

In 2000, Washington approved the sale of agricultural products to Cuba, by payment in cash, but it still impedes that Cuban products enter the American market.

In a recent research made by The Centre of Studies of Cuban Economy of the University of La Habana stated that foreign investors are often hesitant to put their money in the island for several reasons; among those are the long processes for business authorization, the contract regime of labour forces by an employing agency - which makes contracts even more expensive, the slowness and uncertainty about the existing regulation in problem - solving and the ambiguous clauses of propery rights and contracts.

Challenges to the new law

The well-known economist José Luis Rodriguez - once the Secretary of Economy- says that the first obstacle to be solved is to increase credibility around the world in order to attract more DFI. This would be achieved by payment standardization to creditors, which would imply the destination of many resources in a short term. This would certainly limit immediate growth, but it's an essential strategy. In recent periods, the government made advances in obtaining 70% of debt cancellation with Mexico and 90% of the debt owed to USSR, assumed by Russia.

Rodríguez also explains that in the current context the implementation of a new law for DFI, more in line with the present economic situation, is vital. This legal instrument should deepen elements already in vigour in the ZEDM, such as the extension of DFI's character, the incorporation of new ways of DFI (i.e. franchises), the BOT projects that mean the construction, operation and later transference of the eventual investments' properties, holdings and expansion of free-trade zones, establishing within the law bonuses and tax exemptions and facilitating policies when it comes to hiring workers. He believes it is necessary to establish Legal Stability agreements for DFI, especially in exchange rate policy and the protection of foreign properties previously naturalized in Cuba.

For Rodrigo Malmierca, Minister for Foreign Trade and Investment, the new law ''not only is not a retreat, but it also offers more guarantees and incentives, and reassures the attraction of capital that effectively contributes with a sustainable development and with the restoration of the national economy, which has a strategic connotation for the country (...) The important thing is to boost aspects in favor of foreign investments, to strengthen the financial prestige and to win the trust of investors in an environment of transparency, clear rules and incentives''.

According to José Luis Toledo, President of the permanent Commission of the National Assembly of the Popular Power that deals with Legal and Constitutional Affairs, the next legal instrument will reinforce guarantees to the investors, especially those related to production. It will also allow the establishment of an investments' portfolio, in a way that businessmen will be able to know the country's areas of interest and will contemplate, as well, tax bonuses, total exemptions and flexibility in the fields of customs.

When the approaches of the Representatives of the General Assembly - who will discuss the issue in an Extraordinary Session for the new Law for Foreign Investments - are analyzed, some worries about the scope and implementation of the law are highlighted. For example, how labor rights of Cuban workers will be defended, the period of investments' application and the protection of national patrimony.

In 2013 the profits due to DFI in Latin America, according to the Economic Commission for Latin America and the Caribbean (CEPAL, in Spanish) exceeded the 100.000 million dollars. With the approval of the new Law for Foreign Investments, Cuba wants to join a scenario where foreign capitals are inseparable for the economic development of a country.

Miguel Ernesto. PanamericanWorld. La Habana

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