Cuba and an Investment Law

Cuba and an Investment Law
March 20, 2014
Fernando Ravsberg*

HAVANA TIMES — On March 29, parliament debates the new foreign
investment law to govern "in almost all sectors of the economy" (1),
advanced José Luis Toledo Santander, head of the Constitutional Affairs
Committee of the National Assembly.
The issue is vital for Cuba, so much so that the former Minister of
Economy José Luis Rodríguez says that "the increase in the rate of
growth of the Cuban economy ( … ) represents a significant increase in
investment in the coming years". (2)

The law aims to attract more foreign entrepreneurs by offering greater
guarantees and assurances. Toledo added that it even "includes bonuses
and total tax exemptions in certain circumstances, as well as
flexibility in Customs."

The issue is closely linked to the Mariel Special Development Zone
project with financial and technological support from Brazil, which aims
to create a kind of Caribbean Hong Kong, with different rules than those
that apply in the rest of the country.

And other regulations will be needed because it is not difficult to
imagine the face of new investors when informed they have to pay a
quarter of a million dollars for each new car they buy for their
business in Cuba.

The amazement will repeat when they learn the cost of Internet service
and more so when they realize how slow the connection is, coming from
the same server used illegally for resale of connections on the black
market, the mechanism by which Cubans can gain access from home.

The contracting system in Cuba

José Luis Toledo ensures that among the concerns of the legislators is
the "labor rights of Cubans who would work on these projects," also a
concern of citizens who are already part of these companies.

Under the current rules, to hire staff for their companies investors are
forced to resort to the government's employment offices. For being the
intermediary in the contracting they keep 90% of the salary that the
employer pays its employees.

The remaining 10% is not enough to live on, so if the employer wants to
require efficient work they are forced to give an extra bonus in hard
currency, also taxed at 35%.

Employees of foreign companies can be considered privileged over other
Cubans. Nonetheless, many feel upset when they learn that the state
retains such a higher percentage, more than even paid in Scandinavia.

In this sense, José Luis Rodríguez proposes "more flexible contracting
arrangements for the workforce without relinquishing control of the
labor system of partnerships with foreign capital, using an appropriate
wage and fiscal policy."

Challenges for Cuba

Another obstacle is the state's import companies, the only ones
authorized. These are monopolies that enjoy enormous power of decision
and are known for very slow management and sometimes lack business
integrity.

And last but perhaps most important according to Rodriguez is "to
increase credibility by normalizing the payment of outstanding debts
with different creditors" and the timely payments to business people who
currently trade with the island.

For those late payments, sometimes due only to bureaucratic reasons,
Cuba spends more on imports. Foreign entrepreneurs increase the profit
margin to cover the interest to be paid to the banks financing their
operations.

The challenges facing the Cuban parliament in its attempt to promote
foreign investment are huge and their success will depend on their
understanding what they are saying when they assure that in the new
foreign investment law "there will be no concessions or setbacks."

If not making "concessions" means that national interests will be
defended and that "in no way will mean selling the country" can be a
long-term guarantee that a nation that already belongs to the new
generations of Cubans will not be mortgaged.

But if to avoid "setbacks" the Kafkaesque web of irrational regulations
and inefficient agencies remains, Mariel will be no more successful than
the failed free trade zones opened with equal fanfare two decades ago.
—–
(*) Visit Fernando Ravsberg's blog (in Spanish).

Source: Cuba and an Investment Law - Havana Times.org -
http://www.havanatimes.org/?p=102526