Stakes Are High for Cuba Foreign Investment Law

Stakes Are High for Cuba Foreign Investment Law
HAVANA March 28, 2014 (AP)
By PETER ORSI Associated Press

Cuban authorities are on the verge of enacting a new foreign investment
law considered one of the most vital building blocks of President Raul
Castro's effort to reform the country's struggling economy.

The law is seen as so important that an extraordinary session of
parliament has been scheduled for Saturday so the matter doesn't wait
several months until the regular summer session.

Few concrete details have been made public, but this week official media
gave some hints of what the draft law looks like.

The newspaper Juventud Rebelde said it will allow foreign participation
in all sectors except health and education, and not only through joint
partnerships with the socialist government. Also allowed would be an
"international economic association contract, or business of completely
foreign capital."

Juventud Rebelde said most companies would be taxed at 15 percent of
profits, half what they pay under current rules, and they will be exempt
from paying for the first eight years of operation. Investors apparently
will not see their personal income taxed.

Duties may be higher for operations that exploit natural resources, such
as nickel and fossil fuels.

Foreign investment in the Communist-run country has lagged behind
expectations in recent years, and the shortfall is seen as a major
reason for disappointing economic growth. Analysts say that officials
must show they are truly committed to easing the way for foreign firms
if this latest attempt to lure overseas capital is to succeed.

"It's really about (creating) a business climate in which business feels
government at senior levels has an unambiguously favorable attitude
toward foreign investors," said Richard Feinberg, a professor of
international political economy at the University of California, San
Diego. "That's the best guarantee."

"If this law gives the right signals," Feinberg said, "it would be a
major step forward in the economic reforms."

Cuba isn't the easiest place for a foreign businessperson to make a buck.

Labor taxes are high, there is no open bidding for projects, the
approval process is opaque and cumbersome and the government has been
reluctant to let outsiders have majority ownership.

Companies often find themselves negotiating multimillion-dollar deals
with government officials who earn tiny salaries, and some say payoffs
are an unfortunate part of doing business in Cuba. At the same time, a
crackdown on graft, including the jailing of Canadian, Chilean, Czech,
English and French citizens, has sent a chill through the foreign
business community.

Then there's the 52-year-old U.S. embargo, which bars most American
trade with the island and effectively obliges many foreign companies to
choose between doing business with Cuba or the United States.

There's no sign the embargo will be lifted anytime soon, but observers
say Cuba can make itself more attractive to investors by doing things
like making approvals more transparent, easing payroll taxes, enabling
direct hiring of local employees and relaxing rules that require foreign
companies to purchase a certain amount of local inputs.

The rules described in Juventud Rebelde would be almost as favorable as
those already in place for a special economic development zone at
Mariel, a massive port project west of Havana that was formally
inaugurated in January.

Officials are also talking of guarantees that the property of foreign
companies and individuals will not be nationalized as happened after the
1959 Cuban Revolution, except in cases of national interest and only
with due compensation.

In a recent report for the online publication Cuba Standard, which
closely follows Cuban business news, former Cuban Central Bank economist
Pavel Vidal noted that foreign investment has remained flat since
Castro's economic reforms began, about 20 percent below forecast on
average. GDP grew just 2.7 percent last year, low for a developing
nation and again short of expectations.

Meanwhile, Cuba is heavily dependent on the billions of dollars in oil
it gets from ally Venezuela. The socialist-run South American nation is
experiencing its own economic woes these days, rocked for weeks by
violent protests amid calls by some in the opposition for President
Nicolas Maduro to resign.

Vidal said the new law could help stimulate investment by limiting
government officials' discretion in decision-making on approvals, ending
a longstanding tendency to green-light only large-scale investment and
allowing investment in Cuba's emerging privately owned businesses and
independent cooperatives.

"The new foreign investment law is the last opportunity for the reform
to come close to the growth goals planned through 2016," wrote Vidal,
who is currently a professor at Javeriana University in Cali, Colombia.
"At the same time, it will help diversify the island's international
relations, as well as reduce vulnerability due to its links with Venezuela."

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Peter Orsi on Twitter: www.twitter.com/Peter—Orsi

Source: Stakes Are High for Cuba Foreign Investment Law - ABC News -
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