Cuba’s Foreign Investment Law Behind the Scenes

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.