Monday, March 31, 2014

Cuba's past raises scepticism about new foreign investment law

Cuba's past raises scepticism about new foreign investment law
31/03/2014 - 13:11
By Daniel Trotta

HAVANA (Reuters) - Cuba has declared itself open for business with a new
foreign investment law but faces deep scepticism given a history that
includes jailing foreign executives and attempting to seize greater
control of businesses once they prove successful.

The National Assembly unanimously passed a law on Saturday that embraces
foreign capital as crucial to Cuba's development, while disappointing
those who had hoped for even more changes, such as allowing foreign
ventures to hire Cuban labour freely instead of through the government.

Cut off from U.S. investment by Washington's comprehensive trade
embargo, Cuba says it needs $2 billion (£1.2 billion) to $2.5 billion
(£1.5 billion) a year in foreign direct investment (FDI) to help reach
its target of 7 percent growth a year. Economists estimate current FDI
at a few hundred million, and the economy is expected to grow just 2.2
percent this year.

The new law, which will take effect within 90 days, is most notable for
cutting the tax on profits in half and eliminating a labour tax while
granting new investors an 8-year exemption on the profits tax.

In an economy suffering from chronic underinvestment, foreigners are
being enticed. Among the areas in need are agriculture, infrastructure,
sugar, nickel mining, building renovation and real estate development.

The law is part of a series of reforms enacted by Cuban President Raul
Castro that would have been unthinkable before his brother, Fidel,
formally handed over power in 2008.

It appears to be a genuine attempt to join the global economy, although
Cuba's past dealings with foreign investors suggest caution.

"Given what we know so far, this is something of an improvement in the
investment climate but some important obstacles remain. We won't really
know until we see how it is applied in practice," said Richard Feinberg,
a former national security advisor to U.S. President Bill Clinton who
now teaches at the University of California, San Diego.

The communist government sometimes lets investment proposals die on the
shelf without explanation. It has, for example, entered talks with
several groups about building golf resorts only to let proposals wither
after once appearing to favour them.

"The problem with the new law is that except for taxes, little has
changed, which means their attitude hasn't changed," said one European
diplomat who declined to be identified. "In the end, the entire law
remains discretionary."

Experts say Cuba's approach to foreign business has been arbitrary. If a
venture is successful, the government often wants a bigger stake. It
welcomes foreign financing, but once a project is operational it wants
to take charge, they say.

"Use the foreigners where it suits you. Spit them out as soon as their
usefulness is over," said another European diplomat who requested anonymity.

Cuba has closed more joint ventures than it has opened since the ruling
Communist Party adopted wide-ranging economic reforms in 2011, and last
year the Anglo-Dutch consumer goods group Unilever ended a 15-year joint
venture after failing to resolve a dispute with the government over who
would have the controlling interest.

More chillingly, Cuba jailed executives in British investment and
trading firm Coral Capital Group Ltd on unspecified fraud changes. They
were found guilty of minor charges last June and released for time
served, more than a year each.

The government was previously more likely to deport such suspects. Now
it has made clear it is willing to find executives criminally liable.

French entrepreneur Michel Villand stopped doing business in Cuba after
establishing a chain of bakeries called Pain de Paris, now in the hands
of the government. He wrote a book entitled "My Associate Fidel" in
which he said his government partners defrauded him by keeping two sets
of books, then offered a ridiculously low sum for his stake.

"Starting a joint venture in Cuba for a small or medium-sized foreign
business is the same as putting a noose around your neck," Villand told
the Spanish news agency EFE.

A number of foreign companies have prospered in Cuba, notably Swiss food
giant Nestle, Britain's Imperial Tobacco Group, Spain's Melia Hotels
International, and Canada's Sherritt International, which has a joint
venture with the Cuban state to mine nickel.

"It's still a place to do business. Ask the Brazilians. They just put
$800 million in there," said Kirby Jones, president of Alamar
Associates, a consultancy for companies with an interest in Cuba.

Brazilian development bank BNDES financed a new special trading zone at
Cuba's port of Mariel, with an expansion built by the Brazilian
construction company Odebrecht SA.

Despite the past failings, some investors and analysts believe the new
law shows that Cuban authorities at the highest levels agree they need
to attract more foreign investment and that it marks a true change in
course by a secretive government that has been in power since a 1959

"This is still only speculation, but I believe it is a real change,"
said Thomas Herzfeld, whose Herzfeld Caribbean Basin Fund groups stocks
and other assets that he believes will benefit from an eventual end to
the U.S. economic embargo. "The new bill will probably encourage foreign
investors to take another look at Cuba."

(Reporting by Daniel Trotta and Marc Frank; Editing by Sandra Maler)

Source: Cuba's past raises scepticism about new foreign investment law - -

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