1364. Cuba Opens Its Economy to Foreign Investment, Carefully

By Adam Molon, CNBC, March 28, 2014

In this Nov. 6, 2013 photo, small fishing boats float anchored on the opposite shore of a port under construction in the Bay of Mariel, Cuba. Authorities have high hopes that Mariel could become a strategic economic center. Photo credit: Franklin Reyes, AP

The Cuban government said this week that it will open most of the nation's economic sectors to international investment and allow the existence of wholly owned foreign firms in Cuba, as part of a new foreign investment law that is expected to pass on Saturday.

The Cuban government is also expected to cut the profit tax it charges foreign enterprises operating on the island to 15 percent from the current 30 percent.

But experts like John Kavulich, a senior policy advisor at the U.S.-Cuba Trade and Economic Council, said that while these proposed initiatives have the potential to bring positive, liberalizing reform to Cuba's economy, international firms should still approach with cautious skepticism.

"What they've announced they'd do, does it sound progressive? Yes. Does it have the potential to be progressive? Yes," Kavulich said, referencing the Cuban government and the newly proposed foreign investment legislation.

"But Cuba's had a foreign investment law since the 1980s. And one of the problems has been that when the government feels that they've made enough progress, they reverse course and try to take back or eliminate the opportunities that they've presented to companies. Any changes announced now have to be looked at in that historical context."

Currently, international firms are allowed to operate in Cuba only as minority stakeholders in so-called mixed companies that are majority-controlled by the government.

Kavulich pointed to a lack of legal and procedural transparency as a key issue affecting Cuba's business environment, noting that some of the key challenges foreign firms face in Cuba include repatriation of profits, arbitration of conflicts and disputes, and regulations requiring that Cuban personnel be hired through a state-run employment agency.

"On a plate of appetizers, it's not going to be the first appetizer that you select," said Kavulich of Cuba's international investment environment. "There are many countries throughout the world that are far more transparent and have a less hostage-like relationship with cooperating partners."

John McAuliff, executive director of the Fund for Reconciliation and Development, a nonprofit organization advocating warmer relations between the U.S. and Cuba, said that a new foreign investment law enacted within an opaque and evolving system like Cuba's could lead to misunderstandings for international investors, and, in some instances, even something potentially as bad as jail time.

"In a transitional situation where not all the rules are clear or not all the laws are clear, people could, through overreach, or greed, or ignorance, get themselves into trouble with local laws," said McAuliff. "There have been serious issues with people cutting corners and getting into trouble with the law, and facing criminal charges in Cuba."

Robert L. Muse, an attorney who specializes in U.S. laws relating to Cuba, said that in order for new Cuban foreign investment policies to be effective, specificity of terms and clarity of process are key.

"I would encourage Cuba to go very quickly from the general to the highly specific. What are the timelines? What are the approval processes? How are they going to be enforced? Then, move on to specificity of rule-making and regulations," said Muse. "It's not going to be good enough to make broad pronouncements that Cuba is now seeking foreign investment. Some questions are going to have to be pre-emptively answered."

Muse cautioned that international companies considering investment in Cuba should do so with their eyes wide open to the opportunities and risks present in the island's economy and politics.

"This is a country that is opening up after 60 years of dormancy in the investment sectors," said Muse. "You're almost pioneering your way in, but there are risks associated with it."

Andrew MacDonald, director and chief executive of Esencia Group, said he finds those risks worth taking. His company plans to build biomass power plants in Cuba through a joint venture formed with a state-owned company in Cuba's Ministry of Sugar.

"There are some unique factors," said MacDonald of international investment in Cuba. "It can be a tad bureaucratic at times, but the country is developing economically in the right direction."

MacDonald said that while his company has been able to work effectively within Cuban joint ventures through considerable efforts, the prospect of being able to form a wholly owned venture in Cuba is appealing.

"One of the issues in Cuba is that it is a little bit chicken-and-egg. You've got to do a lot of prework and invest a lot of resources before you get the joint venture approved, and then you can actually do the real work," said MacDonald. "From a foreign investment point of view, it's an attractive proposition to be able to own 100 percent of your company and not have to form a joint venture."

Whether working in joint venture arrangements or as a wholly owned entity, MacDonald said his company has no plans to exit Cuba.

"The opportunity side is enormous, because Cuba is a country rich in natural resources," he said. "We believe in the Cubans, and we respect them for their technical abilities and the resources they have."