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Stakes are high for Cuba foreign investment law

Friday - 3/28/2014, 9:21am  ET

Cuba's President Raul Castro, smiles during a meeting with Vietnam's Prime Minister Nguyen Tan Dung, not seen, at Revolution Palace in Havana, Cuba, Thursday, March. 27, 2014. Tan Dung is in Cuba in a three-day official visit. (AP Photo/Adalberto Roque, Pool)

PETER ORSI
Associated Press

HAVANA (AP) -- 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


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