Foreign investment in Cuba: Hurry up and wait

HAVANA — More than two years ago, Cuba doubled the bet to attract a greater flow of foreign capital. It no longer conceives it as “a necessary evil” or “a complement” but as an essential factor in the nation’s development.

However, in dealing with foreigners, the primary philosophy seems to be to leave for tomorrow what could be done today, as if “mañana” were a constant for an economy that — according to experts — needs between 2 billion and 3 billion dollars a year to maintain a sustained growth between 3 percent and 4 percent.

“One of the problems we have is the slowness in negotiations,” admitted the minister of Foreign Trade and Foreign Investment (MINCEX), Rodrigo Malmierca, during the recent Havana International Fair.

“The foreign companies sometimes complain, and with reason, that our answers to their questions take a long time. We have to work to speed up these processes,” he said.

The figures, closely guarded by MINCEX executives, were made public during that trade show. Since the passing of Law 118 on Foreign Investment (March 2014), Cuba has concretized 14 reinvestments, 15 new projects in the Mariel Special Development Zone and 54 projects outside the MSDZ. That’s a total of 83 enterprises valued at more than 1.3 billion dollars.

That performance, Malmierca conceded, is “below the expectations, below the needs of the country,” which is eager to accede to outside financial sources to grow and promote its development.

As stated by economist Omar Everleny Pérez Villanueva, if we focus on that number and parse it, the results are not very encouraging, in view of our hopes to attract an annual volume of 2.5 billion dollars.

“For example, there we find the contracts for hotel management, for hotels owned 100 percent by the Cuban state, i.e., more than 35 establishments. That capital is committed money, still not invested; therefore, it still does not give tangible results to this economy.”

Also included, Pérez says, are projects for the expansion of companies that were already working in the local market. In other words, the expansion of capacities in Mariel for Brascuba and Unilever.

“The fact is that there are few new foreign companies,” Pérez adds. “The volume of business is not sufficient to obtain economic rewards in the next several years that will allow the Cuban economy to grow above 5 percent, generating jobs that will improve the lives of a significant number of workers.”

Researcher Juan Triana Cordoví says in an essay that, to reach the goals of social improvement, countries need not only to grow but also to grow at rates that enable them to achieve palpable results in not too long a time.

The count is almost asymmetric: a country that grows at an average annual rate of 1 percent will need 64 years to double its product; if the rate is 6 percent, it will need about 11 years to obtain the same result.

In Cuba, to revert the low increments in the GNP, the indices of foreign investment must be more than 20 or 25 percent. At present, the index is about 10 percent.

If today we have a clear definition of what our strategic axes are, why do we continue to spend time that we don’t have, in order to decide issues that don’t allow for delay? In terms of GNP growth, what is the cost of waiting? What is the cost of qualified jobs that we fail to create? asks Triana Cordoví.

Pérez Villanueva warns that the national economy — facing financial problems in 2016, 2017 and possibly in 2018 — is in urgent need of a strong investment process that will slow down the decapitalization of industry and agriculture while improving the country’s physical infrastructure. That process should also improve the standard of living of the people, who, after 1990, have had no relief from the pre-crisis, except for some social achievements that have been maintained.

The context of forming alliances with foreigners is favorable. “No doubt, the body of legislation that exists on the island is very attractive for businesses. And beginning with the normalization with the United States, plus the advantages of the debt pardons and the rapprochement with the European Union, Cuba becomes one of the most attractive sites for investment in the region,” the expert says.

But that scenario is worth little if the proposals drown in so much paperwork. In the researcher’s opinion, the selection has slowed down because of the inability of the parties involved to make decisions involving foreign capital. All investments are approved at the same level. The concept of the “single window” has not worked in all cases. Some institutions that participate in the assessment of a project (a requirement for documentation) have taken too long to make that assessment. Land appraisal is one such instance.

While not ignoring the obstacles raised by the blockade, Oscar Fernández Estrada, a professor at the University of Havana’s School of Accounting and Finance, criticizes the policy of betting on grand projects and creating an excessive bureaucracy.

“You have to empower the local governments to sign up businesses of smaller size. Approval [for projects] should not necessarily be granted by a minister,” he says.

To those elements that discourage investors from settling in Cuba can be added the nation’s macroeconomic climate, where growth has been shown to be below 1 percent. There are other endemic ills, Pérez Villanueva says: the dual currency, restrictions on direct hiring, a very small domestic market.

Seduced by the industry of leisure

Cuba’s new portfolio of opportunities holds 395 proposals. One hundred and eleven of them are in the tourism sector, currently the strongest generator in the national economy and its second source of hard currency.

According to the new portfolio, in 2015 the so-called industry of leisure was the most attractive offer for foreign investors. Contracts for hotel management occupied an important place among the modalities chosen for the establishment of projects.

According to Yuslenia Saumell, business director at the Ministry of Tourism (MINTUR), ever since the enactment of Law 118, 40 pacts have been approved for the management and commercialization of hotels, as well as two joint ventures for the construction of buildings on golf courses.

“It is very encouraging to see so much interest in tourism,” says Pérez Villanueva, “and that happens because there are more guarantees of a swift recovery of the investments — except for the golf courses, where recovery is very long-term.”

For example, he says, an amusement park erected to create business outside a hotel begins to create revenue as soon as it’s built.

And if it is advantageous to invest in tourism when the country is visited by more than 3 million foreigners a year, it should be borne in mind that the projects are authorized without appealing to the highest levels of government.

The system of approval of foreign investments has been established by law and is applied by the following organizations: the Council of State, the Council of Ministers, and the ministers of MINCEX and MINTUR. The chain of authority was described in an online forum by MINCEX officials (click here).

Reality tells us that it’s not enough to promote a modern legal framework or rehash good-will speeches. What’s needed is to build a really viable road for investors because, as minister Malmierca said, attracting foreign capital to Cuba “is not a necessary evil. We need to foster its development.”

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