First impressions on Cuba’s Decree-Law 46 for MSMEs

From La Joven Cuba

It is encouraging to note the recent approval of the Decree-Laws to strengthen the Cuban economic-social model, such as those dealing with the creation of micro, small and medium-sized enterprises (MSMEs), non-agricultural cooperatives, or self-employment. Their approval comes ahead of the analysis of these regulations which were expected during the upcoming National Assembly meetings. 

There are many positive aspects that comprise the Decree-Law on MSMEs highlighting the recognition of private initiatives through companies with their own legal personality, under the figure of limited liability companies. There are many others that can be found in the regulations.

Let us not pause at the non-recognition of joint-stock companies (SA), nor the size of the medium-sized companies based on the maximum number of its workers, not even at the restriction that states that a person cannot be a partner in more than one MSME.

Joint stock companies could well be the vehicle to encourage foreign investment, but it seems that the declaration of the private initiative with a business nature was already considered a huge leap to have to now further expand its scope. Likewise, in many other countries the medium-sized company is considered one with as many as 250 workers.

The impossibility of owning several companies deals with the desire to not allow the accumulation of wealth, as was approved in the Constitution. The reasons for taking measured steps can be understood, although not everyone would agree with the slowness of the process.

I will focus on the aspects that raise, in my opinion, the greatest doubts.

It is stated that MSMEs may be private, state-owned or mixed. Later it is clarified that the mixed companies will require a special legal regime when conditions allow it, but it is already regulated that in the mixed companies only legal persons of different types of property will be partners. In this way, the possibility of a foreign legal entity associating itself with Cuban natural persons to establish a mixed MSME is not allowed.

This will result in the narrowing of the field in the creation of companies of this type. It should help increase the attraction of foreign direct investment, since some foreign investors prefer private interlocutors as partners, or the country may not authorize foreign investments in small and medium-sized companies with a limited number of workers, given that the investment would be smaller and not interesting for the preferences of state-owned companies. In the end, the investment would not be made one way or the other. The question then becomes: Who loses the most?

The rule does not clarify whether MSMEs will be created for an unlimited time, as is normal everywhere. However, when dealing with the dissolution of an MSME, it is stated that the company may be dissolved when the term of validity of the same expires without having registered the extension in the Mercantile Registry, which implies that the MSMEs will have a term limit and must undergo evaluation and approval procedures to continue operating.

It is one of the problems that foreign investment faces in Cuba today… Can investors be sure that when the time limit is up will they be allowed to continue operating?

The activities to be carried out are established in the Annex to the aforementioned Decree. It is indicated there that private MSMEs will not be able to function, for example, in the areas of health, telecommunications, energy, defense, press and others that were already banned for self-employed workers. It should be understood that if this list of prohibited activities is very broad, it will be useless if we have the best law in the world on MSMEs; it will become basically useless and its real impact on the country’s economy will be very low.

Given Cuba’s social structure, it is possible to understand the aspiration that the state enterprise continues to be preponderant and that the strategic sectors remain in the hands of the State. But there do not seem to be solid reasons to limit activities in everything that is not classified as strategic.

It must be taken into account that if private activity is authorized primarily for some services and products, there will be no possibilities of resizing irrepressible state companies, redirecting masses of workers to more efficient companies, or having companies — state or private — more dynamic and MSMEs with higher added value productions. Depending on the activities to be carried out, they will end up being self employment ventures with more salaried workers but with little impact on the generation of national GDP.

For example, the “generation, transmission and distribution of electrical energy” is not allowed, which, understood on a large scale, makes sense to keep under state control. However, if you want to change the energy matrix, take care of the environment and save imported fuels, it seems sensible to allow private MSMEs to produce, assemble, and mount solar panels on the roofs of homes and businesses, and with the capacity to sell the surplus electricity generated to the state electricity grid.

The same applies to warehousing, transportation, cabotage, pleasure boats with crew, the rental and leasing of recreational and sports equipment, or the management of bowling alleys, sports clubs and other sports activities, just to cite a few examples. Are they prioritized to the point that they should not be detached from the hands of the State? Are not some of these activities where deficiencies in the service are noticed, precisely due to lack of State resources?

The presence of companies with totally foreign capital has had to be authorized allowing for fleets of trucks that meet the demand for transportation of goods within the country. Why couldn’t a private MSME solve this same problem? Probably a private MSME authorized to carry out such activity would buy and fix disused trucks in the hands of state companies, or would solve the problems of the blockade to import trucks, or public transportation buses from other countries.

If there are currently private trucks — produced before 1959, and having to be fixed often — that provide services for the transportation of goods or people, what prevents an MSME from importing a more modern truck and / or bus and offer this same service with fewer breakages and greater road safety?

As a principle, if for any activity the presence of foreign investment has been allowed, thus breaking the absolute state control for that sector, it seems logical to admit that the same activity can be managed by national MSMEs, even if they are private.

No less important will be the operation of the bank accounts that the MSMEs open, and the billing currency. Currently, a self-employed worker can charge something to his personal account in convertible currency (MLC), or change Cuban pesos (CUP) to the currency in the informal market making it difficult to detect this anomaly made by a natural person. Both operations are extremely important to pay for imported raw materials, supplies and investments and to keep the activity running.

For a company, which issues financial statements and can be audited in depth, this would be more complicated. But it is clear that without imports (no matter if they are direct or through intermediary state companies), which require foreign exchange for their realization, the activity of MSMEs would be very restricted, or limited.

Without accounts in MLC, and without the capacity to invoice in MLC, or with restrictions to redeem CUPs to MLC and make payments abroad, MSMEs would have similar limitations as state-owned companies. And if it is difficult to lift these obstacles for the state companies, the new MSMEs should not be burdened with that burden of prohibitions or limitations.

In this sense, the regulations must also provide for the possibility that MSMEs receive financing from abroad, both from institutions and individuals. It is no secret to anyone that many potential partners of MSMEs would receive financing from relatives abroad in order to start the operation of the company.

This implies being able to pay external suppliers from third party accounts abroad. For example, a family member who provides financial support for the venture — which would be a way of circumventing the blockade.

However, this also means recognizing the need for MSMEs to make payments abroad and repay the debts incurred. If the country does not have large savings, one would expect an insignificant creation of private MSMEs, unless they receive initial support from outside the Island. It is in the hands of legislators and regulators that this happen behind the scenes, or in an agile and transparent way.

Finally, MSMEs in Cuba cannot separate themselves from the economic environment in which they operate, which is currently complex: the economy has decreased since 2019, and in 2021 it will maintain that trend; the blockade is still intact; the Covid-19 pandemic does not allow for an optimistic scenario in the near future; tourism is almost nil; and sugar exports practically zero, or very low. Short-term outstanding debts, the product of renegotiations with the Paris Club, will apply pressure very soon and the liquidity crisis increases daily.

With these signals, it is very difficult to foresee, at least in the short term, that MSMEs will be another driving force behind the economy, despite their enormous potential.

Translation by Progreso Weekly.