Investing In Cuba: Balancing The Risk
Weber, Crabb & Wein
Continued from part one... Q1 hedge fund letters, conference, scoops etc Abrams and his team want to understand the fundamental economics of every opportunity because, "It is easy to tell what has been, and it is easy to tell what is today, but the biggest deal for the investor is to . . . SORRY! Read More
May 11, 2016
ABA International Investment and Development Section, Forthcoming
There is no doubt that Cuba is working hard to attract foreign investors. In 2014 its foreign investing laws were completely reformed to accommodate this, however, it may be too early to determine whether these reforms actually reduce investor risk. For foreign investors ready to make the move challenges abound. The focus of this paper is to explore the potential risks investors may face pursuing opportunities in Cuba.
Investing In Cuba: Balancing The Risk
Change is on the Horizon
Cuba has been in an accelerated state of adapting and adjusting since 2011. Zamora, 2015a, p. 138) The entire economic landscape is currently under reconstruction with diversification of international trade, domestic restrictions being lifted, and Cuban nationals being encouraged to develop entrepreneurial ventures. (Piccone & Trinkunas 2014, p. 1-2) Cuban Entrepreneurs, who comprise eleven percent of the local labor force, are being trained, in part, through the work of Proyecto Cuba Emprende, a school run by the Catholic Church of Cuba dedicated to equipping Cuban entrepreneurs. Since 2012, there have already been nearly 2000 graduates.
Reforming Foreign Investing Laws
In April of 2014 the Cuban Legislature adopted Law No. 118, known as the Foreign Investment Act, to strengthen guarantees for investors and offer increased tax incentives in the form of credits and exemptions that allow for flexibility in customs procedures. (Cuban Law No. 118, 2014) The Foreign Investment Act also reformed foreign direct investment with diversification of markets, access to advanced technology, and a substitution of importation, giving priority to agriculture. (Law No. 118, Ch. XVII, art. 61) The law promises greater protection against expropriation, repatriation of dividends and profits free from taxes in convertible currency and tax incentives including reduced profit tax, exemption from income tax and the elimination of the labor tax. (Law No. 118, Ch. III, art. 3, art. 4.1 & art 9.1)
Modes of International Investing in Cuba
The Cuban State encourages three modes of international investing including: (1) International Economic Association Contracts (IEA); (2) full foreign capital company; and (3) joint ventures consisting of both Cuban and foreign shareholders. (Law No. 118, Ch. V, art. 12.) Matias F. Travieso-Diaz and Charles P. Trumbull IV (2003) described the IEA as an entity that: “[D]oes not require the establishment of a legal entity separate from the contracting investors. IEAs are normally established because the contracting parties can meet a common objective through cooperation.”(p. 182)
A full foreign capital company is still disfavored by the Cuban State and rarely seen in operation, however, when it does happen it is established through registration with the Chamber of Commerce and authorized by the Cuban government. (Travieso-Diaz & Trumbull IV, pg. 182) That leaves the joint venture, the most favored choice of the Cuban State. (Travieso-Diaz & Trumbull IV, p. 182)
The Joint Venture
Joint Ventures accounted for an estimated $1.9 billion in exports in Cuba in 2008, with eighty percent coming from a very small number of firms including Sherritt International, Habanos, Havana Club rum, Rio Zaza, & BM and Sol Meliá according to Richard Feinberg in his 2013 report Foreign Investment in the New Cuban Economy.xi
Further, the report stated Cuba has added $3.5 billion to savings and investments from foreign direct investments in the last two decades. (Feinberg, 2013) Popular joint ventures between the Cuban government and foreign investors usually include: natural resource exploration, construction, agriculture production, hotel administration and professional service areas. (Miranda Diaz, 2015) xii However, foreign direct investments accounted for only seven percent of Cuba’s domestic output in 2013 and joint ventures employed less than one percent (or 34,000 workers) of the active labor force. (Feinberg, 2013)
These figures may bolster investor confidence, however, it is important to remember that these are joint ventures with the Cuban State. Disputes between partners and judicial resolution can prove to be tenuous. (Paparelli, 2015) The only private Cuban citizens who may incorporate businesses or form joint ventures are those seeking self-employment such as taxicab services, restaurants, and similar small businesses, or cooperatives consisting of associations of self-employed persons such as taxi drivers. (Feinberg, 2013)
For investors interested in forming a joint venture Chapter V, Article 14.1 of the Foreign Investment Act provides the following guidance: (1) start with a company incorporated with nominal shares; (2) the proportion of shares need to be agreed upon by the shareholders; (3) offices may be maintained in Cuba or abroad; (4) a document created by a notary deed must include the social rules; (5) an inscription in the Cuban commercial registry is required and; (6) any changes to the shareholders require State approval. (Law No. 118, 2014) xiii According to Cuban attorney Miranda Diaz (2015), controlling ownership in a Cuban joint venture can be negotiated at the time of contracting.
Import and Export
In an effort to encourage foreign import and export, Cuba has recently allowed the building of the Mariel Port and Free-Trade Zone by Odebrecht, a Brazilian construction company. (Morris, 2014) xiv This joint venture with Brazilian bank, BNDES, is believed to be “the largest infrastructure investment since 1990.” (Morris, 2014) Raul Castro said of the Port: “This container terminal, and the powerful infrastructure accompanying it, are a concrete example of the optimism and confidence with which we Cubans see a socialist and prosperous future.” (George, 2014)xv Chapter X, Article 26.1 of the Foreign Investing Act specifically provides that, “Joint ventures, national and foreign investors which are parties to international economic association agreements and totally foreign capital companies shall be entitled, in accordance with the provisions set for such purposes, to directly export and import whatever is needed for their operation.”
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