Cuba's past raises skepticism about new foreign investment law

HAVANA Mon Mar 31, 2014 8:04am EDT

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HAVANA (Reuters) - Cuba has declared itself open for business with a new foreign investment law but faces deep skepticism given a history that includes jailing foreign executives and attempting to seize greater control of businesses once they prove successful.

The National Assembly unanimously passed a law on Saturday that embraces foreign capital as crucial to Cuba's development, while disappointing those who had hoped for even more changes, such as allowing foreign ventures to hire Cuban labor freely instead of through the government.

Cut off from U.S. investment by Washington's comprehensive trade embargo, Cuba says it needs $2 billion to $2.5 billion a year in foreign direct investment (FDI) to help reach its target of 7 percent growth a year. Economists estimate current FDI at a few hundred million, and the economy is expected to grow just 2.2 percent this year.

The new law, which will take effect within 90 days, is most notable for cutting the tax on profits in half and eliminating a labor tax while granting new investors an 8-year exemption on the profits tax.

In an economy suffering from chronic underinvestment, foreigners are being enticed. Among the areas in need are agriculture, infrastructure, sugar, nickel mining, building renovation and real estate development.

The law is part of a series of reforms enacted by Cuban President Raul Castro that would have been unthinkable before his brother, Fidel, formally handed over power in 2008.

It appears to be a genuine attempt to join the global economy, although Cuba's past dealings with foreign investors suggest caution.

"Given what we know so far, this is something of an improvement in the investment climate but some important obstacles remain. We won't really know until we see how it is applied in practice," said Richard Feinberg, a former national security advisor to U.S. President Bill Clinton who now teaches at the University of California, San Diego.

The communist government sometimes lets investment proposals die on the shelf without explanation. It has, for example, entered talks with several groups about building golf resorts only to let proposals wither after once appearing to favor them.

"The problem with the new law is that except for taxes, little has changed, which means their attitude hasn't changed," said one European diplomat who declined to be identified. "In the end, the entire law remains discretionary."

Experts say Cuba's approach to foreign business has been arbitrary. If a venture is successful, the government often wants a bigger stake. It welcomes foreign financing, but once a project is operational it wants to take charge, they say.

"Use the foreigners where it suits you. Spit them out as soon as their usefulness is over," said another European diplomat who requested anonymity.

Cuba has closed more joint ventures than it has opened since the ruling Communist Party adopted wide-ranging economic reforms in 2011, and last year the Anglo-Dutch consumer goods group Unilever ended a 15-year joint venture after failing to resolve a dispute with the government over who would have the controlling interest.

More chillingly, Cuba jailed executives in British investment and trading firm Coral Capital Group Ltd on unspecified fraud changes. They were found guilty of minor charges last June and released for time served, more than a year each.

The government was previously more likely to deport such suspects. Now it has made clear it is willing to find executives criminally liable.

French entrepreneur Michel Villand stopped doing business in Cuba after establishing a chain of bakeries called Pain de Paris, now in the hands of the government. He wrote a book entitled "My Associate Fidel" in which he said his government partners defrauded him by keeping two sets of books, then offered a ridiculously low sum for his stake.

"Starting a joint venture in Cuba for a small or medium-sized foreign business is the same as putting a noose around your neck," Villand told the Spanish news agency EFE.

A number of foreign companies have prospered in Cuba, notably Swiss food giant Nestle, Britain's Imperial Tobacco Group, Spain's Melia Hotels International, and Canada's Sherritt International, which has a joint venture with the Cuban state to mine nickel.

"It's still a place to do business. Ask the Brazilians. They just put $800 million in there," said Kirby Jones, president of Alamar Associates, a consultancy for companies with an interest in Cuba.

Brazilian development bank BNDES financed a new special trading zone at Cuba's port of Mariel, with an expansion built by the Brazilian construction company Odebrecht SA.

Despite the past failings, some investors and analysts believe the new law shows that Cuban authorities at the highest levels agree they need to attract more foreign investment and that it marks a true change in course by a secretive government that has been in power since a 1959 revolution.

"This is still only speculation, but I believe it is a real change," said Thomas Herzfeld, whose Herzfeld Caribbean Basin Fund groups stocks and other assets that he believes will benefit from an eventual end to the U.S. economic embargo. "The new bill will probably encourage foreign investors to take another look at Cuba."

(Reporting by Daniel Trotta and Marc Frank; Editing by Sandra Maler)

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