Cuba: Port Upgrades and Free-Trade Zones
When Latin American and Caribbean heads of state gather in Cuba in January 2014 for the Comunidad de Estados Latinoamericanos y Caribeños (Community of Latin American and Caribbean States— CELAC) summit, the agenda will include a side trip to Mariel Bay. There, Brazilian President Dilma Rousseff and Cuban President Raúl Castro will cut the ribbon on a brand new container terminal that Cuba hopes will replace Havana as the country’s principal port.
Brazil financed more than two-thirds of the $900 million project, built in partnership with Brazilian construction company Odebrecht over six years—providing $670 million in loans for terminal construction and infrastructure development such as rail and road. The facility, with an initial capacity of 850,000 to 1 million containers, will be operated by Singaporean port operator PSA International.
The Mariel Bay facility, located 28 miles (45 kilometers) west of the capital on the northern coast, was built to attract traffic from the larger container ships expected to traverse the Panama Canal in 2015. It could also serve as a major transfer point for cargo heading to other destinations. But the competition is already fierce. The Dominican Republic, Jamaica, the Bahamas, and Panama are all rushing to improve their port facilities.
The Cubans hope their main drawing power will be the fact that the new terminal can handle vessels with drafts up to 49 feet (15 meters)—the vertical distance from the water to the lowest part of the vessel. Currently, the much-smaller terminal at Havana Bay is limited to ships with drafts smaller than 36 feet (11 meters) because of a tunnel under the channel that was built in the 1950s.
Mariel is at the heart of a planned 180-square-mile (46,620-hectare) free trade and development zone that will offer competitive customs and tax incentives. Cuba expects this new Special Development Zone (SDZ), and others it plans for the future, will “increase exports, [achieve] the effective substitution of imports, [spur] high-technology and local development projects, as well as contribute to the creation of new jobs,” according to a 311-point reform plan adopted by the ruling Communist Party in 2011. In addition, the Cuban government has plans to increase the terminal’s capacity, develop light manufacturing, storage and other facilities near the port, and build hotels, golf courses and condominiums in the broader development zone.
The terminal is ideally situated to handle U.S. cargo if the American trade embargo is eventually lifted. But even now it is preparing to handle U.S. food exports, valued at $500 million last year, flowing into the country under a 2000 amendment to the trade embargo.
For the moment, though, the big market boost remains a big “if.” U.S. sanctions right now represent a large potential brake on the terminal’s future success. Washington bans ships entering the U.S. for six months after docking in Cuba, unless they carry licensed U.S. agricultural goods.
Nevertheless, many shipping experts believe the terminal and free trade zone, at its current modest size, could still turn a profit with the help of Cuba’s Asian and Latin American friends.
In efforts to stimulate foreign interest, new rules governing investment and trade in the SDZ went into effect in November.
Investors will be given up to 50-year contracts, compared with the current 25 years, with the possibility of renewal and 100 percent ownership. They will be charged no labor or local taxes and will be granted a 10-year reprieve from paying a 12 percent tax on profits, which can be repatriated. This compares with a 30 percent profits tax and 20 percent labor tax for the rest of the country, though the labor tax is gradually being reduced.
Investors will, however, pay a 14 percent social security tax and 0.5 percent of income to a zone maintenance and development fund. All equipment and materials brought in to set up shop or imported for processing and re-export will be duty free.
Cuban economists believe large flows of direct investment will be needed for development and to create jobs as the government follows through with plans to move more than 20 percent of the labor force—over a million workers—into what is called the new “non-state” sector made up of small businesses and farms, cooperatives and joint ventures.
And they, along with foreign investors and governments, are now waiting to see if not just the taxes and customs duties have improved, but the business environment.
The new regulations do address one of the issues: the years it takes to get an investment approved. The office overseeing the SDZ will handle most paperwork without clients having to pass from one location to another, and includes strict time limits for approval by an intergovernmental commission and then, except for very small investments, the Council of Ministers.
Nevertheless, the new regulations are not without their pitfalls. Each investment will still need to be negotiated before the approval process begins, and promises in the past to speed up the paperwork have not materialized.
Another complaint of foreign investors in Cuba is not addressed in the new regulations: that they must hire and fire through a state-run labor company. The new regulations also maintain the highly discriminatory exchange-rate regime for contracting Cuban workers, in which foreign companies pay contracted employees in convertible pesos (at a one-to-one exchange rate with the dollar) directly to the state, which then pays its workers in non-convertible pesos at a much less favorable rate.
Finally, investors will face tough supervision, the high cost of services such as Internet, and the requirements that their facilities must be insured through Cuban state companies, and that contract discrepancies must be brought before Cuban state entities unless stipulated otherwise.