Constitutional Constraints and Considerations for Cuba in Attracting Foreign Direct Investment

In analyzing Cuba as a potential recipient of foreign direct investment (FDI), the investor will focus on the regulatory framework specifically tailored to the proposed investment activity.  A review of that framework would involve an analysis of Law 118 of 2014, authorizing foreign investment, as well as other laws and regulations that could impact the proposed investment activity and operations in Cuba.  However, any analysis would be incomplete without a review of the country’s constitution as it would serve as the overarching document under which other Cuban laws would operate and therefore affect the legality of the investment and its continuous operations.

With the new constitution adopted in 2019 (the “New Constitution”), Cuba has attempted to bridge the gap between a socialist system and the capitalist systems from which it is attempting to attract capital.  The attempt at reconciliation creates a central tension in the New Constitution by featuring contradictory provisions without clear authority of which governs a specific circumstance.

This brief review of the New Constitution is useful in understanding the pervasive dominance of the State in the Cuban economy, in a nation that remains committed to centralized planning and control.  Moreover, the New Constitution establishes a fundamentally different role for the judiciary in the Cuban system from that in Europe and the U.S. and an outsized role for the Cuban Communist Party (the “Party”).  The powers granted to each of these institutions under the New Constitution result in obscuring which constitutional provisions will govern the foreign investment.
 

Fundamental Principles of the Nation

The New Constitution proclaims in its preamble that it is guided by the most advanced revolutionary, anti-imperialist, Cuban-Marxist, Latin American, and universal thought, in particular by the ideals and examples of José Martí and Fidel Castro, as well as the social emancipation ideas of Karl Marx, Frederick Engels, and Vladimir Lenin.  Further, it proclaims that Cuba will never return to capitalism, an economic regime characterized as the exploitation of man by man, and concludes that only in socialism and communism can a human being achieve his or her full dignity.

Thus, the New Constitution begins by portraying investors from all capitalist economies (presumably including those from socialist systems such as China and Vietnam) as part of perceived inferior economic systems engaging in exploitative practices.  Likewise, it discourages any early investment in Cuba now with the goal of future participation in any developing capitalist economy in the country by warning that will never occur.
 

Dominance of the State in the Economy

Articles 18 and 19 of the New Constitution provide that the Republic of Cuba is governed by a socialist economic system based on ownership by all people of the fundamental means of production, which is the primary form of property.  In contrast to a capitalism system where the market determines the value of exchanges of goods and serves to allocate resources, a socialist system involves central planning with the State determining the direction of the economy, regulating and monitoring the economy “according to the interests of the society”.

Therefore, the New Constitution considers that socialist planning constitutes the central component of the system of governance for economic and social development. The State is empowered to design the economy, conduct strategic development and achieve the “relevant balance” in the allocation of resources, minimizing or even ignoring the role of the market.  The New Constitution is silent on who and how the “interests of the society” are determined or what is or how the “relevant balance” is achieved.

The predominance of the State enterprise is established under Article 27 of the New Constitution, providing that State enterprises play the leading role in the national economy.  State enterprises are granted by the New Constitution autonomy in their administration and management and are tasked with performing a primary role in the production of goods and services in order to comply with their social responsibilities.

These provisions, taken together, suggest that:

• the opportunities for foreign investors are limited to those that the State does not choose to undertake; and
• the foreign investor is continually at risk of having its investment opportunities diminished or extinguished, as its principal local competitor (the State), in its role managing the economy and allocating resources, could decide in the interests of the society to curtail the growth of the investor’s operations or even nationalize them, as the State will determine from time-to-time what is in the interest of all the people.
   

Limited Recognition of Private Property

Article 22 of the New Constitution sets forth the forms of property:

• Socialist property, belonging to the entire population, in which the State acts as a representative and beneficiary as property owner on behalf of the people;
• Cooperative property, that which is sustained through the collective labor of partner-owners and through the effective exercise of the principles of cooperativism;
• Property of political, social, and mass organizations, in which ownership is exercised over goods necessary to fulfill their missions; and
• Private property, in which ownership is exercised over specific means of production by natural or legal persons, whether Cubans or foreigners, with a complementary role in the economy.

Moreover, Article 29 limits the full enjoyment of the private property right granted by Article 22, and its development for the benefit of the national economy.  Leasing, sharecropping, and mortgage loans to individuals are prohibited, although mortgage loans are a key tool used by enterprises from a capitalist system to finance construction projects and improvements on real property.

The New Constitution provides the State with a preferential right in relation to private actors to the acquisition of land through the payment of a “just price”.  Who makes the decision that the price is just or that it is appropriate for the State to exercise the preference does not appear to be anywhere established, creating uncertainty for the property owner and opening the State up to claims of arbitrariness.

In capitalist economies, the State also has a right of “eminent domain” for the benefit of the public at large.  However, that right of the State must be exercised only for the benefit of a public interest (not a State enterprise); and the public interest is usually determined by a regulatory process involving public hearings, often with voting by the affected members of the public, and the decision is usually subject to appeal to the courts of law that act as independent arbiters.

Again, the ownership of private property by a foreign investor, whether legal or natural, is limited not to a specified type of property or the location of real property but by a determination that it qualifies as a complementary role in the economy - a role that would presumably fluctuate as the economy develops and State redefines what is “complementary”.  Foreign investors must ask themselves whether a specific investment in a property makes it really theirs.

Nonetheless, in Article 28 of the New Constitution, the State is tasked with promoting and providing guarantees to foreign investors for their investments in the nation, recognizing the important role FDI should play in the economic development of the country.  By law, the State charged with adopting regulations for FDI and the rational use of the human and naturals resources, demonstrating respect for national sovereignty and independence.

The adoption of the New Constitution, with its recognition of the existence of private property and that private property may be owned by its foreign investors, is an advancement from the prior Cuban constitution.  The prior constitution did not recognize the existence of private property - even while the Cuban legislature adopted Law 118 seeking to attract private investment from abroad.

However, it does not appear that the New Constitution offers the foreign investor the type of protections it would need to commit substantial capital.  For example, in case the Cuban State were to deem that the foreigner’s share of a return from a joint venture investment with a State enterprise in Cuba should not be remitted because it is necessary and appropriate to be retained by the State to satisfy an emergency need, no provision of the New Constitution would appear to protect the financial interests of the foreign investor.  In fact, under the New Constitution the State would be authorized to repurpose those funds to address any need it considers for the benefit of the people.  This leaves the foreign investor in the unenviable position of suffering a loss without legal recourse under the law of the land.

While Article 99 provides a private right of action against the State by anyone wronged by the State, it is not clear whether this provision would govern in the case the State would exercise the preference and powers it is given over the foreign investor under other provisions.
 

Lack of Independent Consideration

The interpretation of the constitutional provisions is by virtue of Article 108 are delegated to the National Assembly of People’s Power (the “National Assembly”).  In particular, the National Assembly is authorized:

• To adopt amendments to the New Constitution, according to the terms of Title XI; and
• To issue a general and binding interpretation (a judicial-type right granted to the legislature) of the New Constitution and the laws adopted thereunder.

The New Constitution does not contemplate that it would be interpreted by independent courts.  So, the New Constitution and laws adopted under it by the National Assembly are interpreted by the National Assembly and not necessarily subject to independent judicial review.

By virtue of Article 149, the magistrates and lay judges of the People’s Supreme Court are elected by the National Assembly or by the Council of State (the executive committee of the National Assembly with power to act between legislative sessions).  So, the judges are not appointed for life in order to ensure independence as is the case in some other nations.  While Article 150 provides that judges are independent and do not owe obedience except to the law, they are required to report to the National Assembly as required by Article 154 and may be removed under specified circumstances.

The lack of a separation of power between the judicial and legislative branches further concentrates power in the State vis-a-vis any investor.  Investors usually seek an independent court system in order to resolve disputes with other actors in the economy, including the State.  The quasi-independence of the judicial system as contemplated by the New Constitution would present potential foreign investors with a concern about whether they could get a fair hearing in a dispute with the State or a State enterprise in Cuba.
 

The Communist Party is the Last Word

Article 5 of the New Constitution designates the Communist Party of Cuba as the superior driving force of the society and the State.  What this implies is that the Party has power of direction (and veto) over all activities of the society, including the economy.  For a foreign investor, the ability of an institution to trump the constitution and the law of the land is a significant concern. 

Foreign investors seek certainty for their investments and attempt to manage risks of loss, among other ways, by relying on written rules and established practices.  The existence of an institution such as the Party with power to trump the law or overturn regulations governing an investment creates another significant element of uncertainty, presenting yet another concern for a foreign investor.
 

Conclusion

The New Constitution is an improvement over the prior one in that it recognizes the existence of certain kinds of private property and specifies that foreign investors can receive certain protections for any investment.  However, the uncertainty created by other provisions of the New Constitution for FDI cannot be easily mitigated. The current normative framework is not sufficient to attract sufficient FDI to Cuba.  It is necessary not only to modify the foreign investment law but the whole normative framework, including the New Constitution, in order to provide sufficient protections for foreign investors.

Pedro Freyre is the chair of Akerman’s International Practice, a full-service team advising multinational and global corporations on a wide range of cross-border M&A, joint ventures, capital markets transactions, syndicated and secured lending, project finance, debt restructuring, trade, compliance, as well as complex construction and other international disputes. Pedro is an internationally recognized authority on the U.S. Embargo on Cuba and the evolving regulations enacted since the restoration of diplomatic relations between the United States and Cuba. Most recently, he has been instrumental in guiding clients with respect to the defense of claims arising from the implementation of Title III of the Helms-Burton Act.

Pedro advises U.S.-based companies on the types of business transactions that are legal in Cuba under the U.S. embargo, helps U.S. entities that are engaged in authorized activities in connection with entering the Cuban market, and advises foreign entities that are involved in Cuba business on implications with U.S. law.