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Apr 29, 2014

Cuba's market reforms spread to largest companies

Regulations eased, managers given more responsibility
By Marc Frank
    
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HAVANA (Reuters) — Cuba loosened regulation of its largest state-run companies on Monday, shifting the ongoing reform of the Soviet-style economy from retail services and farming into some of the country's most important businesses, including minerals, tourism and telecommunications.

The reforms will affect hundreds of big state enterprises, from nickel producer Cubaniquel and oil company Cubapetroleo to banks and wholesale trade.

Larger enterprises are being overhauled as the country strives to avoid bankruptcy and boost growth, which has averaged around 2 per cent annually since the reforms began.

With the latest changes, a total of over 5,000 companies will now operate outside the government, be allowed to keep 50 per cent of their profits after taxes, and design their own wage systems under regulations that came into effect on Monday with their publication by the government.

In addition, these companies may sell excess product on the open market after meeting their state quotas, have more flexibility in production and marketing decisions, and will be evaluated based on just seven criteria, a reduction from dozens previously.

Many of the changes were already under way as pilot projects and are now being generalized to over 5,000 companies in the latest of the market-oriented reforms that Cuban President Raul Castro has implemented since taking over from his brother Fidel in 2008.

"Now we are cooking, getting into the really important stuff," said a local economist who specializes in company reform, asking that his name not be used due to restrictions on speaking to foreign journalists.

He was referring not just to Monday's announcement but also the recent approval of a plan to end Cuba's dual-currency system and new regulations and tax breaks designed to attract foreign investors.

Cuba's economy was more than 90 per cent in state hands up until 2008 and almost all of the labour force of 5 million workers were state employees. Economists estimate 75 to 80 per cent of the economy is state-controlled today.

Cuba began laying off hundreds of thousands of state workers and deregulated small retail services in 2010, simultaneously creating a "non-state" sector of more than 450,000 private businesses and their employees and leasing land to 180,000 would-be farmers.

Under the latest reforms, companies will be largely cut off from state subsidies and must now make a profit or risk being downsized, merged with others, or closed. Company directors also face more modern accounting requirements.

"These are rational economic measures — separating businesses from the ministries, giving managers more autonomy, institutionalizing incentive pay and profit sharing for workers," said Phil Peters, head of the Cuba Research Center in Alexandria, Virginia.

"The hard part will be allowing managers to lay off excess workers and living up to the commitment to close state enterprises that can't survive without subsidies," he said.

The process will be gradual, giving managers more and more responsibility for their own companies, said Grisel Trista Arbesu, the Communist Party's head of company reform, in Monday's edition of Granma, the official Communist Party daily.

The rules and regulations make clear that government ministries and other entities would be removed from business, except that government appointees would remain part of management.

"The company plan will now be approved by the president of the board of directors, something that up to now was done by the (state)," Trista Arbesu said.

However, the companies still cannot import and export directly or freely partner with foreign firms.

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