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US business faces game of catch-up if Cuba sanctions are cut

Tuesday, December 23, 2014 - 08:53
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International rivals have a clear head start in Cuba but US companies could catch up quickly if the economic embargo that has kept them away is dismantled in a new era of cooperation between Washington and Havana.

[HAVANA] International rivals have a clear head start in Cuba but US companies could catch up quickly if the economic embargo that has kept them away is dismantled in a new era of cooperation between Washington and Havana.

Cuba's inhospitable regulatory environment under communist rule has made doing business difficult and costly for foreign businesses, limiting investment.

The domestic economy is also small with low salaries severely limiting retail businesses and inefficient state-run companies a drag on productivity and growth.

Nevertheless, hotel companies such as Spain's Melia Hotels International and France's Accor, Canadian miner Sherritt International Corp, Britain's Imperial Tobacco and French beverage giant Pernod Ricard have survived and profited. "We've found it to be quite a stable and good place to do business and have had a lot of success there," said David Pathe, the chief executive at Sherritt, which has been in Cuba for 20 years and has joint ventures with the government in nickel, oil, gas production and electricity generation.

He, like others, declined to comment on the problems facing investors, saying only that "there's always been some noise around Cuba because of the U.S.-Cuban relationship." Experts say the restoration of diplomatic relations with the United States and a gradual dismantling of the U.S. economic embargo could open opportunities in areas from financial services and telecommunications to agriculture and oil. "The interest is pretty widespread, pretty much every multinational," said Jodi Bond, vice-president for the Americas at the US Chamber of Commerce, whose top executives made an exploratory trip to Cuba in May, their first in 15 years.

A foreign investment law passed earlier this year lowers taxes and promises an improved regulatory system, leading some potential investors to propose new projects to the Cubans.

When Obama announced the dramatic policy shift last week, US corporations were quick to respond. Within minutes, the phones started ringing at Miami law firms from clients seeking guidance on business opportunities. "We had 10 very significant clients ... Fortune 50 entities, call since Wednesday to start a Cuba conversation at a much more detailed and profound level," said Pedro Freyre, the head of the Cuba practice at Akerman, a large Miami-based law firm.

Those clients work in telecoms, construction, food, light manufacturing, and pharmaceuticals, and all asked about the legal implications of Obama's move, potential resistance in the US Congress - and in Cuba - and logistical challenges. "They want to know can foreigners own land in Cuba, how do you get landing rights, how do you get docking rights, what is the power and water supply like, what are the work force rules?" Freyre said. "Companies want to know what are the rules of the game? It's more strategic thinking than specific proposals." There could be plenty of opportunities for US firms if Cuba's government is ready to open up the economy. The pace of change, however, is unclear.

President Raul Castro is already implementing market-style economic reforms but is moving gradually and warns that Cuba will stick to its socialist principles.

As part of the talks between Havana and Washington, Obama said Cuba decided to give its citizens more access to the Internet. Its government has been reluctant to expand access in the past and it is not clear how much it is prepared to do now, but there is clearly a potential market.

Cuba has one of the lowest Internet penetration rates in the world, barely 5 per cent, and highly restricted broadband Internet access and WiFi. "With all of the pent up demand in Cuba, I think companies would line up around the block to get in to provide service in Cuba," said Doug Madory, director of Internet analysis at Dyn Research in New Hampshire who monitors Cuba. "Mobile operators with experience fielding a network in the developing world would be a good fit. They will bring the equipment they need." There might also be opportunities in Cuba's 74,000 square mile Exclusive Economic Zone that runs along its northwestern coast and then outward to within 45 miles of Florida.

Both the United States and Cuba agree there is plenty of oil below the zone's deep waters, yet just six of 59 blocks are leased because other foreign companies decided before the recent slide in oil prices that the embargo made exploration too costly.

Two international construction companies are already active in Cuba - French firm Bouygues builds hotels and Brazil's Odebrecht is working on ports and modernizing airports.

But Cuba plans over the next 10 years to build many more hotels, condominium complexes, more than a dozen joint venture golf courses and amusement parks as well as upgrade its ports, rails, roads and bridges. All of those are possible business opportunities for US companies.

An end to sanctions would help ease Cuba's strained public finances, for example by cutting shipping costs as it purchases goods closer to home, opening up a possibility that it join the International Monetary Fund and World Bank, and sending millions of US tourists to its shores.

The US tourism industry, from travel agencies and transportation to cruise lines and hotels, has much to gain if travel restrictions are lifted.

Spanish, Canadian and other hotel chains are already well placed along beaches and in colonial cities but there is still plenty of beach front and prime real estate available, most hotel ventures are run under short-term management deals and Cuban law allows US firms to buy out foreign owners.

Cuba is only now opening its agriculture, including sugar and livestock, to foreign investment, where there are currently only a few minor ventures.

Plunged into crisis by the collapse of the Soviet Union, Cuba signed deals in the 1990s giving exclusive distribution rights for its famed cigars and rum to Imperial Tobacco and Pernod Ricard, but it recently said there would be no more exclusive agreements and that current ones expire in the next few years.

A look at what happened in 2000 when the US allowed agricultural sales to Cuba for cash says much about future export potential.

Within three years, sales reached US$800 million a year at the expense of Canadian and European companies and the United States ranked fifth among Cuba's trading partners although sales have since declined to US$400 million a year because Cuba prefers to buy on credit.

REUTERS

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