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Cuba’s capacity limited by few firms, little infrastructure and lots of tourists

Cuba’s capacity limited by few firms, little infrastructure and lots of tourists

Posted by PanamericanWorld on December 14, 2015

The cobbled streets of Old Havana are choked with tourists these days: sweaty, sunburned tourists from the United States, most of them, who make the rounds of the small hotels in the morning to beg and plead. But it does little good: There isn’t a room – or, often, a café table or a taxi – to be had. The tourists just keep coming – arrivals are up 62 per cent this year. But the city’s limited tourist infrastructure is bursting at the seams.

“It’s a big problem,” said Omar Everleny, an economist at the Centre for the Study of the Cuban Economy in the capital. “Havana is 100 per cent full.” The U.S. visitors have seized on new freedom to visit since the United States and Cuba normalized relations a year ago this week, but they are still mostly restricted to Havana. Yet beyond the capital, in the beach resort mecca of Varadero or the keys to the north, occupancy is also near-full, and there is a huge unmet market for beachfront rooms, sailboat slips and villas. A much-heralded process of economic reform is under way in Cuba, and foreign investment laws were made significantly more favourable for investors earlier this year – and yet the level of building pales in comparison to the size of the demand, in tourism and other sectors.

That’s due in part to the U.S. embargo, which remains firmly in place despite a year of détente. The ongoing tight control of all major economic activity by the state, and the still-strangling bureaucracy, means everything happens slowly.

But many people here – both Cubans and the handful of foreigners based in the country on behalf of international firms – express surprise that Canadian companies, in particular, aren’t a bigger presence, taking advantage of the lull before the looming U.S. storm, to build on their historical edge.

“Canadian companies could and should take advantage of the fact that they can be here already and know Cuban institutions,” said Raul Rodriguez, a researcher with the Centre for Hemispheric and United States Studies at the University of Havana. “Why aren’t there more Canadian infrastructure companies, more interests, given that there are more than one million Canadian tourists?”

“There should be a Tim Hortons in Varadero,” he added.

Mr. Everleny said he has made presentations on opportunities in the Cuban economy to senior executives from every major U.S. company one could name, from McDonald’s to Colgate-Palmolive, in the past year. None can yet operate in Cuba, because of the embargo, which is controlled by Congress and thus unlikely to be lifted for at least the next two years, no matter how hard President Barack Obama pushes. That, Mr. Rodriguez noted, gives Canadians the option of getting in the door first to build or acquire assets or stakes that can be resold.

Cuba now receives three million tourists a year (of whom 1.2 million are Canadian); that figure is expected to shoot to nine million when the embargo is ended. They are a significant factor in an economy valued at $68-billion. The reform process begun in 2011 was meant to kick-start higher productivity. Growth hit 4 per cent this year, but the target is 8 per cent or 9 per cent next year, Mr. Everleny said. While the pace of reform has been slower than expected, Cuba’s lack of access to any international credit also remains a crippling problem. The reform of foreign direct investment (FDI) laws is aimed at accelerating the inflow of hard currency.

Guy Chartier, who is CEO of Wilton Properties, the Cuba branch of Montreal’s Dundee 360 Real Estate Corp., said there has been a significant overall shift in tone from government in the past year. His company was invited by the military, which controls tourism ventures, to more than double the size of its resort project at Jibacoa, midway between Havana and Varadero – the new plan covers more than 3,200 acres – and urged to accelerate construction of their 350-room hotel in Havana. “We’re getting more access to key players; there’s a lot more responsiveness to our needs,” said Mr. Chartier, who has worked in Cuba for more than 13 years.

At the same time, he said, he has seen a huge influx of international players seeking partnerships with a degree of eagerness that alarms him.

“They’re signing deals we don’t believe would be good business, because there’s such a frenzy of trying to get their hands on things,” he said. “It’s so important to get a foot in door that they can justify accepting terms that wouldn’t normally be acceptable, and they’re creating precedents.”

“Those of us here for many years are lucky because we have been able to negotiate most of our deals in the relative calm,” he added. Wilton’s two projects in Cuba are approaching more $2-billion (Canadian) in projected development revenue; Jibacoa includes villas for sale to foreigners, the first such property sale since the 1959 revolution.

Gregory Biniowsky represents Canadian law firm Gowlings in Havana, consulting to firms who are seeking joint ventures (still the only kind allowed). The key to operating in Cuba today is having a physical presence, he says. “You can’t afford to fly someone in every time there’s a problem because there’s a problem here every day.”

And you have to have relationships of trust with people in the regime, said Mr. Binioswky, who has lived in Havana for more than 20 years. “Forget your Harvard Business School ideas: You can come to Cuba with the biggest idea and pool of capital but if they don’t see it as in their interest … I tell all my clients, Cuba is not an investor-friendly government. There is a daunting bureaucracy. There are non-economic policies that have an impact on the economy.”

For all of that, he calls it “one of the most attractive emerging markets” in terms of its room for growth. “The buying power is very low but they are the best-educated population in Latin America, and the embargo will be lifted,” he said.

Beyond tourism, he is most excited about the opportunities presented by Cuba’s vast pool of highly skilled medical personnel: The government has used them as a source of foreign exchange, sending them on missions to Brazil and Venezuela, but those contracts are winding down. As the doctors come home, Mr. Biniowsky suggested, they could be redeployed to medical tourism facilities, offering services that are too expensive or have too long a wait in the United States or Canada. Similarly, he believes that Cuba’s excellent health care, rich cultural life and fine weather make it an obvious destination for retirement facilities.

Mr. Rodriguez, at the University of Havana, added to the list of opportunities: infrastructure and telecommunications are both areas with an urgent need for investment. In addition to roads, bridges and electrical networks, Cuba has a deficit of approximately 800,000 housing units. More than half of the country’s arable land is not farmed, due to lack of capital.

But because Cuba remains shut out of international markets, international firms looking to do business here need help from back home. Brazil’s government, for example, supplied bilateral credit for the $900-million Mariel seaport project.

“The Canadian government is going to have to do more than warm fuzzies,” Mr. Binioswky said. “That means credit, if we’re going to compete with the Chinese.”

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