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In tourist-deluged Cuba, Canadian firms are noticeably absent

In tourist-deluged Cuba, Canadian firms are noticeably absent
STEPHANIE NOLEN
HAVANA — The Globe and Mail
Published Sunday, Dec. 13, 2015 7:03PM EST
Last updated Monday, Dec. 14, 2015 3:54PM EST

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.

What changing U.S.-Cuba relations will mean for Canadians ( BNN Video )
“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.”

What’s happened already:

– Licensing of 201 activities for private business operators, from
restaurants to barbershops – which now employ more than a million
people. Private sale of homes and cars permitted.

– Co-op business model was extended from agriculture to urban services.

– Land leases for foreign firms extended to 99 years from 50.

– Foreign investment permitted in all sectors except health care,
education and armed forces.

– Foreign investors exempted from personal income tax, labour tax and
taxes on select imports; new investors have eight years before paying
tax on profits.

What hasn’t yet changed:

– Cuba operates with two currencies, the national peso, in which nearly
everyone is paid, and the Cuban convertible peso, which is pegged
roughly to the U.S. dollar and worth 25 times more.

– Foreign firms must still work through state-run agencies for all
hiring and payment.

– All major tourist facilities, retail chains, gas stations,
telecommunications, rental cars and import companies remain in the
control of the government, usually through the military.

– A “special trade zone” at Mariel has had projects approved but is not
operational.

Follow Stephanie Nolen on Twitter: @snolen

Source: In tourist-deluged Cuba, Canadian firms are noticeably absent –
The Globe and Mail –
www.theglobeandmail.com/report-on-business/international-business/latin-american-business/cubas-capacity-limited-by-few-firms-little-infrastructure-and-lots-of-tourists/article27741756/

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