Analysis: Cuba’s Portfolio of Foreign Investment Opportunities

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Cranes overlook tourists enjoying a beach in Varadero. Photo by Matias J. Ocner.

As a play to attract much-needed foreign investment, each year Cuba unveils a portfolio of projects open to foreign participation to kick off the Feria Internacional de la Habana, the country’s largest annual general interest trade fair.

The 2017 portfolio is the largest Cuba has unveiled since it first started sharing the reports in 2014. It contains 456 project proposals open to foreign participation – up from 396 in 2016. The opportunities represent about $11 billion in potential foreign investment into sectors such as tourism, biotechnology, construction, energy, agriculture, and mining.

The portfolio is presented in a refreshingly frank way that makes it necessary reading for any potential investor. It details the country’s investment advantages, legal structures, and expectations from foreign investors. Each investment proposal includes information on the project’s location, estimated costs, nature of partnership with Cuban parties, and contact information.

What’s missing from the pages of the 300-page report is a candid discussion on the obstacles for investment in Cuba. It doesn’t mention the prolonged approval processes, restrictive hiring requirements, lack of wholesale markets, and financing restrictions that are emblematic of doing business on the island.

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Nevertheless, there are signs Cuba is gradually confronting the issues stalling foreign investment. Minister of Trade and Foreign Investment Rodrigo Malmierca Díaz opened this year’s trade fair by announcing that Cuba had attracted about $2 billion in investment agreements so far this year – enough to meet Cuba’s goal of capturing $2 to $2.5 billion a year. By comparison, Malmierca opened the 2016 trade fair by announcing that Cuba had only captured $1.3 billion in the two years following the approval of a law that eased restrictions on foreign investment.

But approving projects with foreign participation doesn’t necessarily guarantee money will immediately pour in. About $2.5 billion of Cuba’s recent foreign investment approvals have come from deals with Spanish, British, and Chinese investors to develop luxury golf resorts. It’s not clear when those resorts will be completed, or even break ground.

Pressure will likely mount for the Cuban government to accelerate foreign investment. The Cuban economy contracted by 0.9 percent in 2016 – marking the country’s first recession since the “special period” of the ‘90s. While the Cuban economy showed some promise of recovering in the first half of 2017, Hurricane Irma hampered several crucial sectors such as tourism and agriculture. Those factors, along with plummeting oil deliveries from Venezuela and souring relations with the U.S. leaves Cuba with few options but to find more business partners.

Those seeking to play a role in the future of the Cuban economy will benefit from reading the new portfolio. It offers many clues, albeit few guarantees, on how the Cuban economy will transform after Raúl Castro leaves the presidency next year.

Tourists enjoy the sun and sand at Guardalavaca in Holguín province. Photo by Jon Braeley.

Priorities

The 2017 edition of the foreign investment portfolio provides details on which sectors of the Cuban economy have momentum and which ones need a revival.

Tourism remains a priority for the Cuban government since it produces much-needed foreign currency. The 2017 portfolio lists 152 proposals – up from 114 in 2016. The proposals include opportunities to build and commercialize new hotels; management contracts for existing hotels; management and expansion contracts for marinas; the establishment of an equestrian club; upgrades to a restaurant and food plaza; the creation of nature parks; development of a sport fishing and diving center; and the construction of several water parks.

Tourism in Cuba is one of the few sectors that shows real promise. The Ministry of Tourism recently reported it welcomed more than 4 million tourists in the first ten months of 2017 – topping last year’s 4 million mark in spite of Hurricane Irma causing some cancellations.

The Cuban government appears to have a clear plan on how to steadily increase tourist arrivals. Understanding there soon might not be enough hotel rooms for the growing supply of tourists, the government has set a goal to increase the total number of rooms from the current 60,000 to about 108,000 by 2030. Until then, the government has partly dealt with the room shortage by approving several U.S. cruise lines and allowing more Cubans to open private bed-and-breakfasts called casas particulares (though the Cuban government recently suspended the issuance of new licenses for casas particulares, private restaurants and several other private sector activities).

The government also appears to be enthusiastic about expanding the variety of its accommodations. The opening of the Gran Hotel Manzana Kempinski, the first Cuban hotel to meet international 5-star rating standards, shows Cuba is attempting to attract a wealthier clientele. Several proposals to develop eco-tourism parks and accommodations shows an interest in welcoming adventure travelers. The approval of luxury golf resorts, despite their undefined future, also demonstrates a willingness to try new things.

While the abundance of tourism proposals demonstrates momentum in that part of the economy, the other sectors with more than 50 proposals in the portfolio show a need for transformation.

Jon Braeley Cuba Trade Magazine

An organic farm situated on the outskirts of Havana. Photo by Jon Braeley.

The 2017 portfolio lists 104 proposals in agro-food – an increase from the 76 proposals in 2016. There is an urgency to stimulate food production because the country imports anywhere from 60 to 80 percent of its food. The government has continually stumbled in reducing dependence on imports, so the emphasis on agro-food proposals may reflect the government’s willingness to invite foreign partners.

The portfolio’s agro-food chapter mostly consists of proposals to domestically produce imported commodities, as well as some projects that aim to export certain crops. There are proposals to boost domestic production of commodities such as poultry products, beef, pork, seafood, dairy products, rice, corn, fruits, and vegetables. There is also a proposal to produce wheat, which the country does not currently produce domestically in spite of it regularly importing more than $200 million worth of the crop annually.

There are also several agriculture-related proposals that aren’t aimed at food production. Cuba has recently had success exporting marabú charcoal and is seeking partners to boost production for exportation and for use at biomass plants. There are also proposals aimed at refrigeration and boiler services, avian vaccines, exotic leathers, flowers, wood boards, pine resin, and small boat repairs.

Not included in the agro-food chapter are several proposals aimed at food processing. They appear in the Mariel Special Economic Development Zone (ZED Mariel) chapter, which means there are tax incentives and long-term contracts available to food processing investors.

Cuba is seeking to boost domestic oil production now that cheap oil deliveries from Venezuela are declining. Photo by Nick Swyter.

Besides agro-food, energy is one of the sectors of the Cuban economy that desperately needs revitalization. Cheap oil deliveries from Venezuela are plummeting and Cuba is pushing the limits of its existing domestic land wells. The energy shortage has led to regular blackouts and fuel rationing. The 78 oil proposals in the 2017 portfolio aim to explore potential oil reserves. The 13 renewable energy proposals aim to generate energy from other sources.

The portfolio lists 76 blocks Cuba is interested in exploring because they may hold untapped oil reserves. Nineteen of the blocks are on land, eight are in coastal waters, and 49 are in Cuba’s section of the Gulf of Mexico.

Four previous attempts to explore oil reserves in Cuba’s section of the Gulf of Mexico were unsuccessful. Industry leaders have shown reluctance to invest millions of dollars into deep-sea exploration in Cuba (see story page 44) especially at a time when global oil prices are low. At the moment, it’s more feasible for oil investments to focus on Cuba’s land and coastal blocks.

The portfolio also lists a proposal for “secondary recovery contracts for deposits being exploited.” Put simply, this means Cuba needs foreign investment to extract oil from places it’s known to exist, but needs new technologies to acquire.

There is also a proposal for a fuel storage base in the province of Matanzas, where the majority of Cuba’s oilfields exists.

Besides oil, Cuba is also looking at renewables to fulfill its energy needs. The Cuban government has set a target of producing 24 percent of its energy needs from renewable resources by 2030. The portfolio lists 11 proposals for biomass plants, one proposal for a wind farm, and one proposal for solar farm. There are fewer proposals than last year, which is attributed to several projects recently earning approval.

Besides proposals focusing on tourism, agro-food, and energy, the portfolio lists many other noteworthy opportunities. Potential investors are encouraged to read the chapters that detail opportunities in sectors such as water, construction, biotechnology, and mining.

Jon Braeley Cuba Trade Magazine

Womy Equipment Rental constructs a dealer facility in the Mariel Special Economic Development Zone. Cuba’s 2017-2018 foreign investment portfolio lists 50 proposals to invest in the zone. Photo by Jon Braeley.

What’s new

For the most part, the 2017 portfolio resembles last year’s edition. Many of the proposals are identical to the ones shared in 2016, which means they are still open to foreign participation.

There are, however, several noticeable additions to the new portfolio.

This year’s ZED Mariel chapter contains 50 proposals – up from 24 in last year’s portfolio. The proposals focus on sectors such as biotechnology, manufacturing, food processing, construction, transportation, and real estate. Some of the most notable additions to this year’s ZED Mariel chapter include an electric motorbike assembly plant; a metals transformation center; a mattress and pillow production plant; facilities that produce several types of containers; catering services; a sausage factory; a tile production plant; warehouse construction; and a solid waste management system.

Proposals listed in the ZED Mariel chapter have several advantages over the ones located in other parts of Cuba. The benefits include long-term contracts that can be renewed, a willingness to allow 100 percent foreign ownership, and no tax on profits for the first 10 years of operation (and only 12 percent after that). ZED Mariel is also located next to a refurbished port and container terminal that Cuba hopes to turn into a transshipment hub for the Americas.

Potential investors in several sectors have few options but to establish their projects in the zone. Nearly all the portfolio proposals with a focus on biotechnology and food processing are located in the three-year-old zone.

ZED Mariel leaders also appear to be taking steps to correct an often-repeated criticism of doing business in Cuba: slow approval processes. Twelve of the zone’s 31 authorized users were approved this year, according to state-controlled media. The zone’s front office also recently created a “one-stop shop” to handle all the paperwork and approval processes for potential investors. The entity is intended to save potential investors from sharing project plans with countless layers of Cuban bureaucracy.

Beyond ZED Mariel, there are several sectors with exciting new proposals featured in the portfolio. Cuba is now seeking the help of foreign investors to boost production of food such as seafood, soft drinks, wheat, vinegar, and pasta. In tourism, there are opportunities to build water parks, revitalize restaurants and food plazas, and create nature facilities for environment-oriented travelers. In construction, there are new proposals for beach dredging, a light fiber-cement panel factory, and a dry mortar production plant.

The 2017 portfolio also includes an entirely new chapter focused on culture, which includes the audiovisual proposals from the previous portfolio. The chapter’s two new proposals aim to showcase Cuban performers and artists to international markets.

Jon Braeley Cuba Trade Magazine

Under new Trump administration regulations, the recently opened Gran Hotel Manzana Kempinski is off-limits to U.S. visitors. Photo by Jon Braeley.

US on the sidelines 

The Trump administration’s new sanctions on travel and business with Cuba undoubtedly limits U.S. companies from injecting certain foreign direct investment into Cuba. But the new regulations haven’t transformed the new portfolio into a blacklist either.

In addition to adding restrictions on individual travel to the island, the new rules bar U.S. citizens from conducting transactions with a State Department list of 180 entities linked to Cuba’s military, intelligence, and security services. U.S. companies may still work with several state-owned enterprises and the private sector, but many of the new portfolio’s most exciting opportunities require a partnership with a banned entity.

ZED Mariel was included on the State Department list, which means the zone’s 50 proposals are mostly off-limits to U.S. investors for now. Rimco, Caterpillar’s dealer for Puerto Rico and the eastern Caribbean, will be able to operate a planned dealer facility in ZED Mariel because it signed a deal with the zone a week before the new regulations were approved.

The State Department list also includes GAESA, the Cuban military’s massive business conglomerate that owns prominent tourism companies such as Gaviota and Habaguanex. Gaviota owns the bulk of Cuba’s luxury hotels, marinas, and tour agencies, among other businesses. Habaguanex owns boutique hotels, restaurants, and stores frequented by tourists in Old Havana.

To the discontent of several Cuban-American members of Congress, state-owned tourism companies such as Cubanacan and Gran Caribe did not appear on the State Department list. Both of those groups are seeking to sign management contracts with foreign hotel companies for properties of various sizes across the island. They are also seeking partners to build and commercialize new hotels.

Nevertheless, many of the most attractive hotel management contract proposals remain in the hands of Gaviota. The company owns nearly all management contract proposals for large hotels with 5-star ratings.

Proposals to manufacture furniture, repair boats, produce tin cans, and boost chicken meat output are also off-limits to U.S. companies because the involved Cuban party appears on the State Department list.

However, the new regulations did not touch many of the trade embargo exceptions that allow U.S. companies to do business with Cuba. The exceptions include selling Cuba goods such as telecommunications equipment, food, medicine, medical devices, environmental protection equipment, and certain items that will be used by the private sector.

The exceptions don’t represent the type of foreign direct investment Cuba urgently needs, but it keeps the door to Cuba open.

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  1. Daily Briefing - December 7, 2017 - Cuba Trade Magazine - December 7, 2017

    […] Assessing Cuba’s foreign investment portfolio: Cuba’s latest foreign investment portfolio highlights the country’s economic aspirations in a refreshingly frank way, but it glosses over what has stalled foreign investment for years. The portfolio contains 456 project proposals open to foreign participation – up from 396 in 2016. It provides details on which sectors of the Cuban economy have momentum and which ones need a revival. This year’s portfolio also contains 50 proposals for projects in the Mariel Special Economic Development Zone, an area with tax incentives and other benefits that is off-limits to U.S. corporations under the Trump administration’s new regulations. (Cuba Trade) […]