For the third time in as many years, Cuba’s Ministry of Foreign Trade and Investment (MINCEX) has churned out an impressive compilation of projects open to foreign participation. The latest 279-page “Portfolio of Opportunities for Foreign Investment” for 2016-2017 includes 395 business opportunities, up from 326 projects floated in 2015 and 246 projects in 2014.
The projects are a mix of joint ventures and management contracts. Some projects listed in the 2015 portfolio do not appear in the latest version. According to Cuban authorities, such projects have either been successfully signed or are under intense negotiation.
But the projects that have worked their way from the glossy printed pages of the annual portfolio to a signed contract have been the exception. On various occasions MINCEX Minister Rodrigo Malmierca has suggested an annual target of $2.5 billion in foreign investment inflows, but in November lamented that over the last two years only $1.3 billion of projects had been approved. Furthermore, according to Reuters, two of those projects were for luxury golf courses, valued at a combined $900 million, but no ground has yet been broken at the sites. That would leave only $400 million, or an average of $200 million per year, in new project approvals—and of these, how many will make the demanding journey from formal authorization to completion of build-out and ribbon-cutting?
Some of the approved projects will be built in the new development zone at Mariel. By year end-2015, the Zona Especial de Desarrollo (ZED) Mariel had approved only eight projects with a cumulative investment value of about $200 million, of which over $100 million was accounted for by BrasCuba, less a new investment than the transfer of that firm’s cigarette factory from downtown Havana to a new, modern facility in Mariel. At the November, 2016 annual Havana International Trade Fair (FIHAV) the government released a list with an additional 11 projects, the biggest being a joint venture with Unilever: again, not really a new investment but rather signaling the return to Cuba of the global firm after its departure in 2012 following an investment dispute.
Explaining Bureaucratic Paralysis
Cuba desperately needs foreign investment, not only for the capital but also for the technology, managerial expertise, and global marketing networks. Cuba’s investment/GDP ratio is a woefully inadequate 8-10 percent, less than half the Latin American average, not to mention the still higher investment rates in the dynamic economies of East Asia. There is only one way to quickly raise the island’s investment/GDP ratios—and that’s through foreign capital inflows. This is especially true today, as the decline in export earnings and in Venezuelan largesse have placed the island in a tight foreign exchange tourniquet, forcing the government to further reduce planned levels of domestic investment. Growth in 2016 is projected at an anemic 1 percent, and could well fall into negative recession territory in 2017.
Many Cuban authorities are fully cognizant of these basic economic realities. The long list of investment projects, prepared by the various ministries and state-owned enterprises, makes clear that many Cuban officials are well aware of their country’s pressing requirements, and of the vital contributions that foreign firms can make to the island’s development path. Yet, despite this knowledge, the nation struggles to accelerate the approval of foreign investment projects (outside of the tourism sector).
What Explains This National Reluctance?
We do not have access to the key decision makers within the Cuban state and ruling Cuban Communist Party, so we can only speculate as to why they are moving so cautiously on economic reforms, and on opening the economy to international commerce and investment. Several factors are probably at play.
Ideologically, the old guard, and some younger “leftists,” fear that opening the country to globalization and market forces will jeopardize what they see as the genuine gains of the revolution, including social equity, universal social services, and a fiercely defended national sovereignty.
Politically, some in power most probably fear that deepening economic reforms and foreign capital inflows, by gradually empowering an emerging private sector and an internationally connected middle class, could eventually threaten the political monopoly of the hegemonic Communist Party.
Bureaucratically, fifty-seven years after the revolution the Cuban state has become so multi-layered, so burdened with thick red tape, and so risk-averse that the decision making procedures are broken.
Raúl Castro and his aging colleagues seem to lack the energy to drive comprehensive reform, so the Cuban people may have to wait until 2018 when new leadership—a new generation—comes forward.
To accelerate reform, Cuba needs national leadership that removes ambiguity and sets forth clear goals and objectives and rallies public opinion behind a new economic vision. That political leadership must empower a team of younger, dynamic and committed technocrats to decisively drive reform—and
definitively open the doors to foreign business.
The 2016-2017 Portfolio: Continuity and Change
As with its earlier versions, the latest portfolio is a must-read for analysts and investors seeking a deeper understanding of the economic matrix of Cuba. The government publication provides remarkably frank, data-rich surveys, sector by sector, of current production capabilities and shortfalls. For example, the production of “garden produce” fell from 2014 to 2015, suggesting why urban prices for fresh fruits and vegetables have soared. At the same time, revenue generated by the entire food industry rose from $947 million in 2014 to $992 million in 2015; the sales attributed to tourism remained constant at 28 percent.
The most pressing investment priorities have remained the same over the last three years: tourism (114 projects listed in the latest edition) to earn foreign exchange; energy (87 hydro-carbon projects and 23 renewables) for import substitution; and agriculture (76 agro-goods projects and 13 in the sugar industry) to address food security and promote exports. For ZED Mariel, the 2016-2017 portfolio lists 23 export-oriented projects emphasizing biotech and light industry.
The document reaffirms the government’s determination to retain control over key economic resources and decisions: there will be no privatization of large state-owned enterprises, and hiring of workers will remain in the hands of state employment bureaus.
Amidst this general panorama of near paralysis, tourism is a big bright spot. In 2015 some 3.5 million tourists visited the island generating nearly $3 billion in hard-currency revenues, and 2016 has been a banner year. The Ministry of Tourism (MINTUR) has announced intentions to increase the number of rooms available for international tourists by a factor of three, from the current level of about 60,000 to over 100,000 by 2030. In Havana and on select beaches and bays important construction activities are visible, raising building cranes against an otherwise quiet skyline.
However, the Cuban authorities are planning to allow foreign equity in only a minority of these tourism projects, channeling most foreign participation into management contracts. Yet, if the government is to reach its ambitious growth targets, it will have to accept direct investment in a higher proportion for its future hotels and resorts.
Among the many advertised tourism projects in the 2016-2017 portfolio, there are new hotel sites, older hotels in need of renovation, marine management contracts, and the establishment of an international-quality equestrian club catering primarily to expatriates working in embassies and JVs. Foreign firms are also asked to consider helping to build nature tourism facilities within national parks, and “to construct eco-accommodations.”
While most of the projects listed in the new portfolio made their appearance in earlier versions, the latest edition does signal some new directions in the desired composition of foreign investment. MINCEX now welcomes these proposals from foreign firms:
- Investments in infrastructure making use of long-term financing. Tourism-related infrastructure projects will be given priority.
- Partnerships with agricultural cooperatives, using the broad definition of cooperative to include most of agricultural lands and production. Partnerships can include joint ventures as well as management and service contracts. However, “in no case will land ownership be transferred,” even as the Cuban contribution may include usufruct or surface rights.
- The ZED Mariel welcomes a joint venture to produce 20 million pairs of footwear, employing 300 workers. (Cubans complain bitterly about the poor quality of domestically manufactured shoes).
- Participation in a management contract to produce and process fresh vegetables to supply the growing tourism industry and for export.
- Growing organic vegetables for the European market, and organically-farmed bananas for the Cuban market.
- A JV to produce sporting goods including various types of rubber balls (including soccer) and plastic-injection (chess and dominoes).
Significantly, the 2016-2017 portfolio includes an expanded chapter on the sugar industry. Previously, Cuba allowed a single Brazilian firm, Odebrecht, to manage and upgrade one sugar plantation in Cienfuegos. Now, it appears that Cuba is willing to open sugar mill management “throughout the country, depending on the sugar mill chosen.” The production of bagasse by-products is also envisioned. As in previous editions, the portfolio includes projects in biomass and other alternative energy sources including wind and solar.
A whole new sector—banking and financial services—debuts this year. However, distinct from all the other sectors, no specific projects are proposed. Rather we just have these generalities: “Foreign investment in the banking and financial sector may be undertaken via the purchase of shares in the banking institutions created under the Law of Foreign Investment, the constitution of joint capital or 100 percent foreign capital institutions as affiliates. Not included are investments in the capital of 100 percent Cuban capital financial institutions, as well as establishing branches of foreign banks.” In that Cuban state banks monopolize the market, opportunities for investments in the financial sector remain limited, and branch banking is not yet contemplated. But the very appearance of the financial sector should be seen as a significant ideological concession by the aging Cuban revolution—foretelling more significant market openings in the years ahead.
The latest version of the portfolio shows a widening imagination expanding various production frontiers across the island. Cuba sees flowers in its future: tropical flowers and ornamental plants for export as well as greenhouse-cultivated cut flowers for sale to Europe. Cuba wants to produce 176 million quail eggs, or 500,000 laid daily by 601,344 birds. It also wants to breed ducks for meat and duck paté (not very PC!).
The Trump Effect: Wait and See
Prepared prior to the U.S. presidential elections on Nov. 8, the new portfolio of investment opportunities does not comment on the possible relevance of an administration led by Donald J. Trump. In the short term, many potential investors are taking a “wait and see” attitude. Will Trump be captured by the emotions of the hardliners in the exile community in south Florida and turn back the clock to pre-2009, or will he seek a “deal” that extracts some concessions—assuming some responsiveness on the Cuban side—but fundamentally preserves the Obama policy of gradual economic and diplomatic engagement? Some investors in Europe, Canada and elsewhere may welcome a pause in U.S. activity, hoping to rush in to secure investment opportunities and market shares before the inevitable onslaught from the U.S. mainland.
For their part, Cubans increasingly view Raúl Castro as a lame duck, and await the promised transition in early 2018 to a younger, more energetic—and reform-minded—generation.