If Cuba embargo ended, U.S. businesses ready for rush, but not island

Posted on Saturday, 09.12.09
If Cuba embargo ended, U.S. businesses ready for rush, but not island
While U.S. companies dream of a post-embargo Cuba, infrastructure woes,
a lack of financing and Cuba's legal system may present challenges.
BY JIM WYSS AND JOHN DORSCHNER
jwyss@MiamiHerald.com

At first glance, Cuba's business potential looks as pretty as its
postcards: A nearly five-decades-long embargo has made the island just
90 miles from Florida's coast hungry for nearly every good and service a
U.S. company might provide.

But the flip side tells a different story about the most populous
country in the Caribbean: that of a cash-strapped state with crumbling
infrastructure and an economy in the stranglehold of an authoritarian
government.

Those conflicting realities, however, are not stopping entrepreneurs
from planning for the day when the embargo is lifted -- or from taking
advantage of business opportunities already permissible under the embargo.

Tourism and telecom firms have been energized by recent regulations
promising greater access; port operators and oil drillers are gearing up
for a rush; and lawyers and consultants are lining up for a piece of the
action.

``Every sector is going to be important,'' said Richard Waltzer, the
chairman of the Havana Group, a consulting firm that helps U.S.
businesses lay the groundwork for the day sanctions are lifted. ``This
is an island that really hasn't developed.''

But in the short term, Waltzer said, the ``building of hotels and
tourism infrastructure is going to be the new economy for Cuba.''

THE TOURISM DRAW

With its broad beaches, stunning colonial architecture and world-class
artists, it's not hard to imagine the island as a tourist mecca.

For Cuba, more foreign visitors would provide access to the quick cash
that it needs to jump-start the economy.

The island received 2.3 million visitors in 2008, according to the
Caribbean Tourism Organization.

If the U.S. government dropped its travel restrictions entirely, rather
than just for Cuban Americans -- and Cuba proved as big a draw for
American tourists as Jamaica, the Dominican Republic, or Cancun, Mexico
-- the island could expect more than one million additional visitors a year.

Mere curiosity -- seeing '58 Oldsmobiles and giant Che portraits on
buildings -- could lure many, said Damian Fernandez, a longtime Cuban
policy expert and provost of Purchase College State University of New York.

``Post-embargo, the biggest, fastest impact would be in tourism,'' he said.

But it's unclear if Cuba could handle the influx. The island has about
50,000 hotel rooms, about as many as Miami-Dade County, according to a
report released by the Cuba Committee of the Greater Miami Chamber of
Commerce.

And while it is making improvements, its phone system, electricity and
water-supply infrastructure are struggling.

Cuba's Old World feel is part of its charm, but many visitors are also
looking for modern amenities, said Mark Watson, 30, a tourist from
Canada who recently visited the island.

Compared with other Caribbean tourist destinations, he found the
island's food mediocre, prices expensive and his hotel, the Tryp Habana
Libre, where rooms start at $168 a night, outdated and shabby.

``I'm not sorry I came here,'' he said. ``But I will never be back.''

The infrastructure woes may not only scare away visitors but stunt the
growth of other tourism enterprises, said Tim Gallagher, vice president
for public relations at Carnival Cruise Lines.

``You can take people to the islands, but you have to have a way to
transport them once they are there and have tours for them,'' he said
from the company's Miami offices. ``Whenever Cuba does finally open up,
it will take a while to put all that into place.''

Gallagher said Carnival will develop a Cuba strategy if and when
visiting the island is viable. ``It has been so many years that people
have been saying that Cuba will open up, but no one really knows when
that will happen,'' he said. ``At the time they do, then we are
certainly interested.''

The infrastructure challenge is not easily overcome.

``It's a chicken-and-egg problem,'' said Jorge Piñón, a longtime Cuba
analyst. ``Cuba needs the infrastructure to attract investors, but it
can't pay for the infrastructure until it gets the investors.''

RETIREMENT HAVEN?

One way to skirt the issue is to look at businesses that might be
created in self-sufficient compounds, said Leo Guzman, founder of the
Guzman and Co. investment bank and a former board member of the Pension
Benefit Guarantee Corp.

Cuba's mild weather, proximity to the United States and surplus of
trained doctors and nurses could make it ideal for Cuban-American
retirees and those requiring long-term medical care, he said.

Such enclaves might also be more likely to win approval from the Cuban
government, he said.

Cuban authorities would ``want the Cuban Americans in a community as
opposed to interspersed in the community, to lower social friction,'' he
said. ``And from a political perspective, [retirees] are the kind of
people that the Cuban government would want, i.e. too old to cause
problems.''

TELECOM OUTLOOK

Rebuilding the island's infrastructure is where many see the money.

Under regulations issued by the Treasury Department on Sep. 3, U.S.
companies can now offer cellular roaming services; satellite TV and
radio; and fiber-optic cable to the island.

Sprint and AT&T would not comment on Cuba's potential, saying they were
still studying the rules, but there are a number of telecom companies
actively seeking licenses to do business in Cuba.

It's unclear what kind of opportunity this represents for U.S.
companies, said Phil Peters, a Cuba expert at the Lexington Institute.

Cuba's ally Venezuela is already laying a fiber-optic cable to the
island. And Cuba routinely blocks radio and TV transmissions from the
United States, which would make U.S. firms unlikely contenders for that
market.

``It's not clear where the U.S. would fit into their plans,'' Peters said.

But the island also has one of the lowest telephone-density rates in the
region. According to Cuba's National Office of Statistics, the island
has one fixed or mobile telephone line for every eight people. The
United States, by comparison, has 1.4 phones for every person.

In addition, the Cuban government already has roaming agreements with
European carriers, which make the prospect of U.S. deals more likely, he
said.

But, once again, the demand for phones, or any other service, is no
guarantee that it's a market opportunity, said Piñón: ``It's a two-way
street. Cuba needs practically everything. But the first question is how
much the Cuban government would allow. The second is how much could it
afford.''

EXPORT POTENTIAL

In the absence of foreign investment, another avenue for Cuba to finance
its development would be to sell products to the United States. But
there, too, complications exist. Tobacco and sugar could bring in quick
cash, but exporting sugar would require the United States to drop sugar
quotas. And while Cuba is thought to have as much as a third of the
world's nickel reserves, much of it is locked up in a deal with Canada's
Sherritt International.

Pharmaceuticals and biotech are another possibility, particularly
products developed by the Center of Molecular Immunology (Centro de
Immunología Molecular), which has created some potential cancer vaccines
and treatments.

Washington recently allowed U.S. clinical trials of Cuba-developed
nimotuzumab, a cancer treatment that is already approved in some nations.

If the embargo were lifted, some believe U.S. pharmaceutical companies
would be more likely to hire Cuba's best biotech scientists rather than
to purchase rights to Cuban drugs. But as long as the Castro government
remains in power, top scientists might not be able to leave the country
easily.

GULF GOLD PROSPECTS

Perhaps the biggest wild card in the Cuba equation is the prospect of crude.

The U.S. Geological Survey estimates that there are 4.6 billion barrels
of untapped oil off northern Cuba, some of it just 50 miles from
Florida's coast.

While drilling has been hampered by the global slowdown and Cuba's cash
crunch, companies are moving in, including Spain's Repsol YPF, Brazil's
Petrobras, PetroVietnam and Russia's Zarubezhneft. Venezuela's PDVSA has
said it will begin exploring in 2010.

It's not surprising, then, that U.S. companies are eager to have a piece
of the action in their own backyard, said Eric Smith, the associate
director of the Tulane Energy Institute in New Orleans.

If and when the sanctions are lifted, ``Americans will be all over the
place,'' Smith predicted. ``But they'll also be playing catch-up.''

Lifting the embargo could also speed the pace of current operations, as
producers would suddenly have the United States -- the world's largest
energy consumer -- as a nearby buyer.

``Those wells are fairly expensive to drill, and [investors] will have
to be convinced that they will have access to the market to monetize the
oil,'' Smith said.

However, it might not be the bonanza some expect. Piñón, who is also the
former president of Amoco Oil Latin America, calculates that the island
uses 150,000 barrels a day, with 93,000 barrels coming from Venezuela.

A typical foreign oil deal would give Cuba 40 percent of output. That
implies that new oil fields would need to produce more than 230,000
barrels a day just to replace the Venezuelan contribution -- and only
after that could Cuba consider selling oil overseas.

A WILLING PARTNER?

All of these scenarios assume not only that Cuba wants to do business
with the United States, but that the end of sanctions would come with
other changes on the island.

``The lifting of the embargo does not change an iota of Cuban law,''
Guzman said. ``Just because the embargo is lifted, you are not going to
have property rights, labor rights, the rule of law and other guarantees.''

Indeed, one of Guzman's fears is that U.S. citizens will be so
enthusiastic about buying property in Cuba that they might turn a blind
eye to those issues. ``Obviously, that scenario becomes ripe for
abuse,'' he said.

While the United States has control over if and when it lifts the
embargo, it takes two partners to do business.

``Suppose there is a pipeline between the American economy and the Cuban
economy,'' said Jorge Sanguinetty, president of the Association for the
Study of the Cuban Economy. ``It has two faucets. The United States
controls one faucet, Cuba the other.''

If Cuba embargo ended, U.S. businesses ready for rush, but not island -
Cracks in the Embargo - MiamiHerald.com (12 September 2009)
http://www.miamiherald.com/embargo/v-fullstory/story/1230959.html