Source: LOHAS Weekly Newsletter
Published: Wednesday, November 01, 2000

In October, Congress eased trade sanctions to allow food and medicine to be sold directly to Cuba by U.S. companies. And though Cuban officials are protesting the changes as insignificant and one-sided—sales are restricted to cash transactions—most U.S. observers view the legislation as an official policy shift that recognizes what business people in other countries realized years ago: Cuba is a tourism market and trade partner that's ripe with potential. With Cuba importing between $750 million and $1 billion of food products annually, American food producers are determined to tap the island's emerging market, and their lobbying pressure forced the move by Congress to ease trade sanctions—a crucial step toward free-market access to the home of Castro's revolution.

“We hope to eventually provide a significant amount of food and feed products—not only wheat, rice, bean and dairy products but also such items as fruits and vegetable, and meat—particularly as Cuba builds its tourism industry,” Bob Stallman, president of the American Farm Bureau Federation, told reporters after the bill was overwhelmingly passed by Congress.

American farmers aren't alone in looking expectantly to Cuba. For the past decade, entrepreneurs from around the globe have been hunting trade and investment opportunities on the island. From agribusiness to mining firms, hotel chain operators, fast-food reps, airlines, tourism services — they've been pouring in. “Six hundred companies from around the world have offices there,” says Kirby Jones, a Washington-based consultant specializing in the Cuban business market and president of the U.S.-Cuba Trade Association.

Hundreds of North American investors as well are eyeing opportunities in Cuba. “They're looking into everything from product specs, buying and selling processes, distribution networks, and getting to know the players,” Kirby says. “Cuba has a much more diversified economy than 10 years ago.”

With an emphasis on environmentally friendly businesses, Cuba is striving to become the Latin American leader in clean technology and sustainable development. Renewable fuels, biomass energy, ecotourism, nutraceutical supplements — these are Cuba's themes for a new millennium.

A New Economy

In 1989, the unexpected occurred when the Soviet Union collapsed, followed closely by the severing of Cuba's economic lifeline. The credo on the island became “think fast and hold your breath.” In 1994 the Ministry of Tourism (MINTUR) was launched and President Castro announced that to salvage the struggling economy, tourism would eclipse sugar as Cuba's No. 1 export by the year 2000. And so it has.

Before Castro's revolution in the late '50s, Cuba had been the Caribbean's crown jewel of tourism. Neighboring islands were developed as vacation spots only after North America lost its tropical winter haven in Havana. By 1991 Cuba found itself with only 12,000-operable rooms on the island, most in poor condition. That year, Cuba hosted 340,000 visitors, who spent some $300 million. Growing at an average rate of 19 percent annually in the '90s, the volume of tourists reached 1.6 million by 1999, with revenues of $1.9 billion. Cuban officials are aiming for 7 million visitors by 2010.

John Kavulich, president of the U.S.-Cuba Trade and Economic Council, a nonpartisan business resource center in New York, believes the attainment of that goal “will depend on if Cuba has built an infrastructure to handle luxury tourists by that time. Cuba has not moved into the upper echelons of the Four Seasons, the Intercontinentals and the Regents. It's maintained a focus on low-demographic tourism and budget-conscious people buying tour packages.”

That too is changing. The five-star accommodations of the new Golden Tulip Hotel in Old Havana are designed to attract well-heeled North American tourists. Other deluxe hotels are springing up in Havana's gardenlike Playa section, as well as in the Romano Archipelago, which lies off the island's north-central coast.

With room rates ranging between $20 and $200/night, Cuba offers an attractive option to the Caribbean vacationer accustomed to paying between $60 and $600 a night in such places as Nassau. While more than half of Cuba's tourists are European, about 100,000 come from the United States—60,000 traveling there legally and another 40,000 going illegally. And those numbers are growing.

During the past decade, approximately one-fifth of foreign investment in Cuba was in the tourist industry, amounting to more than $3.5 billion. MINTUR has created more than 84,000 jobs in tourism, half of those occupied by English-speaking graduates of the Sistema Nacional de Formacion para el Turismo, the island's training center for the industry's service sector.

Ecotourism Growing

With a seascape, semi-arid tropical rain forest, abundant flora and fauna, and a landbase the size
of Pennsylvania, Cuba has ambitions to grow its young ecotourism industry into a powerhouse. Cayo Coco, a key just off the north-central coast, is slated to be Cuba's future port for ecotourists, with a new international airport opening there in 2001. “They've invested a substantial amount in equipping and marketing the health tourism and ecotourism sectors,” Kavulich says.

In November the Cuban government staged its first annual ecotourism conference, called “Turismo Natural”—or TURNAT, in bureaucratic shorthand. Held in the Viñales Valley, one of Cuba's prime natural preserve regions, the inaugural conference was designed to position Cuba's ecotourism industry as the Caribbean pacesetter. The conference afforded ample opportunities for attendees to run business proposals by officials who oversee the island's ecotourism industry.

Structuring the Deal

Foreign investors interested in breaking into ecotoursim or other industries on the island have three basic options in the kind of deals they create. Joint venture proposals are taken to the Ministry of Foreign Investment (MINVEC) for approval. In such deals, the investor is expected to provide capital and business expertise while the government furnishes land and workers. An investor can also form an “economic collaboration” with a Cuban business or government entity; both parties then pool their capital to start a business. Approval for collaborations must be obtained from MINVEC before the new business is launched. Ditto for full capital investments, deals in which the investor bankrolls an entire enterprise. Depending on the
industry, application might also have to be made with a second ministry. For instance, the Ministry of Agriculture (MINAG)
oversees ecotourism development, while the Ministry of Tourism oversees ecotour services.

While the web of Cuban Socialist bureaucracy can appear difficult to grasp at first glance, the government's basic structure is fairly straightforward. The National Assembly of People's Power is a parliamentlike legislative body. Charged with enforcing laws passed by the National Assembly, the various ministries also have the responsibility of overseeing Cuban business and keeping the system running smoothly. Like their American counterparts, many individual Cuban businesses run independently from the government, with their own budgets, boards and decision-making authority.

A Gold-plated Crutch

Like the island's longtime economic mainstay, sugar, tourism is strongly influenced by fluctuations in the world economy. But the capacity of tourism to generate hard currency makes it a crutch, albeit a gold-plated one, on which Cuba's economy will continue to lean. However, Cuba's economic ministers have ambitions to diversify, with an emphasis on industrial production geared toward domestic and tourist consumption, and an ultimate goal of bolstering the country's export market.

In 1995 the National Assembly passed Foreign Investment Law 77, allowing foreign capital investments in businesses in all sectors of the Cuban economy except for medicine, education and the armed forces. That change in policy has borne fruit for the island's economy. Cuba's gross domestic product growth rose from 2.5 percent in 1995 to 7.8 percent the following year. Growth of 4.6 percent is projected for 2000, a rate just above the global average.

The government also offers investor tax breaks such as waiver of tariffs on imported raw materials for the production of exportable goods. Four duty-free industrial zones are located in Havana, another in the port of Mariel and another in the port of Cienfuegos. Cuba also offers exemptions from income and labor taxes for the first 12 years of a business operation and a 50 percent deduction for the following five. Service providers are exempted for the first five years, with a 50 percent deduction for the following three. Other tax incentives can come into play as well.

Sustainable Cuba

Cuba has long been one of Latin America's leaders in sustainable practices. Forced by the economic hardships of the embargo and the Soviet breakup to rethink conventional business practices, Cubans learned firsthand the benefits of recycling, prudent use of resources and an environmentally friendly approach to business. Following the Rio Earth Summit in 1992, an article was written into the Cuban constitution obligating the government and citizens to protect and conserve Cuba's environment and natural resources.

When Soviet aid dried up a decade ago, Cuba was forced to convert an agricultural system heavily reliant on imported chemical fertilizers and pesticides to a largely organic system. Now farming is done for the most part on a small-scale basis or on moderate size co-ops. Some 8,000 small farms and community gardens in and around Havana provide vegetables, eggs, medicinal plants, honey and such food livestock as rabbits and poultry. Rural areas are dotted with co-ops, some producing single-crop products such as bananas, tobacco or sugar, others mixing crops and livestock to market multiple agricultural products.

The country's commitment to sustainability took institutional form in 1994, when the Ministry of Science, Technology and Environment (CITMA) was established to enforce environmental regulations. Many new industries must submit environmental impact statements to CITMA before opening their doors, and the agency has the authority to shut down any operation that falls below environmental standards.

On the incentive side, Cuba offers rapid depreciation of investments that are environmentally friendly, as well as bonus tax incentives. As with industry and tourism in the Caribbean community, Cuba aims to become a world leader in sustainable development.

Official Opportunity

The ministries regularly post open calls for foreign investment in business concepts they wish to target. The best resource for these calls is a magazine, Business Tips on Cuba. Last year, a bid seeking capital and expertise in producing spirulina, a nutrional supplement derived from algae, was placed in Tips. Today, following an infusion of $150,000 in foreign funds, spirulina is stocked across the island in every tourist pharmacy and supermercado for the general population. Similarly, shark cartilage, a natural supplement prescribed by Cuban homeopathic doctors for its cancer-inhibiting qualities, is being marketed both domestically and for export. Another recent ad calls for an investment of $1 million to $2 million for manufacturing waferboard construction materials from bagasse, a by-product of pressed sugarcane. The Cuban government is also interested in using bagasse as a biomass fuel to power sugar factories.

While Cuba welcomes large investments, small to medium-size investments are sought as well, especially if they contribute to market diversity and environmental sustainability. According to MINVEC, 75 percent of foreign investments in Cuba are under $5 million.

There are a handful of professional consulting firms and attorneys in Cuba, the United States, and abroad thoroughly versed in Cuban investment law and ready to guide potential investors through the process. With 26 years in the business, Kirby Jones' Washington consulting firm, Alamar Associates, ranks as the dean of U.S. firms specializing in the intricacies of the Cuban business world. In Havana, a foreign business person can find reliable advice and help with feasibility studies and other red-tape hoops at Rado and Associates Consultants, and at Conavana, another “one stop” business resource and assistance firm.

Making a proposal to MINVEC is no overnight procedure. The process takes nine months to a year, and whether the proposal is approved or not, the investor must spend roughly $8,000 in nonrefundable attorney fees, including letters of introduction, proposals, feasibility studies and processing fees.

Easing the Embargo

For the past two years, the Washington buzzwords on Cuba have been “food and medicine.” Nearly 50 bills were introduced to ease or lift the trade embargo on Cuba, but anti-Castro lobbies and a handful of conservatives stalled or sidetracked those efforts.

The most recent legislation is the Trade Sanctions Reform and Export Enhancement Act of 2000, which permits restricted food and medicine sales to Cuba, Iran, Sudan, Libya and North Korea.

“We're real happy about the bill,” says Alex Jackson of the American Farm Bureau. “Those five countries represent about $6 billion in global food imports. Cuba was once one of the top-five U.S. rice importers.”

The new law will allow one-way cash sales of agricultural food commodities from U.S. companies to the Cuban government and Cuban businesses. Due to the Act's restriction on credit to Cuban interests, third-country banks must be used to secure funds for the transactions. In addition, those negotiating sales of food to Cuba may now legally travel to the island

“Essentially, it would be short-term credit for shipments until the Cuban check would clear,” says Philip Peters, Cuba analyst for the Lexington Institute, a policy research center in Arlington, Va. “It'll probably be large exporters who do this kind of trade because smaller vendors won't have the facility to find a Mexican or French bank to provide the credit to float a shipment.”

Cuba has protested the restrictions built into the new regulations. Officially, the Cuban government has stated that it will purchase no U.S. products now permitted under the Export Enchancement Act. “The Cuban government's reaction is that they want two-way trade,” says Peters.

“You have to separate a little bit from the rhetoric,” adds Jones. “Cuba is price-driven like any other country. If you go to Havana today, ketchup in
the restaurants is from Spain. But given the choice, they're probably going to buy that ketchup from Florida because it's cheaper.”

The Act will be a bonanza for U.S. exporters, Jones predicts. “Ancillary industries involved with trade will
also be involved: ports, freight forwarders, warehouses, shipping
companies, food manufacturers and medicines,” Jones says.

The legislation permits the sale of any article or component of medicine “recognized in the official U.S. Pharmacopoeia, official Homeopathic Pharmacopoeia or official National Formulary, or any supplement to any of them.” That is good news for vitamin, mineral and supplements makers, as well as producers of homeopathic and herbal remedies.

“To American business,” Peters says, “it means there's a market opening up, and if you're in the food business, it's worth visiting Cuba to start building contacts, definitely. And it means travelers to Cuba will continue going illegally and the foreign tour companies taking them will continue to profit.”

“It's the beginning of the end for the embargo,” says Jones. “When Congress reconvenes in late January, you're going to see more bills and efforts to open up trade further and further. You're going to have more industries saying, 'Hey, what about us?' With the new legislation, for the first time people are going to be talking about what can be done as opposed to what might be done.”