The Pope visited, the US dollar stayed
For decades, Fidel Castro would send armies of Cuban workers into the cane fields, exhorting them to bring in a bumper crop to cover the national debt. Bent double in hundred degree temperatures the workers scythed away at the debt. It never worked.
However, more recently other harvests have begun to grow, and they should pay the rent: tourism, real estate, biotech, natural resources and infrastructure development. Getting the investment into place behind these kinds of ventures will be a challenge. The barriers are clear: Cuba is a poor country, whose primary industry seems to be keeping 30-year-old American cars on the road. But recently policies have been changing. After the Pope's visit, religion is now openly tolerated. After the Soviets went home, the US dollar became the de facto currency.
Times are changing in both the US and Cuba. Last year Salomon Smith Barney broadcast a television campaign on 'what will happen in Cuba after Castro.' With the end of the Soviet era, Cubans have been forced to rethink economics. In 1992 Cuba received $2.6 bn in Soviet oil. Just five years later that figure had shrunk to $750 mn.
Surrounding the old Russian Embassy is a new construction boom - one that is restoring the city's colonial grandeur, and also features an unprecedented Caribbean hotel expansion. The Soviet Cold War fort was an embassy in name only. Sitting on a ten-story windowless concrete stronghold, four floors covered in one-way glass leaning out over the city. It sits as an ominous reminder of an era of controlling supervision. Today, the gardens and rebuilt verandahs on the Havana mansions are not places to spy from or to hide: they are there for people to meet each other.
And an increasing number of these meetings have to do with how to invest and manage what could become the hot emerging market of the Americas. Despite boat people rhetoric, socialism is being transformed into cross-sector profit-making enterprises. Twenty years ago the US sent a ping-pong team to China, Nixon followed and investment replaced politics as the name of the game. Cuba seems to be following the same discrete steps to a more open and investment-ready climate. Last March one of the highest paid teams in baseball, the Baltimore Orioles, played the Cuban national team in Havana. The game went to eleven innings before the squad of millionaires proved their worth. And while no presidential visits are on the cards yet, Cuban IR is moving into it's nascent stages.
According to John Kabulich of the independently funded US Cuba Trade and Economic Council, the rate of investment interest in Cuba continues to increase dramatically. Over the past five years 4,500 businesses from nearly 100 countries have come to do business in Cuba. While partnerships and indirect investment have soared, the number of listed equity pure plays has been limited to three sectors: tourism, biotech, and natural resources. However, says Kabulich, the bankers have done their homework on equity participation. The new co-ventures and partnerships have acceptably transparent accounting procedures. Once the books are in order we'll see far more equity offerings, perhaps even a Havana real estate investment trust (Reit), within the next few years.'
There are two other reasons for an orderly approach to equity investment. First as one analyst told congress, 'Within four years of dropping the embargo the US would control 85 percent of the Cuban GNP.' Without a controlled transition, the Cubans would fail to profit from the island's potential. And secondly, they have no reason to proceed with less caution. The Cuban turn to western economics was not prompted by the ideological meltdown that characterized the privatizations in eastern Europe and Russia. It was prompted by sheer economic necessity - one that is now being efficiently managed with the winning of new investment, and the quiet development of a new profit-motivated economic order.
Getting the house in order
In order to proceed to the next stage of equity privatization, the Cubans have decided not to privatize their socialist enterprises. Instead they are building a raft of new profit-driven enterprises that are partnering offshore businesses. This 'roots up' growth ensures that these companies will be run with accounting and transparency requirements that will soon lead to market-ready IPOs in European and Canadian capital markets.
Kabulich notes the efforts of established multinationals like Unilever, which assists Cuban joint venture partners in implementing western accounting practices, for instance in its relationship with the new Cuban company, Suchel. Other multinationals such as AT&T, Exxon and General Electric have received licenses from the US Department of Treasury's Office of Foreign Assets Control, to engage in commercial activities with entities within Cuba.
These companies have entered in joint ventures with many profit motivated state-owned ventures that have taken over state assets since 1993. Cimex is the largest with over $1 bn in interests including marine and road transportation, home appliances and gasoline distribution. Cimex gas stations compete with those of Cubalese, the second largest profit driven company. Cubalese is an entrepreneurial group that grew out of the organization which supplied foreign diplomats with imported products. It also operates in other sectors including supermarkets, car dealerships, computer dealerships and restaurants. The new commercial arm of the revolutionary military, Rafine is now involved in automobile sales and competes in hotel construction.
IR growth & talent
Cuba has made it clear that tourism is the cash flow machine it is counting on to restart the economy. As Cuban vice president Carlos Lage remarked at last year's Havana Trade Fair, 'Forty-three percent of the island's assets and exportable services now come from tourism.' Sugar may have been king of the economy in the last 30 years, but middle class travel to the Caribbean is growing. Cuba now wants to create the largest tourist destinations in the area.
Plans are well underway, with two-thirds of the land mass in the region, Cuba has 25,000 hotel rooms and plans to double this number by next year. Considering there are only 17,000 hotel rooms in Jamaica, the Cuban plan is ambitious. Over 60 international airlines land at Havana's new $100 mn airport. Visitor arrivals are growing at a staggering 20-25 percent per year. All of this is without Americans, who once made up 85 percent of the tourists. One cruise line estimates an increase of 1 mn guests a year once the embargo lifts.
Leading the way is a Grand Caribe/Leisure Canada joint venture developing three five-star resorts and two major golf courses. With the proliferation of cruise vacations and fun-in-the-sun clubs, explaining investment in Caribbean leisure growth would seem a given. But not so when the hotels and golf courses are being built in joint venture with one of the newest players in town - the Cuban government. Explaining the lofty goals of Leisure Canada's plans is IR consultant John Gray. His diverse background includes government, mining, and tourism. He is known for his gregarious and amiable approach that allows him to get quickly to the point.
Leisure Canada demonstrates the need for long-term relationships and business credibility to make Cuban investment work. It's headed up by Wally Berukoff, former CEO of Miramar Mining, who developed the first copper and gold mines on the island, and that later led to his deal with Grand Caribe and the rights to develop three of the choicest locations on the island. In a bid to show a commitment to long-term value, he has hired top talent in the hotel construction and management like Peter Macleod, who was appointed president of Leisure Canada after 20 years of hotel development with Delta, Imperial Hotels and CP Hotels.
Heading up IR at Leisure Canada, Gray notes three problems in raising the estimated $400 mn required to fulfill the company's ambitions. 'The first question is the potential opposition of the US to this investment. But the Helms Burton act only applies to land seized by the Cuban government from Americans. We've researched the claims and visited senator Jessie Helms. None of the properties are impacted by Helms Burton.'
A second issue Gray has to deal with as he profiles the project to investors in North America and Europe, is the amount of money that will be at risk in one single tourism location. 'We are not concerned. In any case country risk insurance is available for 2 percent, and the Cubans have always stood by agreements with foreign investors. The new Cuban economic establishment is based on fair and transparent dealings, as it moves forward in a dollar-denominated economy.'
As for the size of the amount to be at risk? 'We are the largest pure Cuban play in the market. The growth potential is visible to everyone who's visited this economy. While other developing markets see their economies in free fall, Cuban expansion continues. Should the Americans come in over the next few years, we will still not be ahead of the game.'
Sherritt's risk
The most discussed investor in Cuba is Canada's Sherritt International Corporation. It is in clear violation of the Helms Burton Act by virtue of its use of assets expropriated from the US mining company Freeport McMoRon. Senior managers of the company have been precluded from entering the US. Nevertheless Sherritt continues to use its stake in Cuba to attract investors. It recently raised $300 mn for investment in other Cuban projects. Noting low prices for nickel at the time, it began to shop around for other Cuban projects.
One of these, Sherritt Power Corporation, is now financing and constructing two power plants in Cuba. Because of the Helms Burton sanctions, getting direct comment from Sherritt is difficult. But typical comments include, 'Many are aware of the potential growth in Cuba. But what we bring is a track record of integrity in our dealings with capital markets. We've always made the risk clear, and have always delivered. That is a factor many smaller Cuban start-ups don't have in their favor. They will need partners with a reputation in international capital markets to meet the needs of those that can put money into Cuba's opportunity.'
Sherritt's IR program, developed on the basis of its reputation for honest risk disclosure in the speculative metals and mining industry, has put it in good stead as a leading Cuban player. Other sectors the company is pursuing are agriculture, and communications. Both sectors could benefit from large-scale capital investment.
No frontiers
One of the lesser known aspects of Cuban economic development is the emphasis that's put on health and medicine. Cuba has around one doctor per 200 inhabitants. York Medical of Canada has been prospecting for new facilities as well as products developed by Cuba's state-run medical establishment.
Brainchild of chairman David Allen, the company is looking to the equity markets to raise capital. IR is headed up by consultant Barbara Kay, who specializes in biotech companies in Toronto. 'This is one area where the embargo won't apply. The US government has given SmithKline Beecham rights to distribute a Cuban meningitis B vaccine in the US. Disease has no boundaries.' York is quiet about the size and timing of any equity offerings. They will depend on the results of the phase one study underway at a Toronto hospital.
The advanced state of Cuban life sciences was underscored when the Office of Foreign Assets Control of the US treasury department processed York's license for a meeting with Cuba's ministry of public health in just seven days. Normal procedure takes over 30 days.
According to Kay, York's IR program now involves getting the good news out. 'With the US opening its doors to Cuban drugs and treatments, we now have an additional 20 percent of the world market at our doorstep. Investors, particularly Europeans who are sophisticated in the biotech sector, are eager to see our equity offering come to market as soon as possible.'
Tourism, natural resources and biotech may seem an unusual assortment of investments to test the interest in the upcoming privatization of Cuban industries. But it has demonstrated that good management, good opportunities and the restructured Cuban economy is now coming to the notice of savvy investors across a broad spectrum of industry sectors. Over the next five years, as Cuban privatization continues, the equity offerings will get bigger. With many of the basic IR issues now answered by this small group of pioneers, the road ahead should continue to be a profitable one.