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 Pinon, a longtime Cuba analyst. “Cuba needs the infrastructure to attract investors, but it can’t pay for the infrastructure until it gets the investors.”
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.”
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 Pinon: “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.”
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 Immunologia 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. Pinon, 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.”