Why ‘complicated’ Cuba may not see a ‘gold rush’ from the opening of U.S. relations

Why 'complicated' Cuba may not see a 'gold rush' from the opening of
U.S. relations
Gail DeGeorge, David Tweed and Christopher Donville, Bloomberg News |
December 26, 2014 4:13 PM ET
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For companies seeking Miami attorney Pedro Freyre's advice on how to
exploit U.S. President Barack Obama's opening to Cuba, two stories may
serve as cautionary tales.

With thaw between U.S. and Cuba, Canada's lucrative corner of cigar
sales may go up in smoke

One concerns an 18-hole golf course that took a Canadian designer eight
years to build near the island's famed Varadero beaches. The second
involves the rooftop cell-phone towers that a Norwegian company has
struggled to erect halfway around the world, in Myanmar.

While the embargo is still in place, Obama's move Dec. 17 to
re-establish diplomatic relations "changes the tone of the
conversation," says Freyre, chairman of the international practice of
Akerman LLP. While new opportunities such as in the telecoms industry
may be permitted, along with the sale of food and medicine already
allowed, he cautions that doing business in Cuba is difficult. "In their
heart of hearts, the rulers of the country don't believe in capitalism,"
he says.

For all the attention on Cuba because of its role in the Cold War, Fidel
Castro's out-sized personality and the political clout of Miami's exile
community in U.S. politics, it remains a small-market country of 11
million people. Comparisons with other communist countries where the
U.S. has normalized relations — China with its 1.4 billion population
and Vietnam with almost 90 million — are tempting. Yet for the
challenges of moving into a transition economy, Myanmar may serve as a
better example.

The Southeast Asian nation began attracting foreign investment in 2012,
when the European Union and U.S. began easing sanctions after political
changes that ended about five decades of direct military control.

Restrictions Remain

Restrictions remain, with U.S. individuals and companies barred from
investing or doing business with people with links to the army's
repression of the democracy movement. Among those whose names have been
removed from the list are President Thein Sein and parliamentary speaker
Shwe Mann, former junta members who have been at the forefront of the
new government.

"This is a serious challenge for western investors because not only
American companies abide by those requirements," Romain Caillaud,
managing director of Vriens & Partners, a political risk consulting
firm, said by phone from Yangon, Myanmar. "It means you need to do a lot
of background checks to be absolutely sure who your business partner is."

Lodged between China and India with a population of about 53 million
people, Myanmar has an economy that is on track to grow 7.8% in the year
ending March 31, 2015, according to the Asian Development Bank. The
expansion is being propelled by commodity exports, natural gas
production and tourism, the ADB said.

Investment Disappointing

Investment in Myanmar since the sanctions eased has been disappointing,
according to Erin Murphy, a former U.S. Central Intelligence Agency
analyst who is the founder of the Inle Advisory Group, and James Clad,
deputy assistant secretary of defense for Asia Pacific Security Affairs
during the George W. Bush administration.

U.S. companies such as General Electric Co., Coca-Cola Co., and Procter
& Gamble Co. have invested more than US$600 million since 2012, "a
number that is impressive but does not approach anticipated levels,"
Murphy and Clad wrote in a National Bureau of Asian Research note
published Nov. 4.

You need to do a lot of background checks to be absolutely sure who your
business partner is
"The major 'gold rush' of investment has not reached expected levels;
instead, the majority of U.S. corporations have delayed entry into
Myanmar due to the overwhelming and complex investment challenges,"
Murphy and Clad wrote.

Telenor Troubles

Norway's Telenor ASA has experienced some of those challenges after
winning an auction for one of two mobile licenses last year and rolling
out the first phase of service to 2 million customers in Myanmar.

To build towers and erect antennas, Telenor had to gain access to
thousands of small land plots and rooftops across the country. That was
complicated by land-rights issues, the lack of a national-property
database and inefficiency in processing applications, the company's
Myanmar Chief Executive Officer Petter Furbergag said in an e-mail.

Any company considering investing in a newly opened economy needs to
weigh the availability of land, tax situation and rules on foreign
investment that may vary from sector to sector and the choice of equity
partner, said John Hancock, of John W. Hancock Associates, a
Yangon-based consultant.

"You have to do your homework — the risk analysis — and decide what
level of risk you are prepared to accept," he said. Chief among those is
legal uncertainty. Though Myanmar has ratified the the Convention on the
Regulation and Enforcement of Foreign Arbitral Awards, known as the New
York convention, the local legislation that makes it binding hasn't been
passed yet, Hancock said.

"An international investor wants to know, if they have a contractural
dispute, whether they can enforce that in Myanmar's courts," said
Hancock. "Some companies come here and hope that that legislation is
eventually put into place. Others aren't comfortable with that."

You have to do your homework — the risk analysis — and decide what level
of risk you are prepared to accept
In its risk analysis, Telenor realized Myanmar lacked the workforce
needed to run a modern mobile telecoms operation, Furbergag said. The
education system hasn't been able to produce enough competent employees,
so Telenor had to increase training and hire more international staff.
Telenor Myanmar now has about 450 employees, of which 80% are local, he
said.

"While there are myriad challenges to sort out every day, it is very
obvious that change is wanted and welcome among the people of Myanmar,"
he said. "But success will require patience, perseverance, executive
presence and a long-term perspective."

Eight Years

Such qualities were needed by Canadian golf-course designer Les Furber
while building Cuba's first 18-hole course since the 1959 revolution.
Started in 1990, the US$4 million project took eight years to complete,
said Furber, 68, co-founder of GDS Golf Course Design Services Ltd. in
Alberta, Canada.

A shortage of diesel fuel, tires and batteries, in part because of the
U.S. embargo, shut down equipment, and Cuba's lack of credit made
obtaining materials difficult, he said. Other delays were caused by the
country's bureaucracy and some intrinsic challenges, he said. "They
don't work very efficient and they got old equipment," he said. "It was
fun, but frustrating sometimes," he said, and "not lucrative in any sense."

Another 18-hole golf course is part of the Carbonera Club, a 400-acre
luxury resort that's been five years in planning by U.K. company Esencia
Experiences near Varadero and has yet to start construction.

"Cuba is complicated," said Tanja Buwalda, general manager of Esencia
Travel Division in Havana. Its aging infrastructure, bureaucracy and the
U.S. embargo "all combine into a big soup of difficulty," she said. "For
those who are patient, you can realize some good opportunities."

Those prospects will be limited for American companies until Congress
lifts the embargo, said Andrew Zimbalist, an economist at Smith College
in Northampton, Massachusetts, who has studied Cuba extensively. "As for
trade, it is still a small country with low per capita income so to
compare it to China or Vietnam isn't reasonable," he said.

Foreign investors also remain cautious given Cuba's insistence on a
majority stake in most ventures, and complicated work arrangements, he
said. Companies usually must contract with state agencies to hire
employees, who are paid in pesos with bonuses sometimes allowed in
dollars or goods.

Motivation Challenge

While Cuba has an educated workforce, training in business concepts is
still needed, said Zimbalist, who in the 1990s jointly ran a United
Nations program to teach microeconomics, finance, marketing and
personnel relations to about 150 Cuban managers.

Creating incentives and a work culture "is a very real problem," he
said. Cubans "live in a society that provides basic needs and little
else. It's not possible to get ahead by working harder so not it's not
easy to motivate people."

Even if sanctions were lifted, it "doesn't mean there's a capacity to do
business in Cuba tomorrow," said Julia Sweig, senior fellow and director
for Latin America studies at the Council on Foreign Relations in
Washington. "There's not a lot of bench strength in how to run a
business," she said, including how to write legal contracts and run
accounts.

There's a gap between a foreign investment law passed by Cuba earlier
this year that cuts taxes on profits and promises legal protections to
entice investors, and the reality of doing business there, she said.
"How hard it is to cut a deal and how much waiting time there is, the
lack of transparency — all of that is very, very real," she said. "Just
as there are examples of Canadians, and Spanish and others who do
business there, there are just as many examples of attempts to do
business and being thwarted by the bureaucracy."

Obama said Dec. 19 that the full opening of relations between Cuba and
the U.S. may take years, even as he offered assurances that the new U.S.
stance will bring change to the island nation's closed society. While
the changes won't open Cuba to U.S. tourism, they will make it easier
for American businesses to export to Cuba's construction,
telecommunications and agricultural sectors. Commerce Secretary Penny
Pritzker is planning a trade mission to the island.

Another complicating element of doing business in Cuba is an estimated
US$1.8 billion in U.S.-certified foreign claims on everything from
houses to sugar mills and hotels to homes. The list totals 109 pages.
"There are all kinds of issues," Freyre said. Cuba has not made any
commitment to democracy and its opening of the economy has been very
controlled and rooted in pragmatism, not a change in ideology, he said.
"This is not Myanmar, Vietnam or China — it's a little bit of each."

–With assistance from Tony Jordan in Bangkok and Bruce Einhorn in Hong Kong.

Bloomberg.com

Source: Why 'complicated' Cuba may not see a 'gold rush' from the
opening of U.S. relations | Financial Post -
http://business.financialpost.com/2014/12/26/why-complicated-cuba-may-not-see-a-gold-rush-from-the-opening-of-u-s-relations/