US companies still facing investment hurdles

US companies still facing investment hurdles

"There was a kind of euphoria after last December," says Pedro Freyre,
who chairs the international practice at law firm Ackerman and advises
US companies on Cuban issues. "But now, companies are realising that it
makes sense to kick the tyres first before investing in Cuba:'
Despite improved relations since President Obama's announcement last
year, US companies seeking to invest in Cuba still see more roadblocks
than welcome signs. The US embargo on trade and travel remains and
requires an act of Congress to overturn. But this is not the only
impediment.
Most of Cuba's 11m citizens are very poor, which limits market
opportunity, and infrastructure is corroded. Gary Hufbauer, fellow at
the Peterson Institute for International Economics and co-author of
Economic Normalization with Cuba, emphasises the flawed incentive
structure of the statist model. Investment is inefficient because of bad
data and a workforce with little experience of big projects.
The distorting effects of the embargo and communism have also produced
idiosyncratic obstacles for US companies.
Taking Cuba off the government's list of terrorism sponsors makes it
easier for financial institutions to offer services there. Yet doing so
would continue to pose a regulatory risk for US banks, which might worry
about their liability if they process a
customer transaction that runs foul of the embargo or laws that govern
money laundering.
MasterCard removed its block on the use of its US-issued credit cards in
March, but the banks that issue the cards decide whether they will work.
They have declined so far, as the risk may be small but is still hard to
justify.
It is a balancing act, says Yosbel Ibarra, co-chair of the Latin America
practice at Greenberg Traurig, the law firm. "What are the bank's
compliance costs? How much money can be made? It's complicated. Though I
also think that it's just a matter of time:'
Telecommunications companies could try to capitalise sooner. IDT Corp
became the first US company to offer direct, long-distance telephone
calls to Cuba after a deal in March with ETECSA, the state telecoms company.
But ETECSA will not allow IDT to offer other services, such as sending
top-up mobile minutes to relatives in Cuba, and fees imposed by the
Cuban government for calls from the US are some of the highest in Latin
America.
To the rest of the world, tourism is Cuba's most appealing economic
sector, and it is growing. The number of tourists climbed by 36 per cent
in the first quarter from the 2014 figure, and available bedrooms at
hotels or privately run casas particulares have been hard to find
lately, according to economist Omar Everleny of the University of Havana.
Arnold Donald, chief executive of cruise line Carnival, cites "pent-up
demand" and the country's proximity to the company's main port in Miami.
Yet cruises to Cuba almost certainly cannot begin until the embargo,
which prohibits American tourism to Cuba, is lifted. Certain categories
of travel are permitted — for journalistic activity, cultural exchange,
to visit family —but it is unrealistic to fill a cruise ship with people
who satisfy these criteria.
A different set of challenges awaits US hotel groups, should they try to
set up in Cuba, says Mr Hufbauer: "Any US company [considering future
investment] must do its own strategic analysis about whether it will
eventually want to compete with state-owned enterprises or partner with
them."
The state typically insists on having a majority stake in partnerships
with foreign companies. And for now, Cuba's dual-currency system
effectively functions as a tax on this sector Similar obstacles arise in
other sectors, and they all point to the same conclusion.
The promise of closer diplomatic ties is exciting, but without an end to
the embargo and a further liberalisation of the Cuban economy, US
corporates can only wait, watch and prepare.

Cardiff Garcia

Source:
http://im.ft-static.com/content/images/63c9c164-1312-11e5-8cd7-00144feabdc0.pdf