Having returned recently from a six-day “people to people” trip to Havana arranged through the State Bar of Texas, I am struck by a variety of changes in the country since my last trip to Havana more than twelve years ago (also arranged through the State Bar of Texas).
Of course, this trip was at a particularly exciting time, following in the wake of the recent presidential trip by Barack Obama (and a large American delegation) and the first concert in Cuba by the Rolling Stones. However, I sensed other changes, perhaps symbolized by the new construction near the Hotel Parque Central were we were staying. Since the adoption of the 2014 Foreign Investment Law No. 114, Cuba has cautiously embraced private foreign investment to a greater degree than before, albeit subject to more restrictions than foreign investors are accustomed to.
Cuba clearly has a more focused approach to foreign investment, and transportation and tourism are priorities for the largest country in the Caribbean. The recently announced Sheraton deal with the Cuban Government to manage three hotels in Havana (beating its U.S. rivals to the Cuban market, but considerably behind its Spanish rivals such as Melia and Iberostar who have been in Cuba for much longer) may be a bell weather transaction. Cuba also recently announced that it would drop the 13 percent surcharge on converting U.S. dollars to Cuban currency, but at the time of my trip this measure had not yet been implemented.
Protecting the top priorities of the Cuban government, including social stability and equality, remain a top priority and foreign investors should be prepared to articulate and defend how the investment is likely to have a positive social effect (above and beyond the creation of employment). The two most important models for foreign investment are a joint venture with a state owned company and a management contract. In contrast, wholly owned subsidiaries of private companies represent only about five percent of the foreign investment projects approved by the government under the new law. Only a few strategic sectors remain off limits, such as health, education, mass media, and defense.
Cuba has even approved a special “free trade” or better said, “preferential trade” zone in Mariel with reduced tax rates for several years.
A country seeking the optimal form of foreign investment is certainly laudable, but it likely will test the patience of foreign investors, who may have already embraced corporate social responsibility (CSR) principles, but will need to possibly refine their message or efforts to be successful on these terms.
Doing business in Cuba presents numerous obstacles including a difficult bureaucracy to manage, a dual currency system, FCPA issues, and a labor system that requires contracting with a state owned employment agency, to name just a few.
However, there are some indicators to suggest that Cuba is changing. Cuba has identified a goal of shrinking its public payroll by hundreds of thousands of people, a process that was inconceivable only a few years ago. The expectation is reflected more in the negative reinforcement of low salaries resulting in a slow and gradual pushing out of employees to the private sector rather than mass layoffs. Of course, this also comes with risks. Any government needs a stable and qualified public workforce to study and respond to new developments and carry out government priorities.
Despite the 2014 reforms, in walking through the streets of Havana, one still gets the sense, despite the evidence of new construction in some of the most touristic areas, that Cuba and Havana, in particular, are not prepared for the wave of American visitors likely to arrive in Cuba when US passenger service starts later this year.
Perhaps surprisingly (to some Americans) Raul Castro has announced his intention to step down as President in 2018 and many observers are expecting that Cuba’s Vice President, Miguel Diaz- Canel, will be the likely successor. Whether the absence of a Castro leading the Cuban government for the first time in decades is the impetus for negotiating the end of the embargo remains to be seen. However, turning back the clock by terminating diplomatic relations by a new U.S. administration at this moment seems improbable, if for nothing more than the pressure from Latin American countries to settle this long standing Cold War dispute.
Of course, the largest caveat from the perspective of U.S. foreign investors is the status of the U.S. embargo. Most Cuba observers expect continued incremental openings and liberalizations for the balance of the term of President Obama. Of course, in certain cases, seeking a special license from OFAC is always an alternative, although our experience is that this governmental body is overworked and may not have sufficient resources to handle all of its rapidly emerging Cuba responsibilities. The Obama Administration will have more success advancing its policy goals through adopting new regulations, rather than relying on OFAC to grant exemptions.