Experts Predict Grim Outlook for Cuba

February 20, 2007

HAVANA - Think of the nightmares possible in doing business overseas: Tight government regulations. Supply shortages. Sky-high utility bills. Unmotivated workers. Dismal customer service.

International companies in communist-run Cuba face all of those - and more.

The London-based Economist Intelligence Unit ranks Cuba among the world's worst business environments - No. 80 of 82 nations surveyed, with only Iran and Angola rated lower for the past five years.

And with little policy change expected, the Caribbean nation likely will stay among the worst for business over the next five years, the Economist Intelligence Unit predicted in a recent survey.

Even managers of Chinese companies favored these days by Havana cite headaches.

"Our company does business with 46 countries, and Cuba is the only one where we can't have a commercial representative to find clients and service them," said a Chinese executive who declined to be named for fear of Cuban reprisals.

Most U.S. companies can't do business with Cuba because of Washington's four-decade embargo aimed to squeeze the island's communist regime. But those few with permission - like U.S. food exporters - also face obstacles, from reams of U.S. paperwork to Havana's prodding that U.S. suppliers lobby on Cuba's behalf.

"And you've basically got one customer: the Cuban government," said Jay Brickman, vice president of government services for Jacksonville, Fla.-based Crowley Maritime Corp., whose shipping service hauls authorized U.S. food exports from Florida's Port Everglades to Cuba.

Havana cracked open the door to foreign capitalists in the 1990s after the collapse of the Soviet Union and the end of generous Soviet subsidies sent the island's economy crashing. But foreign investment has always been more tolerated than embraced by authorities, analysts said.

"It's seen as bitter medicine, like castor oil," said independent economist Oscar Espinosa Chepe in Havana. "Some hardliners call it 'ideological contamination.'"

Nowadays, as hefty Venezuelan oil subsidies and Chinese loans lift Cuba from its economic hole, the government is getting more selective about what foreign investment it approves and what foreign companies can do.

Numbers tell the story. The tally of Cuba's foreign "economic partnerships" fell to 236 last year from more than 400 in the year 2000, authorities have said.

Cuba now seeks foreign partners mainly for large, costly projects, such as oil exploration and mining. And it gives priority in joint ventures to Venezuela and China, nations with a fellow leftist bent, said Paolo Spadoni, a teacher at Rollins College in Winter Park, Fla., who specializes in Cuba.

Smaller European firms once welcomed even for limited retail operations are now being turned away, as Cuba's government expands its own restaurant and store network.

"Every day, Italians come in and say they want to put up a pizzeria or clothing store. That type of business, the government says, we generally don't need," said Miriam Martinez, a spokeswoman at the Cuban Chamber of Commerce.

Once approved, operations in Cuba are increasingly centralized in government hands, foreign executives said.

Though Cuban law permits 100 percent foreign ownership, most foreign companies operate through partnerships with the government and hold only minority control.

Even foreign embassies generally can't hire their own staff, but must hire through government staffing agencies. Some foreigners bemoan nepotism at the agencies.

Foreign businesses pay their staff through the government agencies, but employees get only a sliver paid to them in local currency. The government pockets the bulk, saying it needs the cash for Cuba's free education, health care and welfare programs.

Local salaries don't stretch to pay the bills, so foreign employers generally pay a bonus to their employees, sometimes up to $1,200 a month, executives said.

Then, there's the delay issue, especially long waits to obtain imported supplies. Few imports are warehoused because Cuba faces foreign currency and credit shortages and won't tie up its cash.

What's more, Cuban bureaucracy can be painstakingly slow.

Italian clothier Benetton, which operated as many as five shops in Cuba in the 1990s, has closed at least two permanently, said Tania Hernandez, a manager of the Old Havana shop now temporarily shut amid renovations.

Benetton's Cuba sales have drooped, partly because of rising costs and import difficulties, she said.

Some executives say the only way to operate in Cuba is to plan ahead - way ahead.

"For example, if I know in six months I'll need to change the chair covers in the hotel, I try to ask six months in advance for what I want," said hotelier David Ocete, a Spaniard who runs the 437-room Occidental Miramar in Havana, one of three hotels operated in Cuba by Spain's Occidental Hotel Group.

Tight government controls can have some advantages for business, however.

Minimum room rates set by Cuba's Tourism Ministry, for example, avert price wars, keeping tour operators from playing one hotel off another and squeezing hotel profits.

"I wish the Canary Islands and Mallorca had minimum rates," hotelier Ocete said.

And Cuba offers some advantages envied elsewhere in Latin America: high literacy rates and low crime.

Those gains clearly don't outweigh the problems, especially when business faces a unique external pressure exerted by the U.S. embargo both on American and international companies.

U.S. scrutiny and sanctions against banks and other companies that do business both with Cuba and the United States have become so tough that some international firms are opting not to work with Cuba and to safeguard their larger and more lucrative U.S. operations.

At least two Swiss banks, UBS and Credit Suisse, and one American money transfer company, MoneyGram International of Minneapolis, announced an end to financial operations with Cuba in recent months amid the U.S. crackdown.

Amid all the hurdles, many foreign executives are focusing outside Cuba to more attractive spots for business.

CHALLENGES TO FOREIGN BUSINESS IN CUBA

Employer pays government for workers, but the state pockets most of the money.

Increasingly must import through state agencies.

High degree of theft, low productivity, weak customer service.

High utility and transportation costs.

Concern over judicial issues, since government is partner and also judge.

Repeated need to renew visas and work permits.

Source: Association for the Study of the Cuban Economy; Sun-Sentinel research

WORLD'S BEST AND WORST BUSINESS ENVIRONMENTS

Best:

1. Denmark
2. Canada
3. Singapore
4. United States
5. Finland

Worst:

78. Libya
79. Kenya
80. Cuba
81. Iran
82. Angola

Source: Economist Intelligence Unit of London, 2002-2006 study

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