HAVANA, Aug 26, 2001 (Reuters) - After 12 years of opening itself to foreign capital investment, communist-run Cuba has become more selective in forming joint ventures, while making it easier and cheaper to invest in other ways.
While economic ties with individual European nations continue to flourish in the absence of U.S. competition, this two-track policy reflects the Caribbean island's gradual recovery from the economic crisis that followed the collapse of the Soviet Union, and the need to attract capital to its still-depressed sectors, sources and analysts said.
Cuba, which allows foreign investment only in association with state-run companies, has publicly stressed just the first track of the policy -- that of being more choosy of its partners.
By contrast, officials have hardly mentioned the second aspect, which for the first time allows some investors to skirt Cuba's notoriously impassable bureaucracy and high labor costs, compared with other Latin American countries.
Foreign Investment Minister Marta Lomas gave the official spin to the first tack of the policy earlier this year. "Today the process of negotiating (ventures) is much more complicated and the deals we sign much more important," she said. Lomas explained that while the total number of joint venture companies formed in 2000 increased by only 18 to 392 in all, compared with an average annual increase of 42 in the previous five years, the value of those new partnerships last year was twice the value of those formed in 1999. She said that by 2001 investors had signed agreements valued at over $5 billion with the government of President Fidel Castro -- perhaps the best-known living critic of capitalism -- of which about 50 percent of the cash had actually arrived in the country. Officials say 60 percent of the companies in joint ventures with Cuba were from Spain, Canada, Italy, and France.
Foreign bankers, diplomats, and others involved in brokering joint ventures said they were not happy about the policy shift toward greater selectivity. "It has become even more difficult to invest. They no longer look at joint venture proposals of less than a million dollars," a western diplomat complained.
The representative of one of a dozen foreign banks with offices in Cuba said: "The problem is that necessity forced them to allow direct investment in the first place. It's the last thing they really want."
A BREAK FOR THE LITTLE GUY
At the same time, however, the diplomat and banker agreed that Cuba's investment practices have become more flexible in some cases, particularly involving small and medium-sized businesses -- the second track of Havana's policy on foreign capital.
Around 200 mainly small- and medium-sized foreign companies have taken advantage of the opening to sign what are called cooperative production agreements, judging from scattered reports, as there are no official figures.
Foreign Investment First Vice Minister Ernesto Senti Darias recently gave the official version of the deals. "They are a new and advantageous way to capture foreign investment without compromising the nation's property," he said. Santi did not mention the advantages of the agreements for investors, who are quick to point them out. "For the first time you can invest without paying for labor in dollars and waiting years to begin operating," said one foreign businessman, who wished to remain anonymous.
Jose Bucay Atri, the Cuba-based representative of the Mexican textile firm Bumartex, was not shy about speaking out. He characterized one of his company's business operations as a "Maquila" -- in the style of U.S. assembly plants on the Mexican border -- in an interview in 2000 with the official monthly "Business Tips on Cuba."
As with joint ventures, the government says the cooperative production agreements' objectives are to obtain capital, new technology and know-how, substitute imports and gain access to markets. The investor avoids lengthy Foreign Investment Ministry approval, simply by signing two documents with a state-run company and its ministry.
HIGH LABOR COST AVOIDED
The cooperative production agreements can take many forms. For example, the investor sells on credit raw material, technology, and know-how to its Cuban partner in exchange for a fixed sum per product produced, or purchases the finished product outright for export.
In all cases the investor does not pay the high labor cost charged by state-run labor agencies and mandated by Cuba's 1995 Foreign Investment Law.
And there are other benefits, according to more than one foreign investment broker. Because the producing company remains 100 percent Cuban, the investor pays no taxes. The trade-off is that these are small deals, with a limited life span, and the investor has no real managerial control, they said.
"The cooperative production agreements have made possible a division between capital-intensive investments that can be made through traditional partnerships and smaller investments that will generate an almost instant return and in which the foreign investors play a more limited role," business lawyer Sebastiaan Berger said. A few years ago, he and his Canadian partner founded Berger, Young & Associates, one of the few international consulting firms based in Havana.
About 75 percent of Cuba's joint venture companies, and 50 percent of the cooperative production agreements, are located in Havana and the surrounding Havana province, where the infrastructure and business environment are much better than in the other provinces. The area is home to around 30 percent of the island's 11 million residents and accounts for some 60 percent of its gross domestic product.
Capitalist companies have teamed up with state-run companies to upgrade and operate most of the capital's infrastructure. Spain's Aguas de Barcelona is a joint venture partner in Havana's waterworks, while Italy's Telecom Italia owns part of the fixed-line monopoly phone company. Britain's Trafigura is working to provide Havana residents with cooking gas in place of the traditional kerosene, while Canada's Sherritt International is using natural gas to generate electricity to keep the lights on.
ABSENCE OF U.S. COMPETITION
Office buildings are being built in partnership with the Israeli BM investment group, and half a dozen new hotels are partially owned or managed by foreign companies such as Spain's Sol Melia and France's Accor.
The buses that navigate the streets of the capital are assembled by a joint venture with Brazil's Busscar. Havana port's container terminal is a joint venture with two Spanish companies, and the cruise ship terminal with an Italian firm.
Many of the hundreds of manufacturing and assembly companies in the area have signed cooperative production agreements.
Some foreign partners in Cuban joint venture companies complain about having to hire workers for hundreds of dollars a month through state employment agencies, which pay those same workers the equivalent of $10.00 to $20.00 a month in local peso currency.
And everyone, including the government, agrees it takes far too long, sometimes years, to win approval of a joint venture company.
"There is a big difference between foreign investment in Cuba and the rest of Latin America. The investments are with state companies, for a limited period of time, and you can't do anything without your government partner's approval," Cuban economist Omar Everleny, the author of a book on investing in the region, said. "In Latin America you buy a company, pay workers the lowest possible rate, and can sell or do what you want with the property -- but not here," Everleny added.
Asked why capitalist companies invest in communist-run Cuba, the economic attaché of one of the island's most important partners said: "The simple answer is that, if you can make the right deal, there is a good return on investment." Business lawyer Berger agreed. "There are different rules here than anywhere else, so you have to learn to play the game. But what's most important is that, once you learn the rules, you can win," he said.
The lack of U.S. competition, the chance to become established before the four-decades-old U.S. embargo ends, and speculation over the "wall of money" that could crash in upon the island when it does, also attract investors, diplomats and foreign businessmen said.