CUBA
BRIEF
Information
and Analysis from the Institute
for Cuban and Cuban-American Studies
University of Miami
Perils
of Investing in Cuba
Pedro
Roig*
The
Economist, a respected magazine, portrays Cuba’s new Foreign Investment
Law as an “economic liberalization,” adding the subjective judgment that the
regime is becoming “less communist.” (1) The Economist is calling
on foreign companies to trust the Cuban leadership and invest in Castro’s
impoverished island. Yet these opinions do not fit the facts or the policies of
the Castro government. First and foremost, the Cuban Constitution is the active
and prevailing law of the island. It frames and controls the Cuban legal
system.
1.
Cuba’s Constitution: An Investor’s
Nightmare?
Written
in 1976, and extensively revised in 1992 and later in 2002, the Constitution
clearly defines the power vested in the Communist Party. Article 5 states that
“the Communist Party is the superior leading force of the State.” Article 3 of
the Constitution adds that the socialist system “shall be irrevocable and Cuba
will never return to capitalism.”
As
a communist regime, the national economy is centralized, planned and run by the
State (Article 9). It is also based on a socialist ownership of the means of
production (Article 14). These laws are specific and a prevalent part of Cuba’s
legal system. They have not been set aside by the new Foreign Investment Law.
The
communist constitution does not allow room for doubts on the issue of property
ownership rights. On the contrary, it is clear, direct and precise. It states
that “sugar mills, factories and all enterprises, banks and installations that
have been nationalized and expropriated from imperialists, large estate owners
and the bourgeoisie” (Article 15) are the property of the state.
The
State controlled legal system in Cuba fails to protect foreign investors.
Judges and lawyers are not independent and follow party and military orders. A
recent example is the arrest 3 years ago of Cy Tokmakjian, a Canadian investor
that has been languishing in jail without trial. On April 30, 2014, Peter Kent,
Chairman of the Canadian House of Commons Defense Committee, complained
publicly about the arrest of Mr. Tokmakjian and criticized Cuba for not
protecting foreign investors. (2)
The
Economist praise of Cuba’s new Foreign Investment law is an absurd
misinterpretation of the island’s prevailing legal system. Factually, General
Raul Castro’s military oligarchy is no “more liberal” or “less communist.” The Economist’s
baseless praise is without merit.
The
issue is that General Raul Castro is opening for business but in his own
communist terms. The second problem for potential investors is that Cuba’s
physical infrastructure is moving rapidly from acute decay to fatal collapse.
2.
Deteriorated Roads, Bridges and
Railroads
The
island’s roads and bridges are unsafe and in need of urgent repair and the state
lacks the needed funds to make the repairs. The fatigue, cracking and
exacerbated deterioration of the bridges and roads are caused by low quality
materials combined with inconsistent repair practices. As noted by a relevant
study, “the lack of investment and maintenance are reflected in the
deteriorated condition of the transportation system.” (3) In addition,
hundreds of bridges throughout Cuba are in need of rehabilitation. (4)
In
the global market, trucking is a vital commercial component and the decay of
the national highway system presents a major obstacle for the safe and timely
transportation of commercial cargo.
Cuba’s
railroad system suffers from multiple infrastructure problems including rotten
cross beams, rusted rails and loose tie plates. The dilapidated conditions of
the railroad grid demand that in some areas the trains go at a maximum of 20 km
an hour to avoid accidents. (5) Railroad bridges are also in
precarious conditions with sinking foundations that disrupt the angles on the
tracks. (6) Railroads are excellent forms of moving bulk commodities in
cargo such as sugar and minerals. The task of repairing the infrastructure is
beyond Cuba’s financial capacity. The acute deterioration of the transportation
system is among the perils of investing in Castro’s Cuba.
3.
Inadequate Ports With Mariel
as the Exception
With
the exception of the mega transshipment Port of Mariel, with a draft up to 49
feet and a capacity to store over 3 million containers, Cuba’s principal ports
(Havana, Matanzas, Santiago de Cuba and Cienfuegos) are unable to accommodate
large, modern vessels.
Experts
have pointed out that in Cuba’s ports “all basic infrastructures, including
connectivity to ground transportation networks, energy, telecommunication and
water have suffered. All such systems are antiquated, unreliable and incapable
of supporting the demands associated with a consumer-oriented economy.” (7)
The
U.S. Trade Commission stated that the ports’ poor maintenance has created a
situation where loading and unloading cargo can be a hazard. Furthermore, there
is limited availability of cold storage, a crucial infrastructure component
necessary for perishable food products. In addition, the availability of
equipment and trucks used for moving loads on to and off the ports is
inadequate and they lack spare parts needed for repair and maintenance.
The
modern Port of Mariel, just 45 km West of Havana, is designed to serve
super-container ships. However, the future possibility of serving as a
container transshipment facility for a U.S. (post-embargo) commerce has major
competition from high-tech Port of Miami, the closest American port to the new
Panama Canal expansion. The Port of Miami enlargement has a dredge of up to 50
feet in depth and is capable of berthing even the largest container vessels in
the world, including the future Maersk Triple E Class, which will have a
draught of 47 feet and will be nearly 200 feet wide.
The
mega Port of Miami has completed an under the bay tunnel for trucks to bypass
Downtown Miami, doubling the port’s traffic capacity. So, why would the Pacific
exporters choose the Port of Mariel if they could bring their cargoes directly
into the U.S. via the excellent highway infrastructure of the Port of Miami?
This fact should be a major concern for the Port of Mariel investors.
4.
Unreliable Energy
Cuba
has an aging and expensive centralized electrical power network that reaches
95% of the island’s population. Fossil fuels generate 85% of the energy. (8)
There are seven major power plans that use inefficient equipment from former
Soviet Union and Eastern communist countries, as well as old American
equipment. All plants are operating below their estimated capacity level.
Cuba’s
oil consumption is over 170,000 bbl/d, while domestic production is about
55,000 bbl/d. (9) Therefore; Cuba has to import 2/3 of its fuel needs.
Over 100,000 bbl/d are imported from Venezuela. (10) Thus the financial
stability of Cuba depends almost entirely on the largesse of Nicolas Maduro’s
regime in Caracas. If support from Venezuela is reduced or ended, Cuba’s energy
sector will have to find, urgently, another country willing and capable of
providing this extreme and generous subsidy. A serious concern for any
future investor interested in General Raul Castro’s business consortium.
5.
Outdated Water and Sewer System
In
Cuba, the water supply and sewer infrastructure is at a breaking point and
close to catastrophic failure. Throughout the island, the water and sewer
infrastructure is failing due to the deterioration of the pipelines,
inefficient maintenance practices, antiquated equipment and substandard
plumbing materials.
According
to a 2013 report published in Granma, the Cuban government’s official
newspaper, 58% of potable water is lost through leakage. (11)
Havana’s
sewer system, which was built almost one hundred years ago, has been due for
major repairs for almost five decades and it serves over two million citizens-
well beyond its original design capacity of 400,000. The wastewater
infrastructure is a serious concern. Fifty nine percent of the 2,160
contaminants recognized by UNEP are released into Cuba’s environment without
any treatment. (12)
For
over 54 years, the wastewater process has been substandard as a result of
decades of neglected infrastructure and pollution control. This has taken a
severe toll on the land which is now recognized as one of the most polluted in
the world. (13) The growing deficiencies of clean water supply and
wastewater contaminants are a major problem for corporations committed to clean
environments.
6.
Decaying Health
Although
Cuba has an international reputation is having an excellent medical system, the
hospitals and health infrastructure servicing the Cuban population have
severely decayed since the collapse of the Soviet Union (1990). The majority of
the inefficiencies are due to the high costs associated with the acquisition
and maintenance of health equipment and the sector being ineffectively centralized
and controlled by the government that operates the national health system.
There are no private hospitals or clinics.
An
ABC-TV 20/20 report on Cuba’s healthcare highlighted the dilapidated conditions
of some hospitals that are accessible to everyday Cubans by pointing to the
bleak conditions of hospitals rooms and the filthy environment of the medical
facilities. (14)
A
prominent economist had pointed out to this critical issue: “the 1990’s crisis
(the collapse of the Soviet Union) almost totally halted imports of medical
supplies, medicine and chemical inputs previously supplied by the socialist
camp.” (15)
In 2012, it was stated by experts in the medical field that health facilities
on the island tend to lack adequate equipment, medicine, syringes, potable
water, bed sheets, disinfecting chemicals, faucets and even toilets in patient
rooms. (16)
A three part series published by Canada’s National Post pointed out that common
pharmaceutical items such as aspirins, antibiotics and rubbing alcohol are
almost non-existent. The black market offers the best chances to obtain these
items. (17)
A
foreign journalist with several years reporting from Cuba wrote in June 2012
that he witnessed “many hospitals where there was no running water, the toilets
did not flush and the risks of infection- by the hospital own admission- was
extremely high.” (18)
Potential
investors must be aware that Cuba’s healthcare provision has severely decayed.
The country lacks funds to expand and upgrade equipment, which generally needs
to be imported. The labor force may therefore have limited access to quality
medical treatments- a sensible welfare issue.
7.
Food and Agricultural Sector
Failures
Since the establishment of the food
rationing system in 1962, the issue of undernourishment or chronic food
insecurity has been ever present in the daily life of Cubans. A 2001 study on
food availability indicated that despite its fertile soils and favorable
climate conditions, “Cuba could not achieve the country’s self-sufficiency in
food.” (19) There are numerous natural and ideological reasons for this
failure that have resulted in Cuba importing close to 80 percent of the food
consumed by its 11 million inhabitants at a cost of over US$ 1.5 billion per
year. (20) The imports primarily represent purchases of soybeans,
corn, wheat, rice, beans, eggs, and poultry meat. (21)
Presently, it is estimated that
over one third of Cuba’s arable land is uncultivated. (22) One of the main
problems is the rapid proliferation of marabú- a spiny bush. This plant
has proven to survive many efforts to remove it from the arable land. (23)
There are provinces with high levels of marabú infestation.
The major causes of the
agricultural failure are the scarce supply of fertilizers and modern farming
equipment, poor transportation and irrigation infrastructure, inefficient
management practices, theft, and bureaucratic corruption. Mistrust in the
government’s commitment to reform is widespread and agricultural production is
in a critical stage of stagnation. The food production failure is a disturbing
social issue for foreign investors.
8.
Outdated Internet Communication and
Information System: An Unfriendly Business Environment
The global economy relies on modern
internet communication technology for secure, reliable, swift and precise
commercial, industrial and professional activities. This is a crucial factor
for the successful fulfilment of trade exchange and distribution of goods. In
Cuba, the high tech infrastructure is at a minimum level of performance while
the communication system relies on antiquated equipment. Censorship is also
among the most severe in the world. (24)
Although some efforts at
modernization are being implemented, the State lacks the financial resources.
Additionally, the Cuban government fears the powerful impact of new
communication technologies on the people’s ability to share news and develop
social networks among themselves.
Cuba has one of the lowest rates of
population with internet access among all countries; with less than 3 percent
of Cubans having access to internet. (25) The State also controls the
flow of high tech internet equipment and information that reaches the island.
Due to the outdated and restricted
communication infrastructure, Cuba’s information technology (IT) sector has not
developed to modern standards. Unlike in free market economies, IT experts on
the island do not focus on the integration and strengthening of systems that
facilitate transactions. Instead, they emphasize technologies that simplify the
government’s supervision of activities. An unfriendly business environment
hindering a swift and successful participation in the global economy.
9.
Violation of Workers’ Rights and
Foreign Investors’ Complicity
General
Raul Castro’s regime systematically violates the rights of workers to bargain
for wages and labor conditions with the complicity of foreign entities engaged
in joint ventures with the Cuban government. Article 33.3 of the Foreign
Investment Law clearly states that Cuban workers “shall be hired through a
contract between the company and an employing entity” controlled by the State.
Article
33.4 states that payment to Cuban workers “shall be made in national currency
which must be obtained beforehand from convertible foreign currency” by the
Cuban entity.
With
the exchange rate of about 25 pesos (CUP) per dollar, (26) the foreign
investor entity pays a fixed salary to the state employment agency in
convertible pesos, or CUC (1 CUC= $1). The employment agency then pays
the Cuban worker in Cuban pesos, CUP. Thus Cuban workers receive 1/25
less per peso after the currency is exchanged for CUP. The Cuban
government keeps close to 80% of what the foreign entity pays.
This
is an ethical travesty in which the workers’ real monthly wage is around 10% of
the payment for its labor. A shameful business practice condemned by labor
organizations worldwide.
A
foreign investor in Cuba should carefully consider the unethical, unfair and
abuse labor practice of workers’ exploitation when considering a joint venture
with Cuba’s military oligarchy.
10.
The High Risks of Venezuela’s
Financial Collapse
According
to Moody’s report of April 2014, Venezuela’s economy is in a downgrade,
negative outlook rating and Cuba faces the risk that Venezuela will be forced
to reduce or eliminate its huge financial support of over $6 billion yearly. (27)
General Raul Castro’s regime is among the most vulnerable recipients of
Venezuelan oil subsidies. Every day, Cuba receives over 100,000 barrels of oil
from Venezuela in exchange for medical services.
Moody
explains that when it downgraded Venezuela, last December, to a negative
outlook rating, the key drivers were unsustainable macroeconomic imbalances,
and a materially high risk of economic and financial collapse. (28) For
Cuba’s subsistence economy, this is a catastrophic possibility. This high risk
scenario must weigh heavily in the exposure to harm analysis of potential
investors in Cuba. Definitely not an attractive option.
11.
Widespread Corruption
In
the 2012 corruption report by Transparency International, Cuba (tied with
Namibia) was below most countries in the Caribbean and Central America. It
defined corruption as “the abuse of central power for personal gain.” (29) Corruption
can take many forms, from minor use of influence to high ranking government
officials, institutionalized bribery and extortion. Widespread corruption is
recognized as a major obstacle for a nation’s sustainable economic development.
State
controlled Cuban newspaper Juventud Rebelde reported that over half of
workers in retail enterprises routinely steal from cash registers. The paper
stated that some state owned services are being used for personal profit. The
report also added that many of the principal state enterprises are
dysfunctional, unable to supply essential products and maintenance material to
their retail outlets. The reason is theft. (30)
On
May 2013, the Cuban Minister of Foreign Commerce and Investment reported on
“the irregularities detected in the functioning of businesses with foreign
capital.” The Minister of the Economy also stated that “corruption and
theft are rampant in the fuel sector.” (31)
Stealing
from government owned enterprises and their foreign investor partners is an
acceptable way of life in the impoverished island in which the military
oligarchy controls over 75% of the economy.
In
the book, “Corruption in Cuba,” two prominent scholars argue that the Cuban
privileged leadership has contributed to institutionalized corruption with
rampant practice of nepotism, cronyism, bribery, control of production
materials, pricing and lack of accountability. According to the study,
few citizens hesitate to steal from government and enterprises. (32)
Today,
large corporations are focused on anti-corruption mechanisms to protect their
international reputation and the best interest of their stakeholders. Doing
business in a corrupted business environment is also very costly, estimated to
add 10% or more to the cost of operations.
Investors
are discouraged by corruption since it increases the financial burden on the
business. Unlike taxes, that are known and predictable and can be built into
the expected cost, bribes, theft and extortions are difficult to control and
unpredictable in magnitude and will negatively impact cost control, reduce
profits, undermine investor confidence and unleash a commercial climate of fear
and uncertainty in a country in which the revolutionary leadership control the
judicial system.
Corporations
doing business in Cuba are required to cooperate with State Security. This
includes the use of cameras and microphones in hotels, restaurants, stores and
other business enterprises to keep track of customer and employee activities
and the use of State Security repressive methods which violate workers’ rights.
(33)
Doing
business with a corrupt military oligarchy that can, arbitrarily, make a
negative and detrimental judicial decision on any matter affecting the
investor’s corporate interest is a powerful deterrence for potential investors
in Raul Castro’s Cuba.
Conclusion
Given
these conditions and risks, only very daring investors are likely to pluck
large sums of money into Cuba. A hostile state and controlled legal system
together with a collapsing infrastructure does not make Cuba an attractive
investing location. There are other countries with much more attractive
internal markets and a population with significant purchasing power to buy
products manufactured by foreign companies.
The
average Cuban has a yearly income of approximately $228, one of the poorest in
the world. (34) The Economist should point out that most
investments in Cuba have occurred in the export sector of the economy, tourism,
nickel and rum. Very few companies invest to satisfy the needs of the Cubans.
They are not likely to do so while Cuba remains an impoverished island ran by
an old military dictatorship.
*Pedro Roig is a senior
research associate and lecturer at the Institute for Cuban and Cuba-American
Studies, University of Miami. Dr. Roig has taught Cuban history courses at
various institutions and was former director of the Office of Cuba Broadcasting
(OCB)- Radio & TV Marti. He holds a Master of Arts degree from University
of Miami and a Juris Doctor Degree from ST. Thomas University. He has written
several books including “The Death of a Dream: A History of Cuba” and “Marti:
The Cuban Struggle for Freedom.” He is a veteran of the Brigade 2506.
Notes
1)
“As
Cuba eases investments rules, many Cuban-Americans turn against the embargo.” The
Economist. April 5, 2014.
2)
“Canadian
Parliament Member Warns Cuba Investors.” The Miami Herald. April 30,
2014.
3)
Alfonso
and Penin, Transportation Infrastructure in a Free Cuba: How to Meet Demands
in a Challenging Economic Environment (Association for the Study of the
Cuban Economy, 2009).
4)
Roberto
Torres, “A Wonder of Cuban Engineering” Granma International, September
13, 2012.
5)
“Ferrocarriles de
Cuba quieren echar a andar” Diario de Cuba, February 8, 2011.
6)
Official
Daily: 90% of Cuba’s Railways Deteriorated” Latin American Herald Tribune.
7)
Babun,
Teo. “Reforming Cuba’s Port Operations during a Transition.” Association for
the Study of the Cuban Economy. (2007).
8)
King,
Dawn. “Cuban Sustainability: the Effects of Economic Isolation on Agriculture
and Energy.” Western Political Science Association. Portland, Oregon. (2012).
9)
Country Profile: Cuba. U.S. Energy
Information Administration (EIA). EIA.gov. (2013).
10)
Belt,
Juan. The Electric Power Sector in Cuba: Sustainability. U.S. Agency for
International Development (USAID). Usaid.gov. (2008).
11)
Puig, Yaima and
Martinez, Leticia. “Analizo el Consejo de Ministros Asuntos Vitales para la
Economía Cubana.” Granma. (September
2013).
12)
Puig, Yaima and
Martinez, Leticia. “Analizo el Consejo de Ministros Asuntos Vitales para la
Economía Cubana.” Granma. (September
2013).
13)
Cueto, Josenrique
and De Leon, Omar. “Evaluation
of Cuba’s Water and Wastewater Infrastructure Including High-Priority
Improvements and Order-of-Magnitude Costs” Association for the Study of the
Cuban Economy (ASCE). AsceCuba.org (2009).
14)
Healthcare in Cuba. Wikipedia.org. (2010).
15)
Mesa-Lago,
Carmelo. “Social Service in Cuba: Antecedents, Quality, Financial
Sustainability, and Policies for the Future.” Woodrow Wilson International
Center for Scholars. Washington D.C. (2011).
16)
“El Mito de la Medicina
Cubana”. Martinoticias.com (August, 2012).
17)
Balis,
Ryan. “Sicko Presents False View of Cuba’s Health System.” National Policy
Analysis. NationalCenter.org (2007).
18)
Newman,
Lucia. “The Truths and Tales of Cuban Healthcare.” Aljazeera.com. (June,
2012).
19)
Ibid.
p. 4.
20)
“Cuba
Admits Food Imports Bill is up 25% and Miracles are Running Out” MercoPress.
April 16, 2011.
21)
Cuba’s
Food and Agriculture Report. Foreign Agricultural Service (FAS) USDA.
FAS.usda.gov. 2012.
22)
Oridis
Pimentel Perez, Marabu that Dammed Plant of the Cuban Countryside. Cubanews.
2007.
23) Reinaldo Cosano, Marabu: ¡Apunten! ¡Disparen! Cubanet. 2007.
24) Cuba. FreedomHouse.org.
2012.
25)
Cuba
(Freedom House, 2012).
27)
“Moody's
cuts Cuba rating on risk from Venezuela turmoil.” Agence-France Presse.
April 23, 2014.
28)
“Moody's
downgrades Venezuela to Caa1; outlook negative.” Moody’s Investor Services.
December 16, 2013.
29)
“Corruption
Perception Index.” Transparency International. Transparency.org. 2012.
30)
Juventud
Rebelde. JuventudRebelde.cu. 2007.
31) Tamayo, Juan.
“Cuba Government Minister Reports on Corruption in International Deals and
Gas.” Miami Herald. 2013.
32) Diaz-Briquets,
Sergio and Perez-Lopez, Jorge. Corruption in Cuba: Castro and Beyond. University of Texas Press. 2006.
33) Fernandez, Jose. “Riesgo y Miseria de Invertir en Cuba.”
Diario ABC de Madrid. Autentico.org.
34) “Cuba eleva salario medio pero no llega a 19 dólares.” MartiNoticias.com.
2013.
