US-CUBA TRADE ASSOCIATION Doing Business in Cuba Citrus Club, Orlando, Florida April 13, 2006

1. US-CUBA TRADE ASSOCIATIONDoing Business in CubaCitrus Club, Orlando, Florida April 13, 2006 OVERVIEW OF CUBAN BUSINESS ENVIRONMENT Prepared by: Paolo Spadoni Stetson University

2. Cuban Economy: Introduction • Deep economic recession in early 1990s • Fall of former Soviet Union • Beginning of “Special period in time of peace” • Intensification of US sanctions (Torricelli, Helms-Burton) • Economic reforms • International tourism, foreign investment • Legalization of US dollars (remittances) • Self-employment, agricultural cooperatives, free farmers markets • Slow but constant economic recovery since mid-1990s • Reforms: good results • Re-centralization of the economy (search for efficiency) • Closer relations with Venezuela and China (and US food sales)

3. Cuba’s GDP Growth (1989-2005) • Sources: CEPAL; EIU; Cuban Government. • 1990-93: GDP contracted by 40.1% • Positive performance since then, but growth rate has fluctuated substantially • Record GDP growth of 11.8% in 2005 with “sustainable social” formula

4. Cuba’s New GDP Formula • “Sustainable social” GDP • Recognizes value added of subsidized social services (healthcare, education, sports) provided by Cuban state to its population and to citizens from other countries, mainly from Venezuela. • Cuba’s arguments • Traditional GDP formula designed for market economies • Assigns no added value to subsidized social services • Uses cost calculations that do not reflect “true purchasing power” of Cuban population • Wages are low, but citizens pay no rent, free healthcare and education, subsidized utility services and basic products • New formula: key issues • What added value is assigned to Cuba’s vast social safety net? • Profitability in a market system? • What countries are used as a reference?

5. Cuban Economy: Current Situation • Good economic performance in 2005 • Main reason: unprecedented earnings from exports of medical and educational services, particularly to Venezuela • Exports of G&S from $5.9 billion in 2004 to $8.7 billion in 2005 • Other reasons: higher revenues from tourism and nickel exports • But economy negatively affected by: • Severe energy crisis and continuing drought • Two major hurricanes in 2005 causing losses of about $2 billion • Strengthening of US sanctions • Future economic challenges • “Energy revolution” (small electricity generation plants) • Housing program (construction) • Improvement of transportation sector • Fight against “corruption and illegalities” • Reducing income inequalities

6. International Tourism in Cuba: 1993-2005 • Source: Anuario Estadistico de Cuba; Cuban Ministry of Tourism. *Author’s calculations • 2005: tourist arrivals 2.3 million (+12%), revenues almost $2.6 billion (+10%) • Gross revenues per tourist in 2005 about 23% below 1995 level

7. Cuba: Main Export Products, 2000-2005 ($U.S. million) • Sources: Oficina Nacional de Estadísticas; EIU. *Preliminary estimates • Export performance • Growing nickel revenues mainly result of higher international prices • But injection of financing and technology by foreign partners (China and Canada) expected to lift production • Decline of revenues from sugar exports, growth of tobacco exports • Pharmaceuticals and biotech exports estimated at $300 million in 2005 • Imports • Fuel (Venezuela), foodstuffs (US), machinery/equipment, chemicals • Cuba’s main trading partners • Venezuela, China (US fourth largest import partner in 2004)

8. Foreign Investment in Cuba • Cuba’s opening to foreign investment in early 1990s (handful of hotel and • oil exploration joint ventures) • After 1993, number of international economic associations (AECEs) • increased and expanded to different sectors of the Cuban economy • Since 1998, preference for AECEs that involve higher amounts of capital • and loan financing

9. Active International Economic Associations (1993-2005) • Source: Cuban Ministry of Foreign Investment (MINVEC) • Number of AECEs dropped from 403 in 2002 to 258 in 2005 (-36%) • Cuban authorities: country has been concentrating on businesses with results • Number of JVs more suitable to Cuba’s current needs

10. Authorized and Dissolved Associations by Year of Dissolution (1988-2005) • Source: Author’s calculations from MINVEC data. • About half of dissolutions occurred in last 3 years (and less authorizations) • 60 AECEs in process of dissolution at the end of 2005

11. Foreign Direct Investment in Cuba in $U.S. million (1993-2004) Sources: Cuban Central Bank, May 2002; EIU. *1994 data are cumulative to that year. • Cuban experts: committed FDI is more than $6 billion (about half delivered) • AECEs by sectors and country • Leading sectors: basic industry, tourism, construction • Leading countries: Spain, Italy, Canada • In terms of capital invested • Leading sectors: telecommunications, mining, and tourism • Leading countries: Canada, Italy, Spain • FDI priorities • Mining, energy, oil, sugar derivatives, biotechnology, tourism • Tourism • 49 hotels under management contracts with 10 foreign companies in 2005

12. Cuba’s Business Climate • Complaints by European investors (June 2002) • Excessive utility costs due to the state monopoly on services • Bureaucratic hurdles, payment delays • Expensive dollar payments to Cuban workers recruited by state-entity • Cuba’s stance • Rules of the game always clear (FDI complementary) • Efficiency through re-centralization, more revenues to the state • Increased ability of Cuban government to respect payment obligations • Recent developments • Focus on large investment projects • Decline in number of cooperative production agreements • Free Trade Zones development halted in 2003 • Major FDI operations in oil and mining • Virtually all new FDI projects are with China and Venezuela • But still opportunities for investors from other countries

13. AECEs Operating Abroad by Geographical Area (percentage as of June 30, 2003) Source: Centro de Promocion de Inversiones (CPI), September 2003. • Cuba’s investments abroad increasingly important • Major biotech and pharmaceuticals projects in East Asia (China, Malaysia, • India), Middle East (Iran), and Africa (Namibia and several other countries)

14. Main Indicators of AECEs, 1993-2005 • Source: Cuban Ministry of Foreign Investment • Main indicators of AECEs have shown constant progress • 2005: Increase in total sales, exports, domestic sales (even with fewer JVs) • FDI fostered competitiveness of Cuban production, import substitution

15. Foreign investment: Big Players in Cuba • A limited number of joint ventures with foreign partners have a large economic impact • 5 joint ventures account for vast majority of export revenues of AECEs • Corporacion Habanos S.A. (tobacco, Altadis) • Havana Club International S.A. (rum, Pernod Ricard) • Compañia Azucarera Internacional S.A. (sugar, unknown) • ETECSA (telecommunications, Telecom Italia) • Sherritt International (nickel) • Increasing dissolutions: little negative effect as long as big players continue to invest in Cuba

16. Exports of AECEs, 1995-2005(as percentage of Cuba’s total exports of goods and services) • Sources: Author’s estimates from MINVEC and CEPAL data. • Important presence of FDI in oil, mining, and energy production • Foreign participation has substantial influence over the production and • marketing for five largest export sectors (sugar, nickel, tobacco, rum, fishing)

17. Conclusion • Cuban economy is improving • Increased foreign exchange earnings (first current account surplus) • New revenues from export of medical services (Venezuela) • Tourism, nickel exports on the rise, soft credits from China • Translating growth into tangible benefits for population • State investments in energy, housing, transportation, consumer products • More food imports,raising wages and pensions • Reducing gap between those with/without access to hard currency • Business environment • Cuba’s closer relations with Venezuela and China • Re-centralization of the economy • More controls, but also more efficiency? • Preference for large investment projects (with results) • Strong presence of FDI in Cuba’s most successful industries • Brightest investment opportunities in basic industry and tourism