Minutes of John Kavulich Meeting
There are approximately 11.3 million people in Cuba making it a very desirable target market for U.S. companies. Plus, in the past, these people and Cuba were practically an extension of the U.S. with tastes that echoed those here.
When the relationship between the two countries changed, Cubans often looked to their relatives in the U.S. to supply, or at least supplement the necessities of life such as food and clothing. But with the recent changes, the Cubans want more than just necessities. They also want new technology and opportunity. These desires are fostered by the young and the old, but resisted by the middle aged who formed their careers under the Communist regime. Likewise the Cuban government is resisting change to the degree it can while at the same time seeking additional capital, which it desperately needs.
Consequently, change is inexorable, but proceeds very slowly. An indicator of this is the trade show in Cuba arranged by our own Peter Nathan, which featured 923 exhibitors and resulted in $91.9 million dollars in contracts signed. This even went unduplicated and stood alone as the only such trade show for the next 14 years.
The advantages, which Cuba could offer businesses from abroad are substantial such as excellent ports that can handle all the modern ships, good roads and a well-designed railway system. But old laws, both Cuban and U.S., work against U.S. companies developing in Cuba exacerbated by the Cuban government’s desire to maintain control by severely limiting changes that might speed up a cultural and governmental change.
Yet, with the advent of regular air flights between the U.S. and Cuba along with regular cruise ship routes between the two nations and the resulting surge in tourism, change will continue.
Q. When are things going to get better?
A. Castro said he will retire in 2018 although he may still keep control of the party. Congress will wait until Castro is out of the picture and hope that his successor will be easier to deal with.
Q. What is the logic behind the 180 day rule?
A. It was designed primarily to punish Cuba and keep company subsidiaries from dealing with Cuba.
Q. How come the Treasury Department has the oversight on our commercial relations with Cuba?
A. They are the U.S government police force enforcing all executive and congressional actions involving money.
Q. What is the difference in the way commerce developed with Vietnam and Cuba?
A. The people of Vietnam didn’t have many relatives here the way the Cubans do. And there were influential politicians that favored doing business with Vietnam. But most importantly, Vietnam wanted a change in its relationship with the U.S.
Q. Can Cubans now own property and do they have access to the Internet and American television?
A. Cuban nationals can own private property. There is some Internet availability although still limited and they have their own rather robust television service.
Q. How do the good Cuban attributes like their education and health care factor in?
A. The Cuban government still controls what they can read and write despite their education and their health care system still has some gaping holes.
The following are John Kavulich’s Notes from his presentation
U.S.-Cuba Trade and Economic Council, Inc. New York, New YorkTelephone (917) 453-6726 • E-mail: firstname.lastname@example.org Internet: http://www.cubatrade.org • Twitter: @CubaCouncil Facebook: www.facebook.com/uscubatradeandeconomiccouncil LinkedIn: www.linkedin.com/company/u-s–cuba-trade-and-economic-council-inc-
The Future Relationship With Cuba
Y’s Men of Westport/Weston Connecticut
Saugatuck Congregational Church 245 Post Road East Westport, Connecticut 06880
22 September 2016 10:30 am to 11:30 am
John S. Kavulich President
Today, the relationship between the United States and Cuba is much about intersections, parallel tracks, peaks and valleys. And the belief, the expectation, that the re-emerging commercial, economic and political relationship has both space for inspiration and aspiration. It’s not an easy journey.
With your permission, I would like to expand the title of my remarks from “The Future Relationship With Cuba” to “Where We’ve Been, Were We Are, And Where We’re Likely Going.”
For United States businesses, there is a prospect of 11.3 million consumers residing 93 miles south of Key West, Florida, who have one of the highest awareness’s and preferences for United States brands of any non-English-speaking country.
Why? Cuba was in some ways an extended state before 1959; with United States companies dominating the landscape. And, because there are now more than two million individuals of Cuban descent who reside in the United States, primarily in Florida and New Jersey. These friends and family have and will continue to influence the purchasing decisions of those who reside in Cuba.
An anecdote. Three years ago, a friend of mine who lives in Florida and has relatives in Cuba was asked to send a cellular telephone to Havana- any device, however old, would due. Last month, the friend received another request- for another cellular device…. But, not just any cellular device, a smartphone, an iPhone7.
What does this mean? There is a segment of the population in Cuba, primarily in Havana which accounts for approximately 20% of the country’s residents- but majority of purchasing power, who want more than they have now.
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From our perspective, the initiatives of President Obama have helped to create this environment; so he deserves the credit.
From the government of Cuba’s perspective, the initiatives of President Obama have helped to create this environment; so he deserves the blame.
The challenge for my friend was providing basic necessities to his relatives was understood- they needed money, medicine, clothing… but now there is a demand for the latest technology… rather than basic necessities. This is a transformational moment.
Despite inspirational and aspirational statements, Cuba will continue to morph from what it is- an entity which functions as it does primarily due to the financial largess of others, to a commercial, economic and political model encompassing components of Vietnam, China, Russia, Spain, France and the United States.
During the coming years, Cuba will increasingly find a magnetism from the United States that will be impossible to reject- the forces created by the desire of youth, equipped with the means to communicate within the country and outside of the country- principally to the United States, will result in societal schisms.
It’s not the young people in Cuba who will object to change. It is not the old people in Cuba who will object to change. It is those of middle-age whose careers have been constructed and sustained by slowwalking change and preventing change… because it jeopardizes their domestic power bases.
Haves And Have Nots… Yet
Cuba of today is eerily similar to a reality television program- and not a good one; if there is a good one.
Viewers are being entertained with visits by President Obama, Kardashians, the Rolling Stones, Madonna, cast of Fast and Furious; a stream of celebrities- famous, infamous, shouldn’t be.
Nearly a thousand representatives of United States companies- sole proprietorships, consultants, partnerships; small, medium and large; privately-held and publicly-held; organizations, associations, cooperatives, groups- if you can think of a type of business, then it has probably visited Havana.
Important to note that not all of these visitors traveled with a business visa; some did not bother; some were frustrated by the processing delay. Not all met with officials of the government of Cuba or with representatives of Cuba government-operated companies.
Some, rather most, did not spend time in advance of their visit researching whether an opportunity for their company existed. They simply wanted to go.
This is a problem.
That there are 11.3 million people living on top of an 800-mile archipelago is undeniable. That these people need to be clothed and fed and provided energy is undeniable. That they need to communicate is undeniable; some will argue inalienable.
But, these undeniables quickly come up against reality- the reality of what Cuba can afford and what Cuba wants to afford. How the government of Cuba defines success and how the people of Cuba define success has, and will continue, to be a challenge.
It has been this conflict that the Obama Administration has encountered and sought to counter with opportunities.
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We hear often that for the government of Cuba, the reason for a limited response to the Obama Administration initiatives is “The Embargo.” Granted, there are statutory and regulatory impediments to a “normalized” relationship.
However, the question for the government of Cuba is to what extent will the people of the country be denied opportunities solely because not all bilateral issues have been resolved?
Thus far, the government of Cuba has responded by focusing upon those Obama Administration initiatives that will bring it revenue.
United States Exports
Since December 2001, thirty-five (35) ports in the United States- from Virginia to Florida to Alabama to Louisiana and Texas have been the transit point for more than 4.6 million metric tons of food products and agricultural commodities exported from the United States to Cuba.
The value of those exports? More than US$5.2 billion and all on a payment of cash in advance basis, as required by United States law. The best year was 2008 with US$710 million and the worst year was 2015 with US$170 million.
Of 232 global export markets for food products and agricultural commodities from the United States, Cuba has ranked from 25th to 60th.
Some of these exports can be directly traced to Westport, Connecticut, and the efforts of one of your members, and my friend of twenty years, Peter Nathan.
In October of 2002, after a three-year political journey, Mr. Nathan’s creation, the U.S. Food & Agribusiness Exhibition was held in Havana. Honesty requires me to share that I was at first a discouraging voice… But, Mr. Nathan would not be dissuaded. In 2000, Mr. Nathan had created and managed the first U.S. Healthcare Exhibition in Cuba.
Here are the statistics. Please note that in the fourteen years since that event, the following numbers for any single gathering in Cuba focusing upon the United States have never been approached, let alone equaled or surpassed. Not even close.
225 product export licenses processed by United States Department of Commerce
154,000 pounds of cargo transported to Cuba (dry, chilled, frozen; and livestock- yes cows, sheep, pigs, goats, and cattle)
4 cargo aircraft
Exhibitors from 35 states and District of Columbia and Puerto Rico
218 exhibition booths
92 non-Cuba-based media representatives
Minnesota Governor Jesse Ventura
The Lieutenant Governor of North Dakota
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Seven Secretary/Commissioners of Agriculture
Value of contracts signed- US$91.9 million (that’s 2% of all food/ag products exported from the United States to Cuba since December 2001).
923 individual representatives of exhibitors. To put that number in a historical perspective, the CIA-sponsored Brigade 2506 that invaded Cuba at the Bay of Pigs in April of 1961 had 1,400 participants. So, Mr. Nathan’s event was a big deal in terms of Cuba being invaded again- by those whose weapons this time were food and ag products rather than guns.
What has the United States exported? Poultry, Soy products, Corn, Calcium Phosphates, Pork, Beef, Rice, Cotton, Wood, Wheat, Newsprint, Brewing Dregs, and products found in supermarkets- from beer to chocolate to whiskey.
Why doesn’t Cuba purchase more rice from Arkansas? Because government of Vietnam-owned companies provide Cuba with two years to pay for rice. No United States company will do that.
The primary reasons for the cumulative reduction in United States exports to the Republic of Cuba
lack of foreign exchange due to commercial and economic decisions of the government of Cuba which lessen its ability to earn foreign exchange.
financial largess by the governments of Venezuela and China lessens the interest of the government of Cuba to purchase products from the United States, regardless of cost, quality, or delivery considerations.
re-emergence and/or continuation of import relationships (barter, substantial credits, political motivation) with the governments of Brazil, Argentina, Vietnam, Mexico, Spain, Mexico, Canada, Russia, Iran, New Zealand, and France amongst other countries.
preference to purchase products from government-controlled entities, which provide more favorable payment terms and less publicity when payment terms are not honored, which is expected given the lack of foreign exchange of the government of Cuba.
efforts (which had been successful, but had lessened in their effectiveness) by the government of Cuba to increase the motivation of United States-based companies, organizations; state and local government representatives; and Members of the United States Congress to be more visible in their lobbying efforts for changes in United States policy, law, and regulations.
Cuba has also become a small export market for healthcare products (medical equipment, medical instruments, medical supplies and pharmaceuticals). From 2003 through this year, the total value is US$12.3 million.
Direct Foreign Investment
Next to the Direct Foreign Investment (DFI) made by Canada-based Sherritt Corporation in mining (nickel plus cobalt), the financing for the Port at Mariel is the single largest example of DFI in Cuba to date.
During the last twenty-five years, the government of Cuba has changed its laws and regulations and policies relating to DFI; generally creating an environment more favorable to companies. However, the calculus remains heavily imbalanced in favor of the government- land ownership remains restricted, hiring remains complex, dual currencies remain problematic, lack of transparency and promptness in decision-making remain frustrating.
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For perspective, in the United States individuals in government or at companies vie to be the last signature on a document that authorizes a project- so that they might gain the most credit for the project.
In Cuba, the general rule is to avoid being the last signature on a document- because that person may be held accountable for the project… they “made it happen.”
And, in Cuba today, a project with a company from outside of the country, and particularly from the United States, is most certain to receive political scrutiny- and political interference.
For these reasons, and others, DFI remains low and generally is sourced from companies in countries where the government of those countries provide guarantees.
Last December, representatives of the Group of Creditors of Cuba and of the Government of Cuba on an arrangement to clear US$2.6 billion of debt in arrears due to the Group of Creditors of Cuba over an 18year period.
This arrangement offers a framework for a solution to total stock of debt of US$11.1 billion, including late interest, as of 31 October 2015.
The repayment agreement included opportunities for debt to be converted to equity for new DFI projects.
The Group of Creditors of Cuba includes Australia, Austria, Belgium, Canada, Denmark, Finland, France, Italy, Japan, the Netherlands, Spain, Sweden, Switzerland and the United Kingdom.
Last month, the Prime Minister of Japan visited Cuba and agreed to forgive approximately US$1.17 billion in debt- or 75% of total current debt- on top of previous debt-reduction agreements that went mostly unfulfilled. Japan-based Mitsubishi Corporation and Marubeni Corporation have reopened their offices in Havana. Sumitomo Corporation has operated in Cuba since 1974.
The governments of France and Spain and China and United Kingdom have also continued to forgive debt owed by Cuba… The taxpayers in these countries generally end up paying for this generosity.
Important to appreciate the view of DFI from the perspective of Cuba, today’s Cuba…. DFI is not permitted as a means to change Cuba; it is permitted as a means to sustain Cuba, to preserve Cuba.
During the last twenty-five years, when the presence of DFI has fulfilled its need to provide foreign exchange, the government has throttled-back its impact.
Today, however, as Cuba can no longer depend upon the financial largess of Venezuela; and the governments of Russia, Iran, and China are incapable of replacing the billions of dollars in annual value that’s been provided by Venezuela since the signing of a discount oil agreement in 2000, DFI is a beast that must now be embraced, albeit reluctantly.
The delay for Cuba to maximize its potential is primarily due to two reasons-
Cuba is not importing at a level for a vibrant economy of 11.3 million citizens and
Cuba is not exporting at a level for a vibrant economy of 11.3 million citizens.
For each of these reasons, much, though not all, for the lack of vibrancy rests with commercial, economic and political decisions taken by the government of Cuba. United States laws, regulations and policies too have a negative effect upon DFI.
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Cuba has 2,200 miles of coastline. There are 70 ports, 31 of which have cargo operations. The ports are generally deep, protected harbors with narrow entrances and generous anchorage.
The port system can accommodate 150,000-ton oil tankers, accept modern roll-on, roll-off vessels, discharge all types of grain and fertilizers in bulk, handle 40-foot containers in gantry cranes… and dock up to six submarines.
The Port of Havana, which has three primary harbors, remains most active, but has an annual handling capacity of approximately 350,000 TEU’s (Twenty-Foot Equivalents). It’s heavily polluted; with water entering remaining for eight days. It has a depth of 12.8 meters (42 feet). Due to a tunnel under the entrance to the port, there are limited options for dredging.
Since 2013, an increasing number of vessels from the United States and other countries have been calling at the port in Mariel, near Havana. Mariel is being managed by Singapore-based PSA International. This 180 square mile facility with 2,300 feet of jetty and four cranes can accommodate 13,000 TEU NeoPanamax vessels. Total current annual capacity of Mariel is 800,000 TEU’s.
Brazil-based Odebrecht was the primary contractor for the US$957 million project. Approximately US$682 million in financing was provided for the first stage by the National Bank of Economic and Social Development (BNDES) of Brazil. For the second stage, BNDES will be providing approximately US$290 million in financing.
Two new rail-mounted gantry cranes from Shanghai, China, arrive this month for installation. Currently, the port has an average of one train per day.
In 2014, Mariel handled 160,000 twenty-foot equivalent TEU’s; and 330,000 TEU’s in 2015. The estimate for 2016 was 360,000 to 370,000 TEU’s.
But this year will likely be similar to 2015 due to an economic contraction- low commodity prices for exports (nickel plus cobalt, citrus, tobacco, sugar, seafood, coffee, etc.), declining discounted oil imports from Venezuela, and declining payments by countries for medical/educational services all resulting in a decrease in imports.
Infrastructure at Mariel remains a challenge. Lack of warehousing. Operational issues- warehouses are open less than sixteen hours per day- they need to be open twenty-four hours a day.
In 2019, the plan is to add 300 meters (984 feet) of quay (KEY) at Mariel. Long-term development includes an additional 1,400 meters (4,593 feet) of quay- for a total of 1.5 miles of quay and a total annual potential of 3 million TEU’s.
The government of Cuba views Mariel as a future “hub & spoke” for Caribbean Sea-area countries; but, this goal will remain a goal for many years.
Cuba views itself as a potential for using a low-cost workforce to add value to products transiting the Panama Cana. I am skeptical that Cuba will be a low-cost opportunity for companies due to the connectivity with the United States- and the desire to be rewarded at parity with their relatives, friends, colleagues, and competitors in the United States.
The Port at Mariel has many “coulds” …but….
There remain issues impacting Cuba, United States ports, United States exporters, and cargo shippers.
A primary issue is a provision within the 1992 Cuban Democracy Act. The “180-day rule” which prohibits vessels that call at a port in Cuba from calling at a port in the United States for 180 days, unless licensed by the United States Secretary of the Treasury.
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Creating a general license for the 180-day provision of the CDA will not, by itself, remedy the imperfections that exist by law, regulation and policy.
And while there would be benefit to Cuba, specifically, to Mariel, because more shippers would include Cuba in their schedules, there are potential consequences for United States ports and shippers from increased competition.
The current US-Cuba bilateral relationship, as evidenced by the 180-day provision, is unnatural and unsustainable and unwise for it maintains an abnormal competitive environment.
Pondering a fully-integrated Cuba is not mythology; it’s coming and United States ports and shipping companies should have a transition rather than a moment to prepare.
What Has To Happen & The Competition
For Mariel to become a fully-functional and profitable transshipment point, United States laws and regulations and policies will need to be changed. And, Cuba laws and regulations and policies will need to be changed.
Within five years after the removal of all legal, regulatory and policy impediments to United States-Cuba bilateral commercial activities, there are economic models suggesting 20 million tons of dry cargoes moving in both directions.
Currently, shipping company alliances impact decisions to include Cuba in routes- vessels owned by or operated by NYK Line, K Line, MOL, and South Korea-based companies value their operations in the United States more than operations in Cuba. If the vessels are insured by a United States-based company, those are additional considerations.
While Mariel becoming a widely-acceptable transshipment point might provide value for ports in the United States, such as Port Everglades, Florida, and Tampa, Florida, it could negatively impact Kinston, Jamaica; and place pressures upon the Freeport Container Port in the Bahamas and the port of Caucedo in the Dominican Republic- both of which are making substantial investments in their respective infrastructures to accommodate Neo-Panamax vessels.
Representatives at Mariel believe that if their facility has made dredging investments and will continue to make dredging investments, there would be less reason for ports in the United States to make those investments and, thus, the funds could be saved or invested elsewhere.
Those statements set-up the crucial discussion about the United States and Cuba- specifically about ports in the United States and ports in Cuba….
Is a change in United States laws, regulations and policies that would create competition from ports in Cuba going to be helpful to United States exporters and United States importers and United States ports or be harmful to each?
Presently, on the United States east coast, few ports can accommodate Neo-Panamax vessels; and debate continues relating to required investments and investments for servicing Post-Panamax vessels.
Ports with plans to accommodate larger vessels include: Jacksonville, Savannah, and New York (requiring the platform of Bayonne Bridge to be heightened).
United States ports will not relinquish commercial opportunities easily- and certainly not to benefit Cuba or any other country in the Caribbean Sea-area.
So how does it look since 17 December 2014 when Presidents Obama and Castro addressed their respective nations to discuss the commercial, economic and political re-engagement?
When President Obama addressed the nation in December 2014, he wore a dark suit, stood at a podium, and for fifteen minutes (using 2,283 words) shared with specificity what he wanted to do to, with, and for the citizens of Cuba.
When President Castro addressed his nation the same day, he wore a military uniform, sat at a desk, and spoke with vagueness for five minutes (using 682 words).
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During the last 646 days, there have been visits to Cuba by President Obama and four cabinet secretaries, more than one hundred and seventy representatives of the United States government; and more than ninety representatives of Cuba have visited the United States. Five governors and many Members of Congress have visited Cuba.
Other than permitting a substantial increase in the number of visitors to Cuba, and thus earning significant revenues, there has been no embrace (or authorization) for most of the commercially-focused initiatives offered through the United States Department of the Treasury and United States Department of Commerce.
Carnival is operating one cruise itinerary to multiple ports in Cuba.
Starwood Hotels is managing one property and will be managing two additional properties.
Airbnb is managing reservations for thousands of residences in Cuba.
Verizon, AT&T, and T-Mobile have roaming agreements in Cuba.
Eight airlines led by Alaska, American (which has more than 210 employees in Cuba), Delta, JetBlue, Southwest and United are or will be operating regularly-scheduled flights to cities in Cuba. Both American Airlines and JetBlue will have ticket offices in Havana. Important to note that the United States Department of Transportation (USDOT) has authorized approximately 1.2 million to 2 million passenger seats for the 110 daily US-Cuba routes; less than the 3.4 million requested by airlines. And, 3.4 million is the approximate total number of visitors to Cuba in 2015. Issues of capacity abound.
In August, Nespresso, of Switzerland, began importing to the United States “Cafecito de Cuba” capsules. A journey of 10,000 miles rather than hundreds of miles… Cuba was sending a message.
The re-establishment of commercial flights was a transformative moment. Passengers using the charter flights had to endure a journey to Cuba on a charter flight- perhaps an American Airlines aircraft paid for by a third party who then sold tickets in order to repay American Airlines; the aircraft would have an American Airline crew, but that is where the comfort ended.
Sometimes, tickets would be need to be paid for in cash; they often would not be refundable or changeable (because one charter operation would not necessarily honor travelers from another charter operation), the schedules would be inconvenient, the airfares would be high, the customer service would be terrible, and the benefits non-existent.
Today, a traveler may use frequent flyer miles for a ticket, may earn miles for the flight, may upgrade to first class, select seats in advance, will have access to airport lounges, will be able to use credit cards, make changes to reservations, obtain refunds, make a complaint and obtain a resolution, find lower ticket prices, and, most importantly, do it all using the Internet. Earning something from traveling to somewhere is an important component of today’s traveler profile.
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Where charter flights reinforced an aura of restriction, illegitimacy, forbidding, stress; the re-establishment of regularly-scheduled commercial airline service welcomes consistency, comfort, normalcy and accountability.
Accountability to the passenger in the form of improved passenger service at Cuba’s immigration, customs and airport facilities. United States airlines will be changing Cuba; Cuba will not be changing United States airlines.
There have been and will continue to be enormous infrastructure challenges within Cuba that will severely impact the country’s ability to absorb the new arrivals; changing this reality will take years, not months.
Starwood Hotels & Resorts Worldwide has an interesting journey to Cuba….
As a result of a series of mergers and acquisitions during the last fifty-seven years, a US$51,128,927.00 claim initially made by New York-based International Telephone & Telegraph Corporation (ITT) is now controlled by Stamford, Connecticut-based Starwood Hotels & Resorts Worldwide (2015 revenues exceeded US$5.7 billion), which was acquired in September by Bethesda, Maryland-based Marriott International (2015 revenues exceeded US$14 billion); both companies can use this value as a means to secure opportunities within Cuba.
In 2016, the Office of Foreign Assets Control (OFAC) of the United States Department of the Treasury granted a license(s) to Starwood Hotels & Resorts Worldwide to manage properties owned by Republic of Cuba government-operated entities located in Havana.
The properties are Gran Caribe-owned Hotel Inglaterra; Habaguanex-owned Hotel Santa Isabel and Hotel Quinta Avenida (re-branded as Four Points by Sheraton Havana on 27 June 2016). The Hotel Quinta Avenida is owned by Cuba government-operated Gaviota SA, under the auspice of Grupo de Administración Empresarial (GAESA), which is controlled by the Revolutionary Armed Forces of Cuba (FAR).
Now for a Six Degrees Of Separation Moment….
Here’s a little anecdote about the intersection of business and politics…The Speaker of the House of Representatives, Paul Ryan, would like to prevent United States companies from engaging with companies in Cuba that are controlled by the military.
Paul Ryan was the running mate of Mitt Romney, who is on the Board of Directors of Marriott International; both William and Richard Marriott are two of the Republican Party’s major financial supporters….
Marriott International which owns nineteen brands (including Chevy Chase, Maryland-based RitzCarlton) confirms its discussions with Cuba government-operated companies to identify propertymanagement opportunities within the Republic of Cuba.
On the other side of the pond… Denham, United Kingdom-based InterContinental Hotels Group PLC (2015 revenues exceeded US$1.8 billion) manages more than 5,028 hotels (742,000 rooms) in nearly 100 countries.
The company is the owner of a US$4,637,898.30 claim against the government of Cuba certified by the United States Foreign Claims Settlement Commission (USFCSC) under the auspice of the United States Department of Justice.
The claim is for compensation due to the loss of its management contract of then National Hotel of Cuba (Hotel Nacional de Cuba). The management contract commenced on 1 August 1955 and was to terminate on 21 November 1989. The lease was intervened by the government of Cuba on 10 June 1960.
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The Libertad Act of 1996 authorizes individuals and companies subject to United States jurisdiction/law to engage in direct negotiations with the government of Cuba to settle claims certified by the USFCSC.
In December 2015, the government of the United Kingdom participated in an agreement signed between members of the Paris Club of Creditor Nations and the government of Cuba that reduced debt from US$11.1 billion to US$2.6 billion which will be repaid over an eighteen-year period. With debt, in some instances, becoming equity for projects.
So, could the Hotel Nacional de Cuba return to the InterContinental portfolio or become a Ritz-Carlton? Perhaps.
Staying with hotels for a moment…
In 2015, Hotel Mercure Sevilla Habane (operated by Paris, France-based AccorHotels) located in Havana, was US$120.00 per night (with buffet breakfast)
At the beginning of 2016, the rate was US$180.00 per night (with buffet breakfast)
In the fall of 2016, the rate will be US$280.00 per night (with buffet breakfast)- representing an increase of 133% in twelve months.
Might there be a negative result in that the customer experience has not improved 50%, 56% or 133%? The concept of supply and demand is at play, but there should be a concern about reputational damage from a perception of price-gouging… and creating a negative social impact upon employees who are Republic of Cuba nationals.
Melia Cohiba and Melia Habana, hotels located in Havana that are managed by Palma de Mallorca, Spainbased Melia Hotels International, have also increased room rates substantially as have the hotels Saratoga (rack rate nearing US$500.00 per night), Parque Central, Nacional (reported up to US$500.00 per night), Capri, Inglaterra, Telegrafo, Plaza and Presidente. A room at the Habana Libre (the former Havana Hilton) was reported at US$450.00 per night; it should be US$99.00.
The increase in room rates at hotels located throughout Havana are primarily impacting visitors subject to United States law, as restrictions implemented by the Office of Foreign Assets Control (OFAC) of the United States Department of the Treasury upon individual and group itineraries necessitate Havana-based land and sea arrivals/departures amongst other activities.
Oh, please remember that there are twelve categories of authorized travel to Cuba; and “tourism” is not one of them….
Individuals subject to United States law have the highest net profit margin of any visitor to Cuba- the hotel rates we pay are higher, there is a surcharge to exchange United States Dollars to Convertible Pesos.
A substantial increase in hotel room rates without a corresponding increase in the quality of hotel services is unsustainable and inadvisable.
An opinion from a hotel industry executive: “… the incumbent hotels will take advantage of the short-term supply and demand imbalance while new hotels will obtain their fair-market share; the aging properties will be forced to upgrade (and improve guest experience) to survive or decrease their rates.”
The rate increases are unsustainable because with an increase in cruise ship activity, visitors will be able to have the services that they desire, are comfortable with, and equate with value, without feeling taken advantage of by either Cuba government-operated properties or properties managed by companies located outside of Cuba, in this instance, AccorHotels.
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Some owners of homes that are licensed to host guests, Casa Particulars, have increased pricing per night from 60% to 100% during the last twelve months. Guests are generally more forgiving to owners of private residences as there is a belief that supporting private enterprise is worth the sometimes difference between price and value.
With the implementation of regularly-scheduled commercial airline service between the United States and Cuba, there will also be opportunities for travelers to make day-trips and avoid hotels.
The rate increases are inadvisable because a substantial increase in gross revenues and lack of corresponding increase in the guest experience, or the salaries of Cuba nationals who work at the property, does nothing to encourage the government of Cuba to make changes to the operations of its hospitality sector; rather, the hospitality sector is at risk of becoming another revenue stream to redirect to other priorities of the economy with property maintenance neglected based upon a belief that regardless of the guest experience the demand for hotel rooms is sustainable so pricing can continue to increase irrespective of corresponding quality issues.
What Hasn’t Cuba Yet Done?
During the last twenty-two months, Cuba has received more than US$1 billion in additional gross revenues and additional savings as a direct result of the initiatives created by the Obama Administration.
There are other cruise companies that await authorization (Cuba has sacrificed more than US$50 million by only permitting one cruise line to operate; the decision was about control- which was more important than economic benefit)
Ferries await authorization
Imports of products from the United States continue to decrease
Authorization for United States companies (other than airlines) to open offices has yet to materialize
Proposals for a distribution center and tractor assembly facility have not been approved
United States companies continue to await permission to export products directly to independent businesses in Cuba.
Important to note that since the Obama Administration initiatives were announced, there were only two commercial projects that sought to have an operational presence in Cuba where the focus was not hospitality and not companies providing free services or donations. Neither have been approved.
There was one contract issued to a United States company to export one piece of agricultural equipment; it has yet to be delivered.
In the meantime, Cuba has awarded contracts for cellular communications to companies in China, airport renovations and management to companies in France and Turkey, and power generation contracts to companies in Spain and Russia among others. Significant that these contracts were awarded to companies where those companies have the financial backstop of their respective governments; or, the companies themselves are government-controlled.
Which leaves us where?
The initiatives proposed and implemented by President Obama (some of which were unsuccessfully attempted by predecessors) are designed to tear at the social fabric of Cuba; with a goal of recreating a
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middle class and a professional class abridged by the 1959 Revolution… a challenging landscape today defined by those who have (through earnings or remittances) and those who have not.
President Obama’s message… Create your worth as opposed to the government of Cuba determining your worth. Be what you can, what you want… not what you’re told to be.
So Where We Are Headed?
The Obama Administration has used visitors as an army, airlines as an air force, cruise ships as a navy and, to a lesser extent thus far, companies as marines to create a beachhead in Cuba that can’t be pulled or pushed off the island- either by political forces in the United States or in Cuba. The armada is digging in; not quite with a permanent foundation, but closing in….
In Internet terms, The Obama Administration is creating CubaLegacy 2.0- too big to roll back, too visible to hide, too collaborative, too many participants to remove, too bilateral to untangle… The perfect presidential legacy vehicle.
President Obama wants to bring change to Cuba far more and far faster than President Raul Castro wants change to arrive in Cuba. For both men, the issue is legacy.
President Castro wants to withstand everything that is coming his way, yet find a means to gain value from it and not be perceived as rejecting it by governments and companies that are needed to fund what the government of Cuba requires; a complex series of juggling maneuvers.
Running out of time.
President Barack Obama and President Rail Castro are running out of time to engage with each other.
The government of Cuba will never have a more energetic negotiating partner than they do in President Obama. Does not matter who wins the presidential election in November.
The government of Cuba will continue to maintain that it will never, on behalf of its citizens, surrender socialist principals, never negotiate socialist principals.
But, socialism costs money; a lot of money. The government of Cuba neither has the funds nor can obtain the funds to maintain the definition its current definition of socialism.
The definition of socialism will be defined by the amount of resources directed from the government of Cuba to socialist institutions, which are inefficient.
The government of Cuba will need to choose between a socialism where efficiencies and personal successes are capped to arbitrary levels; and where few have what many desire. Or, choose a type of socialism where rationing doesn’t exist, constraint of initiative is relaxed and youth is embraced rather than feared.
The government of Cuba is depending upon the increase in visitors from the United States resulting in additional net revenues which may then be directed towards maintaining socialism… but those revenues won’t be enough to maintain the status quo.
The Remaining 120 Days
The United States business community has increasing concerns that the Obama Administration does not appreciate the enormity of the impact of the dwindling days until Inauguration Day upon Cuba-focused initiatives.
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There will be no changes to United States statutes relating to Cuba during the remaining days of the Obama Administration; there were never going to be any changes to the Cuban Democracy Act (1992), Libertad Act (1996) or Trade Sanctions Reform and Export Enhancement Act (2000) given the political dynamic existing during the final two-years of this two-term president. There were unavailed opportunities when the President’s party controlled the United States Congress from 2009 to 2011.
Prudent to remember that the last change in United States law relating to Cuba will be sixteen years next month.
Legislative history has shown Cuba to be a low-value commodity; to be traded away in most instances because it lacks importance. The legislative calendar is littered with Members of Congress pronouncing they would not permit legislation unrelated to Cuba to proceed unless issues relating to Cuba were resolved. In the end, no Member of Congress was going to seek to hold appropriation or other legislation of national importance because of Cuba.
Ironically, given the initiatives by President Obama, since his inauguration exports of food products and agricultural commodities have decreased from US$528.4 million in 2009 to US$170.5 million in 2015; thus far in 2016, at US$120.0 million, they have decreased 2% for the first seven months of the year.
Healthcare product exports from the United States to Cuba in 2009 were US$85,000.00; and in 2015 were US$4.8 million. Thus far in 2016, exports were US$620,000.00.
Legislation currently considered by the United States Congress may well result in a “path forward” balance in order to obtain support from opponents- and that equilibrium could include unintended, but predictable consequences- a limitation upon United States companies as to which entities within Cuba are authorized for commercial engagement (i.e., military-affiliated).
Opponents to further changes in United States law have twenty-four years of precedent (1992, 1996, 2000); and they have prevented statutory changes in the last 638 days (since 17 December 2014) during which the President of the United States has sought to make Cuba a significant component of his two-term (eightyear) legacy.
For the Obama Administration, there may be non-Cuba considerations that will stifle additional regulatory changes- the importance of hearings for a nominee to the United States Supreme Court and approval of the Trans-Pacific Partnership (TPP).
For the Obama Administration, the use of regulatory authority was always the only efficient pathway for creating changes to the commercial, economic and political bilateral landscape with Cuba.
The Obama Administration focus must be upon departing at 12:00 pm on 20 January 2017 with only statutory impediments remaining throughout this bilateral landscape. In this way, all that can be done will have been done.
As a result, the government of Cuba will need to reconcile with the reality of opportunities available for engagement or continued posturing about what statutes remain in place as reason(s) for awaiting any further deepening of commercial relationships.
The Obama Administration does plan to issue changes to existing regulations and issue new regulations before 20 January 2016. That’s the good news.
All parties need time to adjust, adapt, accept and implement.
The Obama Administration does not seem to appreciate the importance for United States companies and the government of Cuba to have sufficient time for regulations to be vetted by legal counsel, dissected to determine if they are viable, and then if possible implemented.
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Regulators at departments and agencies throughout the United States government are generally paralyzed during the first months (or year or more) of any new Administration as they await placement of political appointees for policy guidance.
This freezing of decision-making would be heightened due to the political sensitivities of anything relating to Cuba in 2017 as the anticipation focuses upon 24 February 2018, the retirement of President Castro- and how to entice changes by him during his final months in office or await and provide incentives to his successor, First Vice President of the Council of State of Cuba, Miguel Diaz-Canel, who was born in 1960. That is what the United States Congress will be analyzing.
President Obama should go all in; the government of Cuba has not fully reciprocated, is not fully reciprocating and is unlikely to fully reciprocate to a depth which would balance the Obama Administration initiatives with the Castro Administration responses. The choice is awaiting what will not arrive or finishing the task as forcefully as possible.
The successor to President Obama will unlikely be focused upon regulatory changes certainly at the beginning, and likely through the beginning of their term in office. And, with President Castro retiring on 24 February 2018, there may well be an incentive to withhold regulatory changes until a successor is in place and governing.
So, President Obama should leave only for his successor the shepherding of a legislative agenda.
What Would Be Helpful
Authorize all commercial activity under a general license from the Office of Foreign Assets Control (OFAC) of the United States Department of the Treasury and Bureau of Industry and Security (BIS) of the United States Department of Commerce, including Direct Foreign Investment (DFI)
Issue a general license from the OFAC for all vessels pursuant to the 180-day provision of the Cuban Democracy Act (CDA) of 1992
Authorize all transactions with Cuba government-operated companies
Authorize all imports under general license
Authorize all exports under general license
Authorize Cuba government-operated financial institutions to have accounts with United Statesbased financial institutions for the purpose of correspondent activities
File motions to dismiss unwarranted civil judgements against Cuba
Announce specific progress for the settlement of the 5,913 claims certified with the Foreign Claims Settlement Commission (FCSC) within the United States Department of Justice
The mathematics are simple, the fewer days remaining in the Obama Administration, the fewer days for United States companies to make the greatest advantage of the initiatives implemented since 17 December 2014. It’s time to be practical rather than political.
It’s easy to believe that we have everything that Cuba needs and everything that Cuba wants and that Cuba has the money to pay for everything. It is not that simple. This is a journey, not an errand. Being inspired is the easy part; being rationally aspirational requires diligence and patience.