Has American Business Missed the Boat? Not Necessarily
from January/February 2003
Seven years ago, after Dutch attorney Sebastiaan A. C. Berger had worked as a lawyer in Washington, D.C., and New York City, his firm gave him the choice of opening a branch in London or Havana. He opted for the latter—a decision that took no more than three seconds, he says. Berger subsequently left that firm and hung out his own shingle in Havana, in partnership with Canadian lawyer Cameron Young. Today Berger Young & Associates represents a number of individuals and companies that invest in or start businesses in Cuba—or want to, like some of his U.S. clients. Among other things, the firm, the only one of its kind in Cuba, specializes in helping investors set up the joint ventures that most foreigners need to operate there. Berger is also a director of privately held Beta Gran Caribe Ltd., a euro fund with some $17 million in assets invested in Cuban real estate, tourism, and other sectors.
As the foreign lawyer with the most time in Cuba, Berger, 38, has a unique perspective on the intricacies of local law. He says that the country’s businesspeople are likely to welcome American investors if and when the embargo is lifted. But there will be traps to watch out for, as he explained in a conversation with Corporate Board Member’s Colin Leinster.
What changes have you witnessed during the last seven years?
A lot. Real progress can clearly be seen in tourism, notably in the construction of hotels in the Varadero and Cayo Coco beach-resort areas and in the construction of dozens of new apartment and office buildings, as well as other hotels, in Havana. The Canadians have built a new Havana airport. Old Havana is being restored. In addition, the standard and quality of services—public transportation, communications, and utilities—have improved, and the range of consumer products on store shelves has increased. Traffic, which almost didn’t exist in 1996, seems to nearly double every year.
Where does this progress leave U.S. companies?
Frustrated, I should think, particularly in sectors such as hospitality, telecommunications, and electricity. American companies are not allowed by their government to serve a natural market that is slowly but steadily being filled by competitors from Canada, the European Union, and elsewhere.
How many foreign companies are doing business in Cuba?
More than 400 joint ventures and other types of enterprises have gone into business here since Cuba adopted its new foreign investment law in 1995. In addition, there are more than 400 representative offices of foreign banks and companies in Cuba, and a similar number of foreign companies operate in the country’s free trade zones. Investments are being made in almost every sector of the Cuban economy, and the best opportunities are being cherry-picked by non-U.S. companies, some of which would never have even considered Cuba if the U.S. embargo weren’t keeping the Americans out.
Are any of them making money?
In general, banks, hotel owners and operators, and industries that cater to the hard-currency [primarily U.S.-dollar] market are making money. And you won’t hear exporters of Cuban products such as nickel, citrus, coffee, rum, and tobacco complaining. But is everybody making money? No.
Real estate looks tempting. Is that a good investment area?
Tourism-related real estate is a pretty promising investment area, in my view. Present occupancy levels, combined with tax and import-duty exemptions, make joint ventures to build and operate hotels and resorts economically viable, with an extra upside if and when . . .
Commercial real estate—investments in apartment and office buildings—is presently pretty much off-limits to foreigners. But it would certainly be worthwhile to keep your eye open for any changes in Cuba’s policy on this kind of investment.
How do foreigners start a business here? Suppose I wanted to build a hotel?
In general, there are two ways. The first is to introduce yourself to your Cuban counterparts. If you want to build a hotel, you go to hospitality companies like Cubanacán or Grupo Hotelero Gran Caribe. They present you with a portfolio of investment opportunities in the industry, whether it’s building something new or renovating and operating an older property. Another possibility is to come here, look around for yourself, and then go to meet with the Ministry of Tourism. They’ll tell you whether the beachside property you have your eye on, say, is available or not.
However, it is essential that you obtain good legal advice. Cuba has all kinds of laws and administrative procedures that may turn out to be time-consuming. Taking a wrong approach or starting from the point of view that everything is negotiable can easily set you back in your negotiations or result in a deal that is less beneficial than you expected.
What are the other hot industries?
As I said, people are making money in nickel, citrus, coffee, rum, and tobacco. Then there’s banking, electricity, telecommunications, soft drinks, beer, paper, light industry. Given the general lack of products and services, there are so many opportunities that you have the luxury of being able to select almost any industry. However, everything will depend on how you structure your business and what terms and conditions you are able to negotiate. That’s what will decide whether your investment is excellent, good, average, bad, or a disaster.
Are all foreigners obliged to form some kind of joint venture? Who’s the partner?
In practice, yes. And the Cuban joint-venture partner is usually a company with shareholders, rather than a state enterprise or the Cuban government itself. In contrast, direct investments in Cuba’s free trade zones and industrial parks—to open a factory, say—can be made without any partnership. A possible drawback is that the majority of the products made there must be for export.
What are the legal implications of putting a joint venture together?
At present, the average Cuban joint-venture company has the following characteristics: one, a life span of 25 to 50 years, which can be extended for an additional 25; two, a fifty-fifty Cuban/foreign investor division of ownership; three, the Cuban partner contributes property rights and the foreign partner contributes capital, know-how, and technology, and often procures third-party finance; four, a tax holiday is granted for however long it takes for the partners in the joint venture to recover their investment; and five, national or international dispute resolution in accordance with the rules of arbitration of the International Chamber of Commerce. The Cuban Chamber of Commerce is a member of the ICC, and Cuba is a party to the New York Convention on the execution and enforcement of agreements reached through international arbitration.
What should a U.S. businessman be doing now to start an enterprise in Cuba?
Obviously it’s still against U.S. laws to start a business here, although under certain circumstances American companies are allowed to invest in third-country companies that do business in Cuba. Our assistance to U.S. clients usually takes the form of preparing them for the moment when it will be possible for them to invest directly in Cuba. We think that’s a wise first step, particularly if the opening of Cuba will present either the opportunity of a new market for your company or direct competition with a market in which your company is presently involved. Take, for example, U.S. hotel companies. Before they can start operating in Cuba, thousands of U.S. tourists will already have been here and stayed in hotels run by Canadian, European, and Cuban operators. In addition, the opening of the Cuban market will likely have a negative impact on business in other Caribbean countries where the Americans may have hotels. A quick entry here will be essential once the embargo ends. Ignoring Cuba until the embargo ends is simply not the right way to go.
How do you find a good partner?
The Cuban Ministry of Foreign Investment and Economic Cooperation, its Center for the Promotion of Investments, and the Cuban consulting firm CONAS are all good places to start. There are several Cuban and foreign consulting firms that may also assist companies in their search to find a suitable partner. Or, if I may say so, our own firm.
In addition, there are certain publications, such as the weekly Opciones, that list investment opportunities. And potential foreign partners can simply visit companies and ministries and look for themselves.
How safe is your investment? How can you protect your money?
Cuba’s foreign investment law explicitly provides investment-protection provisions, including the free repatriation of profits. In addition, a large number of countries have signed bilateral investment-protection treaties. U.S. persons, more so than Europeans and Canadians, often express their concern regarding potential expropriation or intervention by Cuban authorities. We are not aware of any expropriation or intervention in any Cuban joint venture or international economic association established on or after the enactment of Cuba’s first foreign investment law in 1982. If desired, foreign investors can obtain appropriate international expropriation and political-risk insurance. Remember: The greatest risk is not taking one.
How can you be sure that your partner really owns what he says he owns—the real estate you plan to build a hotel on, for example?
We’re asked that a lot. Part of the answer is that all joint ventures need government approval, and that comes with a guarantee that the Cuban partner owns the property he’s putting into the deal. To be extra sure, many people conduct additional title searches in order to verify the history of various properties.
What about claims from expat Cubans, such as those living in Miami, that the property really belongs to them?
The ownership of property is a question clearly governed by Cuban law. Persons whose property was confiscated without due compensation may have a claim against the Cuban government. But if they win their case, they’ll get compensation, not the return of their property. Of course, investors who use or benefit from properties that belonged to Cuban-Americans and other U.S. citizens or entities are violating the Helms-Burton Act of 1996. They run the risk of being denied visas to the U.S. and possibly being sued by the former owners.
Some foreigners must have been taken and lost everything. What did they do wrong?
I don’t have any examples of foreign companies that have been taken and lost everything. However, there are companies that started their businesses not knowing that Cuba has a progressive tax system, and others that wrongly assumed that they were entering a market in which they would be the first and only ones. What did they do wrong? In general, I believe it is fair to say that they did not carry out thorough research or obtain sufficient advice, and were ignorant.
However, the Cuban authorities have, on occasion, moved the goalposts. For example, foreign investors that established joint ventures for the construction of apartment buildings were later surprised by a “temporary freeze” on the sale of the apartments to foreigners. Nevertheless, in that particular case the Cuban joint-venture partners purchased all the unsold apartments from the joint-venture companies at the same prices they were asking foreign buyers to pay.
After you’ve formed a joint venture, how long does it usually take to start a business?
Negotiating and incorporating a joint venture may take anywhere between one and three years, although the Cuban authorities are making efforts to speed up this process and lower bureaucratic barriers. Once you’ve done that, the joint venture starts as soon as the two parties contribute their capital and land, say, to the company. Establishing yourself in one of Cuba’s free trade zones can be a lot quicker, but that only applies if you are going to export at least 75% of your products.
How long before you see any money?
That depends on the type of business and the market.
Is it already too late for America to catch up with other countries that have formed business ventures in Cuba?
Time will tell. The U.S. and Cuba are each other’s natural markets, which at least should make it easier for the U.S. to catch up. Nevertheless, it is a fact that the rapidly increasing involvement of non-U.S. companies in certain sectors of the Cuban economy, like tourism, would make it more difficult for U.S. companies to enter that sector. America should be able to catch up, but the question is, When will it be allowed to do so, and at what price?
From your contacts with Cuban businesspeople, do you think they would welcome American business?
Given the history of U.S. involvement in Cuba, there would be strong resistance to Americans who want to come here and run a business that they alone control. But in my opinion, Cubans—who have an almost natural entrepreneurial instinct, by the way—would be happy to partner up with Americans and American companies that wish to set up joint ventures with Cubans as their partners.
