4 sectors in Cuba that could be profitable for investors

HAVANA, Sept. 4 The resumption of diplomatic relations with Cuba has pried open the door to business, and investing, opportunities previously closed to Americans. Although foreign businesses from Canada to Spain have been doing business on the island for some time, albeit warily—both because of the strictures imposed by the Cuban government and the potential for damage to relationships with the U.S.—American investors have been restricted from investing in foreign companies that derive the majority of their corporate revenues from Cuban activities and operations.

But no more. The potential is there for outside companies to see some impressive growth from Cuban business in the years to come—particularly since the Cuban government is actively seeking foreign investment to spur growth after having been shut off from much of the global economy for more than 50 years.

That doesn’t mean the business environment in Cuba will be lacking challenges. On the contrary, as of 2012, the Cuban government, according to Pew Research, “was … the source of more than three-quarters of Cuba’s economic activity,” both directly and through state-owned enterprises. In addition, Havana has very specific rules that foreign businesses must follow—or face the consequences. That said, here are four sectors in Cuba that could see the most growth—and offer the best payoff for interested investors.

1. Travel and tourism
One sector Cuba would like to encourage is travel. Foreigners visiting the island and spending money is something the government would very much like to encourage—and even if tourists don’t flock to its natural attractions, foreign investors will come to size up business opportunities.

And all those people will need amenities: places to stay, ways to get around, and—if they’re investors—ways to open and run businesses of all types. So look for increased flights—which will require more and better airports—as well as hotels, ground transportation and restaurants.

Indeed, many countries are already hoping to be a part of that expansion. In July, Spanish tourism minister Jose Manuel Soria said in reports after a trip to Cuba that his country is engaged in talks to nail down hotel and infrastructure deals there, and that Cuba is looking at a goal of more than $2 billion in foreign investment each year as it seeks to grow its economy.

Soria was quoted saying, “The Cuban government told me of the objective for 30,000 new tourist beds.” That’s a lot of visitors—and Spain is already on the spot. Iberia Airlines operates a Madrid-to-Havana route, and NH Hotel Group SA and RIU Hotels SA also have a presence in Cuba. According to the Spanish government, Spanish exports to Cuba totaled 75.7 million euros ($83 million) in May.

Oh, and Soria was not alone. He was accompanied by representatives from 75 Spanish companies. The Italian deputy minister for economic development, Carlo Calenda, also made the trip, along with representatives from 140 Italian companies. German Foreign Minister Frank-Walter Steinmeier had to cancel his trip because of concerns over the Greek crisis, but is rescheduling, along with German business representatives—and Britain, France and the Netherlands have already sent business delegations there. Looks as if tourism is already on the rise.

2. Infrastructure
If it’s hoping to attract tourists or would-be investors, Havana is also going to need more than a few upgrades to things that people in other countries take for granted: reliable power generation and delivery, as well as more and better roads and airports.

Cuba’s need to increase its power generation capacity is clear; its grid is outdated and inefficient, and it’s looking toward renewables to provide help. In fact, some estimates place potential growth for the renewable energy market in Cuba to total $6 billion in years to come.

Presently Cuba depends on fossil fuels—low-grade domestic crude and oil that it imports from its neighbor Venezuela. But it’s in a prime location to build a new power grid based on renewables: solar, wind, hydroelectric and biomass. It’s a question of who can get in on the ground floor to midwife the transformation of its power system.

Last year Havana signed an agreement with Moscow, based on fossil fuels, for the construction of four generators at its Mariel thermoelectric plant. But the island country is looking to cut its dependence on oil, and looking for a greener way to grow electric generation. It’s also reportedly in talks with China on renewables.

3. Imports
The list of products the U.S. allowed to be imported to Cuba is still pretty limited, and mostly focused on food. When the rules changed in January, they allowed—in addition to various food products, medicines and medical devices and certain agricultural products—“tools, equipment, supplies and instruments for use by private-sector entrepreneurs.”

But the country has no wholesale system to accommodate mass imports of goods, and that will handicap its rapidly growing private-sector entrepreneurs. It will have to come up to speed pretty quickly if it’s going to start bringing in products that will help them build their businesses, so that it’s not solely dependent on outside intervention.

Under Raul Castro, the country expanded its list of categories of private employment open to Cubans to the heady number of 201. Such classifications as carpenter, decorator, electrician and plumber are now available—as are taxi driver, barber and cellphone technician. Employment in any of these fields requires goods or supplies of one sort or another, so change is underway, and the importation of vital goods can’t be far behind.

That means the building of a whole structure for the importation and distribution of everything from raw materials to finished products, including spare parts and the tools to do the work.

4. Telecommunications
And you thought Comcast was bad. In Cuba, it can cost $2 an hour for access to the Internet—pretty pricey when state salaries tend to fall in the $20-a-month range. And that’s if you can get it—less than 4% of homes have it, only a few businesses have it, and the country’s mobile phone network can’t handle it.

Oh, and remember dial-up? That’s what most who want to go online have to do. Broadband is severely limited and there are just 35 Wi-Fi hotspots in the country. But Cuban officials are saying that by 2020, at least half of the population will have access to the Internet at home, and 60% will have mobile phone service.

To make such a quantum leap in service in such a short time, Havana will have to get busy. Look for an explosion in telecommunications as Havana works to make that happen. Etecsa, the country’s state-run telecommunications monopoly, is even testing 3G and 4G cellphone service with Internet capability (the country’s existing system is 2G.

While Cuba wants desperately to bring in foreign investment, it’s not quite ready to cede control over communications and information to outsiders. However, given that global businesses run online, that’s going to have to change. And it might change through China, which has similar concerns over the free flow of information to its people—but nonetheless has gone online in a big way. Reports of a leaked Cuban government document told of plans to allow Chinese companies Huawei Technologies and ZTE Corp. to build residential broadband.

http://www.thinkadvisor.com/2015/09/03/4-sectors-in-cuba-that-could-pay-off-for-investors?page=5