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Cuba Commits to Private Enterprise and Foreign Developers Want In

As Raúl Castro vows to create new openings for private enterprise, foreign developers are eager for a piece of the action.

For a country that claims to want to open its economy after five decades of communism, Cuba has chosen an unlikely poster child for its efforts to attract foreign tourists: Che Guevara. A photograph of the revolutionary leader dressed in combat fatigues and swinging a golf club adorns walls at the Ministry of Tourism and at the Havana offices of some of the foreign companies that are teaming up with the government to develop golf courses, luxury hotels, vacation villas and condominiums. Never mind that Che posed for that photo op to thumb his nose at Yankee capitalists during the 1962 Cuban Missile Crisis. The picture’s message today is that there is nothing counterrevolutionary about golf — or about seeking to lure the game’s well-heeled practitioners from abroad.

“The Cubans have been astute in gauging the competitive climate in tourism and coming up with new product offerings to meet foreign consumer demand,” says Robin Conners, president and CEO of Vancouver-based Leisure Canada, a leader among private developers planning high-end resorts in partnership with the Cuban government.

Foreign companies like Leisure Canada have dreamed about the potential of the Cuban market for years. Now they hope the political conditions are finally right for turning their plans into reality.

In August, President Raúl Castro announced that the government would lay off half a million workers — roughly 10 percent of the labor force — by March and open up new sectors of the economy to private enterprise. Also that month, the government declared it would allow foreigners to take out 99-year leases on state property; industry executives regard this measure as crucial for developing high-end tourist resorts in the country.

The layoff decision, if implemented, would signal a historic policy shift by this Caribbean nation. Since Castro’s ailing brother, Fidel, led a Communist revolution here in 1959, the government has maintained an iron grip on the economy and remains virtually the sole employer in the country. Now, decades after China and Russia abandoned central planning for their own forms of capitalism, Havana appears to have decided that it too needs to unleash market forces to revive the island’s stagnant economy.

“We have to erase forever the notion that Cuba is the only country in the world where one can live without working,” Raúl Castro, 79, said in announcing the layoff plans in a speech to the National Assembly.

Is Cuba serious about opening its economy or just making a feint toward capitalism? Observers have their doubts. Consider the regime’s heavy bureaucratic hand. Supposedly to free up the economy, the government has designated 178 specific businesses — including family-run boardinghouses, small restaurants, tourist boat rentals, taxi owners and even party clowns — that will be eligible to operate privately under state licenses beginning next year. “This enumeration of private work seems more in tune with a feudal village than a 21st-century country,” wrote Yoani Sánchez, Cuba’s most famous dissident blogger, in September. Private businesses, ranging from small farms to market stalls to barbershops and beauty salons, currently employ just 144,000 workers, and they have no access to credit from the state-owned banking system or to microfinance. It’s hard to see how this tiny private sector can absorb the looming army of unemployed, few if any of whom have entrepreneurial experience. “It is challenging to suggest that the least productive 10 percent of the labor force will become a juggernaut of commercial enterprise,” says John Kavulich II, a senior adviser to the U.S.-Cuba Trade and Economic Council, a New York–based organization that advises U.S. businesses on Cuban affairs.

In short, the new era does not yet appear to be a Cuban version of 1978, the year Deng Xiaoping unleashed market forces in China by allowing peasants to cultivate private plots. Yet Castro’s gesture marks a welcome change after five decades of suffocating state control. “This is no opening of the floodgates, but it may mean the beginning of a new socialist era,” says Ted Henken, an expert on the Cuban private sector who teaches at New York’s Baruch College.

If private sector employment is to take off, tourism is bound to play a leading role. The island — the largest in the region — boasts white-sand beaches and expanses of unspoiled nature. Havana itself is a virtual museum of architecture. The old town center, Habana Vieja, features scores of Spanish colonial buildings dating to the 16th century, while Centro, the downtown district, has hundreds of neoclassical, art nouveau and art deco structures.

Along with oil exploration and nickel mining, tourism is one of the few areas of the economy open to foreign investment, and it has grown rapidly over the past two decades to overtake sugar as Cuba’s largest source of hard-currency revenues. The sector pulled in $2.1 billion in 2009, compared with $2.88 billion for all the country’s exports of goods and services. “I believe the economic reforms are cause for optimism,” says Andrew Macdonald, chief executive of Esencia Hotels & Resorts, a privately held company based in London that is seeking government approval to develop a $200 million luxury resort east of Havana complete with a golf course, 800 luxury apartments and 100 villas. “Anything that increases the private sector and reduces the role of the state in the economy is a favorable development.”

Cuba began developing its tourism industry nearly two decades ago. The country was hit hard by the 1991 collapse of the Soviet Union, which had propped up the Castro regime with subsidies. Cuba’s economic output contracted by a third in the three years after 1991. In a bid to cover the shortfall, the government ordered ministries to devise commercial strategies to help fund their budgets. The Ministry of Education sent teachers to Nicaragua and Venezuela, and the Ministry of Health dispatched an army of doctors overseas to earn hard currency. The armed forces, then under the command of Raúl Castro, plunged into tourism.

In 1991 the new Russian government abandoned plans to build a naval base on the coast east of Havana, forfeiting tens of millions of dollars that the old Soviet regime had placed in escrow for the project. Castro’s Ministry of the Revolutionary Armed Forces used those funds to expand its fledgling tourism arm, Gaviota, into luxury hotels, travel agencies, car rentals, marinas and restaurants. The company currently operates 38 hotels.

Gaviota’s success has spawned several imitators. The Ministry of Tourism is considering proposals from several joint ventures to develop a dozen golf resorts — this in a country with only one 18-hole course, at Varadero, a beach resort town 86 miles east of Havana. Foreign investors know the wait can be painfully long. “In normal countries joint ventures are quickly created and assume high risks for potentially high profits,” says a Cuban working with a foreign developer. “In Cuba decisions are so centralized and slow that it can take years to form a joint state-private venture. On the other hand, once it is created, the business risks are very low and high profits are almost guaranteed.”

Leisure Canada hopes to prove that hypothesis correct. The small company (market cap $31 million) focuses exclusively on the Cuban market and has been lobbying the government for more than a decade for the right to develop tourism projects. The company has a ready market: Canadians are avid snowbirds, accounting for 933,000 of the 2.4 million foreign tourists who visited Cuba last year. The U.K. ranked a distant second with 171,800 visitors. The half-century-old U.S. trade embargo continues to keep American companies and tourists out of Cuba, although an estimated 200,000 Cuban-Americans (who are not counted as tourists by either Havana or Washington) visit relatives in Cuba each year.

Last year, Leisure Canada finally won approval to set up a 50-50 joint venture with Grupo Hotelero Gran Caribe, a fully owned entity of the Ministry of Tourism. The company plans to break ground in early 2011 on a $200 million, 716-room hotel in Miramar, a Havana district popular with wealthy Cubans and Americans before the revolution that today houses a number of government agencies and foreign multinationals. “Now they are reacting pretty quickly to feedback from us,” CEO Conners says of the authorities.

In August, for example, the government announced it would allow foreigners to take out 99-year leases on state property, up from a previous maximum of 50 years. The move followed lobbying by Leisure Canada and Esencia, which regard long-term leases as essential to developing resort properties for upscale foreign tourists. “We explained to our Cuban partners just how important a 99-year lease is for this sort of client and to obtain better financing terms for the project,” says Conners. “Banks view it as virtually full ownership.”

The new long-term leases are crucial for Leisure Canada’s other two projects, which are pending approval. The company wants to develop a $130 million luxury resort with 425 hotel suites, condo apartments and villas at Cayo Largo, an islet 50 miles south of Cuba’s main island that has an air force base with a runway large enough for transatlantic aircraft. Even more ambitious, Leisure Canada hopes to build a $900 million resort with a golf course, marina, hotels, condos and villas at Jibacoa, some 40 miles east of Havana.

Both of those projects could take years to get started. The site currently houses a state-run campground and cabins for the Cuban proletariat. Conners is optimistic that economic necessity will ultimately prevail. “Cuba has a large pool of workers available for the hotel construction and service industry,” he says. Groups of people hanging around the Jibacoa village square attest to that fact. Nearby, a bare-chested watchman stands guard at the entrance to the planned development site. After letting a company executive enter the area, he pleads, “Hurry up with the project — and sign me up for the first job.”

At the other end of the tourist industry spectrum, family-run bed-and-breakfasts and restaurants are also expected to expand in number as a result of the economic reforms, but that will require new sources of financing. Thus far the state banks that monopolize credit do not lend to the private sector. The most obvious source of foreign capital is the Cuban-American community. “But will the Cuban government allow somebody in Miami to send a relative in Havana $50,000 to start a business?” asks U.S.-Cuba Trade and Economic Council adviser Kavulich. “And will the U.S. government allow it?”

To survive and succeed as a private innkeeper in socialist Cuba demands the sort of entrepreneurial spirit, ingenuity and persistence that Carlos Repilado has displayed over a quarter century. Repilado rents out three rooms to foreign tourists for about $30 a night in a bed-and-breakfast called Carlos&Nelson that he has created in his second- and third-floor apartment in a 1920s Havana townhouse.

Repilado, a broad-shouldered 72-year-old who looks two decades younger, began his adult life as a computer programmer for IBM Corp. in the mid-1950s. When the Castros and Che entered Havana triumphantly in 1959, Repilado was among the revolutionaries’ excited sympathizers. IBM pulled out of Cuba in the early 1960s, leaving him without a job, but Repilado took advantage of the new regime’s large cultural affairs budget and found work in the theater, eventually gaining a reputation as a lighting designer. He has worked in Havana and abroad on Cuban theatrical and musical productions, from highbrow European plays to the high-kicking Tropicana Cabaret. But even with his renown, Repilado earns barely double the average monthly wage of $20 in his profession; the B&B provides the bulk of his income.

Becoming a jack-of-all-trades during a half century of theater assignments has made him an expert at the home repairs necessary to running a thriving guesthouse. Finding specialized labor and ready-made products is nearly impossible in Cuba. “Here you have to learn to do many things on your own,” says Repilado as he goes about reupholstering an ancient sofa on a hot, humid afternoon. Later in the week he and a friend will stanch a leak in the 20-foot-high ceilings and repair the wooden window shutters that have been lashed by tropical storms.

Repilado became an innkeeper through luck, skillful bargaining and a Rolodex of foreign contacts. With aging parents and aunts to care for, he traded his own small apartment and theirs for the large duplex apartment, which had been occupied by a friend whose growing family required more than one residence. This is the usual horse-trading that goes on in Cuba, where there is no legal right to sell one’s dwelling and where there has been almost no urban residential construction for 50 years. Repilado’s relatives moved in with a bounty of heirlooms that later turned his B&B into a comfortable living museum of armoires and tables with matching carved wood chairs, European paintings and sepia photographs, porcelain statuettes and alabaster chandeliers.

After his parents and aunts died, Repilado began to offer free lodging to foreign theater colleagues. When a 1985 government decree authorized a limited number of B&Bs in private homes, he opened his residence to paying guests recruited through the grapevine of his acquaintances abroad. Now there are 138 B&Bs — known as casas particulares — in Havana and more than 200 nationwide, according to the Casa Particular Association. But few have lasted as long as Repilado’s. In a country where hardly any innkeepers speak foreign languages, his serviceable English has allowed him to expand his guest list to Canadian, British and even U.S. travelers.

Only a robust occupancy rate enables Repilado to survive the onerous taxes and fees that scuttle dozens of casas particulares every year. Like other guesthouse keepers, he hopes the government’s reforms will include lower fees and taxes. “But until now we have heard nothing,” he says. He must pay the government about $300 a month in guesthouse fees regardless of how many clients arrive. And taxes rise steeply depending on his occupancy rate. Other casas particulares are known to underreport income or secretly rent unauthorized rooms. “But I’m not going to do anything that is against the law — it’s just not worth it,” says Repilado.

Determination and serendipity in the face of a hostile state bureaucracy have also been keys to success for restaurateur Omar González Rodríguez. Lean, angular and white-haired, the 64-year-old González bears an uncanny resemblance to the late Gregory Peck in the lead role of Old Gringo, which is why he named his Havana restaurant after the 1989 film based on the Carlos Fuentes novel. “We met when Mr. Peck came to Cuba for a film festival, and he did say we looked like each other, except he was a head taller,” recalls González.

González opened Gringo Viejo 15 years ago in a basement in Havana’s Vedado neighborhood, right after a 1995 decree allowing entrepreneurs to go into the restaurant business. These private restaurants, known as paladares (from the Spanish word for “palate”), were permitted only 12 seats each and had to be located in the owner’s home and staffed only with family members. They were prohibited from serving lobster and beef, which were available only in state restaurants catering to foreigners. Taxes were steep and have continued upward, ensuring that the government takes well over half of reported profits. Little wonder that after reaching a peak of more than 200 paladares a decade ago, the number has dropped to fewer than 100 today.

González has made the most of his cramped, windowless dining space. The room is unexpectedly splendid, lined with photographs of prominent diners and a poster of Peck in Old Gringo. There are exposed racks of imported wines against the walls. A flat-panel television above the bar plays a video of Aretha Franklin belting out “Respect.” The menu offers dozens of main courses, mostly pork and chicken dishes. All the clients are foreigners, including a Chinese family, an Italian couple and two German friends. At the equivalent of $15 to $30 a meal, Gringo Viejo is far beyond the reach of ordinary Cubans.

González was a graphic designer by training and made a living by producing handmade sandals and wallets as well as metal sculptures, one of which hangs in his paladar. The dining area used to be his workshop, in the basement of his home. “At night friends would come by because they knew there was always a bottle of rum,” says González.

When the decree permitting private restaurants was announced, González opened his paladar with encouragement from his friends. He hired his son as bartender, his daughter as chief waitress and other relatives as cooks and assistant servers. González himself enrolled in cooking and wine-tasting classes. His idea was to infuse traditional Cuban dishes with European and Asian ingredients. Today one of Gringo Viejo’s most popular entrées is a typically Cuban pork cutlet topped with fried quail eggs and a soy-based sauce, with flash-fried bok choy and bean sprouts on the side. “I’m always experimenting with recipes, and then I turn them over to the cooks,” says González.

A government decree issued in October allows paladares to expand to 20 seats, hire employees who aren’t related to the owner and, finally, serve lobster and beef. But the measures don’t evoke much enthusiasm among private sector advocates. “They are just enough to survive,” says Baruch College’s Henken. “Obviously, the government doesn’t want paladares to become full-scale restaurants and compete against the state.”

Becoming too well known and successful can incite a government backlash. Only last year the authorities shut down one of the top paladares, El Hurón Azul, because the owner had purchased forbidden luxury imports, including a refrigerator and a stove. González is savvy enough to navigate these political shoals. But he does complain that it is hard to compete with government-owned restaurants that have no capacity restrictions and lower costs.

He is optimistic, however, that the government will expand its tepid reforms. “Joblessness will push the growth of paladares,” he predicts. His son, the bartender, is already planning to start his own tapas bar. For now, González would be content if he was permitted to expand his paladar to the cramped terrace, located between the street and the basement entrance, to accommodate a barbecue grill and a smoking area. “After a meal, people should be allowed to enjoy a good Cuban cigar,” he says.

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