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.
...
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.
From:
Institutional Investor
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