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Opportunities in the Emerging Cuban Market

Presentation by Dr. Tim Ashby Cuba Emerging Markets Practice Global Services Group Public Law &Policy Strategies


Sonnenschein: Specialists in the Last Great Emerging Market Public Law & Policy Strategies Group

Sonnenschein’s Cuba Emerging Markets team advises enterprises of all sizes, domestic and international, with a wide scope of services, including:                      

Investment opportunities Property & site location research Gap & risk analyses Competitor analysis Design of strategic plans Regulatory requirements Product positioning Registration of intellectual property Marketing & distribution strategies Political Intelligence Obtaining licenses for U.S. exports


Cuba’s Potential for U.S. Business Public Law & Policy Strategies Group

Once the embargo is ended, Cuba’s business potential is unlimited. Projections are 50 flights per day from South Florida alone, practically all cruise ships based in the Eastern half of the US will visit the Island, as many as 7 million U.S. visitors per year, annual trade in the 5-6 billion dollar range, & a real estate development boom. This boom will be the result of the construction of new hotels; 250,000 new housing units to be used by Americans as second or retirement homes; office & commercial facilities, at least 1 million housing units to satisfy Cubans’ needs & the infrastructure to accommodate the residential and business expansion. Soon – with due respect for Cuba’s sovereignty - the U.S. will be able to be a partner in the island’s economic development.


Cuba Overview Public Law & Policy Strategies Group

An under-invested frontier market that offers the type of value-creation opportunities & returns realized by other highgrowth emerging markets such as Eastern Europe, Vietnam and China   Largest Caribbean island - 70,000 square miles – about the size of Pennsylvania   2,320 miles of coastline with more than 1,000 world-class and largely undeveloped beaches   Population 11.4M   97% literacy rate   Natural resources include cobalt, nickel, iron ore, chromium, copper, gold, salt, timber, silica, petroleum and arable land


Cuban Market Public Law & Policy Strategies Group

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2008 imports: $14.249B f.o.b.

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U.S. companies exported $528M worth of food and agricultural products to Cuba in 2009

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2.43 million visitors in 2009, 3.5% more than previous year, generating approximately $2.3B

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1,053,000 visitors January-April 2010, an increase of 101 percent over the number of tourists who came to Cuba during the same period in 2009

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Cuba will be the Number One Caribbean destination within 5 years

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Over 1/3 of world’s known nickel reserves, 800 million tons of proven nickel plus cobalt reserves, and another 2.2 billion tons of probable reserves

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Oil reserves estimated at 4.6-to-9.3 billion barrels; at least 10 trillion cubic feet of natural gas


Ernst & Young on Cuba Public Law & Policy Strategies Group

“Cuba has tremendous advantages long-term; not least an educated and literate population of 11 million people, firstworld health indicators, a vibrant cultural, sporting and historical heritage, and an advantageous geographical location where ultimately it could act as a bridge between the US and Central/Latin America. “In the future it is possible that in addition to tourism, Cuba could develop a significant regional role in telecommunications, banking and finance, and aviation, as well as significant interests in oil, mining, pharmaceuticals and light industry.”

Ernst & Young Business Guide to Cuba 2009


Cuba’s Foreign Investment Laws Public Law & Policy Strategies Group

•  In 1997, Cuba’s National Assembly enacted Law Number 77 - “The Foreign Investment Act.” •  To complement Law 77, the Ministry of Foreign Investment and Economic Collaboration (now the Ministry of Foreign Trade & Investment) was formed. •  Intended to be augmented with further legislation on banking, real estate and duty free zones. Law 77 not only guarantees transferability of profits to foreign countries, but also no expropriation without compensation, the right to transfer ownership to other foreign investors, & protection against claims of third parties under Cuban law. •  Three forms of foreign investment are allowed: (1) international association contracts, (2) joint ventures, & (3) totally foreign-owned companies. For JVs, no limitation of foreign ownership (may reach 100%). This can be accomplished by either establishing a subsidiary of a foreign company in Cuba or creating a separate Cuban company to operate the business.


Cuba’s Foreign Investment Laws Public Law & Policy Strategies Group

•  Law 77 requires a process of negotiation & approval before foreign investment is authorized. Investments of more than US$10 million, 100% foreign ownership, those involving a foreign country, those using natural resources, or that convey either government-owned property or projects involved in certain special sectors, such as: transportation & communication, require the approval of the Council of Ministers’ Executive Committee. All other investments are approved by a Commission created for that purpose by the Council of Ministers. •  Cuba has signed bilateral agreements (BITS) for the protection of foreign investment with more than 40 countries. These provide mutual equal treatment for foreign investment, facilitate repatriation of profits and establish procedures for arbitration of disputes. Cuba had signed 12 tax agreements for the principal purpose of avoiding double taxation.


Cuba’s Foreign Investment Laws Public Law & Policy Strategies Group

•  Law 77 authorizes the establishment of duty-free zones & industrial parks open to investment by foreigners. •  Law 165 of 1996 was enacted to implement free trade zones & industrial parks regulations under more flexible investment and operational rules. Three free trade zones and several industrial parks have been created since Law 165 went into effect. The success of these special areas, however, has been quite limited and will remain so until such time as trade with the US is reestablished because there isn’t much manufacturing, assembly or storage business under present circumstances. •  Law 77 provides that foreigners may acquire ownership & other property rights over Cuban real estate. The areas of investment are limited to: real estate development in the tourism sector, housing or offices of foreign companies established in Cuba and residences & other housing structures dedicated to private residences or private tourism activities for individuals who do not permanently reside on the Island.


Can Americans Invest in Cuba? Public Law & Policy Strategies Group

•  49/49 Rule: According to guidelines from the US Treasury Department’s Office of Foreign Assets Control (OFAC), persons subject to U.S. jurisdiction may invest as minority non-controlling shareholders in foreign companies doing business in Cuba, provided that such companies do more than 50% of their overall business outside of the Island. •  For example, the convenience store chain OXXO, which has four shops in Havana, is owned by Mexican corporate giant FEMSA. Bill Gates’ Cascade Investments LLC owns 3% of FEMSA.


Current U.S. Regulatory Landscape Public Law & Policy Strategies Group

  While the U.S. maintains an embargo against Cuba, exceptions exist   Cuban Assets Control Regulations (CACRs) prohibit persons subject to U.S. jurisdiction from engaging in transactions with Cuba or Cuban nationals   Certain travel & travel-related transactions are permitted by the CACRs & require licenses issued by the Treasury Department’s Office of Foreign Assets Control (OFAC)


Doing Business with Cuba - Now Public Law & Policy Strategies Group

Current provisions in federal law contain exceptions that allow specific export transactions, including travel to, from & within Cuba. How?

  Trade Sanctions Reform & Export Enhancement Act of 2000 (TSRA) - Agriculture Commodities   Cuba Democracy Act - Medical devices and medicine


The Trade Sanctions Reform & Export Enhancement Act – Agriculture Products Public Law & Policy Strategies Group

  Allows exports & re-exports of “agricultural” products to Cuba   Agricultural products include processed food, animal feed, fish, livestock, beer, wine & spirits, soft drinks, dairy products, coffee, sugar, tobacco products, wooden telephone poles, newsprint . . . even monkeys, whales, ornamental fish & caviar!   Building materials, including plywood, doors & frames, windows, parquet flooring, formwork for concrete construction, shingles, tools & handles, cellular panels & structural wood forms.   Vitamins, minerals & food additives, & dietary supplements   Seeds & reproductive materials such as fertilized eggs & embryos   Cotton, wool & other fibers


Examples of US Brands & Products Legally Exported to Cuba Today (on Cuban Grocery Shelves) Public Law & Policy Strategies Group


The Cuban Democracy Act: Licensed Export of Eligible Medicines and Medical Devices Public Law & Policy Strategies Group

  Medicines are drugs as per the Federal Food, Drug & Cosmetic Act   Medicines include prescription/OTC medicines for humans and animals   Medical devices include medical supplies, instruments, equipment, equipped ambulances, institutional washing machines capable of sterilizing hospital clothing & bedding, & vehicles with installed medical testing equipment   The definition of “medical devices” does not include general purpose furniture (e.g., tables, desks or lamps that may be used in hospital offices or reception areas)


New Regulations Liberalize Commercial Travel to Cuba Public Law & Policy Strategies Group

On September 3, 2009, OFAC announced final rule changes to its CACRs that impact commerce with Cuba:   Creates a new general license for travel-related transactions incident to agricultural and medical sales under TSRA   Authorizes, with certain conditions, travel-related transactions directly incident to commercial marketing, sales negotiation, accompanied delivery, or servicing in Cuba of agricultural commodities, medicine, or medical devices that appear consistent with Commerce Department export or reexport licensing policy   Travelers may rely on this general license if they are regularly employed by a producer or distributor of the agricultural or medical items or by a duly appointed representative, and if that traveler’s schedule of activities is consistent with a full work schedule. Under the new general license, written reports must be submitted to OFAC at least 14 days before departure for Cuba and within 14 days of return


Hotels & Resorts Public Law & Policy Strategies Group

  Cuba’s Tourism Ministry agrees with an estimate by the American Society of Travel Agents (ASTA) that 835,000 U.S. tourists a year, excluding cruise ships or Cuban-American family visitors, would come after an end to the travel ban.

  The U.S. International Trade Commission estimates the number of Americans visiting Cuba would more than triple from 171,000 in 2005 to between 554,000 and 1.1 million.   Cuba currently has around 48,000 hotel rooms and plans to build 30 new hotels with 10,000 rooms and 10 golf courses by 2013  Cuba’s current inventory of hotel rooms, 1,500 tour buses and 10,000 rental cars is barely adequate to meet high-season demand.   Cuba has 15 hotels under joint venture contracts with foreign companies, and 49 hotels managed by international partners. The foreign companies include Sol Melia, Accor, Barcelo, Iberostar and Sofitel.  Qatar Diar (a Qatar Investment Authority company) recently announced two new JVs in Cuba including a five-star resort.


Real Estate Public Law & Policy Strategies Group

Cuba’s pristine beaches & stunning tropical landscape have been largely undeveloped for over half a century.  

  The expected liberalization in U.S. policy towards the island and a new openness towards real estate development by the Cuban government are expected to attract large-scale investment in the following real estate projects:            

Hotels and Resorts Golf Courses Retirement Communities Condominiums Shopping Centers and Retail Marinas


Real Estate (cont’d) Public Law & Policy Strategies Group

The large-scale development of a new real estate market only 90 miles from the U.S. will provide opportunities in the following real estate-related sectors:   Capital Markets

  Construction   Finance   Hotels and Resorts   Leasing   Owner & Developer Services   Shopping Centers and Retail   Tax Advantaged Investing


Real Estate - Examples Public Law & Policy Strategies Group


Travel & Trade: Pending Legislation Public Law & Policy Strategies Group

•  HR 4645 – Peterson-Moran Bill -Travel Restriction Reform and Export Enhancement Act – would repeal US travel ban and liberalize trade finance •  Introduced Feb 23, 2010 with 49 co-sponsors. Now has 62 co-sponsors •  Passed by the Agricultural Committee on June 30; expected to go to full House before August recess •  Latest House vote count is 204 – 218 needed to pass. This number is considered conservative •  Increasing possibility that the legislation will pass in the House of Representatives


Travel & Trade: Pending Legislation Public Law & Policy Strategies Group

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Speaker of the House Nancy Pelosi has reportedly promised Rep. Peterson that she will bring bill to a full house vote if he can assure her of 218 votes

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If HR 4645 passes the House, it will probably be added to an Appropriations bill in the Senate

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62 Senators would reportedly support lifting the travel ban if vote were held today

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The Senate vote would probably take place in the six weeks between US mid-term elections on Nov. 2 and Christmas recess.

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According to Congressional sources, the White House has assured supporters of the bill that President Obama would sign it into law


Telecommunications Public Law & Policy Strategies Group

The new regulations authorize and clarify policy regarding transactions relating to telecommunications services between the U.S. and Cuba. For example, the new regulations: - provide a general license for transactions needed to establish telecommunications links between the U.S. and Cuba. (e.g., fiber optic cable, satellite links) - change U.S. policy to allow specific licenses for telecommunications links between third countries and Cuba to facilitate communication between the U.S. and Cuba - allow U.S. telecommunications providers to enter into and make payments for roaming agreements with telecommunications providers in Cuba - authorize travel to Cuba by telecommunications providers' personnel for multiple business purposes, including accompanying or servicing equipment exported to Cuba under appropriate Department of Commerce, Bureau of Industry and Security (BIS) authorization and to attend telecommunications-related professional meetings The export of actual telecommunications equipment to Cuba will still require a BIS export license, although BIS has relaxed its criteria for reviewing these license applications.


Telecommunications (Cont.) Public Law & Policy Strategies Group

  Cuba is seeking foreign direct investment in its information technology sector to provide employment, services to support its burgeoning tourism sector, and foreign exchange by commercializing new technology.   Cuba’s IT Development Strategy includes expansion of cellular telephone and Internet services and infrastructure modernization.   Despite a population of 11.4 million, Cuba ranks lowest in Latin America for mobile phone and internet penetration, and 5th from last in fixed-line teledensity.   A market of 1.4 million wireless subscribers is predicted by 2014.   Cuba requires state-of-the art telecommunications infrastructure to service its own population and its rapidly growing tourism sector.   Cuba insists on having access to a network of underwater cables that would provide faster connections. This underscores our view that Cuban authorities' principal objective is a "packaged deal" with an integrated telecom company for fiber optic cable connections for internet connectivity and international voice traffic.


Oil, Gas & Alternative Energy Public Law & Policy Strategies Group

  U.S. Geological Survey (USGS) assessed the undiscovered oil and gas reserves of the North Cuba Basin (2004)   USGS estimates: –  4.6 billion barrels of undiscovered oil –  9.8 trillion cubic feet of associated natural gas & 1.2 trillion cubic feet of non-associated gas   Cuba produced 1.7M tons of crude oil during the first half of 2009   Cuba is currently exploring its reserves with companies from Canada, Russia, China, Spain, Norway and Venezuela   Sugarcane ethanol is a promising sector for investment, as Cuba has the capacity to compete with Brazil as a major producer


U.S. Oil & Gas Investment: Pending Legislation Public Law & Policy Strategies Group

  A bill introduced July 24, 2009, S. 1517, contains a provision to allow American companies to participate in Cuba’s offshore oil exploration. The bill was co-sponsored by Senator Lisa Murkowski of Alaska & Senator Mary Landrieu of Louisiana.   The bill’s Section 6 also allows Americans to explore for oil, extract oil, and sell equipment for those activities in "any portion of any foreign exclusive economic zone that is contiguous to the exclusive economic zone of the United States." The bill’s final section provides for travel to Cuba by oil industry personnel.


Summary Public Law & Policy Strategies Group

Sonnenschein Can Help Clients with Immediate Cuban Market Access & Position Them for Future Business Opportunities   Engage in licensed trade under existing regulations   Identify present and future post-embargo business opportunities   Negotiate and enter into letters of intent with Cuban agencies and companies


Sonnenschein’s Global Services Public Law & Policy Strategies Group

Sonnenschein’s Global Services (GS), a cross-practice team, assists clients with cross-border and international issues related to business development, markets, trade, politics & regulations. Key Capabilities            

Business Development, Market Access & Trade Law Import & Export Regulations Foreign Market Analysis Foreign Markets Risk Mitigation Strategies Cross-Border Transactions Public Policy & Diplomacy

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