A Cuba Reality Check, From Golf Course to Myanmar Towers

For companies seeking Miami attorney Pedro
Freyre's advice on how to exploit President Barack Obama's
opening to Cuba, two stories may serve as cautionary tales.

One concerns an 18-hole golf course that took a Canadian
designer eight years to build near the island's famed Varadero
beaches. The second involves the rooftop cell-phone towers that
a Norwegian company has struggled to erect halfway around the
world, in Myanmar.

While the embargo is still in place, Obama's move Dec. 17
to re-establish diplomatic relations "changes the tone of the
conversation," says Freyre, chairman of the international
practice of Akerman LLP. While new opportunities such as in the
telecoms industry may be permitted, along with the sale of food
and medicine already allowed, he cautions that doing business in
Cuba is difficult. "In their heart of hearts, the rulers of the
country don't believe in capitalism," he says.

For all the attention on Cuba because of its role in the
Cold War, Fidel Castro's out-sized personality and the political
clout of Miami's exile community in U.S. politics, it remains a
small-market country of 11 million people. Comparisons with
other communist countries where the U.S. has normalized
relations -- China with its 1.4 billion population and Vietnam
with almost 90 million -- are tempting. Yet for the challenges
of moving into a transition economy, Myanmar may serve as a
better example.

The Southeast Asian nation began attracting foreign
investment in 2012, when the European Union and U.S. began
easing sanctions after political changes that ended about five
decades of direct military control.

Restrictions Remain

Restrictions remain, with U.S. individuals and companies
barred from investing or doing business with people with links
to the army's repression of the democracy movement. Among those
whose names have been removed from the list are President Thein Sein and parliamentary speaker Shwe Mann, former junta members
who have been at the forefront of the new government.

"This is a serious challenge for western investors because
not only American companies abide by those requirements,"
Romain Caillaud, managing director of Vriens Partners, a
political risk consulting firm, said by phone from Yangon,
Myanmar. "It means you need to do a lot of background checks to
be absolutely sure who your business partner is."

Lodged between China and India with a population of about
53 million people, Myanmar has an economy that is on track to
grow 7.8 percent in the year ending March 31, 2015, according to
the Asian Development Bank. The expansion is being propelled by
commodity exports, natural gas production and tourism, the ADB
said.

Investment Disappointing

Investment in Myanmar since the sanctions eased has been
disappointing, according to Erin Murphy, a former U.S. Central
Intelligence Agency analyst who is the founder of the Inle
Advisory Group, and James Clad, deputy assistant secretary of
defense for Asia Pacific Security Affairs during the George W.
Bush administration.

U.S. companies such as General Electric Co., Coca-Cola Co.,
and Procter Gamble Co. have invested more than $600 million
since 2012, "a number that is impressive but does not approach
anticipated levels," Murphy and Clad wrote in a National Bureau
of Asian Research note published Nov. 4.

"The major 'gold rush' of investment has not reached
expected levels; instead, the majority of U.S. corporations have
delayed entry into Myanmar due to the overwhelming and complex
investment challenges," Murphy and Clad wrote.

Telenor Troubles

Norway's Telenor ASA (TEL) has experienced some of those
challenges after winning an auction for one of two mobile
licenses last year and rolling out the first phase of service to
2 million customers in Myanmar.

To build towers and erect antennas, Telenor had to gain
access to thousands of small land plots and rooftops across the
country. That was complicated by land-rights issues, the lack of
a national-property database and inefficiency in processing
applications, the company's Myanmar Chief Executive Officer
Petter Furbergag said in an e-mail.

Any company considering investing in a newly opened economy
needs to weigh the availability of land, tax situation and rules
on foreign investment that may vary from sector to sector and
the choice of equity partner, said John Hancock, of John W.
Hancock Associates, a Yangon-based consultant.

Do Homework

"You have to do your homework -- the risk analysis -- and
decide what level of risk you are prepared to accept," he said.
Chief among those is legal uncertainty. Though Myanmar has
ratified the the Convention on the Regulation and Enforcement of
Foreign Arbitral Awards, known as the New York convention, the
local legislation that makes it binding hasn't been passed yet,
Hancock said.

"An international investor wants to know, if they have a
contractural dispute, whether they can enforce that in Myanmar's
courts," said Hancock. "Some companies come here and hope that
that legislation is eventually put into place. Others aren't
comfortable with that."

In its risk analysis, Telenor realized Myanmar lacked the
workforce needed to run a modern mobile telecoms operation,
Furbergag said. The education system hasn't been able to produce
enough competent employees, so Telenor had to increase training
and hire more international staff. Telenor Myanmar now has about
450 employees, of which 80 percent are local, he said.

"While there are myriad challenges to sort out every day,
it is very obvious that change is wanted and welcome among the
people of Myanmar," he said. "But success will require
patience, perseverance, executive presence and a long-term
perspective."

Eight Years

Such qualities were needed by Canadian golf-course designer
Les Furber while building Cuba's first 18-hole course since the
1959 revolution. Started in 1990, the $4 million project took
eight years to complete, said Furber, 68, co-founder of GDS Golf
Course Design Services Ltd. in Alberta, Canada.

A shortage of diesel fuel, tires and batteries, in part
because of the U.S. embargo, shut down equipment, and Cuba's
lack of credit made obtaining materials difficult, he said.
Other delays were caused by the country's bureaucracy and some
intrinsic challenges, he said. "They don't work very efficient
and they got old equipment," he said. "It was fun, but
frustrating sometimes," he said, and "not lucrative in any
sense."

Another 18-hole golf course is part of the Carbonera Club,
a 400-acre luxury resort that's been five years in planning by
U.K. company Esencia Experiences near Varadero and has yet to
start construction.

Complicated Country

"Cuba is complicated," said Tanja Buwalda, general
manager of Esencia Travel Division in Havana. Its aging
infrastructure, bureaucracy and the U.S. embargo "all combine
into a big soup of difficulty," she said. "For those who are
patient, you can realize some good opportunities."

Those prospects will be limited for American companies
until Congress lifts the embargo, said Andrew Zimbalist, an
economist at Smith College in Northampton, Massachusetts, who
has studied Cuba extensively. "As for trade, it is still a
small country with low per capita income so to compare it to
China or Vietnam isn't reasonable," he said.

Foreign investors also remain cautious given Cuba's
insistence on a majority stake in most ventures, and complicated
work arrangements, he said. Companies usually must contract with
state agencies to hire employees, who are paid in pesos with
bonuses sometimes allowed in dollars or goods.

Motivation Challenge

While Cuba has an educated workforce, training in business
concepts is still needed, said Zimbalist, who in the 1990s
jointly ran a United Nations program to teach microeconomics,
finance, marketing and personnel relations to about 150 Cuban
managers.

Creating incentives and a work culture "is a very real
problem," he said. Cubans "live in a society that provides
basic needs and little else. It's not possible to get ahead by
working harder so not it's not easy to motivate people."

Even if sanctions were lifted, it "doesn't mean there's a
capacity to do business in Cuba tomorrow," said Julia Sweig,
senior fellow and director for Latin America studies at the
Council on Foreign Relations in Washington. "There's not a lot
of bench strength in how to run a business," she said,
including how to write legal contracts and run accounts.

Enterprises Thwarted

There's a gap between a foreign investment law passed by
Cuba earlier this year that cuts taxes on profits and promises
legal protections to entice investors, and the reality of doing
business there, she said. "How hard it is to cut a deal and how
much waiting time there is, the lack of transparency -- all of
that is very, very real," she said. "Just as there are
examples of Canadians, and Spanish and others who do business
there, there are just as many examples of attempts to do
business and being thwarted by the bureaucracy."

Obama said Dec. 19 that the full opening of relations
between Cuba and the U.S. may take years, even as he offered
assurances that the new U.S. stance will bring change to the
island nation's closed society. While the changes won't open
Cuba to U.S. tourism, they will make it easier for American
businesses to export to Cuba's construction, telecommunications
and agricultural sectors. Commerce Secretary Penny Pritzker is
planning a trade mission to the island.

Another complicating element of doing business in Cuba is
an estimated $1.8 billion in U.S.-certified foreign claims on
everything from houses to sugar mills and hotels to homes. The
list totals 109 pages.

"There are all kinds of issues," Freyre said. Cuba has
not made any commitment to democracy and its opening of the
economy has been very controlled and rooted in pragmatism, not a
change in ideology, he said. "This is not Myanmar, Vietnam or
China -- it's a little bit of each."

To contact the reporters on this story:
Gail DeGeorge in Washington at
gdegeorge@bloomberg.net;
David Tweed in Hong Kong at
dtweed@bloomberg.net;
Christopher Donville in Vancouver at
cjdonville@bloomberg.net

To contact the editors responsible for this story:
Ken Fireman at
kfireman1@bloomberg.net
Christopher Anstey

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