Challenges and opportunities in Cuba’s hospitality sector

Resumption of diplomatic relations between the United States and Cuba may open opportunities for hospitality and tourism industry investors in the island, which is the largest in the Caribbean. Although the U.S. economic embargo continues (and can only be removed by an act of Congress), executive actions could ease some travel and trade restrictions.

Even though Cuba offers considerable potential for hospitality and tourism investors, economic, legal, and practical questions and barriers remain, starting with the central control maintained by the Cuban government.

Foreign hospitality and tourism companies seeking to do business in Cuba must navigate the requirements of the Cuban authorities, while operating in the shadow of the U.S. embargo.

The following four issues may hamper international investors:

- finance and banking availability is lacking

- the Cuban government must be a partner in every foreign enterprise

- labor availability and terms are controlled by the government

- the nation lacks credible dispute resolution entities (courts or arbitration).

Although Cuba remains a communist nation with central economic control, the Cuban government has gradually reduced
the restrictions on foreign direct investment over the past twenty-plus years, following the demise of its former trading partner, the U.S.S.R. Shortly after the Soviet Union disbanded in 1991, Cuba revised its constitution to recognize investors’ property rights.

Before entering into an investment in Cuba, investors must consider issues relat- ing to at least four key areas: finance, personnel, govern- ment partnership, and dispute resolution. These areas contain substantial risk for investors. In brief, progress in banking has been dilatory, and until secure international banking relations are established in Cuba, there will be uncertainty in ordinary financial transactions such as deposits and fund transfers.2

Additionally, a foreign business may neither bring its own personnel to Cuba nor hire employees directly, but must hire only through Cuban government employment offices.3 The Cuban government also requires a partnership interest with foreign entities, and we cannot yet identify a commercially reasonable mechanism for resolving business disputes.

The transition from comprehensive government control to an entrepreneurial model mirrors that of other countries that have followed a similar path, notably, China. Even before the diplomatic changes in the U.S. and Cuba, several authors have offered roadmaps to resume normalized relationships between the two nations, together with recommendations for “bridge building” specifically for the Cuban tourism industry.

Even without formal tourism connections for U.S. travel operators, Cuba is the third most popular destination in the Caribbean basin, follow- ing the Dominican Republic and Puerto Rico.

A significant benefit favoring development in Cuba is that U.S. businesses and professionals have been plan- ning for many years to reenter the Cuban market. It is no secret that Miami, Tampa, Atlanta, and New York are among the centers of activity planning for development in Cuba whenever the opportunity presents itself. Many persons of Cuban-American descent, for instance, have the resources and motivation to quickly set up offices in Cuba when the time is right

Another favorable factor is that the population of Cuba is highly literate and well educated. The recent history of Cuban citizens taking advantage of the limited opportunities for private enterprise—including small cafés, bed and breakfast inns, taxis, tour guides, and even prostitution—demonstrates the presence of enterprising Cuban nationals anxious to participate in hospitality and tourism businesses.

he bulk of Cuba’s 334 hotels (71%) are beach proper- ties, and most of the remainder (23%) are in cities. A small number (2%) are located in natural reserves. Two-thirds  of the 58,434 hotel rooms (as of 2012) are in the four- and five-star categories, but the nation also has 8,530 rooms in a substantial number of private accommodations called casas particulares, similar to bed and breakfast inns.

According to Tourism Minister Manuel Marrero, Cuba plans to increase its hotel capacity by creating more than 78,000 rooms by 2020. The northern cities of Camaguey and Ciego de Avila have the potential to build more than 30,000 rooms,20 and some 56 tourism projects, including golf condos and 21 new hotels, are available for foreign investment, according to the Cuban Foreign Trade Minister.

To attract more tourists, Cuba is trying to diversify its appeal, for example, by con- structing six golf courses to appeal to U.S. visitors, to attract high income visitors from such nations as Japan and China, and to encourage higher spending by regular visitors

The largest hotel chain in Cuba is Spain’s Melia Hotels International, which lists 28 Cuban properties on its website. The Cuban government or military owns most of these properties, and Melia operates them by manage- ment agreement, without an equity interest. However, a few of these hotels are joint ventures between Melia and the Cuban authorities. For their part, U.S.-based hotel companies cannot participate in such arrangements until the Congress acts to lift the trade embargo.

 most visitors to Cuba arrive by air, the bulk of them at two of the nation’s ten international airports, Havana and Varadero. About 45 charter flights currently operate weekly from the U.S. to Cuba, and we expect that number to increase dramatically with the reopening of relations.

More than a dozen “gateway” cities in the U.S. have been authorized to offer future direct charter air service to Cuba, including Atlanta, Baltimore, Chicago, Dallas-Fort Worth, Fort Lauderdale, New Orleans, Pittsburgh, and Tampa, 26 although at the moment flights are permitted only from Los Angeles, Miami, and New York. Fast ferry boats are also planned from Florida to Cuba. Additionally, Air China has recently announced plans for flights from Beijing to Havana.29 Although the

Air China routes may be planned as a means to transport cargo for sale in Cuba, this has the potential to tap into the vast Chinese tourist market.

Foreign individuals or companies must follow certain reg- ulations which give the Cuban government operational control of the business as a partner, similar to the business scheme in China.37 Cuba’s Foreign Investment Law No. 77 does not set limits on the contributions of foreign capital, but the current standard is that the Cuban side retains more than 50 percent of the capital.

Although nothing in Law No. 77 prohibits hospital- ity and tourism businesses from being a totally foreign capital (TFC) company, the practicality is that the Cuban authorities have approved only a handful of such entities, as we explain below. The approved businesses to date are either 50-50 joint ventures with a Cuban government entity or hotel management agreements, as in the case of most of the Melia hotels.

Cuba also lacks other essential business and private professional services, such as banking, finance, insurance, law, development, and management.

Although real estate cannot be transferred to a foreign party, a Cuban national may hold property for the benefit of a foreign investor, similar to many other countries which protect the sovereignty of their real estate. The government also allows contracts to be negotiated for a short period of time, for the fulfillment of specific goals. According to estimates, European Union interests operated 169 companies in Cuba in 2011, 89 of them in the tourism industry

Taxation of foreign countries is regulated under Law No. 73, which states that foreign companies with a permanent establishment in Cuba (in cluding branches and representative offices) are taxed on income attributable to that establishment, not their world- wide income. The current tax rate is 30 percent of net taxable income for joint ventures, and 35 percent for TFCs.

On a recent visit to Cuba, Arne Sorenson, President & CEO of Marriott International said ”we are ready to get started right now. While U.S. law still does not allow Marriott to do business in Cuba, we learned that the steps taken by President Obama to reengage with Cuba have launched a bit of a global race involving businesses from other countries to leave as little as possible for American business when the restrictions are lifted altogether.”

Sorenson added ”Nowhere is this clearer than in travel. Hotel companies from Latin America and Europe have been doing business in Cuba for decades. With travel to Cuba now surging, existing Cuban hotels are full and hotel companies from other countries are racing to tie up as many of the new hotels as they can before the likes of Marriott and our U.S. competitors show up.

American visits to Cuba are set to double this year, even before there is a lifting of the general travel ban. If Congress acts to lift the travel ban, the number of U.S. visitors is likely to grow to 5 million within just a few years. Make the trip if you get a chance. American citizens should be free to travel to Cuba, as they are to every other country in the world, and draw their own conclusions about this fascinating culture. Why prohibit people from getting to know each other? We are much more likely to get along if there is a vibrant relationship between our people.”

adapted from The Center for Hospitality ResearchCornell University / additional comments by CPP-LUXURY.COM