So You Want to Help Rebuild Cuba?

Construction and Procurement Law News, Q2 2016

Firm Alert

Author(s)

On December 17, 2014, President Barack Obama outlined a proposal to normalize U.S. – Cuba relations and depart from a U.S. foreign policy position that has persisted for the last half century. Since that time, the U.S. embassy reopened in Havana, travel restrictions have loosened, and certain U.S. financial institutions and credit card companies have started conducting business on the island. Such rapid changes have the potential to usher in new opportunities for the U.S. construction industry and have prompted some to develop “Cuba teams” to explore a potential market that is as appealing as it is uncertain. Intrigued? Here’s what you need to know.

Before proceeding, it must be noted that the U.S. trade embargo with Cuba remains in effect. Practically, this means that U.S. based and owned companies are generally prohibited from conducting business in Cuba and entering into any kind of contract with the Cuban government. Furthermore, with the exception of a few limited categories, the embargo bans the export of U.S. goods to the island. The status of the embargo made recent news in March when President Obama and Cuban President Raul Castro issued a joint statement calling for the embargo to be lifted. Despite this proclamation, the President lacks the authority to unilaterally take this action, as a 1996 act of Congress codified the embargo.

Most experts agree that the end of the embargo is inevitable, with significant change potentially occurring during the next presidential administration. Accordingly, U.S. construction companies interested in Cuba would be wise to use this time to study the current business environment and evaluate the merits of investing in Cuban ventures.

In 2014, Cuba passed Law No. 118, the Foreign Investment Act, which opened up the country’s economy to foreign investment, providing various tax incentives and benefits to would-be investors. This law has prompted foreign companies such as Unilever to return to Cuba with plans to construct plants within a special Cuban geographic zone that features a 0% profit tax during the first 10 years of operation. Moreover, earlier this year, U.S. company Cleber LLC received special approval from the Department of Commerce and the Treasury Department to construct a tractor factory within this Cuban zone. Should this factory be successfully constructed, it would be the first U.S. factory operating in Cuba in over 50 years.

As part of the Cuban government’s attempt to attract foreign business, the Cuban Ministry of Foreign Commerce and Investment recently began releasing an annual “Portfolio of Opportunities for Foreign Investment” detailing proposed projects awaiting funding. Amongst these projects, there are multiple that pertain to the construction industry. These projects span from hotel and golf course construction to manufacturing light panels and helping to modernize various plants and facilities. Each of these ventures is structured to comprise varying levels of partnership between foreign and Cuban entities.

In addition to the opportunities listed within the government portfolio, multiple areas of Cuba’s infrastructure are in need of modernization and improvement. Specifically, transportation infrastructure, wastewater management, and energy production are all aspects of the island’s infrastructure that are in need of an update to accommodate the large influx of individuals expected in the near future.

While this slate of opportunities may be enticing, be forewarned that the shadow of the Cuban government will loom large over any potential project. While Law No. 118 opens up the door for greater foreign involvement, it also creates potential pitfalls that U.S. businesses should be careful to navigate. First, if the government determines that a project has done damage to the environment, the entity responsible will be required to make payment to re-establish the previous environmental conditions. Second, a Cuban government agency is in charge of selecting the labor force, meaning that foreign entities are prohibited from hiring labor directly and face certain limitations to terminating agency-hired employees. Furthermore, the agency will demand a fee for this service and will pay laborers in the weaker Cuban peso (CUP) while charging foreign companies Cuba’s more valuable convertible currency (CUC). Finally, U.S. companies should be mindful of the Foreign Corrupt Practices Act (FCPA) in their dealings with the Cuban government. The FCPA makes it illegal to bribe state officials in order to procure business, and it applies to all U.S. persons and companies. Given Cuba’s reported history of corruption, U.S. businesses must be careful to strictly comply with the FCPA due to the level of involvement the Cuban government would have in any potential construction project.

The relationship between the U.S. and Cuba is rapidly evolving and there are many updates likely to occur in the months to come. And while there remains a level of uncertainly to forging a path onto the island, there also undoubtedly exists great potential for construction companies willing to be patient with the unique challenges that the Cuban market presents. Stay tuned…