Canadians suddenly racing not to squander head start in Cuba

Canadians suddenly racing not to squander head start in Cuba
Peter Kuitenbrouwer | January 30, 2015 7:43 PM ET

Mark Entwistle could not resist a smile at lunch time Tuesday as he
gazed out over a packed room at Gowlings' head office in Toronto's First
Canadian Place office tower. He had not seen some of these lawyers and
business leaders in many years.

"In the mid 1990s, after the fall of the Soviet Union, Cuba was the new
frontier," Mr. Entwisle, Canada's ambassador to Cuba from 1993 to 1997,
recalls in a later interview. "We had almost an invasion of junior
Canadian mining companies. We were doing all kinds of deals. Then Cuba
stopped experimenting as much with foreign investment. Bre-X happened on
the mining side, and all the juniors left because the money dried up."
The U.S. Helms Burton Act of 1996, which penalized foreign (such as
Canadian) companies trading with Cuba, also scared companies off.

The world shifted again Dec. 17, when Raúl Castro, president of Cuba,
and Barack Obama, president of the United States, restored diplomatic
relations after 55 years. On Bay Street, Cuba is sexy again.

"You can tell Cuba's kind of moved its way up the food chain," Mr.
Entwistle joked to the assembled at the Gowlings lunch, "The new Cuba
equation: the Cuban economy, Canada's opportunity and America's new
place," organized by the Canadian Council for the Americas. A think tank
with a 40-year history, the council holds events to discuss politics and
business in the Western Hemisphere.

On the surface this interest in Cuba seems paradoxical. Canada never
broke diplomatic relations with Cuba after its revolution in 1959, and
Canadians have longstanding and deep connections with Cuba, as tourists
and as investors. Why show interest in Cuba now that the U.S. is thawing
relations?

To some extent, with the exception of Sherritt International Corp. —
which generates about 75% of its income from nickel it mines in Cuba —
Canada has squandered its opportunity to solidify its place as the
premier business partner with Cuba during the many years when U.S.
policy froze out American companies. But that is just half the story.

Cuba has been reluctant to let anyone invest very much in its economy;
foreign direct investment in Cuba is less than a tenth of 1% of gross
domestic product. That policy of going it alone has kept out many
Canadians, too. U.S. laws have also frightened off Canadians. Now, with
Cuba and the U.S. playing footsie, investors sense that Cuba may be
opening up more generally, offering renewed opportunities for Canadians,
who already know Cuba well, to make some money.

"The interest is rising again, getting back on the radar screens where
it had been off," Mr. Entwistle says, sipping an espresso macchiato in
Nespresso, a grand coffee shop near his office that feels more like a
Mercedes dealership. He arrived home from Havana on the very day of the
US-Cuba deal. "I got off the plane on Dec. 17, my BlackBerry was
exploding with stuff," he says.

Mr. Entwistle has teamed up with Belinda Stronach, the former MP and
Magna International Inc. executive, and Anthony Melman, a former
managing director at Onex Corp., among others, to form a boutique
merchant bank, Acasta Capital. One investment that interests the firm:
Cuba. In the past month Americans have started calling him, seeking his
advice on investing in Cuba, he says.

At the Cuba lunch, Mr. Entwistle warned Canadians not to be smug about
their connection to that country.

"There is this mythology that we have a special influence with the Cuban
government. That does not give Canada a free ride in Cuba. Cuba is
already a bustling, crowded place. Canadians will have to compete
head-on." Despite Canada's world-class expertise in telecom, he noted,
Orange SA, the French telecom company active across Europe and Africa,
recently signed a deal to help Cuba's telephone system.

"It's the kind of deal we could have done," he says. "We just didn't
bother to go there and do it."

And there was one consensus in the room: Cuba is poised for takeoff.

Juan Triana Cordoví, an economist at the University of Havana, spelled
out the potential of his country. Cuba's health care system is among the
best in the Americas; its infant mortality rate is below that of the
United States. Of its 10.5 million people, 11% have a university
education. Cuba has 14 universities. At the same time, he did not seem
overly optimistic about the possibility of more foreign investment.

Mr. Triana also noted the impressive bond between Cuba and Canada: 1.2
million Canadians visited Cuba in 2014, compared with just 90,000 Americans.

"That was one of the best things about Cuba," a lawyer at the lunch in
Toronto remarked ruefully. "No Americans."

Now the Yanks are coming. By one estimate, with the Obama administration
relaxing rules on travel, a half-million Americans will visit Cuba this
year. "Too many Americans in Cuba," one Cuban remarked at the lunch.

The Canadian Council for the Americas brought the same panel to a
Wednesday event at the Borden, Ladner Gervais law firm in Ottawa.
Diplomats from Switzerland, Indonesia, Korea and the Dominican Republic
attended.

Ken Frankel, who runs the Canadian Council for the Americas out of
Washington, D.C., says Canadians' current interest in Cuba is partly
motivated by fear. "Does this mean that U.S. business is going to flood
into Cuba and push out the Canadians?" he asks.

Americans are certainly keenly interested. Devry Boughner Vorwerk,
vice-president of legal affairs at Cargill, Inc., the agricultural
giant, heads the U.S. Agricultural Coalition for Cuba, and spoke to the
Toronto lunch from Washington via Skype.

Agriculture in Cuba has a lot of upside potential, thanks to rich soil
and an educated workforce, experts agree.

"You throw seeds in the ground and things grow," says Mr. Entwistle.
"You have a professional agronomist class." However, historically Cuba
has focused on growing sugar, and the country has little farm equipment.
"Conceivably Cuba could become a major exporter of fruits and vegetables
to the U.S.," he suggests. "There is a perfect storm of untapped
ingredients for agriculture." Brazil has already begun to invest in
agriculture in the island nation.

"I am working with people in agriculture," Mr. Entwistle said, declining
to name them. "I think it's a big strategic sector for Canadian interests."

Ricardo Alcolado Perez, who grew up in Cuba, runs his own law practice
in Toronto and helps Canadian companies invest in Cuba. But many
investors are gun shy. Historically, Cuba defaulted on some of its debts
to Canadians, he says. U.S. laws pose another obstacle. It may seem odd,
given the flood of Canadian tourists, that Canadians have not invested
in hotels in Cuba, as the Spanish have. "The Four Seasons are not going
to go to Cuba, over fear of losing business with the U.S. They also face
the risk of being incarcerated," he notes.

"I am working on a few projects," Mr. Alcolado Perez adds. "One is a
Canadian company who would like to raise funds in B.C. to build a hotel
in Cuba." He also has U.S. clients who do business in Cuba through
Canadian firms.

Information technology also offers opportunity, he adds.

"In the last 10 years Cuba has invested in training high-tech
specialists. There are a lot of young guys who are very skilled," says
Mr. Alcolado Perez. "Already companies in Canada outsource software
development to Cuba."

Tom Timmins, a partner at Gowlings, heads the firm's global renewable
energy law practise. Like many Caribbean countries, Cuba produces
electricity with generators powered by imported bunker oil, he says —
even though wind energy costs 6.7¢ per kilowatt-hour, compared with up
to 35¢ for diesel. Mr. Timmins is working with Carbon War Room, a
charity founded by Richard Branson of the Virgin Group, to help
Caribbean islands generate power from wind, solar and biomass.

"Cuba has a goal of 40% renewables and I think they will exceed that,"
he says. "Because of [Ontario's] feed-in tariff program, we've gotten
really good at renewable energy and integrating it into the grid. A lot
of the solar panels and wind turbines will be coming from China, but we
can supply Canadian project developers, Canadian equity and Canadian debt."

Cuba also has reserves in gold, silver, copper, other metals, as well as
oil and gas.

Not much will change overnight, though. Polls show Americans favour
lifting the U.S. embargo on trade with Cuba, but Mr. Obama, a Democrat,
will face challenges getting a bill through the Republican-controlled
Congress. And Cuba, concerned about social cohesion, will move
cautiously to expand its small private sector.

Even so, the stars are aligning for major change in Cuba, and Canada
will be there, says Mr. Entwistle.

"This not a hermit kingdom," he says. "It is not an isolated place, but
it's one of the few markets around with a sense of untapped potential.
There are a lot of ingredients for an economic takeoff in Cuba."

National Post

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