The Telecommunications Sector in Cuba

Table of Contents

CUBA 2.0. OFFER ...... 2

CUBA 2.0. DEMAND ...... 4

CONCLUSIONS ...... 8

Armando Camacho Costales, National Supervisor National Office of Tax Administration Ministry of Finance and Prices, Cuba

Computerization is a critical roadmap in the current Cuban transition. The population's access to the Internet began late, in 2014. It was not until December 2018 that mobile data access services were available. Pilot tests with 4G broadband technology begin in early 2019 on the northern coast, from Varadero to Mariel.

Despite the late access to these technologies, the first profound, slow and silent changes related to the use of information and communication technologies (ICT) in Cuba are already being seen. The authorities' proposal to computerize the society is limited not only by this delay, but also by other macro and microeconomic reforms, postponed for more than a decade by the volatility of relations between Cuba and the United States and by international geopolitics.

However, the current reforms will not only modify real costs, prices, salaries and pensions - Cuba belongs to the nations with the oldest population in the Western Hemisphere - it will define new macroeconomic and microeconomic contexts, which in turn will determine novel relationships between supply and demand that are characteristic of a centrally planned society in transition, but subject to the influence of one of its strategic goals: computerization, defined

1 in a guiding document: "Comprehensive Policy for the Improvement of the Computerization of the Society in Cuba”.1

The ICT sector, due to its own characteristics of ubiquitous and integrating technologies and of both generic and massive use, has undoubted impacts on supply and demand: from production processes and the commercialization of tangible products and services and, therefore, measurable from the accounting point of view of the neoclassical economy, to their use in intangible processes, which is very difficult to quantify with current statistical methods. The guiding document recognizes this when it establishes the need to "implement the National Computerization Program as part of the National Economic and Social Development Plan until 2030 [...] define the system of indicators that will allow its impact to be evaluated".

Defining this system of indicators, evaluating its performance, has been done through a set of standards. Decree Law No. 370 establishes a general and comprehensive programmatic framework for achieving this objective. In Chapter II, “Measuring the Computerization Process in Cuban Society”, establishes the necessary competencies and coordination between the governing bodies and the companies in conjunction with the National Statistics and Information Office (ONEI) in order to modernize the statistical indicators of the telecommunications and information technology sector.

Implementing this new system of indicators will make it possible to quantify and evaluate them in accordance with the operating conditions of the telecommunications sector. This is undoubtedly a challenge in the current Cuban context.

Cuba 2.0. Offer

A starting point would be to design it to quantify supply and demand. Current indicators do not measure with certainty the contribution of this dynamic market relationship in national accounts.

There is a small but enterprising technology sector of small or medium-sized private or family enterprises designed under the simplistic legal denomination of "self-employment", which operates outside the official statistics of the telecommunications sector. The new standards that will regulate the enterprise system should recognize and facilitate that the emerging technology sector gains recognition that allows it to operate at the level of private enterprise, with global access to markets, financing possibilities, and access to the best practices and technologies available at the global level.

2 Some of the most successful business models are those that operate globally. This is the case of e-commerce integration with one of the emerging sectors of the Cuban economy: the rental of spaces and/or rooms in the global tourism market and on the international Airbnb platform. In a report published by the platform, the company details its successes in Cuba. For a little more than two years, 560,000 U.S. visitors arrived on the island via this digital platform, an average of 70,000 per month.

Twelve percent of Americans who visited Cuba used this channel. At the publication date of the report, Cuba ranked ninth in demand, above traditional tourist markets such as Australia or Thailand. As for the nationals who provide these services, the text indicates that the average age of the owners of the lodgings was 43 years old, and 58% were women. Gross direct revenues of 40 million U.S. dollars were remitted directly to the owners by Airbnb: an average of 2,700 U.S. dollars per user per year.

Despite recognized statistical limitations, the ICT sector has been the most dynamic in the last five years. Using figures from the Statistical Yearbook of Cuba 2018, chapter 5: “National Accounts (2019 edition) of the ONEI,2 the transport and telecommunications sector that year represented in current prices 9.0% of the GDP and a growth of 6.4% between 2017 and 2018 (constant 1997 prices), surpassed only by the construction sector, with 9.3%. Note that traditional sectors determining growth during the last decade, such as hotels and restaurants, decreased by 3.6%, and that the sugar industry fell by 43.7% during the same period.

Cuba's national accounts do not break down the aggregates of “transport” and of “telecommunications” in the GDP figures. Calculations made according to the gross income and the taxes contributed by ETECSA's Profit Tax - the only provider of telecommunications and internet services in Cuba - determine a percentage of participation in the GDP between 1.9% and 2.7% in 2018 for communications.

In the Caribbean nations, the combined transport and communications sector exceeds 15% in the composition of GDP. In Cuba it reaches 9% in 2018, despite sustained growth over the last five years, as can be seen in the following graph.

Graph 1 Annual GDP, Transport and Communications Growth from 2013 to 2018 (constant 1997 prices)

% growth

6.5 6.4

4.3 4.4 3.7 3.4 3.2 2.7 2.2 1.8

1.0 0.5

2013 2014 2015 2016 2017 2018

PIB Transporte y Comunicaciones

See note (i) to Graph 1 at the end of the document.

However, there is a strong correlation between GDP growth and the transport and telecommunications sector beginning in 2014, coinciding with the authorization of Cubans to use the Internet. It shows that private consumption represents the most significant part of the contribution of telecommunications to GDP, as is the case in the rest of the emerging economies.

Cuba 2.0. Demand

According to ECLAC and ITU, the development of the telecommunications sector in Latin America has three well-defined stages:

• In the first stage, from its creation until the mid-40s, the sector was basically private and dominated by foreign companies.

4 • The second, from the 1950s to the late 1980s, was characterized by nationalization processes and state monopoly. Cuba is now in this intermediate stage.

• The third stage goes from the mid-1990s to the present day. A complex process of liberalization and opening of markets and privatizations; changes in the institutional schemes of regulation and interconnectivity and global competition; integration into value chains, products and services.

In the short term, there will be no change towards deregulation or privatization in Cuba. The opening to markets and privatizations harmonize similar elasticities between supply and demand between national and international markets, requiring regulators and operators to provide infrastructures and technologies similar in terms of integrity in quality, competitiveness and access. This is what happens with the demand and consumption of mobile terminals in the Cuban market: 84% of the terminals in the hands of users have been commercialized by individuals through personal imports, not through official sales.

The report We Are Social 2019, published by the consulting firm Hootsuite, establishes an increase of 27% for internet users from Cuba between 2017 and 2018. This dynamic is what is expected to happen in the short term with access to other services on the network, whose limitations have more to do with the U.S.-Cuba geopolitics and with the traditional schemes that consider these technologies as a potential internal destabilizing danger, not with financial deficiencies or limitations. Not offering mobile telephony and Internet to the population for decades may be based on political, not technical or financial considerations.

For its part, the use of ICT promotes distributed innovation, creativity and conflict resolution with a cost advantage over property-based systems or schemes with petrified vertical hierarchies. Cuba faces its computerization process with a decision-making system and structures that are too vertical and not very dynamic, with inertia to face the current demands of its users and the innovation of the sector. Moreover, with an obsolete and deficient telecommunications infrastructure that contributes to having one of the lowest rates of ICT penetration in the world, despite sustained growth over the last five years. The following table and graph show these growths:3

Graph 2 Annual Growth of PC, Networked PC & Internet Users (2013-2018)

Selected Indicators of ICT 7,000,000

6,000,000

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

0 2013 2014 2015 2016 2017 2018

Usuarios Moviles Usuarios internet PC PC en Red

See note (ii) to Graph 2 at the end of the document.

What is the impact of these figures on the growth of Internet users, beyond the economic ones?

Communication begins to occur between pairs of equals. Now any Cuban with access to the network can contribute to the process of communication and content generation, promote an online deliberative democracy, political and social debate, and require answers from the authorities, the media and government agencies from the digital to the real environment.

The promulgation of the aforementioned Decree Law No. 370 provoked an intense debate in social networks on some of its prohibitions. For example, the prohibition of natural persons from hosting sites on foreign servers, which, in turn, generated a response from the Ministry of Communications on social networks, officially published by Granma, the official newspaper of the Communist Party of Cuba.4

Something similar happens with the new channels for marketing products and/or services designed by the state or private sector. There is an intense

6 government effort to establish and develop the possibilities of e-commerce and e-government. The payment gateway “En Zona” integrates banking and financial services with third parties to improve the possibilities of electronic commerce, hosted in the “.cu” domain with a business model similar to the Chinese platform “TenPay”.

In order to promote the national sites, since the first semester of 2019, natural persons - and, therefore, self-employed persons - are allowed to be hosted in ETECSA's Data Center. Although these possibilities were hitherto reserved only for legal entities, price reductions and improvements in hosting services have not reversed the trend towards stagnation or reduction of “.cu” domains, as can be seen in the following graph:

Graph 3

Domain ".cu" (thousands)

7457 6698 6698 6655

5375

2014 2015 2016 2017 2018

See note (iii) to Graph 3 at the end of the document.

7 Conclusions

In Cuba, the implementation of computerization is at a crossroads, defined by Daniel Kahneman as the paradox of “skewing of results”.5

The comprehensive computerization policies proposed by regulators should be guided by considering these two probable biases: first, incorporate r in the national accounts that make up the Gross Domestic Product all the actors in the market, from the public to the private (supply); and, second, quantify the intangible aspects and indicators of telecommunications. Communication is a human need; individuals and societies give it greater value than it has economically. Policymakers must establish these precedents in the variables to be quantified and include not only GDP growth or indicators of the neoclassical economy, but also other subjective measures that include this multipolarity of "endowment effects". These range from culture, education, politics to the well-being of a well-educated and trained citizens such as the Cubans, who begin to transform their habits and behaviors from the analogical to the digital.

These indicators will facilitate the reorientation of policies considering the reduction of expenses and integrate indicators that relate the use of ICT with capital/work, productivity and competitiveness in key sectors for the Cuban economy - tourism, energy, agro-industrial - together with indices that quantify the population's perception of well-being regarding the use of ICT.

The new legal standards, effective as of 2019, support the possibility of addressing these two biases in a parallel and collaborative manner. For the first time in Cuba, natural persons, with the prior approval of MINCOM, can operate community telecommunications networks that provide services and content, as well as import telecommunications equipment. This, in turn, may increase the creation of sites and platforms hosted on local “.cu” servers and the creation of jobs in the technology sector.

The legalization of community networks (SNet) is a new turning point in the national telecommunications market, a measure comparable only to the opening of the Internet to the population in 2014, although the solution adopted by the authorities to merge community networks with the sole telecommunications provider (ETECSA) and the Young Computer Clubs, attached to the Young Communists Union, has been a point of disagreement between the managers of the SNet and the regulatory bodies. First of all because it deprives them of their valued collaborative autonomy, which ranges from the design and control of their typology to the management of their assets and content.

One of the added values of these Cuban networks is their autonomy. No emphasis is placed on possible financial profitability or on the promotion of a political, religious or ideological agenda, something unprecedented in Cuba. This marks the beginning of an emerging process of collaboration between regulatory authorities, the state sector and academia with the emerging private sector, civil and professional society and end users in order to satisfy the growing demand for a digital citizenship that demands better services at lower prices. It is clear that the State assumes control of the entire telecommunications infrastructure and is only willing to accept a minimum margin of autonomy. In the coming months, other questions and contradictions will have to be answered and negotiated.

The internal market needs to be integrated into the processes of globalization of communications, an indispensable condition that will make it possible to harmonize similar elasticities between supply and demand, cut operating costs and prices, and thus reduce the digital gap and provide access to half of the population that is still disconnected. Cuba has a strategic position in its geographical context, which will allow it to integrate without difficulty into international mega projects such as the Belt and Road Initiative (BRI), known as New Silk Road, an ambitious long-term global investment and development program launched in 2013 by the People's Republic of China with a focus on the construction of communications infrastructures.

Since then, the Asian country has invested 80 billion US dollars and signed 173 agreements with 125 countries and 29 international organisations. The New Silk Road includes a project known as Digital Silk Road,6 to which Cuba has been officially invited.7

Despite the many challenges to be solved with strategic investment in ICT, regulators recognize their importance as integrating technologies, and as generators of new skills in the production of high value-added goods and services, creation and consumption, and economic and social development.

Its massification operates in society as a virtuous circle by creating new skills of organization and citizen mobilization. Their pervasiveness enable digital citizens to bypass controllers and act as public spokespersons for their own visions and values.

ICT demands interdependence between telecommunications operators and providers, along with content and service generators. The computerization of Cuban society must balance these biases, sometimes contradictory, with new policies to promote cooperation and integration between the public and the private, between economic growth and individual and social well-being.

Armando Camacho Costales, telecommunications engineer and finance graduate, telecommunications sector analyst with 15 years of experience in the sector. He received his bachelor's degree in Accounting and Finance from the University of Havana (2000) and his engineering degree in Telecommunications from CUJAE (1995). Creator of the Cuba 2.0. project to promote the use of information technologies in Cuba. Currently he is the National Supervisor of the National Office of Tax Administration in the Ministry of Finance and Prices of Cuba.http://cubaenred.cubava.cu; https://www.linkedin.com/in/armando-camacho-costales-aa050460/

1Ministry of Communications, MINCOM, 2017. "Comprehensive Policy for the Improvement of the Computerization of the Society in Cuba”.http://www.cubahora.cu/uploads/documento/2018/05/25/politica-integral-para-el- perfeccionamiento-de-la-informatizacion-de-la-sociedad-en-cuba-0-0.pdf

2 Statistical Yearbook of Cuba 2018, chapter 5: ‘National Accounts’, 2019 edition”, ONEI. http://www.one.cu/aec2018/05%20Cuentas%20Nacionales.pdf

3 “Information and Communications Technology. Selected indicators, August, 2019 edition”.http://www.one.cu/publicaciones/06turismoycomercio/TIC%20Indicadores%20Seleccion ados%202018/TIC%20Indicadores%20Seleccionados%202018.pdf

4http://www.granma.cu/cuba/2019-07-05/ministerio-de-comunicaciones-aclara-duda-sobre- articulo-del-decreto-ley-370-05-07-2019-18-07-37

5Daniel Kahneman, “Thinking, fast and slow”,https://catedradatos.com.ar/media/kahneman_pensar.pdf

6“Belt and Road Initiative” (BRI);https://thediplomat.com/2019/04/chinas-digital-silk-road-a- game-changer-for-asian-economies/

7“Digital Silk Road”;https://www.prnewswire.com/news-releases/belt-and-road-thematic-forum- on-digital-silk-road-held-in-beijing-300838970.html

Notes to the graphs:

[i] Note to the graph: It shows, in percentages, the annual growth rate of the Gross Domestic Product and the telecommunications and transport sector between 2013 and 2018, where a close correlation is observed from 2014 when Cubans have access to the Internet for the first time.

[iii] Note to the graph: The lines show the annual growth of personal computers, which are connected to a network, Cuban users with internet services and mobile telephony from 2013 to 2018. Users with Internet access exceed six million, with double-digit annual growth rates.

[iii] Note to the graph: It quantifies the total number of sites hosted on national servers under the “.cu” domain. With a slight upturn in the period 2016-2017, the current figures are below the existing domains in 2014.