PRELIMINARY STUDY OF THE IMPACT OF THE PRIVATIZATION OF STATE-OWNED ENTERPRISES IN CUBA Teo A. Babún, Jr. With the prospects of limited trade relations between its underdeveloped and plentiful mineral resources, the United States and Cuba looming closer, the most its educated work force, its top-rated natural attrac- important issue for Cuba is the future of its econo- tions, as well as other characteristics, have a positive my, which has been devastated by socialism, trade impact on potential foreign investors. embargoes, and the cutoff of Russian welfare. This paper summarizes the results of a mayor study Without question, once Cuba moves unequivocally conducted by Cuba-Caribbean Development Com- towards a free market economy, financing institu- pany, a corporation headquartered in Miami that tions will be available to provide funding to promote provides international business services for compa- economic growth in a new Cuba. Financing for nies and individual investors seeking to establish or projects through direct loans and other financial in- expand business ventures in the Caribbean region, struments will be available for improvement of water regarding state-owned enterprises in Cuba available supply and sanitation, support and development of to possible privatization. The paper is divided into small business, modernization efforts, infrastructure two sections: the first section presents the results of repairs and maintenance, environmental clean-up ef- the study with respect to potential privatization tar- forts, from a plethora of public financial agencies, in- gets in the island. The second section discusses some cluding the Inter-American Development Bank ideas on a national privatization strategy in a post- (IDB), the World Bank, the Canadian International Castro Cuba. Development Agency (CIDA), and others. PRIVATIZATION RESOURCES As with Eastern Europe and Russia, it is for Cuba to Based on a variety of information sources—the take the painful reform steps necessary to put its Cuba data bank of the T. Babún Group, publica- economy back on track. However, as was the case in tions, interviews with experts in the business com- Eastern Europe, the largest and most important in- munity, government and academia, information pro- vestments will come from the private sector. Most of vided by scholars, and consultations with officials in these investments will be made for privatization of the U.S. Departments of State and Defense—the state-owned assets, and will come from private com- study identified state-owned resources in Cuba avail- panies, with specific objectives, and from capital able for possible privatization. The authors analyzed markets. On the one hand, unlike Eastern Europe, the pricing strategy employed by Poland, Czechoslo- Cuba is less developed, and has experienced a lengthy vakia, Hungary and East Germany, in the privatiza- economic crisis, which has taken a toll on both the tion of many of their state-owned enterprises, and physical and the human resources, making Cuba then applied similar ratios to Cuba’s assets. We fur- even a harder “sell” for private investors. On the oth- ther evaluated the potential for privatization in infra- er hand, Cuba’s close proximity to the United States, structure concessions to construct and operate toll 425 Cuba in Transition · ASCE 1999 roads and ports, as well as in contracting-out and Plastic and Paper Trust; and Chemical and Fertilizer other private involvement in water and sewage sys- Industries Trust); the Ministry of Steel and Mechanic tems, refuse collection and waste management, etc. Industries (ACINOX, S.A., and Metal Processing We believe that the total value of about 1,500 state- Trust); and the Ministry of Construction Materials owned target projects, when transferred to the pri- (Construction Aggregates Trust and Cement Trust). vate sector, will be between $21 to $39 billion (see Table 3 identifies specific privatization targets within Table 1). This amount does not include potential these larger groups of enterprises (trusts). private assistance and loans, grants and grant guaran- tees from international financial institutions, multi- Cuba can not afford the luxury of a lengthy and pro- lateral organizations, and individual countries. For tracted privatization process. Once a national privati- instance, in January 1997, President Bill Clinton zation program is introduced, it will be very impor- predicted that Cuba could receive from $4 billion to tant that it remain as consistent as possible. Perhaps, a new Cuba could first conduct the privatization of $8 billion from these sources. small-scale businesses, followed by high export-po- Table 1. Summary of Possible Projects tential enterprises (and projects), while the govern- Available for Privatization ment creates the optimum conditions for a full na- tional privatization strategy. Potential Number Privatization Sector of Projects Investments Cuba is well ahead of the former Soviet Bloc coun- Mining 24 $4-$5 billion tries in preparing a base for privatizing its state- Electric power 20 $4-$5 billion owned enterprises. For instance, on August 24, 1998, Other utilities 13 $600 million-$1.3 billion the government approved a new law to decentralize Transportation 59 $5-$7 billion Construction and 95 firms from the control of the Basic Industry Min- construction materials 24 $2-$3 billion istry. The companies planned to be spun off employ Food processing, fishing over 115,000 workers. & beverages 29 $1.5-$2 billion Other light industry 15 $600 million-$1.0 billion Other specialized But privatization of Cuba’s existing state-owned en- industries 33 $600 million-$1.0 billion terprises will not be an easy task. Cuba’s factories are High technology industry 22 $1.5-$2.0 billion large, cumbersome and inefficient. In fact, 88 per- Wholesale and retail facilities 7 $500 million-$700 million cent of Cuba’s industrial plants are considered Sugar and sugar-related “large” by World Bank standards. The study identi- industry 166 $1.2 billion fies 170 state-owned enterprises (not sugar mills), Banking and insurance 16 $1.9-$2.4 billion with 500 or more workers, built or enlarged after Tourism, tourism-related and entertainment 750 $2.5-$3.1 billion 1959, as compared to only 14 plants (not sugar Military enterprises 121 $2.65-$3.2 billion mills), with 500 or more workers existing in 1959. Telecommunications & media 180 $500-$800 million In addition, before large volumes of foreign capital Miscellaneous enterprises 11 $450-$500 million and aid assistance would flow to the island, a new Total potential Cuba will need to deal with issues such as a large ex- investments 1490 $20.77-$39.2 billion ternal debt, and a plethora of individual claims for confiscated properties. An analysis of these and many Table 2 reports on the strong and weak points of po- other critical pre-privatization issues are given in the tential privatization targets within Cuba’s basic in- next section of the study. dustry sector. This sector is composed of enterprises within the Ministry of Basic Industries (Geology and A NATIONAL PRIVATIZATION STRATEGY Mining Trust; Electric Industry Trust; Rubber and The following ideas and proven concepts merit seri- Tires Trust; Nickel Industry Trust; Oil and Gas Ex- ous consideration in designing a national privatiza- traction Trust; Oil Refining and Distribution Trust; tion program of state-owned assets. 426 Privatization of State-Owned Enterprises in Cuba Table 2. Privatization of Cuba’s Basic Industry Sector—Strong and Weak Points A. Chemical and Fertilizer Industries Trust, Partner for Foreign Investors: CEPIQ, S.A. Strong Points Weak Points • Large facilities at Nuevitas, Cienfuegos, Regla, Felton, • The vast majority of the raw materials need to be imported. Matanzas and Santa Lucia, generally in good shape. • High environmental impact, some clean-up works to be • Claims are not a major issue (except at Regla). done by investors • Ethical and well-trained technicians and workers. • Very poor wholesale and retail distribution network. • Fair transportation and port infrastructure. B. Metal Processing Trust, Partner for Foreign Investors: Planta Mecánica de Santa Clara Strong Points Weak Points • Two large plants, producing parts for the sugar cane • Power intensive operations. Some inputs needs to be industry. Fair quality. imported. • The products are competitive in the international market • Substantial maintenance troubles. The organization of work and can be exported. is poor. • The skill of technicians and workers is fair. Reasonable • Intensive political and governmental interference. work ethic. C. Paper Trust, Partner for Foreign Investors: Unión del Papel Strong Points Weak Points • Availability of large quantities of sugar cane bagasse as a • Eleven plants need to be completely reconstructed, with a raw material. significant capital expenditure. • Reasonable training of workers and technicians. • Sensitive environmental impact, the investors need to meet • Two modern plants (paper and cardboard) and one up to some clean-up works. date plant for plastics. • Fuel and power intensive industry, but capable to be energetically improved (cogeneration) D. Rubber and Tires Trust, Partner for Foreign Investors: Empresa de la Goma Strong Points Weak Points • Very large demand, they could allocate more than the • The industry is poorly managed and the labor force is not installed capacity allows. very skilled. • Export potential, despite the current limitations (they need • A second rate operation within