Thursday, March 25, 2010

Cuba eyes foreign investment to halt sugar decline

Thu Mar 25, 2010 9:54am EDT
* Talks with foreign investors advancing: sourcesBonds
* Joint administration of mills on the table
* U.S. embargo, national pride seen as obstacles
* First such projects since 1959 revolution

By Marc Frank
HAVANA, March 25 (Reuters) - Cuba may open sugar production to foreign investors for the first time since the 1959 revolution as it seeks to reverse the once proud industry's relentless decline, business sources said this week. Talks between investors and the government have come and gone with little result for years, but what is shaping up as perhaps the island's worst harvest in a century has increased interest in bringing foreign partners, the sources said.
Their money and management know-how could help revive a sugar industry that has collapsed from neglect and the decapitalization of mills and plantations, local experts and foreign traders said. President Raul Castro, who took over from ailing brother Fidel Castro two years ago, is trying to right communist Cuba's cash-strapped economy by increasing exports and cutting imports.
Sugar, once the driver of Cuba's economy, now accounts for less than 5 percent of Cuba's foreign earnings, but prices have been driven up by ethanol demand, so Cuba is turning to it once again.
A Cuban source with knowledge of the sugar industry said the government has been seriously exploring foreign participation for several months. "The executive Committee of the Council of Ministers approved plans to pursue talks last November, and again this year to sign administrative agreements," the source said. Foreign banking and other business sources confirmed talks were advancing toward agreements that would have investors jointly administer several mills and share in the production for a limited number of years. The sources would not name the various companies involved or provide further details. Similar agreements already exist in the citrus industry, where Panama-based Israeli investors jointly operate juice plants with the government.
Theoretically, the state-run sugar industry has been open to direct investment since 1995, but in practice there has been little interest on the government's part except in a few joint ventures making sugar derivatives such as alcohol and parts used in sugar processing, the sources said.
A big obstacle is the U.S. Helms-Burton law, which penalizes investment in properties expropriated from U.S. owners and contains a yet-to-be implemented chapter allowing Cuban-Americans to sue investors who "traffic" in their expropriated properties. All but eight of Cuba's mills were built before the revolution and therefore nationalized, and most plantations are lands expropriated by the government after Fidel Castro took power in 1959. Foreign investors are forbidden by law to own land in Cuba, and do not need to own anything for the proposed sugar ventures, said a local economist. "There is little need for investors to own land. In fact, it is in their interest to simply administer mills, provide farmers with technology packets and process the cane," he said.
Cuba was once the world's biggest sugar exporter with raw output reaching 8.1 million tonnes in 1989, but the industry went into decline after Cuba's top ally for 30 years, the former Soviet Union, collapsed in 1991. The Soviet Union paid padded prices for Cuban sugar to boost the island's economy, so its demise hit Cuba and the sugar industry hard. Cuba shut down and dismantled 71 of 156 mills in 2003 and relegated 60 percent of sugar plantation land to other uses. More mills have closed since then, with just 44 mills open this season. Another 20 have been maintained in working condition for future use. Only 1.7 million acres (700,000 hectares) of the over 5 million acres (2 million hectares) once controlled by Cuba's Sugar Ministry are currently dedicated to sugar cane. Cuba planned to produce 1.3 million tonnes of raw sugar this season, but milling problems and low yields have resulted in a shortfall of more than 100,000 tonnes to date. With the harvest scheduled to end by May, Cuba is in danger of reaching its lowest output since 1908, when 1.2 million tonnes of sugar were produced.

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