New Business Failures in Cuba Predicted to Exceed 90 Percent
if policy changes are not made
HAVANA TIMES – The report on small and medium-sized businesses (MSMEs) that the Camagüey newspaper Adelante published last Friday lays bare all the regulatory hurdles facing anyone trying to set up a business in Cuba. The situation is so bad that Miguel Hernandez Fernandez, a member of a local group trying to promote entrepreneurship in the province, warns, “The [business] failure rate in Latin America is around 80%. If conditions do not change, it will exceed 90% in Cuba.”
The article, entitled “One Year, Many Problems, Meager Production,” begins by warning of the difficulties faced by small and medium-sized businesses throughout the world in setting up shop. Little by little, however, the focus shifts to the root causes of the island’s particular issues.
One year after MSMEs became legal in Cuba, 181 companies — all of them private except one — had been given the green light. Of those, 68% are currently inactive. The article cites the high cost of obtaining and outfitting commercial real estate as well as the shortage of raw materials as the prime causes. But later in the article it becomes clear that some of these problems could be solved if there were the political will.
“Among the main obstacles are the drawn-out approval process and the legal limitations placed on business professionals. They come here with very good ideas but either Decree 49 prohibits their specific kinds of economic activity or they cannot engage directly in foreign trade,” says Ernesto Figueredo Castellanos, a provincial economic official. Both issues could be resolved by changing the law but the state’s efforts to retain control remains one of the big obstacles.
The shortage of hard currency is no small problem either. New businesses need it in order to buy raw materials but getting it is impossible because the banks simply do not have it. Figueredo Castellanos goes so far as to admit that, under these conditions, merchants can only replenish supplies by accepting donations or turning to the black market. Even then, buying things under the table is not really an option. “Their activities as a company are traceable, which does not allow them, for example, to shop for flour on the street, so many have had to import it.”
As a result, it is nearly impossible to get necessary supplies. One example described in the article is a cafe whose owners explain how they have to bring in everything from outside, including water, because the state will not sell them anything. “We have to get everything from the wholesale market or import it. That’s money that leaves the country and there is no way for me to claim it as a business expense. It also also increases costs, to say nothing of the rent,” notes Pedro Cespedes Aguilar, a partner at Alegre SRL.
Another complaint that businesspeople have is that they may enter into only one kind of business arrangement. “You can no longer invest in a limited liability corporation (sociedad de representación limitada or SRL) and be an administrator in another. It is illegal for Cuban citizens living abroad to be partners, which means finding anonymous partners outside the country because, under current conditions, Cuba needs liquidity to do business and acquire imports,” explains Figueredo Castellanos, who is very critical of the current regulations.
Those interviewed describe excessively high rents. Landlords are state-owned companies which charge 80,000 to 120,000 pesos, creating a financial burden for private businesses. “It would seem that companies would want to solve the rent problem,” says Hernandez Fernandez. He also notes that the level of computer skills remains very low. Registering an MSME is done through a digital platform without any support staff, and most of those filing applications do not have the required knowledge to do it.
“Communication with the Economics Ministry is something else that needs improving,” the article states. “During this investigation, it so happened that interested individuals wrote in but often received no response.”
“In Camagüey, there is an urgent need for the government to help private businesspeople connect with the rest of the local economy and develop a real relationship that enhances the regional development strategy. There are very good examples in Villa Clara and Havana that could well be implemented here,” says Hernandez Fernandez.
That is how Chefmigue has managed to survive. The company began production a year and a day after its business application was approved. The original intention was to produce fresh pastas but the price of wheat forced it to change course and it began processing fish for a state-owned company.
However, this is not without its own set of problems. The company is asking that it be allowed to import fishing gear, or hire fishermen, so it can obtain the best raw material. “The difference between the black market price and the one Fisheries wants to charge us is abysmal. And we don’t get access to the best fish. Lowering my costs would lower the price for consumers,” the owner claims.
“We cannot afford to get a divorce when what we urgently need is to join forces to increase the supply of goods and services for the people of Camagüey. We have to make sure that the sixty-four new food production MSMEs do not end up becoming part of the informal distribution network or leaving the province. To achieve this, they must be given the same attention as a state company,” said Yoseily Gongora Lopez, governor of Camagüey, in a meeting with businesspeople.”
Having the flexibility to import is a common theme among the businesspeople cited in the article. “If I could import flour directly, it would lower the cost of production along with the price consumers pay, which is our cost plus a 15% profit margin,” says Dayron, one of the founders of Marfoxi, a company which produces cookies, breads and other flour-based products. The owner reports that electrical blackouts have slowed production, which has motivated him to set up his own mill.
Madiu Quiroga Gomez, head of the Provincial Territorial Development Group believes several changes must be made next year if there is to be progress. “The new players need the option of managing collections and payments in hard currencies themselves and thus having cash flow out of the country. [It is important to] to support transparency in bidding procedures and the awarding of contracts, to promote national investment by Cubans in the economy and, above all, to develop training courses and opportunities for people not covered by current legislation,” she suggests.
The article ends by urging the state to get involved in finding solutions. The interested parties do not want it to completely let go of the reins, however. “You have to build it on the basis of state control,” it reads, “with the government playing a coordinating role, and with collaboration between the state and private companies steadily ’rowing’ towards a sound and sustainable economy.”
Translation by Translating Cuba