Tourism in Cuba urges great investments and changes of strategies.

21 July 2017

(https://twitter.com/targetemilio) (https://www.youtube.com/user/THCG123/feed)

By HCG BUSINESS INTELLIGENCE UNIT HCG BUSINESS INTELLIGENCE UNIT

Tourism (/en-US?categoryId=12)

Cuba is undergoing a process of restructuring of its economic model, based on the implementation -- very
slow and limited for the moment -- of a group of reforms that began in 2010, which seek to reorganize and
develop the economy of the country and at the same time diminish external economic dependence.

This process of transformation is a great challenge for the Cuban authorities given its broad scope, since it
involves all sectors of the economy and entails setting aside old doctrines and working methods that today
constitute huge barriers that need to be removed to give way to a renewal process that would promote the
development of productive forces to the full extent of their capacity.

One of the most difficult elements of the process is the change in the strategic mentality that is required to
move forward efficiently. This implies conceiving a more open economy, sustained by new laws that will
make the productive processes more dynamic and allow for a faster insertion of Cuba in the world
economy.

A sector that could be one of the transformation engines of this process is the tourism industry, which is
going through one of the most crucial moments in its history.

The new scenario

The thaw of relations between the Cuban and US governments has had a strong impact on the island's
tourism infrastructure. The dream that one day Cuba's doors would be open to American tourism came
suddenly -- even if only partially -- with an avalanche of travelers attracted by the myth of the "forbidden
fruit." The changes associated with the thaw overnight have turned the US into the second largest emitter
of tourists to Cuba, pushing the country's accommodation capacity to the limit. This growth in tourists has
added pressure on an infrastructure that was already overburdened and not prepared to handle such a
heavy tourist load. At the same time, the domino effect of the thaw has also impacted the main European
markets, which have also doubled their growth rates of tourists to Cuba in the last two years. Both factors
have caused an abrupt increase in the prices of lodging never seen before in the Cuban market.

Open to American tourism came suddenly -- even if only partially -- with an avalanche of travelers
attracted by the myth of the "forbidden fruit." The changes associated with the thaw overnight have turned
the US into the second largest emitter of tourists to Cuba, pushing the country's accommodation capacity
to the limit. This growth in tourists has added pressure on an infrastructure that was already overburdened
and not prepared to handle such a heavy tourist load. At the same time, the domino effect of the thaw has
also impacted the main European markets, which have also doubled their growth rates of tourists to Cuba
in the last two years. Both factors have caused an abrupt increase in the prices of lodging never seen
before in the Cuban market.

Despite being the largest island in the Caribbean and having an enormous geographical potential and
exceptional natural conditions to become a tourism leader in the region, Cuba's infrastructure has lagged
that of the afore mentioned markets. In the last two decades, the country has developed a dozen attractive
tourism poles. However, these have not been exploited to their maximum capacity. Most require large
investments in infrastructure for their updating, expansion and development.

Current and outdated infrastructure

In recent years, the structure of Cuban tourism has not shown significant changes, mainly due to the
financial constraints and the backward strategic approach with which its development has been
conceived, which needs to be updated urgently.

The main constraints currently affecting the Cuban tourism industry are: limited accommodation capacity,
lack of maintenance of existing facilities, low quality of services, low wages, limited material and financial
resources, technological backwardness, limited transportation capacity (in airports, ports, highways), little
variety in the supply of entertainment, high concentration of lodging capacity in the hands of the state and
monetary duality.

The strategic approach adopted by the Ministry of Tourism has been aimed at encouraging massive sun
and beach tourism based on all-inclusive packages. As a result, investments in the development of the
hotel industry in the country were directed away from large cities full of cultural and historical wealth of
great value, which are not exploited to their full capacity, with the exception of the Historical Cores of
Havana and Trinidad, which have had a plan of restoration that has allowed to revive both zones as
important tourist destinations in the country. Hence the massive development of hotel infrastructure in
coastal areas such as Varadero, the keys to the north of Villa Clara and Ciego de Avila and the beaches in
the north of Holgun. Investment in accommodation capacity in cities has been better utilized by the
private sector than by state-owned hotel chains. The private sector has grown a lot in recent years,
spurred by entrepreneurs who are dedicated to the business of renting houses and rooms to tourists. They
have filled the void of lodging existing in the cities and have absorbed a good part of the national tourist
lodging demand. The most notable examples are Viales, Trinidad and Havana, where the private sector
surpasses the state-owned lodging capacity. See Figure 1.

Figure 1. Comparison of housing capacity controlled by the state and the private sector in Viales,
Havana and Trinidad, 2016.
 Source: Havana Consulting Group HCG based on data published by the Ministry of Labor and Social
Security and censuses carried out by the HCG Business Intelligence Unit in the territories of Viales,
Havana and Trinidad.

Note:*- Data published by the Ministry of Labor and Social Security, 2016

**- Research carried out by the HCG Business Intelligence Unit in the territories of Viales, Havana and
Trinidad, 2016.

Of the 29,090 rooms available to meet the tourist demand in Viales, Havana and Trinidad controlled by
the state and the private sector in 2016, 68.96% belonged to Cuban entrepreneurs while 31.04% belonged
to the state.

This rapid growth of the private sector and the stagnation of the state sector is mainly due to the difference
in construction costs between both sectors and the rapidity of investment execution by the private sector.
In the private sector, the cost of renovating a room ranges from $ 500 to $ 1,500. The cost of building a
new room ranges from $ 3,000 to $ 5,000. Meanwhile the average cost of construction a state-built hotel
room ranges from $ 150,000 to $ 200,000, depending on the category of the hotel.

State lodging capacity (hotel chains and other establishments owned by state-owned enterprises)
remained nearly unchanged in the last six years, despite the investments made in the main tourist poles of
the country. According to data published by the Oficina Nacional de Estadsticas e Informacin (ONEI), in
the period 2011-2013, accommodation capacity in the island decreased by 19.6% in number of hotels and
5.33% in number of rooms. Hotels in the categories 5* and 4* grew by 11.11% and 8.22%, respectively.
Rooms in the rest of the categories decreased: those in categories 3 * fell by 15.83%, 2 * by 9.223% and 1
* by 70.24%. In the period 2014-2016, there was a slight increase (2%) in the number of hotels and a slight
decrease in the number of rooms (-0.10%.). See Figure 2.

Figure 2. Capacity of lodging controlled by the state: Hotels and number of rooms by category, 2011-
2013 (before the thaw) and 2014-2016 (after the thaw).
 Source: HCG, based on data published by Oficina Nacional de Estadstica e Informacin (ONEI)

As can be seen, the overall number of rooms practically did not vary in both periods, around 54,000 before
and after the thaw.

Conclusion

Cuba has had a sharp growth in tourism due to the thaw, which has filled the island's hosting capacity and
has put in a critical point the tourist infrastructure of the island. The new scenario has created a great
opportunity to attract large investments in the infrastructure of the Cuban tourism sector. However, a
change of strategy is necessary in order to develop a more comprehensive tourism product that would
provide a range of sophisticated, specialized and modern products that would meet the needs of all
market segments, both domestic and foreign.

This implies a great challenge for the Cuban authorities. They need to figure out how to take advantage of
the tourist boom that the country is experiencing and not to miss out on this golden opportunity to revitalize
the tourist industry and the economy in general.

The first major challenge is the required change of business mindset by the Cuban government to
overcome the bureaucratic red tape associated with its centralized economy, and the lack of cost-benefit
analysis and rigorous market studies which have prevented the development of the country over the last
60 years.

The required new mentality would have the great challenge of attracting foreign investment. But to do this,
profound legislative changes must be made that would allow the freeing of productive forces and free
participation of new economic actors: private companies, cooperatives, self-employed, joint ventures, and
all forms of non-state ownership. This would help to decentralize and expedite the approval of investments
from wherever they might come, and create a rapid cycle of wealth generation and capital creation.

Cuba possesses excellent geographical and natural conditions to achieve a first-rate tourism development
in the Caribbean. In addition, it has the human resources necessary to make the leap to such high-level
tourism. However, the centralized economic system lacks the necessary legal framework and flexibility to
respond to this new scenario. The Cuban government is at a decisive time to make changes to develop
the tourism industry and the national economy, bringing prosperity and development to millions of Cubans
and turning Cuba into the tourist metropolis of the Caribbean.

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