Growing potential for P3 infrastructure development in Cuba

January 28, 2015

Public-Private Partnerships Alert

Author(s): Vincent J. Napoleon

You cannot miss today’s continuous news coverage on new developments in U.S./Cuba relations as a result of the Obama Administration’s decision to ease U.S. sanctions in Cuba. Recently, the U.S. Department of Commerce and U.S. Department of Treasury issued new rules on trade, finance and travel with Cuba to put into action the necessary steps to improve political and economic relations with our neighbor to the south. The new regulations, effective as of earlier this month, permit banking relations with Cuba, expand travel by U.S. citizens to the island nation and allow exports of construction equipment, agriculture equipment and telecommunications to Cuba. While President Obama attempts to normalize relationships with Cuba, the ability of U.S. companies to transact business there is limited. The president’s policy suggests, however, that major potential exists for U.S. businesses to engage in Cuba commerce including conducting business in the area of infrastructure development.

Transforming Cuba’s infrastructure

Despite the 50-year-old Cuba embargo remaining largely in place, U.S. businesses and entrepreneurs are watching these developments closely to assess potential economic opportunities on the island. One of the more significant potential opportunities is for U.S. businesses to invest in transforming Cuba’s infrastructure—one the country’s core needs. For example, Cuba’s ground transportation system requires repairs and improvements to highways and repairs and upgrades to the rail foundations of its rail system.[1] As of 2011, the estimated cost to improve its ground transportation system was $25.6 billion. Rebuilding the transportation, water supply system, waste management, power distribution, telecommunications and health care infrastructure will play a significant role in Cuba’s reintegration into the global community as anticipated by the president’s new policy.

As an example of the impact resulting from the new regulations is the U.S.’s relaxation of restrictions that allow U.S. businesses the ability to enhance the telecommunications infrastructure by exporting to Cuba advanced commercial telecommunications services and products. The new regulations also present other infrastructure-related opportunities for U.S. companies, particularly in the areas of travel, telecommunications, construction and equipment manufacturing. One particular area of interest for U.S. companies is the potential to use public-private partnerships (PPPs) to improve and develop Cuba’s existing telecommunications, power, energy, water, transportation and health care systems.

Public-private partnerships

The acronym “PPP” is used here to describe public sector partnerships with the private sector. A PPP can facilitate and provide required infrastructure assets where governments lack the full financial resources and expertise and look to the private sector to assist in accelerating infrastructure development. In this specific context, PPP describes the relationship where the private sector provides public infrastructure under a long-term contract with a public authority such as a local government or agency. These PPP projects are typically large endeavors that bring capital to the market and create local job opportunities, which in turn, when effective, spur consumption, increase wealth and promote stronger economies. PPP projects also tend to draw private investors to the market, thus creating a stronger model for long-term economic growth. While this model for delivering infrastructure projects across the world has been gaining traction among the public sector as a way to close the infrastructure gap, PPPs have been increasing rapidly in emerging and developing countries.[2] With much of Cuba’s infrastructure deteriorating and suffering from neglect over the last fifty years, a partnership between the public sector and private investors from the U.S. could result in increased infrastructure standards that could lead to vast economic growth for the region.

Indeed, as Cuba embarks on its transformation the use of PPPs may play a significant role in bringing Cuba’s infrastructure into the 21st century, prompting significant opportunity for U.S. businesses. With Cuba’s dire need for a modernized railway and ground transportation system, roadways, wastewater infrastructure, water distribution system and an entire energy infrastructure including refineries, power-generating plants, electrical grids, and local wiring,[3] PPPs may serve to infuse greater American capital and investment that could prove to be a win-win for both U.S. business and the Cuban economy. The opportunity to implement PPP structures in Cuba would be consistent with an increasing global trend especially among developing countries where access to capital is limited. Cuba’s island neighbors in the Caribbean region, for example, have shown increased interest in using PPPs to improve infrastructure.[4] This interest is driven by myriad factors including budgetary constraints and the realization of the role the private sector can play in delivering public services.[5]

PPP legal structure in Cuba — empresa mixta[6]

Like its Caribbean neighbors, Cuba has developed some level of experience in utilizing PPPs. U.S. investors should expect to enter into PPPs with a structure based on the empresa mixta model.[7] As an innovative approach to harnessing private sector management skills and investment capabilities for the betterment of the infrastructure and the economy, this model serves to help mitigate major risks by drawing on the strengths of both the public sector and the private investor.[8] Cuba, in the development of its water and sanitation infrastructure, has engaged in the empresa mixta model of PPP through its National Institute of Natural Resources.[9] In the empresa mixta model, the public partner (the municipality) will create a new company in which it retains the majority share (e.g. 51%) while the private sector partner with the capacity to optimize processes and improve customer services holds the minority share. The private shares may be held by a single investor or multiple investors. A unique feature of the empresa mixta is that the main private partner also enters into a management contract (typically 50 years) with the public partner for full control of day-to-day operations. This means that the private partner can be simultaneously operator and part-owner.[10]

Future impact of the Cuba policy decision and American investment utilizing PPPs

Notwithstanding the potential for increased opportunity in the years to come, a number of challenges remain. For example, U.S. businesses may be perceived as late comers to Cuba since countries like Spain, the Netherlands and Canada have been doing business in Cuba for years. U.S. businesses may find it helpful to engage potential international partners with whom they may collaborate on potential projects in lucrative sectors. Another potential challenge is the local procurement process. This is a gray-area for many. Therefore it is important to learn, understand and seek clarification of the Cuban government’s procurement process. Whether the bid process award procedure is transparent and fair will be illustrative of the potential for ongoing investment there.[11] Finally, prior to launching into any agreements for transactions in Cuba, U.S. companies should understand the legal landscape. This includes issues such as the repatriation of profits overseas, taxation, investment restrictions, labor laws and dispute resolution.[12]

Looking forward, recent activity suggests that a number of neighboring islands plan to significantly increase their use of PPPs over the next few years.[13] Whether Cuba will be fertile ground for PPPs to develop its infrastructure and to team up with American investors remains to be seen. Potential private sector participants in the industries such as telecommunications, energy, water, transportation and health care should, however, continue to watch developments as Cuba moves into an era of increased economic independence and prosperity.

  1. Infrastructure Assessment for a Transition in Cuba (Mar. 21, 2011) at 10-11.
    [Back to reference]
  2. World Economic Forum, Strategic Infrastructure Steps to Prepare and Accelerate Public-Private Partnerships (May 2013) at 5. Research continues to indicate that improved infrastructure is directly correlated to a developing nation’s ability to sustain a better standard of living and to increase its trade partners. Notably, the rate of a country’s GDP growth has been linked to the increasing number of PPP projects launched in the country. The support of the private sector is key because the private sector supplies the capital, technology and know-how necessary to launch PPPs. For these reasons, PPPs are important to infrastructure development and economic growth.
    [Back to reference]

  3. Dr. Manuel Cereijo, Republic of Cuba Power Sector Infrastructure Assessment (Dec. 2010) at 50.
    [Back to reference]

  4. World Bank Group, Caribbean Infrastructure PPP Roadmap (March 2014) at 1. Notably, PPPs have been used in countries such as the Dominican Republic, Jamaica and Trinidad and Tobago, among others for road, ports and airports improvements; bulk water treatment facilities; and power plants. While some of these projects have been successful delivering quality infrastructure facilities for years, others have been failures.
    [Back to reference]

  5. Id.
    [Back to reference]

  6. One examples of an empresa mixta in Cuba is the partnership between Agus de La Habana and Interagua in the city of Havana with Interagua (an AGBAR company engaged in water distribution and waste water treatment) having a 25-year management contract. In addition, a partnership exists between Asociación Económica Internacional Aguas Varadero and AGBAR (a Spanish company dedicated to services, distribution or treatment of water) in the city of Varadero having a 23-year management contract.
    [Back to reference]

  7. Mixed Private-Public Ownership Companies “Empresa Mixta,” World Bank PPP in Infrastructure Resource Center for Contracts, Laws and Regulations (PPPIRC) (June 2011), available at
    [Back to reference]

  8. Id.
    [Back to reference]

  9. Id.
    [Back to reference]

  10. Id.
    [Back to reference]

  11. The Potential for Public-Private Partnerships in Cuba at 1-2, available at
    [Back to reference]

  12. Id. at 2-3.
    [Back to reference]

  13. Those islands include Jamaica and Trinidad and Tobago, Suriname, Saint Lucia and Grenada.
    [Back to reference]

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

Back to top