Cuba: capitalist "success seems far from certain"

[Louis N Proyect <lnp3@xxxxxxxxxxxx>]

October 7, 1997

Sherritt Rocks the Boat in Cuba But Success Is Not In-Shored

By PETER FRITSCH and JOSE DE CORDOBA
Staff Reporters of THE WALL STREET JOURNAL

HAVANA -- Ian Delaney brings a rare board meeting here to a close one
recent afternoon, late for an engagement back in Toronto.

But he can't get away just yet: A Cuban citizen holding 100 shares of his
company, Canada's Sherritt International Corp., would like an audience
with the chairman. While such small-time shareholders usually get shunted
off to investor relations, this one is named Fidel Castro, Cuba's voluble
Comandante en Jefe, who is engaged in a grudging flirtation with
capitalism. Mr. Delaney will miss his Toronto appointment.

The meeting, like the shares -- which Mr. Delaney gave to the Cuban leader
last year to hold "in trust for the Republic of Cuba" -- are symbolic of
Sherritt's increasingly cozy business relationship with this island nation
of 11 million. No other foreign company here has charted a course so
dependent on a country whose motto continues to be "Socialism or Death."
Toronto-based Sherritt International was formed in 1995 when Sherritt
Inc., a Canadian fertilizer and mining concern, split in two. Fertilizer
interests went into a company subsequently named Viridian Inc. Sherritt
International was formed specifically to continue to do business with
Cuba, where it has invested about $200 million in everything from nickel
mining and oil to hotels and produce farming. Last November, Sherritt
raised $500 million from an issue of convertible debentures for further
investments here.

"Our fingerprints are all over the way business gets done in Cuba," says
the 54-year-old Mr. Delaney in an interview at Sherritt's Cuban
headquarters in a suburban Havana mansion. "We work overtime to educate
these people" about how a market economy works.

But despite Sherritt's clout, the payoff has been bittersweet and success
seems far from certain. The company's halting progress is being closely
watched as a barometer of the pitfalls and possibilities of investing in
Cuba, a country still in desperate economic straits.

On the down side, Sherritt's Cuba dealings have earned Mr. Delaney, 10
other executives and their families the ire of the U.S. State Department,
which last year forbade them entry into the U.S. for violating the
Helms-Burton law. The law punishes people who "traffic" in stolen property
-- the property in question being U.S. corporate assets nationalized after
Cuba's 1959 revolution. The U.S. action, roundly condemned by the majority
of the international community, puts Mr. Delaney, wife Kiki and their two
sons on the same list with Libyan dictator Moammar Gadhafi.

But perhaps most important for the company's investors, Sherritt has been
largely unable to put the fruit of its $500 million debt issue to work
here, despite the company's designation by Cuba as a "desired investor."

Sherritt's share price, according to investors, reflects frustration with
the slow pace of its Cuban investments, political worries related to a
recent rash of bombings in Havana hotels, and low nickel prices. Sherritt
shares closed Monday at $5.694 on the Toronto Stock Exchange, off its
52-week high of $6.935. (The company earned about $24.3 million on revenue
of $208 million in 1996.)

"They'll likely try to put a good face on it, but the reality is that the
investment climate here has soured considerably in the past two years," a
western diplomat in Havana says.

The main reason for that, analysts say, is that Mr. Castro has braked hard
on the limited economic reforms begun in the wake of the collapse of the
Soviet Union. While Mr. Delaney may well be Mr. Castro's favorite
capitalist, it appears that Mr. Castro remains wary of capitalists of any
stripe. "Cuba is trying to act with caution regarding Sherritt to avoid a
great concentration of power in one company," says Omar Everleny, an
economist with the Center for Cuban Economic Studies, a government think
tank in Havana.

The upshot for foreign companies, even favored ones like Sherritt, is
clear: The standstill in economic reform makes it difficult to invest
here. That means Sherritt investors will have to wait longer than
anticipated to see a return on their investment.

The clampdown is likely to get uglier. Anticapitalist rhetoric has reached
a fever pitch in advance of Wednesday's Communist Party Congress. The
state-owned newspaper Trabajadores, or Workers, recently urged the party
to "halt the mercantilist, disintegrative and individualistic effect" of
economic reform in 1993 that allowed the average Cuban to hold U.S.
dollars.

The Cuban rhetoric doesn't seem to bother Mr. Delaney. "The reality is
that there's a very live and healthy political debate that goes on here;
this is not a monolithic system," he says. At any rate, he adds, Sherritt
doesn't depend on Mr. Castro, who is 71 years old and, according to
diplomats and other observers, isn't in the best of health, for its
permanence in Cuba. "This country isn't managed by Fidel," but by
40-something technocrats like Carlos Lage, vice president of Cuba's
Council of State, widely seen as a potential heir to Mr. Castro and well
known for his socialist austerity. "The prospect that these educated,
literate and aggressive political players will all go back to cutting
[sugar] cane or something [after Mr. Castro's death] is a fairy tale"
created by bitter Cuban-Americans in Miami, he says.

A former president of Merrill Lynch & Co.'s Canadian unit, Mr. Delaney
says he is "offended and insulted" by the U.S. sanctions against him and
his family, but remains unintimidated. Sherritt's willingness to go
toe-to-toe with Washington has made him a folk hero in Canada while
opening up surprising opportunities in Cuba even as some of Sherritt's
hoped-for investments have yet to materialize. For one, Sherritt has
become a lender-of-last-resort to the financially strapped regime.

After several European banks backed away from financing this year's Cuban
sugar crop for fear of having their U.S. interests targeted by
Helms-Burton, Sherritt stepped to the plate with $90 million in short-term
financing. That earned the company fat returns of 14% and up and plenty of
gratitude from the beleaguered Castro regime.

Opportunity abounds when one walks where others fear to tread, Mr. Delaney
says. Sherritt is considering picking up some or all of Mexico's Grupo
Domos SA's 19.7% stake in the Cuban telephone monopoly Etecsa -- a
potential investment of $360 million. Domos, beset by threats under
Helms-Burton and financial problems, is pulling out of Cuba. With the U.S.
scaring off potential competitors, "we don't have to rush," Mr. Delaney
says.

If any foreign company in Cuba can afford to maintain such a sanguine
investment outlook here, it's Sherritt. As one of the island's first
foreign investors since the revolution, Sherritt was able to help shape
many of the terms of its local ventures. "Everything we've done here has
required lots of time sitting on their side of the negotiating table," Mr.
Delaney says.

At the same time, Sherritt has been willing to play by Cuba's peculiar,
and often mercurial, rules. Not only did Mr. Delaney have to acquire a
home here, but Cuban officials required him to remain chairman of the
company for at least 10 years. That is important because Mr. Delaney has
the power to appoint a majority of the company's board and can pick
directors committed to Cuba (two earlier directors quit for fear of being
targeted by Helms-Burton).

Sherritt's Cuban business began with a meeting between Messrs. Delaney and
Castro in January 1991. Mr. Delaney had just taken control of Sherritt and
came to Cuba in search of feedstock for an idle nickel factory in Fort
Saskatchewan, Alberta. A friendship grew into a trade relationship and, in
December 1994, into a 50-50 joint venture operating in the eastern Cuban
city of Moa.

The Moa venture operates a plant that prepares the region's red earth,
rich in nickel and cobalt, for further refining in Canada and eventual use
in stainless-steel production. Built in 1959 with incredibly bad timing by
a predecessor of New Orleans-based Freeport-McMoRan Inc., the plant was
seized by the Cuban government in 1960. Years of subsequent neglect had
reduced the plant to half its 24,000-ton-per-year capacity when Sherritt
came along.

Sherritt had some idea of what it was getting itself into, because the
original plant used Sherritt technology. What proved a surprise was the
complete lack of management skills among its Cuban partners. When
something went wrong, the answer was usually to close the plant.

In February 1995, just two months into the venture, an oil leak set off an
extensive fire at Moa. Frantic Sherritt executives in Havana rushed to the
scene. They found the Cuban managers lined up on the tarmac, waiting to be
fired. "That's how fearful they were," remembers one Sherritt executive.

The executives' solution: Cultivate trust by taking two weeks of vacation
and letting the Cubans handle the repairs. They also gave Cuban managers
the ability to allocate budget resources. The initial result: Some
managers bought radios for their new Mitsubishi trucks.

The company also conducted quickie courses in business management. One
proud graduate: Basic Industries Minister Marcos Portal, whose diploma
hangs on his office wall.

But incentive-based pay was the real revolution Sherritt brought to Cuba.
The venture pays the government about $790 a month for each worker --
competitive with wages elsewhere in the Caribbean. The state, in turn,
pays the workers anywhere from 125 to 540 Cuban pesos a month -- about $5
to $25 -- and keeps the rest. However, the venture also sets aside part of
its operating budget for productivity bonuses of as much as 12% of a
worker's base pay, denominated in dollars. So workers who make 300 pesos a
month are eligible for a bonus of $36 -- a king's ransom here.

Sherritt's critics note that Moa must hire from Cuba's state employment
agency, which typically filters loyal Communist Party members to such
ventures. Workers aren't free to negotiate wages and are loath to protest
a firing. And the kind of incentive package available to Moa workers isn't
available to workers in other foreign ventures. One prominent Cuban
dissident here describes Sherritt's business as "a caricature of
competitive capitalism."

While executives concede that the company worries about creating a
two-tiered society in Moa of those who earn dollars and those who don't,
they say the pay system helps instill an individual sense of worth and
achievement, the tap root of successful market reform.

The bottom line for Sherritt, though, is that Moa is a financial success.
Sherritt relied on the Moa venture for the bulk of its 1996 earnings,
while output has surged to 27,000 tons a year.

Politics, though, continue to make life difficult. Sherritt recently spent
several million dollars on a deal with a British firm to build a new acid
plant at Moa. But the British company's lawyers killed the project: The
company was bidding on U.S. defense contracts and feared repercussions
under Helms-Burton.

And while Freeport-McMoRan officials hint they won't make a U.S. claim on
the Moa assets, Sherritt already faces a suit in Miami federal court by
Consolidated Development Corp. of Miami. A Consolidated predecessor once
held oil concessions Sherritt is now working. Sherritt produces a modest
7,000 barrels of oil a day. (Its efforts to reactivate old wells have been
important to Cuba, which imports most of its fuel and is under constant
pressure to finance those imports.)

Looking ahead, Mr. Delaney seems to recognize that Sherritt, like its host
country, is at a crossroads. Given the present lack of investment
opportunities, he says, Sherritt may have little choice but to build its
position in tourist hotels.

"I hate tourism. We're an industrial company," he says. "But if there was
an industrial opportunity that rivaled tourism, we'd do it."

For the time being, Mr. Delaney shrugs off critics who point to Sherritt's
inability to invest its $500 million war chest. "You can only part with
that kind of money in 10 months if you're buying assets, not building
assets," he says.

He says it may take three to four years for Sherritt to deploy the funds
fully. Under consideration are investments in power generation,
communications, finance, transportation, tourism, real estate, agriculture
and sugar. "We're doing 20-year investments," he says. "We're not two-year
carpetbaggers."

Copyright: 1997 Dow Jones & Company, Inc. All Rights Reserved.