It is essential for any foreign investor, executive or company interested in exploring business opportunities in the Cuban market to know GRUPO GAE, an entity owned by the Ministry of the Armed Forces (MINFAR)and be aware of the scope and power that GRUPO GAE has within the Cuban economy, given the strategic positioning of its companies in many strategic sectors of the Cuban market.
Currently GAE is the leader within certain strategic sectors of the country's economy, such as the retail market, the tourism sector, the Mariel Special Development Zone (ZEDM), telecommunications, finance, the automotive market and the real estate sector, among others. Its business structure is made up of dozens of companies, which operate in the dollarized market.
Figure 1. Business System Structure of the Cuban Ministry of the Revolutionary Armed Forces
Source: Havana Consulting Group.
Scope of GAE
In the history of the Cuban revolution, the armed forces had never concentrated as much economic power on their hands as they do today. During the times that Fidel Castro governed, GAE played a relatively minor role in the Cuban economy. Its business model was geared at raising funds to finance the activities of the armed forces and reduce their financial burden on the state. The situation is different today: GAE has become an entrepreneurial octopus that has gradually gathered the most lucrative sectors of the Cuban economy. It is estimated that its operations in 2016 amounted to about 4.2 billion dollars.
Among its most notable acquisitions in recent years are CIMEX Corporation, Habaguanex SA and Banco Financiero Internacional (BFI). Undoubtedly, these three acquisitions have made GAE one of the most lucrative and powerful companies not only on the island but in the Caribbean region.
The reestablishment of diplomatic relations between Cuba and the US is one of the factors thatcontributed to the growth of GAE as a business holding unparalleled in the Cuban economy. The domino effect caused by the thaw generated an unprecedented interest in exploring Cuba as an investment destination not only by American entrepreneurs but also by those from all over the world. Thus, GAE positioned itself rapidly in sectors where foreign investment was anticipated. Examples are the Mariel Special Development Zone (ZEDM), the location designed to become the country's industrial and technological locomotive; the mega tourist project of the port of Havana and the development of the the historical center of the country's capital, the most emblematic and visited area of the island by foreign tourists populated by museums and historical-cultural locations, hotels, bars, and shops; 85% of the dollarized retail market, commanding the largest networks of convenience stores, gas stations, fast food chains, etc., which are the main points where a large part of the remittances sent by Cuban exiles are spent; 27% of the shares of ETECSA, the country's telecommunications monopoly that controls a growing market for cellular telephony users (4.3 million users) and the distribution of Internet access; the tourist sector with two powerful hotel chains (Gaviota S.A and Habaguanex S.A) that have the majority of the 5- and 4-star hotels in the most strategic tourist poles of the country; and part of the financial sector, through the International Finance Bank (BFI) and the non-bank entity FINCIMEX, which is in charge of the receipt of remittances and controls the magnetic cards for the purchase fuel and credit cards used by tourists.
With this broad presence in the Cuban economy, it is easy to see that a good part of the businesses where the greatest investment opportunities lie are in the hands of the Cuban Armed Forces. That is why the new measures announced by the Trump Administration are aimed at preventing business with these entities controlled by the military, which would be very strong competitors to US companies that are exploring with interest the sale of their products and services in the Cuban market.
CIMEX is the largest and most powerful holding company under the GAE umbrella. In Figure 2 we show a group of the most important companies affiliated with CIMEX.
Figure 2. Description of some of the companies belonging to CIMEX S.A., 2017
Source: Havana Consulting Group.
Apart from CIMEX, GAE has other companies that serve other sectors of the Cuban economy such as tourism, retail, automotive and logistics; some of them are included in Figure 3.
Figure 3. Description of some of the companies belonging to the GAE Group, 2017
Source: Havana Consulting Group.
Also, under the umbrella of the GAE Group there are other companies and strategic projects with great investment potential for the future. They are listed in Figure 4.
Figure 4. Description of some of the companies belonging to the GAE Group, 2017
Source: Havana Consulting Group.
Current importance of GAE in the Cuban economy
In 2016 it was estimated that GAE's business operations generated 21% of the gross income of the Cuban economy.
In recent years the structure of the Cuban economy has undergone notable changes, especially as a result of the reforms undertaken by Raúl Castro and the impact of the thaw in relations with the United States government. In this new scenario, two key developments have occurred: first, the growth of GAE and its expansion throughout the economy and second, the growth of the private sector despite its limitations and the very limited space where its development is allowed.
The former has become a corporate superstructure with enormous economic power and has positioned itself in several of the most strategic sectors of the dollarized economy. In addition, GAE has placed under his control the most strategic investment projects of the next 30 years, such as the ZEDM and the tourist megaproject of the port of Havana, among others. In this way, GAE guarantees its future growth, practically without any type of competition.
The private sector has been innovative, persevering and successful. Despite the limitations it faces by virtue of not being legally recognized as companies, not having a wholesale market for the purchase of its inputs, burdened by a 50% tax rate and limited to some 201 modalities, the private sector competes with the state sector and bests it in several sectors and territories of the country. As a result of its growth, 535,000 people have become independent of the state and this sector currently generates 17.8% of the gross income of the economy. See Figure 5.
Figure 5. New balance of power in the Cuban economy, 2017.
Source: Havana Consulting Group.
CONCLUSIONS
In almost 60 years of socialist economy never had a government company concentrated as much power in its hands as has GAE. Nor had the non-state sector reached such high importance within the island's economy.
Two new forces have emerged in the midst of the reforms undertaken by the government. GAE, with a lot of power behind it, is unencumbered in decision-making as to where, in what, and how to invest and with whom to associate. In contrast, the private sector is limited in the scope of its activities, burdened by high taxes and lack of legal personality, constrained in its ability to associate with others and make investments, and pursues the sole purpose of succeeding, generating wealth, and being able to expand its activities to improve its economic situation and contribute to the development of the country.
The economic future of the island will be closely linked to the development of both forces. At the moment, an economic opening process is not visualized, where both forces could compete as equals. On the contrary, in the midst of this new scenario, what has emerged is a process of castration of the nascent private sector and empowerment of the forces that represent a monopolistic state capitalism, concentrated mainly in the military forces. Left behind is the inefficient rest of the state sector, populated by some successful conglomerates (e.g., those operating as joint ventures with the government, in the tobacco sector, tourism, biotechnology, and food industry, among others) and thousands of inefficient and unproductive companies, weighted down by bureaucracy, technological backwardness and mediocrity, and constituting a tremendous fiscal burden on the country.
This inoperative third force in the country's economy employs a workforce of more than 4 million people. In the future, the state will have to decide if it maintains this sector or it reassigns it to the octopus GAE or to the private sector. If it decides to reassign the current state sector, this process will have two possible paths: the absorption by GAE of the most lucrative sectors that are still in the hands of the state bureaucracy or the enactment of new laws that would liberalize the productive forces. Unless the latter occurs, the Cuban economy will continue in its never-ending stagnation.
