By HCG Business Intelligence Unit

Defending a country from external attack can be the main task of any State. It is therefore understandable that, in a country such as Cuba, "hypothetically" in constant danger of war or of being faced with attack -- it has been the false excuse that the Cuban government has always used to control everything--, the defense sectors are some of the prioritized sectors to receive funds from the State Budget or other sources, to ensure the resources that make it possible to safeguard the country and keep its invulnerability. 

It would be normal for these funds, however large, to be received from what was actually collected by the State. 

While the USSR and the socialist camp existed, the resources for defense could more or less have been defined from existing agreements with those countries. But how to ensure the country's defense, in the face of the Special Period crisis, when the resources generated by the business system and the national economy barely cover the essential needs of the country? 

The answer to that question had already been given a partial solution in previous years, and not just for the defense needs: procure their own resources; generate them by undertaking economic tasks, expanding the so-called civilian sector of the FAR (Fuerzas Armadas Revolucionarias). 

Really in Cuba it is not a unique experience for the FAR and the MININT (Ministerio del Interior [Ministry of the Interior]) to take on tasks that would not normally belong to them. Historically, it has been very common to see a ministry have construction companies or auto repair shops, to name a few examples, in addition, the practice of outsourcing, or hiring of services to specialized third parties, such as the food for the workers, is not widespread. Why? Because everyone complains about the informality of other companies, or doubts that someone outside their ministry will solve their internal problems and commitments to the State, or to the workers. 

Therefore, many prefer to have, for example, their own construction company to solve a particular task; it does not matter if they are not specialists in the subject and their efficiency is inferior. Or their own food production farm. What matters is solving the problem, the costs do not matter. Therefore, it is not unusual to take on tasks that do not correspond to them. Even, not only to do something that would jeopardize their compliance if they had to wait for someone else to do it, but also, sometimes, as if they want to show that they know how to do it better than others, and even with lower costs. 

That is, the general lack of efficiency of the main managers in charge of providing the services demanded by society, or the lack of response to the needs of the market, have always been a spur in Cuba for everyone to want to do everything, forgetting about the popular saying “stick to what you know”. 

But, unlike previous years, it was no longer a question of creating companies to find answers to their own needs for products or services, but to have a foreign currency business system, whose profits could be channeled into the defense sector, without having to wait for the State Budget to allocate the resources. In other words, we are talking not only about business activities that have to do with self-consumption, such as the production of armament, or of food for their troops and their civilian staff, or the construction of their own works, but also about other activities to provide services to third parties, which is done not to meet a need of their own, but to obtain a foreign currency surplus for their own benefit. 

Thus, the FAR business system created the Business Administration Group (GAE), receiving authorization or licenses to own and manage hotel properties for international tourism (Grupo Gaviota), chain stores in CUC (TRD, plus the Gaviota stores in their hotels), taxis operating in CUC, photography services at CUC (Trimagen), Real Estate Agency that rents apartments in CUC to foreigners (Inmobiliaria Caribe), air taxis and other air services for third parties (Aero Gaviota), sale of spare parts and car repair services (SASA), storage and transport of goods (Almacenes Universales), customs agency (AUSA), etc. Meanwhile, the MININT not only provides protection services to stores, banks, embassies, etc., or for the transfer of securities, charging in CUC, through its companies SEPSA and TRASVAL (services that can be classified as related to the ministry in question), but also for a few years it imported goods for third parties, in addition to having a chain of hardware stores in the name of TRASVAL, the goods transport company SERTA and the construction group D'Obras, entities that not only operated to provide services to the MININT. 

Subsequently, the business sector of the MININT was reduced and many of the aforementioned companies had their licenses to offer products and services to third parties revoked. At the same time, however, the GAE was increasingly expanding the scope of its foreign currency activity in various sectors of the national economy. Thus, they undertook the store chains CUBALSE, CIMEX, Habaguanex, plus all the other services that covered these business groups (gas stations, mixed real estate for rent of homes and office spaces, shipping company, processing of family remittances from Western Union and other entities, etc.), as well as productive activities (oil production by ECASOL, plastic packaging, etc.), and other fundamental services in currencies (for example, the Havana Container Terminal was a joint venture participated by the MITRANS (Ministerio de Transporte [Ministry of Transport]), while the Mariel Container Terminal became part of the GAE, in addition to the entire Mariel Special Development Zone). Just by mentioning these companies, anyone can realize that most of the country's foreign currency generating business activity is in the hands of the GAE, with the exception of medical services abroad, mining, sugar export, rum, tobacco, honey, fishery products, some of international tourism and others of less importance. Even in telecommunications the GAE has a significant stake, as one of ETECSA's shareholders. 

Faced with this reality, several questions arise, which we will collect in groups. 

• Do the annual profits of the companies belonging to the GAE remain entirety in the hands of the FAR? Or, does the existence of these companies allow the FAR to directly obtain the limit amount that the State has approved for them annually, without the need to rely on the implementation of economic plans by third parties, but the GAE must subsequently give the State Budget the difference they obtain in excess, over the approved limit of resources? 

Everything seems to indicate that it is the former. But if everything collected by these entities remains in the coffers of their ministry, the FAR would not have a spending cap, but would instead have as much as they were able to collect in their business systems. 

Even if we hear that the GAE, from its surpluses, periodically provides resources to the other companies in the national economy, we are faced with something unusual, when it is not the defense sector that obtains State resources, but it is the State that must request and obtain resources from the GAE, for the needs of the country. It would be as if the State had to beg from the GAE, for it to provide more resources to the national economy, waiting for the GAE to approve it or not, according to its own decisions. 

• Do GAE companies pay TAXES to the ONAT (Oficina Nacional de Administración Tributaria [National Tax Administration Office]) on net profits earned, like the rest of companies in the country? 

Again, everything seems to indicate that they do not pay taxes to the ONAT. The FAR system is said to have its own tax collection agency, but the funds obtained in this way would not go to the country's National Tax Administration Office.  This assertion may not be entirely true, but the opacity and lack of information about the FAR business system does not allow us to confirm or deny this information. Opacity inherent to a defense-related system, but which is incompatible with the economic information generally managed by society as a whole. 

• Are the GAE companies (and the GAE itself) audited, or in any way controlled by the different control bodies established in the country, be it the National Assembly, or the Comptroller's Office, or the ONAT, the BCC (Banco Central de Cuba [Central Bank of Cuba]), etc.? 

In any case, the verification of entities subordinate to the armed forces or the ministry of the interior will always be cumbersome for civilian agencies. Not only because of what it might mean for a civilian to be in front of a military uniform, but because the verifier may always have doubts as to whether their controlling activity, exercised with neatness and care, could damage the country’s security. So, is it preferable to leave these companies without external control and oversight by the bodies established in the country, relying only on the audits of the system itself to which those companies belong? 

• Do the wages and stimulus paid within the FAR, with the help of the results of the GAE companies, not show that incomes must be higher in the sectors where the best results are desired, or where those results are already achieved? 

With the foreign currency benefits they derive from business activities, the FAR and MININT can afford not only to undertake defense tasks and improve their members' food consumption, but also to pay higher salaries to attract better staff, build and distribute homes more quickly than other ministries, send their staff to vacation to optimal locations, give cars and various home appliances to their first officers, sell products in their restaurants and recreation at prices lower than those that exist on the street for the general public, etc. 

I have no doubt that, if a Country decides that these are priority areas, then the remuneration for their staff must also be distinguished and differentiated in one way or another. But is that not an acknowledgement that there must be differentiation in income, based on the results obtained, or the proposed goals?  Why is the concept recognized as valid for some, while for the rest of the country it is not? 

• Is it beneficial for some of the mentioned companies to belong to the GAE, to help combat the U.S. embargo? 

It has been heard that it is beneficial for the country that chain stores, and some other companies, belong to the FAR business system, which are better prepared to combat the embargo. 

These ideas are not really very convincing, or that the GAE companies can be more efficient in this endeavor, or that other companies in the national economy cannot achieve the same results. 

What has been demonstrated is that by moving them into the GAE, the U.S. has identified a group of companies, that are important to the country's economy, as companies that provide taxes for Cuba's defense needs, putting them on sanctions lists and hindering the normal functioning of those companies. It is clear that, even if these companies did not belong to the GAE, in the logic of thought and ideology of the Cuban government "the enemy" could have used other “false pretexts” to sanction them and hinder their activity, taking into account the market of these companies and their importance in obtaining external resources for the country. 

However, belonging to the GAE, it is easier for the “enemy” to sanction a major group of companies, whether hotels, or rum and coffee producers, or family aid remittance processors. Belonging to the GAE, do these companies really bring more benefits than problems, in the fight against the U.S. embargo? 

• Do the companies of the GAE and the other companies in the national economy compete on an equal footing? 

We often hear the criterion that companies belonging to the GAE are more efficient than the rest of companies in the country, and that is why they have managed to grow more dynamically than the latter. Is that really so? 

First, many of the licenses granted in favor of the GAE have been imposed for a certain purpose, but not because the GAE companies have always proven to be more efficient. This is the case, for example, of the hotels in the north keys of Villa Clara, or in the province of Holguin, which at the time were awarded to Grupo Gaviota, of the FAR, without hardly accommodating the other hotel groups of the Ministry of Tourism. Or the case of chain stores CUBALSE and CIMEX, which from one day to the next passed to the GAE, with the first of them disappearing. Are Gaviota hotels much more efficient than those in Gran Caribe or Cubanacán?  Was TRD much more efficient than CUBALSE and Corporación CIMEX? After moving CIMEX to the GAE, is it now much more efficient than before, when it belonged to the Council of State? 

Again, in the absence of precise business and economic information (not military information), it is impossible to answer these questions. However, we can abstract ourselves and assume that we they are; that GAE companies are more efficient than the rest of the companies. Then, we would have to determine the causes and check if both groups of companies compete on equal footing. 

For example, since the NA (“Número de autorizo” [Authorization Numbers]) of the BCC CAD (Comité de Aprobación de Divisas [Foreign Currency Approval Committee]) emerged in 2004 in order to sign an import contract, the MININT and MINFAR (Ministerio de las Fuerzas Armadas Revolucionarias [Ministry of the Revolutionary Armed Forces]) import companies gained a competitive advantage over the others, as they had a “permanent authorization” for their purchases (IP). These companies are supposed to have received the above-mentioned IPs so as not to delay sensitive and urgent purchases for defense, but the prized purchasing mechanism without timely prior authorizations, immediately made them the preferred channel for imports (urgent or not) from any ministry. To some extent it could be logical for the FAR/MININT to have special prerogatives for military purchases from their ministries (if we accept the absurd idea that other companies do need all kinds of excessive authorizations and limitations). But was this differentiation also necessary for purchases they made for third parties, or for their business system that provided services to third parties in convertible currency? 

The CAD were subsequently eliminated, but external liquidity controls emerged (known under various acronyms, such as CL, FP, CF), without which imported goods cannot be paid. The GAE itself has a kind of “closed scheme”, which allows it to use the foreign currencies received by its business system (whether from Gaviota hotels, or external family aid remittances, and others) for the payment of imports from the Group's companies. It is not the only group within the country with an approved “closed scheme”, but it is one of the few that have it, where it is also important to compare the percentage of income that is allowed to remain in possession of the business group in question. This mechanism makes the GAE companies privileged companies within the country, when many other companies in the country do not have the same advantages to obtain the precious CL, even if they were exporting companies or important import substitutes. 

And if we talk – as another example - about construction, it also seems that the workers of the construction companies of the RAF and the MININT do not have to strictly apply the system established by the Ministry of Construction for the valuation of the different finished work objects and their payment to the workers. 

Or the possibilities to hire construction workers from other countries, for the completion of hotel construction works. It does not matter that this hiring of foreign builders was conducted by the foreign company in charge of administering these constructions or delivering them “turnkey”, and that it was even economically advantageous: it is highly unlikely that a company in the national economy would have dared to carry out such a hiring, or allow it from one of their foreign partners, or that they would have obtained those permits from the higher body. It appears that the GAE did not need to go in search of bureaucratic authorizations for this hiring of foreign staff, a politically, demographically or employment-related sensitive issue. 

Some consider GAE companies to be more efficient, because they apply the controls better and are more rigorous and disciplined. It may be an extended idea, judging by the massive practice of putting military staff in charge of running domestic companies, in the managerial positions abandoned, or left vacant due to the sanctions applied to the previous leaders. It is as if it were believed that it is officers that are solely responsible for the business successes in the MININT/FAR. But despite many tests with new leaders from the FAR, the companies subordinate to non-military ministries seem to be resistant to being “amended”. Many of the once successful military officers, have failed in their new civilian missions. 

Could it be then that these officers failed because they cannot apply in civilian life the military discipline to which they are accustomed? Well, we do not think it is that either. We are convinced that what can may have made the GAE companies attain betters results, was: the better stimuli and payment methods for their workers; the lower degree of bureaucracy and all kinds of authorizations and obstacles that afflict other domestic companies; access to financial resources. That is why they can be more efficient; not because the military knows how to establish an order that civilians cannot even copy. 

There is no need to leave the companies of the national economy in the hands of the military, nor to achieve better results, nor to be able to guarantee the resources they need for defense, which they should obtain from what the Budget allocated to them. 

In extreme cases, if the companies were left in the hands of the GAE's business system, they should be supervised and audited by the same agencies that control the rest of the companies in the country, and under the same premises, the GAE would be left with the share of the profits approved by the country, but giving the State’s central treasury everything beyond the maximum amount approved for the RAF, in addition to taxes. 

If not, would we not be in the presence of a State within the State? But given the lack of transparency, this is not the only question we must ask ourselves. Who are the real owners and shareholders of these companies? Where does all that capital them generate go?