June 28, 1999
By JOSE DE CORDOBA and CARLTA VITZTHUM
Staff Reporters of The Wall Street Journal, June 28, 1999
Canadian Engineering Firm Finds Fickle Partner in Cuban Government
During a dinner with Canadian businessmen at Havana's Palace of the Revolution in 1997, Fidel Castro summoned the cook to complain that his fish soup was cold. The terrified chef explained to the hungry comandante that the electricity had failed again.
For Clarence Boudreau, chairman of Ontario-based FirstKey Project Technologies, Mr. Castro's cold soup was a good sign. It underscored Cuba's desperate need for electricity and augured well for the $500 million agreement his engineering company was negotiating to upgrade the island's power grid.
He was right. He got the deal. But is he ever sorry.
Since that night, the Cuban government has reneged on the contract, FirstKey has lost about $9 million spent developing the proposal, and Mr. Boudreau charges that Havana now is using his plans to lure European firms to the same project. "First there is a love affair," he says. "And then they dispose of you like a wet rag."
For many Canadian companies, as well as for the government, it's the morning after their love affair with the island nation. In 1993, when Cuba permitted the dollar to circulate and some small businesses to start up, Canadian officials and investors had hoped that the limited economic opening would lead to wider-ranging economic and political reforms.
"There was an effervescent feeling that Cuba had opened up a process of change," says Archibald Ritter, a prominent Cuba scholar at Carleton University in Ottawa.
That process ended abruptly in 1996 when Mr. Castro made it clear that no further changes would be contemplated. A high-profile visit to Cuba by Canadian Prime Minister Jean Chretien in 1998 failed to yield the dividends in democracy and human rights that Ottawa hoped for. After Cuban officials barred Canadian diplomats from the trial of four human-rights activists in March this year, Ottawa froze new aid initiatives to Cuba and stopped sponsoring efforts to bring the country into hemispheric organizations.
On the business side, Canadian investment in Cuba in the period 1992-97 totaled about $414 million, perhaps the largest amount from a single country. The island has drawn a number of small and medium firms, and some companies have done well. Ottawa-based Intelcan Technosystems Inc. has built or modernized three Cuban airports. Vancouver financier Walter Berukoff, who already has about $40 million invested in Cuban mining and real estate, plans to invest $400 million more in golf courses and hotels in Cuba, although financing for the project has proven elusive.
But there also have been big disappointed suitors. Sherritt International Corp. raised nearly $500 million three years ago to invest on the island. Now the mining and energy company is looking elsewhere; it just bought a share of a nickel mine in Australia for about $35 million. "There's a limit to the rate you can invest in Cuba," Sherritt Chairman Ian Delaney told reporters after the company's annual meeting in May.
FirstKey's Mr. Boudreau, who is 55, has lived the ups and downs of Canada's bumpy Cuban affair. When he first got involved with Havana, Mr. Boudreau thought he had hit the jackpot. In a country where personal relationships are everything, he had direct links to Mr. Castro through two influential Chileans: a prominent left-wing politician and an equally well-known right-wing business leader. They had set aside ideological differences to form a Chilean company that became a partner of FirstKey, with a 5% stake in the Cuban power project.
Doing business with die-hard Communists in a Third World environment didn't daunt the lanky, white-haired Mr. Boudreau, a 34-year veteran of major engineering projects. He has built an office tower in China and power stations in the Philippines, and worked on many power ventures in Canada, among other projects. In 1996, when he became involved in Cuba, he was running a division of Bennett & Wright, a
125-year-old Toronto engineering company. He and some associates later bought out the division and renamed it FirstKey, in part to do the Cuba project. His usual reply when asked how he's doing is "just about fantastic."
An Edge on the U.S.
Mr. Boudreau had the enthusiastic backing of the Canadian government, whose aid agency contributed around $600,000 in seed money to the Cuba venture. It was a rare chance to get ahead of the U.S., which had compounded its 1962 trade embargo with the 1996 Helms-Burton Act, which permits sanctions against companies doing business with confiscated U.S. assets in Cuba.
"Everybody was pushing Cuba. It was the place to invest," Mr. Boudreau says. "Where else could Canadians go and have the Americans in handcuffs, and you have the boxing gloves?"
What's more, Cuba desperately needed electric power. Prolonged blackouts have been a fact of life since the collapse of the Soviet Union ended the island's sizable subsidies and throttled its economy. By Cuba's own accounts, in 1997, when FirstKey signed a joint-venture agreement with the Cuban state utility, the island was generating about 74% of the power it had been pumping out five years earlier.
"People down there live in darkness," says Larry Galajda, vice president of Stantec Engineering, Canada's third-largest engineering consultancy, which was hired by FirstKey to draw up the plans for the project.
No wonder. The Soviet-built plant that FirstKey would rebuild was running at about 40% of capacity. The Cubans had few tools and no spare parts. Mr. Galajda recalls how one technician used the end of a spoon as a screwdriver. He says there were enough dangerous gases swirling about that "any minor electrical fault would have sent off a rocket to the moon."
If FirstKey's project had been completed, the joint venture would have taken care of 30% of Cuba's electric needs. The project, first valued at $450 million, called for FirstKey to arrange a capital investment of $100 million toward the cost of revamping the Soviet plant and installing a new 350-megawatt unit. The remaining $350 million debt would have been repaid to creditors and investors by the Cubans over 15 years from the dollar income generated by selling the power to the island's tourist industry. FirstKey's payoff would come in the form of about $30 million in engineering and management fees, as well as 10% of the revenue the project generated over 15 years.
"It was and still is one of the most interesting electricity projects anywhere in the world," says Manuel Perez, a director of special projects at Radiotronica SA, a Spanish company that designs and installs electrical networks. The project attracted a lot of interest among Spanish companies, including the two largest utilities, Endesa SA and Ibedrola SA.
But finding money for Cuban investment projects isn't easy. The country has defaulted on much of its $11 billion foreign debt, and the U.S. blocks its access to the International Monetary Fund and the World Bank. Helms-Burton has made most banks skittish about lending to Cuba.
Spies in the Office
Cuba itself presented obstacles petty and large. Customs agents confiscated a portable photocopier that Mr. Galajda and his engineers had brought in to copy plans; the agents considered the machine a potentially subversive tool. Alex Constandse, a Toronto investment banker who was FirstKey's financial adviser, says the government also planted spies in FirstKey's Havana office to siphon off privileged information.
Nevertheless, the project appeared to be on track. Most important, Mr. Boudreau says that Iberdrola, Spain's second-largest power producer, agreed to put up the necessary $100 million, contingent on the Spanish utility's completing a four-month due-diligence study. But last July, Cuban officials suddenly killed the proposal, saying the due-diligence requirement would take longer than the contract allowed.
In a written reply to a request for an interview, Cuban officials say the reason for voiding the contract was that FirstKey didn't meet deadlines or the conditions for obtaining financing, a supplier, a lead bank or an operating partner. An official from Iberdrola says his company agreed to look at the deal, but he denies that it ever agreed to provide financing. Other Spanish businessmen say FirstKey, in its eagerness to win the contract, accepted conditions that were impossible to meet.
FirstKey says that it had the financing and that both the Cubans and the Spaniards are wrong on that point. The company also disagrees with Iberdrola on what type of agreement the two companies signed. FirstKey says it was a binding accord, which means it allowed the Canadians to meet the conditions laid down by the Cuban government. Iberdrola says it signed an agreement only to study the project and that it didn't agree to provide financing in the end.
In September, at Cuba's request, FirstKey submitted a second proposal for a trimmed-down $275 million version of the project. This time, Nuon International NV, the Netherlands' largest utility, agreed to invest $45 million in the project while Harbin Power Engineering, a giant Chinese industrial company, agreed to finance and supply a new 210-megawatt turbine.
But the Cubans then pulled a disappearing act, Mr. Boudreau says, refusing to answer repeated telephone calls and faxes. He and Mr. Constandse flew down to Havana and wangled a meeting with Basic Industries Minister Marcos Portal. The minister told them Cuba had been able to reduce electricity consumption by 3% and didn't need the power anymore. Mr. Constandse was skeptical. "With all the blackouts going on, did he think we were stupid?" he asks.
Mr. Boudreau says that since Cuba vetoed FirstKey's project, the Cubans have approached a number of European companies to do the same project, using as a guideline the $1.7 million engineering study compiled by Mr. Galajda. The balance of FirstKey's losses includes legal, financial and development costs and dozens of trips to places ranging from China to Madrid.
Mr. Boudreau's lawyers have sent out cease-and-desist letters to a dozen companies with which FirstKey had shared the studies after signing confidentiality agreements. "What they do is they suck out all the information and drawings," says Mr. Boudreau. "It's not normal practice in the rest of the world."
A Leader Mulls Retreat
More worrisome for Cuba is the uncertain future of Sherritt on the island. Mr. Delaney, tagged in the Canadian press as Mr. Castro's favorite capitalist, has made investments in Cuban nickel, power, oil and gas, agribusiness and the concession for a cellular-phone monopoly. It was Sherritt that led the charge of Canadian businessmen into Cuba, and had sanctions imposed on it by the U.S. State Department under Helms-Burton because Sherritt's Cuban mine had once been owned by an American company.
This year, at Sherritt's annual meeting, Mr. Delaney said that Sherritt was looking to place the bulk of the $347 million remaining from an original $474 million raised for Cuban investments in projects outside the island. It was a striking about-face for a company that Mr. Delaney had hoped would be a Cuban version of Canadian Pacific, the legendary, all-powerful conglomerate that in the 19th century opened Canada's west.
Some analysts predict that Mr. Delaney, frustrated by the slow pace of change in Cuba, may spin off the company's Cuban assets to reduce or eliminate Sherritt's own Cuban exposure. A spokeswoman for Sherritt says the company doesn't comment on rumors.
Back at FirstKey, Mr. Boudreau has taken down the obligatory photographs of himself embracing Mr. Castro. He ruefully recalls that during the three-year affair with Havana, FirstKey hosted Cuban officials on round-the-world trips to help sell the two versions of the power project to European utilities. On one occasion, Mr. Boudreau took Mr. Portal to see Niagara Falls and then hosted him and other officials at a cocktail party and a dinner at Toronto's posh Founders Club to introduce the visitors to the city's financial community. The tab was $20,000.
In hindsight, Mr. Boudreau's enthusiasm appears naive to others involved in the failed agreement. Hans Schepers, who heads Nuon's international division, says FirstKey didn't have the depth necessary to compete in Cuba. "Everybody knows that Cuba is a high risk," Mr. Schepers says. "If you can't afford to lose, don't play."
In Toronto, Mr. Constandse has moved on to other projects. But he has written up his Cuban experiences as a primer for other businessmen. The article, published in a financial newsletter, concludes: "The best way to see Cuba is on a holiday package to the island's beautiful beaches. Don't waste time in the business district."
-- Julian Beltrame contributed to this article.
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