By Marc Frank | Reuters

Cuba is seeking direct foreign investment in sugar milling and cultivation for the first time since nationalizing the industry soon after the 1959 revolution, Cuban and foreign sources said this week.

At least three companies, all with long-term business experience in Cuba, have made proposals to invest in and administer mills and adjoining cane plantations, though the companies wish to remain anonymous as negotiations proceed.

“They told us they were given the green light at the highest level to discuss milling and cultivation,” a potential investor said.

The sources cautioned that hard bargaining lies ahead before the first milling venture could be signed.

“There are many issues still to be resolved. Investors want to administer the mills, higher percentages of shares and pay sugar farmers and workers more,” a Cuban sugar expert said.

Theoretically, the state-run sugar industry has been open to direct investment for a decade, but in practice there has been no interest up to now on the government’s part except in a few derivatives and mechanical ventures, the sources said.

The Sugar Ministry recently formed Zerus, a company empowered to sign joint ventures.

Zerus Director Jose Rivera Ortiz recently told the official business weekly Opciones that Cuba was interested in forming ventures to produce sugar, syrup, ethanol, alcohol, energy and other derivatives, and that “negotiations obviously include the resources necessary for the development of cane.”

A big obstacle is the U.S. Helms-Burton law, which penalizes investment in U.S. expropriated properties and contains a yet to be implemented chapter allowing Cuban-Americans to sue investors who “traffic” in their expropriated properties.

The Cuban sugar industry, once the world’s biggest exporter with raw sugar output reaching 8 million tonnes in 1990, has been in decline since the former Soviet Union collapsed, depriving it of a preferential market.

For centuries a monoculture economy, today sugar exports account for less than 5 percent of Cuba’s foreign exchange earnings.

Cuba shut down and dismantled 71 of 156 mills in 2003 when raw sugar prices were around $.05 per lb, and relegated 60 percent of plantations to other uses.

Last year’s disastrous 1.3 million tonne harvest, the lowest in a century, led to more closings, with just 42 mills opened this year, though shuttered mills were conserved.

All but eight of 85 Cuban mills were built before the revolution and therefore nationalized, and most plantations are on expropriated lands.

But sugar prices have more than tripled since 2003 as high oil prices have led to increased interest in sugar-based ethanol as an alternative fuel for motorized vehicles.

“Prices are very high and are expected to remain so in the foreseeable future so both the government and investors have a big incentive,” a Cuban economist said.

Cuba plans to boost output beginning in 2006 by increasing acreage and use of fertilizer and herbicides, purchasing new equipment and reopening some 30 mills.

President Fidel Castro, alarmed by the industry’s decline and soaring prices, held an emergency meeting of the industry in mid-February.

Castro ordered daily reports from the 42 mills in operation, a crash planting plan, more supplies and said essential spare parts for agricultural equipment should be flown in from Europe, according to a summary of the meeting seen by Reuters.

The Caribbean island consumes a minimum 700,000 tonnes of sugar per year and 400,000 tonnes are destined for a toll agreement with China.