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Diplomacy in Action

2012 Investment Climate Statement - Honduras


2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report
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Openness to Foreign Investment

The Government of Honduras views foreign investment as crucial for economic growth and development. In July 2011, the National Congress passed a new Law for the Promotion and Protection of Investments, which authorizes enhanced benefits for new domestic and foreign investment. After government auditors published findings of widespread corruption and inefficiency at Puerto Cortés, Honduras’ signature port, President Porfirio “Pepe” Lobo suspended the port’s management team and replaced it with an intervention committee, which recommended that the port be run as a public-private partnership. In January 2012, President Lobo appointed a new General Manager to oversee administration of the country’s ports.

In 2011, the Honduran economy continued its modest recovery from the effects of the global economic crisis and the 2009 coup d’état, both of which created an atmosphere of uncertainty leading to a virtual halt in international and domestic investment. In 2011, GDP grew by 3.5 percent. GDP growth for 2010 was 2.8 percent, following a 2.1 percent contraction of GDP in 2009.

In 2004, the United States signed the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR or Agreement) with five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) and the Dominican Republic (the Parties). The Agreement entered into force in 2006. Under the Agreement, the Parties are significantly liberalizing trade in goods and services. CAFTA-DR also includes important disciplines relating to customs administration and trade facilitation, technical barriers to trade, government procurement, investment, telecommunications, electronic commerce, intellectual property rights, transparency, and labor and environmental protection. In 2011, business community representatives expressed concern that an advance tax on income from the sale of imported goods contained in a tax reform law violated CAFTA-DR.

The Honduran government is generally open to foreign investment, with limited restrictions and performance requirements. Some U.S. investors historically have experienced long waiting periods for environmental permits and other regulatory and legislative approvals. However, waiting periods for environmental permits shortened in 2011, and the Ministry of the Presidency is leading an effort to shorten waiting periods for other types of approval. Sectors in which U.S. companies most frequently encounter problems include infrastructure, telecoms, and energy. Low labor costs, proximity to the U.S. market, and Central America’s best Caribbean port (Puerto Cortés) make Honduras attractive to investors. At the same time, however, Honduras’s investment climate is hampered by high levels of crime, a weak judicial system, corruption, low educational levels and poor transportation and other infrastructure.

The Constitution of Honduras requires that all foreign investment complement, but not substitute for, national investment. A new Investment Law, passed in 2011, replaces the 1992 Investment Law, which previously governed investment conditions in Honduras. The 2011 law guarantees national treatment to foreign private firms in Honduras, with few exceptions, and includes enhanced benefits in the areas of insurance and arbitration for domestic and foreign investors. CAFTA-DR, which has equal status in Honduras with the Constitution, requires national treatment and most favored nation treatment for U.S. investors in most sectors of the Honduran economy. The obligations of the CAFTA-DR Investment Chapter supersede equivalent provisions in the 2011 Investment Law since under the Honduran Constitution international treaties are self-executing.

The 2011 Investment Law requires that all local and foreign direct investment be registered with the Investment Office in the Secretariat of Industry and Commerce. Upon registration, an investor is issued an investment certificate, which provides investment protection under the law and guarantees investors’ international arbitration rights. These rights are further reinforced under CAFTA-DR.

The 2011 Investment Law does not limit foreign ownership of businesses, except for those specifically reserved for Honduran investors, e.g., small firms with capital less than 150,000 Lempiras (about USD 7940). For all investments, at least 90 percent of a company’s labor force must be Honduran, and at least 85 percent of the payroll must be paid to Hondurans. Majority ownership by Honduran citizens is required for companies that wish to take advantage of the Agrarian Reform Law, engage in commercial fishing, forestry, or local transportation activities, serve as representatives, agents, or distributors for foreign companies, or operate radio and television stations.

Additionally, government authorization is required for both foreign and domestic investors in the following areas:

- Basic health services,
- Telecommunications,
- Generation, transmission, and distribution of electricity,
- Air transport,
- Fishing, hunting and aquaculture,
- Exploitation of forestry resources,
- Investigation, exploration, and exploitation of mines, quarries, petroleum and related substances,
- Agricultural and agro-industrial activities exceeding land tenancy limits established by the Agricultural Modernization Law of 1992 and the Land Reform Law of 1974,
- Insurance and financial services, and
- Private education services.

Under the current version of the Government Contracting Law, which originally entered into force in October 2001 and was amended based on the CAFTA-DR Government Procurement Chapter, all public contracts of more than 1 million Lempiras (about USD 53,000) must be offered through public competitive bidding. Public contracts between 500,000 and 1 million Lempiras (USD 26,000 - 53,000) can be offered through a closed bid, and contracts less than 500,000 Lempiras (USD 26,000) are exempt from the bidding requirements. CAFTA-DR eliminated the requirement that foreign firms act through a local agent (at least 51 percent Honduran-owned) to participate in public tenders.

CAFTA-DR requires fair and transparent procurement procedures, including advance notice of purchases and timely and effective bid review procedures. Under CAFTA-DR, U.S. suppliers are permitted to bid on procurements covered by the agreement for most Honduran government entities, including key ministries, on the same basis as Honduran suppliers. The anti-corruption provisions require each government to ensure that bribery in matters affecting trade and investment, including in government procurement, is treated as a criminal offense, or is subject to comparable penalties, under its law. However, there have been few trials for bribery or corruption despite a widespread perception that corruption is a serious problem. Since CAFTA-DR came into effect, government agencies have frequently circumvented competitive bidding procedures, including for large infrastructure projects, by declaring “emergencies.” In 2011, the government and Honduran National Congress received widespread criticism for authorizing the National Electrical Energy Company (ENEE) to use emergency procurement authorities to enter into a sixteen-year energy purchase agreement. Honduras is not a signatory to the WTO Agreement on Government Procurement.

In 2002, the Government of Honduras ratified a law for the simplification of administrative procedures for establishing a company. Since this legislation went into effect, the government has made significant improvements in streamlining procedures and eliminating administrative obstacles. According to the 2011 World Bank Doing Business Index, the time required for establishing an enterprise was reduced to an average of 14 days in 2010 from 21 days in 2008. This average is second best in Central America and the Caribbean (tied with Colombia and behind Mexico and Panama, each with 9 days) and significantly less than the 2011 Latin America average of 36 days. Under the leadership of the Ministry of the Presidency, the Government of Honduras is working to further improve its competitiveness, based on the recommendations of the Doing Business Index. Foreign businesses setting up operations in Honduras are subject to the Commercial Code, which recognizes several types of mercantile organizations: individual ownership, general partnership, simple limited partnership, limited liability company, corporation and joint stock company.

The United States-Honduras Bilateral Investment Treaty (BIT) entered into force in 2001. CAFTA-DR contains an Investment Chapter. An exchange of letters posted at http://www.ustr.gov addresses the relationship between these two agreements.

The Law for the Defense and Promotion of Competition went into effect in 2006. The law established the Commission for the Defense and Promotion of Competition (CDPC), which conducts investigations regarding price collusion and other anti-competitive practices. Some U.S. investors have claimed that they were subjected to anticompetitive practices before the law went into effect. In 2010, after a two-year investigation, the CDPC fined two cement companies 87 million Lempiras (approximately USD 4.6 million) for violating Honduras’s competition law by engaging in price collusion. The CDPC has also issued findings on anti-competitive practices in other sectors, including banking, the pharmaceutical industry, and the sugar industry.

Honduras's Rankings on Select Competition Indicators

 

Measure

Year

Index/Ranking

TI Corruption Index

2011

2.6/ 129 of 183

Heritage Economic Freedom

2011

58.6/99 of 179

World Bank Doing Business

2011

131 of 183

MCC* Gov’t Effectiveness

2012

0.19 (0.0)

MCC Rule of Law

2012

0.06 (0.0)

MCC Control of Corruption

2012

-0.08 (0.0)

MCC Fiscal Policy

2012

-3.1 (-2.7)

MCC Trade Policy

2012

77.1 (69.1)

MCC Regulatory Quality

2012

0.53 0.0)

MCC Business Start Up

2012

0.948 0.948)

MCC Land Rights Access

2012

0.663 (0.638)

MCC Natural Resource Protection

2012

97.5 (71.2)

* MCC indicators measure Honduras's performance relative to the median score for all countries in the Low Income Country category. This median score is in parenthesis next to Honduras's score. Scores above the median are considered as passing. Scores on or below the median are considered as failing.

Conversion and Transfer Policies

The 2011 Investment Law guarantees foreign investors access to foreign currency needed to transfer funds associated with their investments in Honduras. This includes:

- Imports of goods and services necessary to operate,
- Payment of royalty fees, rents, annuities and technical assistance, and
- Remittance of dividends and capital repatriation.

In 2011, the Central Bank of Honduras (BCH) abandoned the de facto fixed exchange rate that had been in place since 2005 and reintroduced a crawling peg that allows the Lempira to fluctuate by 7 percent against the U.S. dollar in either direction. The BCH mandated that the crawling peg is subject to the further restriction that any daily price be no greater than 100.075 percent of the average for the prior 7 daily auctions. This secondary restriction limits devaluation to a maximum of approximately 4.8 percent annually (assuming the maximum devaluation daily). As of March 2012, the exchange rate had changed very little under the crawling peg. The Central Bank initially had a very difficult time meeting demand for U.S. dollars, and foreign exchange reserves declined following the introduction of the crawling peg. However, the level of reserves subsequently increased, covering 3.3 months of imports at the end of 2011. The Central Bank uses an auction system to regulate the allocation of foreign exchange. Regulations governing the auction system were published in 2007. These establish the following:

- The base price is established every five auctions according to the differential between the domestic inflation rate and the inflation rate of the main commercial partners of Honduras;

- The procedure to determine the base price is set by the Central Bank’s Board of Directors;

- The Board of Directors establishes through resolutions the exchange commission to be charged by the Central Bank and the exchange agencies in their foreign exchange transactions;

- Individuals and corporate bodies can participate in the auction system for dollar purchases, either by themselves or through an exchange agency expressing the offered price in Lempiras with a maximum of four decimals. The offers can be no less than USD 10,000 nor more than USD 300,000 for individuals, and cannot be more than USD 1.2 million for corporations.


Additional information on the Central Bank’s auction system is available at http://www.bch.hn. To date, the U.S. Embassy in Honduras has not received complaints from individuals with regard to converting or transferring funds associated with investments.

Expropriation and Compensation

The Honduran government has the authority to expropriate property for purposes of land reform or public use. The National Agrarian Reform Law provides that idle land fit for farming can be expropriated and awarded to indigent and landless persons. In order to obtain land under this provision, impoverished farmer groups often invade or illegally occupy land owned by private companies. The occupants then file for the land under the Agrarian Reform Law with Honduran National Agrarian Institute (INA). While government expropriation of land owned by U.S. companies is not common, disputes related to land seizure actions are relatively common for both Honduran and foreign landowners, most notably those in the agricultural sector. In most cases, landowners have found that pursuing the subsequent legal avenues is costly and time consuming and rarely leads to conclusive results.

Compensation for land expropriated under the Agrarian Reform Law, when awarded, can be paid partly in cash and partly in 15-, 20- or 25-year government bonds. The portion to be paid in cash cannot exceed USD 1000 if the expropriated land has at least one building; it cannot exceed USD 500 if the land is in use but has no buildings; and if the land is not in use, compensation will be paid entirely in 25-year government bonds.

Violence in the Bajo Aguan region has risen at a higher rate than Honduras as a whole. In response to the violence in 2011 the government dispatched a security force comprised of the army and police to the region. Additionally, the National Agrarian Institute (INA), with the assistance of Human Rights NGOs, brokered the sale of land previously owned by a large agribusiness firm to two of the largest agricultural workers’ collectives. The INA has also provided equipment, technical assistance, and medical care to the collectives as part of the agreement. Despite the government’s efforts, the region continues to struggle with land invasions by squatters and violence.

 

Dispute Settlement

The Honduran government has a poor record of handling investment disputes due to an outdated commercial code and a weak judicial system. The Honduran Commercial Code, which was enacted in 1950, is the main legislation that regulates the operations of businesses in the country. The application of the Commercial Code and its regulations falls under the jurisdiction of the Honduran civil court system.

U.S. claimants frequently complain about the lack of transparency and the slow administration of justice in the courts. There are also complaints of favoritism, external pressure and bribes within the judicial system. A significant number of U.S. firms have had difficulty navigating the legal system. Many U.S. citizens have complained about the quality of legal representation they receive from Honduran attorneys.

A new Civil Procedures Code (CPC), approved by the Honduran Congress in 2007, went into effect in 2010, replacing a code that had been in effect since 1906. Its goal is to transform the entire civil-court system by establishing open, oral arguments for adversary proceedings, which will now be recorded. The CPC provides for more effective protection of commercial transactions, property rights, and land tenure, as well as a more efficient process for the enforcement of rulings issued by foreign courts.

CAFTA-DR provides dispute settlement procedures between the United States and Honduras. Domestically, Honduras’s Conciliation and Arbitration Law (Decree 161-2000), which seeks to encourage arbitration and clarify the procedures under which it takes place, entered into force in 2001. In that same year, Centers for Conciliation and Arbitration were established within the Chambers of Commerce and Industry in Tegucigalpa and San Pedro Sula. The new investment law permits investors to request arbitration directly, eliminating the previous requirement to include an arbitration clause in investment contracts. Arbitration and conciliation are generally considered swifter and more cost-effective means of resolving disputes between commercial entities, and there may be the additional advantage that the arbitrator or mediator may have specialized expertise in the technical area involved in the dispute. Honduras has been a member of the ICSID (International Center for the Settlement of Investment Disputes) since March 1989.

Performance Requirements and Incentives

There are relatively few performance requirements in Honduras. The 2011 Investment Law guarantees to all foreign investors the freedom to export and import, and eliminates the requirement of prior administrative permits and licenses, except for statistical registries and customs procedures.

Under CAFTA-DR, Honduras granted U.S. services suppliers substantial access to its services market, including financial services. Application procedures for service suppliers in all sectors are generally simple, clear and non-discriminatory. Honduras’s service sector is widely accessible to foreign companies as evidenced by U.S. companies’ participation in the Honduran banking, insurance, and accounting markets. In both the banking and insurance sectors, foreign companies generally operate on equal footing with local companies as long as the foreign company establishes a branch or subsidiary in Honduras. However, there are restrictions on cross-border services and offshore operations. Insurance may not be offered on a cross-border basis, and a foreign bank wishing to operate offshore must establish a representative office in Honduras, which entails cumbersome reporting requirements and procedures. Furthermore, a Honduran branch of a foreign bank may only operate based on its capital in Honduras, not on its global or regional capital.

Honduran law prohibits discriminatory or preferential export and import policies affecting foreign investors. In practice, however, the Honduran government has at times used sanitary and phyto-sanitary requirements to prevent imports of U.S. feed grains to Honduras. Under CAFTA-DR, Honduras agreed to apply the science-based disciplines of the WTO Agreement on Sanitary and Phyto-sanitary Measures. As a result, Honduras installed a National Sanitary and Phyto-sanitary Measures Committee and recognizes the equivalence of the U.S. food safety and inspection systems for beef, pork, and poultry, thereby eliminating the need for plant-by-plant inspections of U.S. producers.

All imported foodstuffs must be registered with the Sanitary Regulations Directorate (previously the Division of Food Control), which issues a sanitary registration number. Some U.S. businesses have complained that delays in the process of granting these permits hamper their abilities to import products into Honduras. U.S. companies have also reported that these regulations are not always strictly enforced for Honduran companies. This may place U.S. companies that comply with the regulations at a disadvantage.

In 1999, the Honduran National Congress passed a Tourism Incentives Law, which offers tax exemptions for national and international investment in tourism development projects. The law provided income tax exemptions for the first 10 years of the project and permitted the duty-free import of goods needed for the project, including publicity materials. In 2002 a reformed law was passed, offering the same basic incentives, but with a narrower definition of who may qualify for the incentives. This change was due in large part to the saturation of the fast food and restaurant market since many franchises established locations in Honduras under the duty-free incentives of the 1999 law. The reforms excluded restaurant and other enterprises including casinos, nightclubs and movie theaters from the law’s benefits. In addition, a requirement was added that a business must be located in a designated tourism zone to qualify for tax exemptions and duty-free status.

Foreigners or foreign companies seeking to purchase property exceeding 3,000 square meters in size for tourism or other development projects in designated tourism zones must present an application to the Honduran Tourism Institute at the Ministry of Tourism. In addition to providing the required personal information, the potential buyer must also prove that a contract to buy a specific property exists and that the project is registered with the Honduran Ministry of Tourism. The buyer must also present feasiblity studies and plans about the proposed tourism or economic development project.

Right to Private Ownership and Establishment

The 2011 Investment Law guarantees both local and foreign investors the right to own property, subject to certain restrictions established by the Honduran Constitution and several laws relating to property rights. This guarantee includes the right to free acquisition, profit, use, disposition and any other right attributable to property ownership. The major exception is the constitutional prohibition of foreign ownership of land within 40 kilometers of international borders and shorelines although Honduran law now permits foreign individuals to purchase properties in designated “tourism zones.”

Investors have the right to freely establish, acquire and dispose of interests in business enterprises at market prices under freely negotiated conditions and without government intervention. Private enterprises compete on an equal basis with public enterprises with respect to access to markets, credit and other business operations.

Protection of Property Rights

Secured interests in property, both movable and real, are recognized under Honduran law. Since 2006, the Chamber of Commerce and Industry of Tegucigalpa (CCIT) has managed the national mercantile registry. In 2010, secured transaction reform legislation came into effect, creating the legislative framework for movable assets to be used as collateral. Honduras’ secured transactions law gives a concession to the CCIT to administer the registry, which began operating in January 2011. As of December 2011, the secured transactions registry had over 3,800 registered assets.

Inadequate land title procedures have led to numerous investment disputes involving U.S. nationals who are landowners. Title insurance is not widely available in Honduras and approximately 80 percent of the privately-held land in the country is either untitled or improperly titled. Resolution of disputes in court often takes years. There have been claims of widespread corruption in land sales, deed filing, and dispute resolution, including claims against attorneys, real estate companies, judges, and local officials. Although some progress has been achieved, particularly in the Bay Islands, the property registration system is highly unreliable, which represents a major constraint on investment. In addition, a lack of implementing regulations leads to long delays in the awarding of titles in some regions. A law passed in 2008 authorized the government to award certain agricultural lands that have been under dispute for more than two years to illegal occupants with only nominal compensation to legal titleholders. This law was declared unconstitutional by the Supreme Court and was repealed in 2011. However, Congress agreed to let stand land seizures based on this law.

According to the 2011 World Bank’s Doing Business Index (DBI), registering property in Honduras requires seven procedures, takes 23 days, and costs 5.5 percent of the property value.

The legislative framework for protection of intellectual property rights (IPR) is generally adequate, but laws are not always effectively implemented. The Property Institute (IP) and Public Ministry handle protection and enforcement of intellectual property rights.

Honduras largely complied with the Trade Related Aspects of Intellectual Property Rights (TRIPS) Agreement by the January 1, 2000 deadline. In December 1999, the Honduran Congress passed two laws to correct deficiencies in previous legislation concerning copyrights, patents and trademarks. The Copyright Law added more than 20 different criminal offenses related to copyright infringement and established fines and suspension of services that can be levied against offenders. The Law on Industrial Property, which covers both trademarks and patents, included modifications on patent protection for pharmaceuticals, extending the term from 17 to 20 years to meet international standards. However, the illegitimate registration of well-known trademarks has been a problem. Honduran law protects data exclusivity for a period of five years, and protects process patents, but it does not recognize second-use patents.

CAFTA-DR provides for the protection and enforcement of a broad range of intellectual property rights, which are consistent with U.S. and international standards as well as with emerging international standards of IPR protection and enforcement. Provisions include state-of-the-art protections for patents, trademarks, undisclosed test and other data submitted to obtain marketing approval for pharmaceuticals and agricultural chemicals, and digital copyrighted products such as software, music, text, and videos. There are also provisions on deterrence of piracy and counterfeiting. Additionally, CAFTA-DR provides authorities the ability to confiscate pirated goods and investigate intellectual property cases on their own initiative.

During the implementation process of its CAFTA-DR IPR obligations, Honduras undertook legislative reforms providing for stronger IPR protection and enforcement. However, as of the end of 2011, implementing regulations for the copyright law have been approved by congress but are awaiting official publication pending the passage of amendments to the copyright law related to the Central America-EU Free Trade Agreement. Honduras strengthened its legal framework with the passage of new laws to provide stronger deterrence against piracy and counterfeiting by, for example, requiring the seizure, forfeiture, and destruction of counterfeit and pirated goods and the equipment used to produce them. The new legislation also provided for the establishment of statutory damages for copyright and trademark infringement, to ensure that monetary damages can be awarded even when losses associated with an infringement are difficult to assign.

The Honduran government lacks the necessary personnel and resources to wage a truly effective campaign against IPR infringement. Although prosecutors have the authority to seize pirated and counterfeit goods when found, they do not have the ability to prosecute cases without a formal written complaint from an injured party. This complicates and prolongs an already lengthy judicial process. Further exacerbating the process is a lack of transparency.

Honduras became a member of the World Intellectual Property Organization (WIPO) in 1983, and became party to the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonogram Treaty (WPPT) in 2002.

Transparency of Regulatory System

CAFTA-DR requires that proposed regulations that could impact businesses or investments be published for public comment prior to passage. The Secretariat of Industry and Commerce sometimes publishes draft regulations on its website. However, the Honduran government does not routinely publish regulations before they enter into force and there is no formal mechanism for providing proposed regulations to the public for comment. The lack of a formal notification process excludes most non-governmental groups, including foreign companies, from commenting on proposed regulations.

Regulations must be published in the official government Gazette in order to enter into force. Honduras lacks an indexed legal code, and lawyers and judges must maintain and index the publication of laws on their own. Procedural red tape to obtain government approval for investment activities is very common. President Lobo has designated one of the three Presidential Designates (Vice President equivalents) as a direct point of contact for foreign investors who have failed to obtain satisfactory results after going through the correct official channels. Foreign market participants who are represented locally and are members of major business organizations essentially have access to the same information as their Honduran counterparts.

The Honduran legal system is neither efficient nor transparent. U.S. claimants frequently complain about the lack of transparency and the slow administration of justice in the courts. There are also complaints that the Honduran judicial system suffers from favoritism, external pressure and bribes. A significant number of U.S. firms have had difficulty navigating the legal system. Many U.S. citizens have also complained about the quality of legal representation they receive from Honduran attorneys.

 

Efficient Capital Markets and Portfolio Investment

There are no government restrictions on foreign investors' access to local credit markets. However, the local banking system is conservative and generally extends only limited amounts of credit. In 2011, the average lending rate was 14.16 percent for loans in Lempiras and 7.73 percent for loans in U.S. dollars. Local banks should not be considered a significant source for start-up capital for new foreign ventures unless they use specific business development credit lines made available by bilateral or multilateral financial institutions, such as the Central American Bank for Economic Integration.

There are a limited number of credit instruments available in the local market. The only security exchange operating in the country is the Central American Securities Exchange (BCV) in Tegucigalpa (http://www.bcv.hn), but investors should exercise caution before buying securities listed on the BCV. The Central American Securities Exchange is supervised by the National Banking and Insurance Commission (CNBS). Instruments that theoretically can be traded include bankers’ acceptances, reposition agreements, short-term promissory notes, Honduran government private debt conversion bonds and land reform repayment bonds. However, in practice, the market is almost completely composed of short- and medium-term government securities, and no formal secondary market for these bonds exists. A few banks have placed fixed rate and floating rate notes which have extended out to 3 years in maturity, but outside of the banks’ issuances the private sector does not sell debt or corporate stock on the exchange. Any private business is eligible to trade its financial instruments on the exchange, and firms that participate are subject to a rigorous screening process, including public disclosure and ratings by a recognized rating agency. Historically, traded firms generally have had economic ties to the different business/financial groups represented as shareholders of the exchange, which has led to lax risk management practices and an enduring loss of public confidence in the institution.

The Honduran financial system is comprised of commercial banks, state-owned banks, savings and loans institutions, and financial companies. The banking system's total assets as of September 2011 were USD 13 billion according to the National Commission of Banking and Insurance. Of this total, about 3 percent of the total asset base is considered to be non-performing. There are currently 17 commercial banks operating in Honduras of which 10 have majority foreign ownership. There is no off-shore banking in Honduras.

In 2004, following a recommendation by the IMF, the Honduran Congress passed a set of four financial sector reform laws to improve supervision of the banking system. The laws reformed the Deposit Insurance Fund, the Central Bank, the National Banking and Insurance Commission, and the general system of financial supervision. A fifth law, passed in 2004, established new and stronger penalties for financial crimes including bank fraud. The major problem with implementation of these laws is a lack of random selection in the auditing process.

 

Competition from State Owned Enterprises

Most state-owned enterprises are public utilities, including telephone, electricity, and water as well as commercial ports. Over the past decade, there have been some successful privatization efforts.

In 2003, the Honduran government opened the telecommunications market for sub-operators to provide services under contract with Hondutel, Honduras's state-owned telephone company. Under this program, foreign and domestic carriers register with Honduras's regulatory body, Conatel, as sub-contractors for Hondutel fixed telephony services. Hondutel officially lost its monopoly on fixed-line telephony services in 2005. Approximately 40 foreign and domestic firms have entered into "sub-operator" contracts with Hondutel. Although the elimination of Hondutel’s legal monopoly was a positive step towards liberalization of the telecom sector, a legal framework through which foreign companies can obtain licenses and concessions to provide long distance and international dialing has not yet been established. Investors remain unsure of whether they may legally establish themselves as fully independent telecommunication service providers.

Legislation to liberalize the telecommunications market has been under discussion by the Honduran Congress for several years. As of January 2012, neither the comprehensive telecommunications reform bill nor implementing regulations that would level the playing field for foreign investors had been passed by Congress. Currently, all sub-operators must obtain approval from Congress. Cellular telephone services are open to full private ownership. TIGO Honduras (formerly Celtel and a subsidiary of Millicom International) signed the first mobile telecommunications concession in August 1995 and started operations in June 1996. Claro (formerly Megatel and a subsidiary of América Móvil) received the second license and started operations in 2003. Hondutel awarded itself the third of three cellular licenses on a noncompetitive basis in 2006 and started operations in 2007. In 2008, Digicel, a Jamaican-Irish company that is the largest telecommunications operator in the Caribbean and a recent entrant to the Central American market, beat three other international firms to win a fourth cellular license with a bid of USD 80 million. Digicel’s operations in Honduras were acquired by Claro in March 2011.

Although most electricity generation in Honduras is in private hands, the state-owned National Electric Energy Company (ENEE) retains a monopoly over transmission and distribution. ENEE controls most hydroelectric generation, which accounts for about one-third of total capacity. The remaining power generation comes from diesel and fuel oil plants. ENEE has been losing money for years, including a loss of more than USD 100 million in 2010. ENEE badly needs additional investment in transmission lines and other infrastructure as well as improvements to its collection and internal controls. In 2011, localized electricity shortages led to power rationing and rolling blackouts across the country, particularly in the west and in northern coastal areas. An August 2011 emergency energy decree allowed for the direct purchase of diesel-generated power. This decree, and ENEE’s subsequent decision to enter into a non-competitive sixteen-year energy contract was widely criticized by the press and leading business associations, and ENEE’s General Manager resigned in February 2012. President Lobo immediately named his replacement. Apart from the controversy surrounding the emergency energy contract, ENEE had been under heavy public criticism for its perceived failure to properly manage Honduras' chronic electricity shortages, make timely investments in infrastructure, especially in the outdated power grid, and address technical and commercial losses accounting for almost 30% of ENEE's power generation, twice the power industry standard for a developing country and the highest rate in Central America. Honduras' electricity rates are the second highest in Central America, badly disadvantaging industrial and residential users. The government has sought to bring additional renewable power onto the grid, mainly from new hydroelectric projects, and it has a strong legal framework and incentives to encourage renewable energy development. Commercial operation has begun on a 51 turbine 100 megawatt (MW) wind farm that is expected to be fully operational by mid-2012. In 2010, the National Congress approved more than 50 contracts between ENEE and private producers for almost 700 MW of new clean energy, but completion of the majority of those mostly hydroelectric projects is not expected before 2017. Many businesses are opting to install their own on-site power generation systems to supplement or substitute for power from ENEE.

All water distribution systems are currently being transitioned from national to municipal government management. San Pedro Sula has granted a 30-year concession to a private company. The municipalities of Puerto Cortés and Choloma have also created public-private partnerships. A 2003 law grants municipalities the right to manage water distribution themselves and to grant concessions to private enterprises. The law established a transition period of five years from its date of publication, after which the current national water service, SANAA, was to be disbanded as a utility and exist only to provide technical assistance to the new service providers. The period for completing this transition was extended until 2013.

In July 2011, following findings of corruption and inefficiency at Puerto Cortes by the Superior Accounting Tribunal (TSC), President Lobo appointed an Intervention Commission to replace the National Port Company (ENP), the government body that oversees port management, as the authority over operations at Puerto Cortes. The ENP’s General Manager and Puerto Cortes’ security manager were suspended. This Commission was charged with developing a plan for improving the port's efficiency and regional competitiveness. The Commission was authorized by the Council of Ministers in December 2011 to take any necessary measures to attract both public and private investment to the port, address environmental issues, and modify tariffs, as appropriate. In January, the government appointed a new ENP General Manager. Concurrently, the government plans to expand the port through dredging and constructing new terminal facilities using funds it secured from the Inter-American Development Bank (IDB) and the Central American Bank for Economic Integration. The IDB and National Revenue Authority, which oversees customs operations and procedures, launched the IDB-funded expansion project of Puerto Cortés in October 2011. All improvements to the port are expected to be executed taking into consideration the work of the Intervention Commission and the IDB-funded modernization project.

Management of Honduras’s four international airports was turned over to a consortium with majority U.S. investment in 2000, the only major privatization effort in recent years. The agreement between the consortium and the government was re-negotiated in 2003 due to a dispute over financing, and the new agreement was approved by the Honduran Congress in 2004. Controversy continued over the terms of this agreement, and U.S. investors divested from this consortium in 2005. The airports concession was acquired by Honduran investors. In December 2011, the government approved the extension of this concession to 2040.

 

Corporate Social Responsibility

Awareness of corporate social responsibility (CSR) is growing among both producers and consumers in Honduras. An increasing number of local and foreign companies operating in Honduras are incorporating CSR practices into their business strategies. This relatively new trend is having a positive impact on corporate governance, philanthropy, and business ethics.

The Honduran Corporate Social Responsibility Foundation (FUNDAHRSE) was established in 2003 and is successfully leading efforts to promote transparency in the business climate and to provide the Honduran private sector, particularly small- and medium-sized businesses, with the skills to engage in responsible business practices. FUNDAHRSE’s members can apply for the foundation’s “CSR Enterprise” seal for exemplary responsible business conduct involving activities in health, education, environment, codes of ethics, employment relations, and responsible marketing. Thirty-nine companies, including nine American companies, were recognized by Fundahrse in 2011 for their CSR efforts.

 

Political Violence

In January 2010, democracy was restored following the June 2009 coup d’état with the inauguration of President Lobo, and political tensions diminished further with the return of former President Zelaya, who was ousted in the coup, in May 2011. In the country as a whole, levels of crime and violence are high, and represent a major constraint on investment. In a World Bank survey conducted in 2006 of both Honduran and foreign firms operating in Honduras, the combined costs of expenses devoted to security measures (hiring security guards, installing alarms, etc.) and loss of annual sales due to security incidents totaled 4.5 percent of sales. The security situation has worsened since 2006 and consequently current security-related costs to business may be higher.

Corruption

Some U.S. firms and citizens have found corruption, including in the judiciary, to be a significant concern and a constraint to successful investment in Honduras. Corruption is pervasive in government procurement, issuance of government permits, real estate transactions (particularly land title transfers), performance requirements, and the regulatory system. The telecommunications and energy sectors have proven particularly problematic. Honduras’ judicial system is widely perceived to be subject to outside influence, and the resolution of investment and business disputes involving foreigners is largely nontransparent. In its 2011 Corruptions Perceptions Index, Transparency International ranked Honduras 129th out of 183 countries (#1 being the least corrupt) and named Honduras as the fourth-most corrupt country in the Western Hemisphere. The country ranks 131st out of 183 countries (#1 being the best) in the 2011 World Bank Doing Business Index. Many U.S. businesses have expressed concern about corruption in Honduras, particularly in the public sector.

Two codes regulate justice and provide for penalties against corruption: the Penal Procedures Code (PPC) and the Penal Code (PC). In 2002, a reform of the PPC entered into force, changing the criminal judicial system from a traditional written inquisitorial trial system to an adversary, oral, and public trial system. The revised PPC is improving justice and accountability in a number of ways, including increased transparency in the criminal justice system.

The main responsibility for fighting corruption lies with the Public Ministry under the direction of the Attorney General (Fiscal General). In 2002, the Government created a new control entity, the Superior Accounting Tribunal (TSC), which brought together the Comptroller General of the Republic (CGR), the Directorate of Administrative Probity (ethics office) and the Office of State Assets under the direction of three members selected by Congress. The leadership of Honduras’ port authority was suspended after the TSC published findings of corruption and inefficiency at Puerto Cortes.

The Institute for Access to Public Information is responsible for implementing Honduras’ anti-transparency law. In 2011, the government introduced a 4-year inter-institutional transparency and anti-corruption plan (2011-2014), with implementation to be overseen by the Office of the Presidency, which seeks to reform government hiring and procurement, increase civil society's participation in budget processes and institutional mechanisms, and promote social awareness of the impact that corruption has on the country's development. The government has announced that it plans to establish the country's first-ever anticorruption law but has not yet introduced this legislation.

Bribery is a criminal act in Honduras and, depending on the degree of the offense, is subject to fines or incarceration. Honduras ratified the United Nations Convention against Corruption in 2005. A bribe to a foreign official is also a criminal act under U.S. law (the Foreign Corrupt Practices Act).

 

Bilateral Investment Agreements

In 2001, a Bilateral Investment Treaty (BIT) between the United States and Honduras entered into force. The U.S.-Honduras Treaty of Friendship, Commerce and Consular Rights (1928) provides for Most Favored Nation treatment for investors of either country. The U.S. and Honduras also signed an agreement for the guarantee of private investments in 1955 and an agreement on investment guarantees in 1966. Most provisions of these agreements were superseded by CAFTA-DR. Honduras signed a Tax Information Exchange Agreement with the U.S. in 1992.

Provisions for investment are included in bilateral commercial treaties between Honduras and Costa Rica, El Salvador, Guatemala, Panama, the Dominican Republic, Canada, and the European Union. Honduras also has bilateral investment agreements with the United Kingdom and Spain. In 2010, four Central American countries, including Honduras, agreed to enter into a free trade agreement with the European Union, but it had not gone into effect by the end of 2011. In August 2011, Honduras signed a free trade agreement with Canada, which is still being negotiated.

OPIC and Other Investment Insurance Programs

The U.S. Overseas Private Investment Corporation (OPIC) provides loan guarantees, which are typically used for large projects, and direct loans, which are reserved for projects sponsored by or substantially involving U.S. small businesses and cooperatives. OPIC can normally guarantee or lend from USD 100,000 to USD 250 million per project. OPIC also offers insurance against risks of currency inconvertibility, expropriation and political violence. In 2004, OPIC concluded a new bilateral investment incentive agreement between the governments of the United States and Honduras. For additional information on OPIC financing, insurance, and other programs that assist U.S. businesses overseas, please visit http://www.opic.gov. Honduras is a party to the World Bank's Multilateral Investment Guarantee Agency (MIGA).

 

Labor

Honduras has significant availability of labor for industries with a demand for relatively low skilled workers. Given the low average education level, there is a limited supply of skilled workers in all technological fields, including medical and high technology industries.

In general, Honduran labor laws closely mirror International Labor Organization standards. However, the laws are not always effectively implemented or enforced. Honduras has the lowest caseload of labor violations in the region and Ministry of Labor inspectors have faced criticism for not conducting thorough inspections. The maquila sector has made great strides in eliminating the worst forms of labor violations. Union officials remain critical of what they perceive as inadequate enforcement by the Ministry of Labor of workers' rights, particularly the right to form a union, bargain collectively, and be reinstated when unjustly fired for union organization activities. Through cooperation within the bipartite and tripartite commissions (unions, Ministry of Labor, private sector) and other venues, Ministry of Labor inspectors' access to maquila plants to enforce the labor code has improved, and Ministry of Labor has continued to work to increase its effectiveness in enforcing worker rights and child labor laws.

The labor law prescribes a maximum 8-hour workday and 44-hour week. There is a requirement for at least one 24-hour rest period every week. The Labor Code provides for a paid vacation of 10 workdays after one year, and 20 workdays after four years. The Constitution and Labor Code prohibit the employment of persons under the age of 16, with the exception that children aged 14 to 15 may be permitted to work with written parental consent and permission from the Ministry of Labor. All persons under 18 years of age are prohibited from night work, dangerous work and full-time work.

The Children's Code (September 10, 1996) prohibits a person of 14 years of age or less from working, even with parental permission, and establishes prison sentences of 3 to 5 years for individuals who allow children to work illegally. An employer who legally hires a 14 or 15-year-old must certify that the young person has finished or is finishing compulsory schooling. The majority of the violations of the children’s code occur in the agricultural sector and informal economy. Additional information about Honduran labor legislation, including copies of the laws themselves, can be found (in Spanish only) at http://www.leylaboral.com and http://www.trabajo.gob.hn/biblioteca-y-documentos/leyes/codigo%20de%20trabajo%20y%20sus%20reformas.pdf.

In 2010, the Honduran National Congress passed a Temporary Employment Law, which established the country's first legal basis for hiring employees on a temporary basis.

Foreign-Trade Zones/Free Ports

There are no known export subsidies provided by the Honduran government, but it provides tax exemptions to firms in free trade zones. The Temporary Import Law (RIT) allows exporters to introduce raw materials, parts and capital equipment (except vehicles) into Honduras exempt from surcharges and customs duties if the input is to be incorporated into a product for export (up to five percent can be sold locally). Export processing zones can be established anywhere in the country, and companies operating in export processing zones are exempt from paying import duties and other charges on goods and capital equipment. In addition, the production and sale of goods within export processing zones are exempt from state and municipal income taxes for the first 10 years of operation. Companies operating in an export processing zone are permitted unrestricted repatriation of profits and capital and have access to onsite customs facilities. However, companies are required to purchase the Lempiras needed for their local operations from Honduran commercial banks or from foreign exchange trading houses registered with the Central Bank.

Most industrial parks and export processing zones are located in the northern Department of Cortés, with close access to Puerto Cortés, Honduras’s major Caribbean port, and San Pedro Sula, Honduras’s major commercial city and a transportation crossroads. Industrial parks and export processing zones are treated as offshore operations. Therefore, customs duties must be paid on products manufactured in the parks and sold in Honduras. In addition, if Honduran inputs are used in production, they are treated as exports and must be paid for in U.S. dollars. While most companies that operate in these parks are involved in apparel assembly, the government and park operators have begun to diversify into other types of light industry, including automotive parts and electronics assembly.

Privately-owned tourism zones may be established to promote the development of the tourism industry in Honduras. The law allows for the free importation of equipment, supplies, and vehicles to businesses operating in designated tourism zones with certain restrictions (see the description of the tourism law, above). Additional information on Honduran FTZs and export processing zones is available from the Honduran Manufacturers Association at http://www.ahm-honduras.com.

Foreign Direct Investment Statistics

Table 1: Foreign Direct Investment Flows by Country of Origin

(Millions of Dollars)

Countries

Years

2008 r

2009 p

2010 e

NORTH AMERICA

530.4

515.2

491.9

UNITED STATES OF AMERICA

448.8

347.1

325.3

CANADA

51.2

23.8

116.5

MEXICO

30.4

144.3

50.0

CENTRAL AMERICA

58.1

32.6

82.6

COSTA RICA

2.5

5.9

37.7

EL SALVADOR

2.6

10.4

4.5

GUATEMALA

44.4

12.8

39.2

NICARAGUA

8.6

3.5

1.1

CARIBBEAN

8.3

60.1

22.4

BERMUDAS

2.8

4.4

13.9

BAHAMAS

5.9

33.9

7.7

BRITISH VIRGIN ISLANDS

-0.4

21.9

0.8

EUROPE

384.1

-91.3

176.7

UNITED KINGDOM

72.4

-89.4

57.6

HOLLAND

1.4

-11.6

-1.1

GERMANY

2.5

-19.0

27.7

SWITZERLAND

-0.6

9.3

52.1

ITALY

1.5

1.7

0.8

FRANCE

33.4

0.0

6.3

IRELAND

273.5

17.7

33.4

ASIA

5.0

5.1

2.7

REPUBLIC OF KOREA

3.3

2.4

1.2

TAIWAN

1.1

2.7

1.0

CHINA

0.6

-0.1

0.6

OTHER COUNTRIES

20.4

1.4

21.2

TOTAL

1,006.4

523.2

797.4

Source: Central Bank of Honduras, r/Actual, p/Preliminary, e/Estimated

Table 2: Foreign Direct Investment Flows by Industry Sector Destination

(Millions of Dollars)

INDUSTRY SECTOR

2008 r

2009 p

2010 e

Transport,, Warehousing, and Communications

537.4

360.4

267.0

Manufacturing Industry

129.3

60.6

123.8

Maquila

137.4

42.3

244.2

Services

140.6

52

98.2

Construction

27.4

9.4

6.3

Mining and Quarries

0.0

12.4

3.2

Agriculture, Forestry, Hunting, and Fishing

3.5

1.9

18.4

Electricity, Gas, and Water

16.5

2.7

18.5

Commerce

14.3

-18.5

17.5

TOTAL

1,006.4

523.2

797.4

Source: Central Bank of Honduras, r/Actual, p/Preliminary, e/Estimated

Web Resources

Economic Commission for Latin America

and the Caribbean (CEPAL) http://www.eclac.cl

Central Bank of Honduras http://www.bch.hn

Honduran Association of Banking Institutions http://www.ahiba.hn

Ministry of Industry and Trade http://www.sic.gob.hn

FIDE http://www.hondurasinfo.hn

National Banking & Insurance Commission http://www.cnbs.gov.hn

Overseas Private Investment Corporation http://www.opic.gov

Honduran Manufacturing Association http://www.ahm-honduras.com

Central America Security Exchange (BCV) http://www.bcv.hn

FUNDAHRSE http://www.fundahrse.org

 



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