Policies Toward Foreign Direct Investment

The Honduran government is generally open to foreign investment.  Low labor costs, proximity to the U.S. market, and the large Caribbean port of Puerto Cortes make Honduras attractive to investors.  At the same time, however, inconsistent and expensive energy, corruption, weak institutions, high levels of crime, low educational levels, and poor infrastructure hamper Honduras’ investment climate.

Entities that make up the legal framework for investment include the Honduran constitution; the investment chapter of CAFTA-DR; a self-executing international agreement that takes precedence over most domestic law; and the 2011 Law for the Promotion and Protection of Investments.  The Honduran constitution requires all foreign investment complement, but not substitute for, national investment. Honduras’ legal obligations guarantee national treatment and most favored nation treatment for U.S. investments in most sectors of the Honduran economy and include enhanced benefits in the areas of insurance and arbitration for domestic and foreign investors.  CAFTA-DR has equal status in Honduras with the constitution in most sectors of the Honduran economy.

Critics complain that lack of clarity and overlapping responsibilities among the multiple entities charged with attracting increased foreign direct investment hinder results.  As of April 2019, the Government of Honduras put forward draft legislation currently being debated by the Honduran Congress that would merge the National Investment Council, ProHonduras, and President Hernandez’s signature initiative Honduras 20/20, an ambitious plan to create 600,000 jobs in six targeted sectors by the year 2020.  It remains uncertain whether the proposed changes will galvanize the political will required to push forward significant reforms.

Limits on Foreign Control and Right to Private Ownership and Establishment

Honduras’ Investment Law does not limit foreign ownership of businesses, except for those specifically reserved for Honduran investors, including small firms with capital less than USD 6,300 and the domestic air transportation industry.  For all investments, at least 90 percent of companies’ labor forces must be Honduran and companies must pay at least 85 percent of their payrolls to Hondurans.  Majority ownership by Honduran citizens is required for companies benefiting from the Agrarian Reform Law, including in sectors of commercial fishing, forestry, local transportation, radio, and television.  There is no screening or approval process specific to foreign direct investments in Honduras. Foreign investors are subject to the same requirements for environmental and other regulatory approvals as domestic investors.

Investors can establish, acquire, and dispose of enterprises at market prices under freely negotiated conditions without government intervention.  Private enterprises fairly compete with public enterprises on market access, credit, and other business operations. Foreign investors have the right to own property, subject to certain restrictions established by the Honduran constitution and several laws relating to property rights.  Investors may acquire, profit, use, and dispose of property ownership with the exception of land within 40 kilometers of international borders and shorelines. Honduran law does permit, however, foreign individuals to purchase properties close to shorelines in designated “tourism zones.”

Other Investment Policy Reviews

In 2016, the World Trade Organization conducted a Trade Policy review of Honduras: https://www.wto.org/english/tratop_e/tpr_e/s336_e.pdf .

Business Facilitation

The Honduran government simplified administrative procedures for establishing a company in recent years.  According to the 2019 World Bank Doing Business Report, the average time required for starting a business in Honduras is 13 days and requires 11 procedures.  Honduras’ business registration information portal (http://www.honduras.eregulations.org/  ) provides information on registering a business, including information fees, agencies, and required documents.  The World Bank’s Honduras Investment Regulation Portal provides quantitative indicators on Honduras’ laws, regulations, and practices affecting foreign companies (http://iab.worldbank.org/data/exploreeconomies/honduras  ).

Outward Investment

Honduras does not promote or incentivize outward investment.

Transparency of the Regulatory System

Though CAFTA-DR requires host governments publish proposed regulations that could affect businesses or investments, the Honduran government does not routinely post proposed regulations.  The lack of a formal notification process prevents nongovernmental groups, foreign companies, and other entities from commenting on proposed regulations. The government of Honduras publishes approved regulations in the official government Gazette.  Honduras lacks an indexed legal code so lawyers and judges must maintain the publication of laws on their own. Procedural red tape to obtain government approval for investment activities is common.

Some U.S. investors experience long waiting periods for environmental permits and other regulatory and legislative approvals.  Sectors in which U.S. companies frequently encounter problems include infrastructure, telecoms, mining, and energy. Generally, regulatory requirements are complex and lengthy, and may be influenced by political factors.  Regulatory approvals require congressional intervention if the time exceeds a presidential term of four years. Current regulations are available at the Honduran government’s eRegulations website (http://honduras.eregulations.org/  ).  While the majority of regulations are at the national level, municipal level regulations also exist.  No significant regulatory changes of relevance to foreign investors were announced since the last report.  Public comments received by regulators are not published. Honduras has made strides, in part with technical assistance from the U.S. Department of Treasury, to make public finances and debt obligations more transparent.

International Regulatory Considerations

As a member of the WTO, Honduras notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).

Legal System and Judicial Independence

Honduras has a civil law system.  The Honduran Commercial Code, enacted in 1950, regulates business operations and falls under the jurisdiction of the Honduran civil court system.  The Civil Procedures Code, which entered into force in 2010, introduced the use of open, oral arguments for adversarial procedures. The Civil Procedures Code provides improved protection of commercial transactions, property rights, and land tenure.  It also offered a more efficient process for the enforcement of rulings issued by foreign courts. Despite these codes, U.S. claimants have complain about the lack of transparency and the slow administration of justice in the courts. U.S. firms report favoritism, external pressure, and bribes within the judicial system.  They also complain about the poor quality of legal representation from Honduran attorneys.

Resolving an investment or commercial dispute in the local Honduran courts is often a lengthy process.  Foreign investors report dispute resolution typically involves multiple appeals and decisions at different levels of the Honduran judicial system.  Each decision can take months or years, and it is usually not possible for the parties to predict the time required to obtain a decision. Final decisions from Honduran courts or from arbitration panels often require subsequent enforcement from lower courts to take effect, requiring additional time.  Foreign investors sometimes prefer to resolve disputes with suppliers, customers, or partners out of court when possible.

Laws and Regulations on Foreign Direct Investment

Honduras’ Investment Law requires all local and foreign direct investment be registered with the Investment Office in the Secretariat of Industry and Commerce.  Upon registration, the Investment Office issues certificates to guarantee international arbitration rights under CAFTA-DR. An investor who believes the government has not honored a substantive obligation under CAFTA-DR may pursue CAFTA-DR’s dispute settlement mechanism, as detailed in the Investment Chapter.  The claim’s proceedings and documents are generally open to the public.

The Government of Honduras requires authorization for both foreign and domestic investments in the following areas:

• Basic health services
• Telecommunications
• Generation, transmission, and distribution of electricity
• Air transport
• Fishing, hunting, and aquaculture
• Exploitation of forestry resources
• 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
• Private education services
• Investigation, exploration, and exploitation of mines, quarries, petroleum and related substances.

In 2015, the Honduran government implemented the online National Investment Register as a starting point for creating a one-stop foreign and domestic investment facility (www.prohonduras.hn  ).  Formalizing a business, however, still requires visiting a municipal chamber of commerce window for registration and permits.

Competition and Anti-Trust Laws

The Commission for the Defense and Promotion of Competition (CDPC) is the Honduran government agency that reviews proposed transactions for competition-related concerns.  Honduras’ Competition Law established the CDPC in 2005 as part of the effort to implement CAFTA-DR. The Honduran Congress appoints the members of the CDPC, which functions an independent regulatory commission.

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 via the Honduran National Agrarian Institute.  In 2013, the Honduran government passed legislation regarding recovery and reassignment of concessions on underutilized assets. Both local and foreign firms have expressed concerns that the law does not specify what the government considers “underutilized.”  The government has not published implementing regulations for the law nor indicated plans to use the law against any private sector firm.

Government expropriation of land owned by U.S. companies is rare.  Seizure actions by squatters on both Honduran and non-U.S. foreign landowners are most common in agricultural areas.  Some occupations turn violent, especially in the Bajo Aguan region in the department of Colon. Owners of disputed land have found pursuing legal avenues costly, time consuming, and legally inconclusive.  CAFTA-DR’s Investment Chapter Section 10.7 states no party may expropriate or nationalize a covered investment either directly or indirectly, with limited public purpose exceptions that require prompt and adequate compensation.

Under the Agrarian Reform Law, the Honduran government must compensate expropriated land partly in cash and partly in 15-, 20-, or 25-year government bonds.  The portion to be paid in cash cannot exceed USD 1,000 if the expropriated land has at least one building and it cannot exceed USD 500 if the land is in use but has no buildings.  If the land is not in use, the government will compensate entirely in 25-year government bonds.

Dispute Settlement

ICSID Convention and New York Convention

Honduras is a member state to the International Centre for the Settlement of Investment Disputes (ICSID Convention).  Honduras has ratified the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention)

Investor-State Dispute Settlement

CAFTA-DR provides dispute settlement procedures between the United States and Honduras.  CAFTA-DR’s Investment Chapter dispute settlement mechanism allows an investor who believes the government has not honored a substantive obligation under CAFTA-DR to request a binding international arbitration.  Proceedings and documents submitted to substantiate the claim are generally open to the public. The agreement provides basic protections, such as nondiscriminatory treatment, limits on performance requirements, the free transfer of funds related to an investment, protection from expropriation other than in conformity with customary international law, a minimum standard of treatment, and the ability to hire key managerial personnel regardless of nationality.

International Commercial Arbitration and Foreign Courts

Honduras’ Conciliation and Arbitration Law, established in 2000, outlines procedures for arbitration and defines the procedures under which they take place.  The Investment Law permits investors to request arbitration directly, a swifter and more cost-effective means of resolving disputes between commercial entities.  Arbitrators and mediators may have specialized expertise in technical areas involved in specific disputes. Local courts recognize and enforce foreign arbitral awards issues against the government.  Judgements from foreign courts are recognized and enforceable under local courts.

The following links provide more localized information:

Tegucigalpa Chamber of Industry and Commerce – Center for Conciliation and Arbitration: https://www.ccit.hn/cca/  

San Pedro Sula Chamber of Industry and Commerce – Center for Conciliation and Arbitration: http://www.ccichonduras.org/es/?p=1571  

Numerous U.S. investors who have been involved with the local judicial system complain it can be inefficient, lacks transparency, and is subject to domestic influence and/or corruption.

Bankruptcy Regulations

Companies that default in payment of their obligations in Honduras can declare bankruptcy.  A Honduran court must ratify a bankruptcy in order for it to take effect. These cases are regulated by the Commerce Code.

The judicial ruling that declares the bankruptcy of the company establishes the value of the assets, the recognition and classification of the credits, the  procedure for the sale of assets and the schedule for the payment of the obligations, in the case that it is not possible for the company to continue its operations.  The ruling must be published in The Gazette. The liquidation of companies is always a judicial matter, except in the case of banking institutions which are liquidated by the National Banking and Insurance Commission.

Any creditor or a company itself may initiate the liquidation procedure, which is generally a civil matter.  The Judge appoints a liquidator to execute the procedure. A mechanism that a company has to prevent bankruptcy is to request a suspension of payments from the judge.  If approved by the judge and the creditors, the company is able to reach an agreement with its creditors that allows the same administrative board to maintain control of the company.

A company may be prosecuted for fraudulently declaring bankruptcy in the case that the administrative board or shareholders withdraw their assets before the declaration, alter accounting books making it impossible to determine the real situation of the company, or favor certain creditors granting them benefits that they would not be entitled to otherwise.

Most state-owned enterprises are in telecommunications, electricity, water utilities, and commercial ports.  The main state-owned Honduran telephone company, Hondutel, has private contracts with eight foreign and domestic carriers.  The Government of Honduras has yet to establish a legal framework for foreign companies to obtain licenses and concessions to provide long distance and international calling.  As a result, investors remain unsure if they can become fully independent telecommunication service providers.

The state-owned National Electric Energy Company (ENEE) is the single greatest contributor to the country’s fiscal deficit.  Energy reform legislation, passed in 2014, called for the separation of ENEE into three independent units for distribution, transmission, and generation. International energy observers, including the World Bank, cite a lack of…political will and vested interests from Honduran political and economic elite who profit from inflated generation contracts, stalling efforts to unbundle ENEE.  While the Honduran government is leading efforts to reform the energy sector and reform ENEE, they face serious structural problems including high electricity system losses, a transmission system in need of upgrades, vulnerability of generation costs to volatile international oil prices, an electricity tariff that does not reflect actual costs, and the high costs of long-term power purchase agreements (PPAs).  ENEE experienced an operational deficit of USD 191.4 million in 2017, up USD 28.4 million from the previous full year. In 2017, the Honduran government issued USD 700 million in sovereign bonds to cover payment arrears and refinance the most expensive existing debtThe IMF recommended thatENEE lower the cost of power generation, increase tariffs, invest in transmission upgrades, and reduce losses in order to reduce its deficit.

ENEE controls most hydroelectric generation, which accounts for about one-third of total capacity.  Approximately 50 percent of all power generation comes from diesel and bunker fuel oil plants and the remaining 20 percent comes from wind, solar, and biomass.  Following a push for renewable energy in 2014, the government approved more than 80 contracts between ENEE and private producers for almost 2000 megawatts of new clean energy, although many of these projects are unlikely to materialize.  In 2018, the government cancelled an incentive programs offering a USD 0.03 per kilowatt-hour for renewable power due to high costs. Many businesses have installed on-site power generation systems to supplement or substitute for power from ENEE due to high costs and uncertainty about the semi-privatization process.

Honduran law grants municipalities the right to manage water distribution and to grant concessions to private enterprises.  Major cities with public-private concessions include San Pedro Sula, Puerto Cortes, and Choloma. The state water authority National Autonomous Aqueduct and Sewer Service (SANAA) manages Tegucigalpa’s water distribution.  The Honduran National Port Company (ENP) is the state-owned organization that oversees management the country’s government-operated maritime ports, including Puerto Cortes, La Ceiba, Puerto Castilla, and San Lorenzo. Private companies Central American Port Operators and Maritime Ports of Honduras have 30-year concessions to operate container and bulk shipping facilities at Honduras’ principal port Puerto Cortes.

Privatization Program

The Honduran government is not actively seeking to privatize state-owned enterprises though it is seeking to increase private sector participation in the electric system.  As part of the International Monetary Fund (IMF) December 2014 standby arrangement, concluded in December 2017, the Honduran government initiated reform of the state-owned energy company ENEE and created an independent Electric Energy Regulatory Commission.  In preparation for another IMF standby arrangement, the Honduran government is preparing a plan to separate ENEE. While the structure of the new entity is unclear, under the previous standby arrangement, Honduras was supposed to reform ENEE by creating a holding company with four components: a distribution company with an operations subcontractor supported by a trust agreement; a concession for the transmission network; a not-for-profit organization with public-private ownership to control the overall electrical system; and a privatized generation company that owns all ENEE generating facilities.  The majority of the reforms were not realized, with the exception of a 2016 sub-contract by a Colombian-Honduran consortium to manage energy distribution.

The U.S. Overseas Private Investment Corporation (OPIC) provides loan guarantees (typically used for large projects) and direct loans 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. The Export-Import Bank of the U.S. also provides project financing in Honduras. Honduras is a party to the World Bank’s Multilateral Investment Guarantee Agency.

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Economic Counselor Lisa Miller
U.S. Embassy
Avenida La Paz
Tegucigalpa, M.D.C.
Telephone: (504) 2236-9320, Ext. 4531
E-mail: MillerLD@state.gov