2010 Investment Climate Statement - Honduras

2010 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
June 2010

Openness to Foreign Investment
The Government of Honduras views foreign investment as crucial for economic growth and development. Economic growth, as measured by the Gross Domestic Product (GDP), grew more than 6 percent per year from 2004 to 2007, led by the construction, agricultural and financial sectors, but it slowed to about 4 percent in 2008. In 2009, the Honduran economy contracted and GDP growth shrank 2.1 percent. Remittance inflows from Hondurans living abroad, particularly in the United States, are the largest source of foreign income and a major contributor to domestic demand. Remittances totaled USD $2.48 billion in 2009, down 11.8 percent from 2008 levels; this is equivalent to almost one-fifth of Honduras’ GDP. The deterioration of Honduran economic activity in 2009 was a result of a combination of the global economic crisis and the domestic political crisis stemming from the June 28, 2009, coup d’état that removed Honduran President Manuel Zelaya from power. Both crises created an atmosphere of uncertainly leading to a virtual halt in international and domestic investment.

On August 5, 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). 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.

The Honduran government is generally open to foreign investment, with limited restrictions and performance requirements although some U.S. investors have experienced long waiting periods for environmental permits and other regulatory and legislative approvals. Sectors in which U.S. companies most frequently encounter problems include infrastructure, telecoms, and energy. Domestic companies have been known to exercise political influence to keep out foreign competitors. Relatively 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, national investment. However, 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. 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.

The 1992 Investment Law, which still largely governs investment conditions in Honduras, guarantees national treatment to foreign private firms in Honduras, with few exceptions. The 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 $7,940). 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. The obligations of the CAFTA-DR Investment Chapter supersede equivalent provisions in the 1992 law since under the Honduran Constitution international treaties are self-executing.

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 over 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 were few trials for bribery or corruption in 2009 despite a widespread perception that corruption is a serious problem. The bid process for an Inter-American Development Bank-funded computer system for the National Electric Energy Company (ENEE) was voided in late 2008 due to improper notification procedures. Since CAFTA-DR came into effect, numerous government agencies have routinely declared “emergencies” to circumvent competitive bidding procedures for public procurements, including for large infrastructure projects. Honduras is not a signatory to the WTO Agreement on Government Procurement.

The 1992 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.

In 2002, the Government of Honduras ratified a law for the simplification of administrative procedures for establishing a company. Through this new legislation, the government made significant improvements in streamlining procedures and eliminating administrative obstacles. According to the 2010 World Bank Doing Business Index, the time required for establishing an enterprise was reduced to an average of 14 days in 2009 from 21 days in 2008 and significantly less than the average of 62 days in 2005. 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.

In almost all sectors, CAFTA-DR provides U.S. investors the right to establish, acquire, and operate investments in Honduras on equal footing with local investors. CAFTA-DR also establishes a more secure and predictable legal framework for U.S. investors operating in Honduras. Among the rights afforded to U.S. investors are due process protections and the right to receive a fair market value for property in the event of an expropriation. Investor rights are protected under CAFTA-DR by a procedure for dispute settlement that is impartial and transparent. Submissions to dispute panels and dispute panel hearings are open to the public, and interested parties have the opportunity to submit their views. Although enforcement is not always consistent, the investment protection obligations of CAFTA-DR apply to a broad definition of investments, including enterprises, debt, concessions, contracts, and intellectual property. Upon entry into force of CAFTA-DR, the 2001 United States-Honduras Bilateral Investment Treaty (BIT) was suspended. For a period of 10 years, however, U.S. investors may choose dispute settlement either under the BIT or CAFTA-DR. Investors continue to maintain important investment rights and protections under the investment provisions of CAFTA-DR.

TI Corruption Index20092.5
Heritage Economic Freedom201099 [58.3]
World Bank Doing Business2010141
MCC Govt EffectivenessFY20100.219
MCC Rule of LawFY20100
MCC Control of CorruptionFY2010-0.042
MCC Fiscal PolicyFY2010-1.6
MCC Trade PolicyFY201083.7
MCC Regulatory QualityFY20100.36
MCC Business Start UpFY20100.943
MCC Land Rights AccessFY20100.655
MCC Natural Resource MgmtFY201084.8

Conversion and Transfer Policies
The 1992 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.

Officially the Lempira trades within a band although in practice the exchange rate is fixed. The Central Bank has been able to meet foreign exchange demand without depleting international reserves. The Central Bank uses an auction system to regulate the allocation of foreign exchange. New regulations were published on November 26, 2007, in Gaceta No. 31,467 (Reglamento para la Negociación Pública de Divisas en el Mercado Cambiario.) 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 purported authority to expropriate property for purposes of land reform or public use. This kind of expropriation often results from the de facto land invasion by impoverished farmer groups. Therefore, disputes related to land seizure actions by the Honduran National Agrarian Institute (INA) are relatively common for both Honduran and foreign landowners. U.S. citizens have experienced land disputes particularly in coastal regions. According to the National Agrarian Reform Law, idle land fit for farming can be expropriated and awarded to indigent and landless persons.

Generally, an INA expropriation case begins after unprotected property is unlawfully occupied. The occupants then file for the land with INA under the Agrarian Reform Law. In most cases, landowners have found that pursuing the subsequent legal avenues is costly, time consuming, and rarely leads to positive results. Compensation for land expropriated under the Agrarian Reform Law, when awarded, can be paid partly in cash and partly in three categories of 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; 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.

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.

Most investment and property disputes are long-lasting and arduous. 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. While some U.S. firms have resolved satisfactorily their cases through the courts, the majority have difficulty navigating the legal system. Many U.S. citizens also have complained about the quality of legal representation they received from Honduran attorneys.

A new Civil Procedures Code (CPC), approved by the Honduran Congress in January 2007, was originally scheduled to take effect in March 2009, but the Honduran Congress delayed its entry into force until 2011. Its goal is to transform the entire civil-court system by establishing open, oral arguments for adversary proceedings. The CPC should provide more effective protection of commercial transactions, property rights, and land tenure and create 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 March 2001. In September 2001, Centers for Conciliation and Arbitration were established within the Chambers of Commerce and Industry in Tegucigalpa and San Pedro Sula. Arbitration and conciliation are generally considered swifter and more cost-effective in resolving disputes between commercial entities. Moreover, 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 1992 Investment Law guarantees to all foreign investors the freedom to export and import, and eliminated 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’ service sector is widely accessible to foreign companies, 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. poultry, milk products, pork, feed grains and rice to Honduras. Changes in sanitary and phyto-sanitary requirements are not always reported to the WTO as required, which creates uncertainty among U.S. suppliers and Honduran importers. 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 now 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), after which it 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 June 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 in order to qualify for tax exemptions and duty-free status.

Right to Private Ownership and Establishment
The 1992 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” (see section on Land Rights below.)

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. However, in several instances the government of Honduras arbitrarily established de facto or de jure price controls on products being sold by private firms. 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

Intellectual Property Rights (IPR):
Although Honduras does not host large-scale in-country optical pirating, pirated goods are imported from neighboring countries, and the piracy of books, sound and video recordings, compact discs, and computer software is widespread. Confiscations have increased with new CAFTA-DR ex-officio powers although the sale of pirated goods continues unabated. The illegitimate registration of well-known trademarks has also been a problem. The legislative framework for protection of intellectual property rights (IPR) is generally adequate, but laws are not always effectively implemented. The Property Institute (IP), Ministry of Industry and Commerce, 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 of Intellectual 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.

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 2009, implementing regulations for some of these laws were still under discussion. In early 2006, 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. In 2006 the Honduran Congress drafted legislation governing the designs of integrated circuits and plant variety protection to bring the country into compliance with its CAFTA-DR commitments, but the proposed legislation did not pass.

Honduran authorities lack the dedicated personnel and resources necessary to wage a truly effective campaign against IPR infringement. The IPR prosecutor’s office was merged into the common crimes office in 2009 but reestablished in 2010. 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. Numerous trademark cases are pending in Honduran courts, including one involving the unauthorized use of a U.S. restaurant company’s trademark that has been pending in the Honduran judicial system for several years. After the U.S. government raised concerns that Honduran cable television operators were using copyrighted U.S. programming without permission, the IPR prosecutor in early 2009 investigated the allegation, found and confiscated the illegal equipment, and effectively disbanded the pirating network.

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 May 2002. Honduran law protects data exclusivity for a period of five years, and protects process patents, but it does not recognize second-use patents.

Land Rights:
Inadequate land title procedures have led to numerous investment disputes involving U.S. nationals who are landowners. Historically, title insurance has not been 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 April 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. A number of properties of U.S. citizens are potentially subject to confiscation under this law.

Honduran law places certain restrictions on land ownership by foreigners in coastal and border areas. Article 107 of the Honduran Constitution prohibits foreign ownership of property in Honduras that lies within 40 kilometers (25 miles) of the Caribbean Sea, the Gulf of Fonseca, international borders, or on any of the islands and cays belonging to Honduras. However, recognizing that the constitutional prohibition of foreign property ownership in Honduras was a barrier to tourism development and the economic potential of Honduras’ coastal and island areas, the Honduran National Congress passed a law in 1990 to allow foreigners to purchase properties in designated tourism zones established by the Ministry of Tourism in order to construct permanent or vacation homes. This law was challenged as unconstitutional in 2004, but in January 2005 the Supreme Court upheld the law, thus permitting foreigners to continue to own littoral and frontier property.

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 Tourism Institute. The buyer must also present feasibility studies and plans about the proposed tourism or economic development project.

According to the 2010 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. A summary of procedures is as follows:

1. Verification of property background;
2. Verification that municipal taxes have been paid;
3. The notary issues the deed (preliminary);
4. Payment of taxes and fees at a commercial bank;
5. Notary issues the first copy of the deed;
6. Registration at the Property Office; and
7. Registration of the change of ownership in the Cadastre office.

Transparency of Regulatory System
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 regulations. However, CAFTA-DR requires that proposed regulations that could impact businesses or investments be published for public comment prior to passage. The Honduran Secretariat for Industry and Commerce has published draft regulations on its website albeit not consistently.

Regulations must be published in the official government Gazette 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. Foreign market participants who are represented locally and are members of well-connected private sector groups 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. While some U.S. firms have satisfactorily resolved their cases through the courts, the majority have difficulty navigating the legal system. Many U.S. citizens have also complained about the quality of legal representation they received 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. As of November 2009, the average lending rate for a loan in Lempiras was 18.97 percent, down from 19.66 percent a year earlier, and 10.41 percent for a loan in U.S. dollars, down from 10.72 percent a year earlier. 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 floating rate notes, but in general the private sector does not sell commercial paper 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 November 2009 were USD $10.1 billion according to the National Commission of Banking and Insurance. Of this total, about 5 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 September 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 December 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 September 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' 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 December 2009, 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. As introduced in 2008, the legislation mandated that the Honduran government regulator, Conatel, would issue new licenses to operate mobile or long-distance services without Congressional approval. When the first draft was reviewed by the Special Telecom Commission in Congress in early 2009, the commission concluded that the measure violated the Honduran constitution, which stipulates that any license or contract that would remain in effect beyond the current administration needs Congressional approval. Discussion on the telecommunications bill was suspended during the political turmoil surrounding the removal of President Zelaya from power in 2009. As several of the proposed provisions of the proposed law potentially conflict with trade commitments undertaken by Honduras in CAFTA-DR, the United States will closely monitor the progress of the legislation when Congress begins discussing it again.

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 January 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. The company initiated service in Honduras in November 2008 and has invested more than USD $450 million in Global System for Mobile Communications (GSM) infrastructure.

Although most electricity generation in Honduras is in private hands, the 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. ENEE has been losing money for years. Rates were raised sharply in 2008, improving ENEE’s cash flow situation, and the Honduran government issued bonds to pay off its arrears to private power producers, but the company lost USD $4.3 million in 2009. ENEE badly needs additional investment in transmission lines and other infrastructure as well as improvements to its collection and internal controls. An estimated 20 percent of total electricity produced in 2008 was lost through illegal hook-ups and leakage. In addition, new generating capacity needs to be added to avoid power rationing and rolling blackouts as electricity demand is quickly overtaking supply. A contract to supply 100 MW of wind power was approved in October 2008, but the project will not likely produce any new energy supply until 2011. In June 2010, ENEE signed a contract with more than 20 small renewable energy producers for up to 250 MW of energy, but they have not yet begun selling energy to ENEE. 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 managed by the national government except for those in San Pedro Sula, which has granted a 30-year concession to a private company, and Puerto Cortés and Choloma, where the municipalities have 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, and no water systems have been transferred to date.

The Honduran government is working to expand and modernize the port at Puerto Cortés. The National Port Company (ENP) plans to expand the port through dredging and by constructing new terminal facilities. It has secured financing commitments from the Inter-American Development Bank and the Central American Bank for Economic Integration. Dredging is scheduled to begin in November 2010.

Management of Honduras’ four international airports was turned over to a consortium with majority U.S. investment in October 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 concession for the airports was acquired by Honduran investors led by Grupo Terra.

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. Approximately 30 percent of Fundahrse’s members have received the foundation’s “CSR Enterprise” seal for their exemplary responsible business conduct involving activities in health, education, environment, codes of ethics, employment relations, and responsible marketing.

Political Violence
The coup d’état that overthrew the government of President Manuel Zelaya on June 28, 2009, resulted in the rupture of the constitutional order and created great polarization among the Honduran people. The opponents of the coup carried out public protests, many of which were repressed by the police and the military. Some of these protests turned violent and resulted in some looting and destruction of property. The frequency of the public strife and demonstrations significantly decreased following the inauguration of the democratically-elected government of President Porfirio Lobo on January 27 and those that have occurred since then have been peaceful. Most major demonstrations occur in downtown Tegucigalpa, but demonstrators have also blocked roads in other areas of the country on occasion. Travelers should avoid areas where demonstrations are taking place, and they should keep informed by following the local news and consulting hotel personnel and tour guides. For the latest security information, Americans traveling abroad should regularly monitor the State Department’s Internet website (http://travel.state.gov), where the current Travel Warnings and Public Announcements can be found. Americans living or traveling in Honduras are encouraged to register with the U.S. Embassy through the State Department’s travel registration website (https://travelregistration.state.gov/ibrs/ui/).

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 so current security-related costs to business are likely higher.

The human rights situation deteriorated following the coup d’état. The Lobo government has expressed its commitment to respect human rights, investigate allegations of violations, and prosecute perpetrators. Organized labor represents approximately 8 percent of the work force and its economic and political influence continues to decline.

U.S. firms and citizens have found corruption to be a serious problem and a constraint to successful investment in Honduras. In its 2009 Corruptions Perceptions Index, Transparency International ranked Honduras 130th out of 180 countries (#1 being the least corrupt). The organization named Honduras as the fifth-most corrupt country in the Western Hemisphere, tied with Nicaragua, and placed Honduras in the category of countries with “rampant” corruption.

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 new 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. While the TSC has undertaken numerous investigations, it has had no noticeable effect in limiting or reducing corruption in Honduras.

Honduras has passed a transparency law and is implementing an anti-corruption plan, which includes elements such as civil service reform, external audits of public utilities (especially electricity and telecommunications), strengthening of police capabilities, and implementation of the transparency law. Progress reports are public documents; they are shared with members of the international donor community and are available online. The Institute for Access to Public Information was established to implement the transparency law.

Corruption is pervasive in government procurement, issuance of government permits, real estate transactions (particularly land title transfers), performance requirements, and the regulatory system. 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. This has affected Honduras’ ability to attract foreign investment; the country ranks 141st out of 183 countries (#1 being the best) in the 2010 World Bank Doing Business Index.

Due in part to assistance from the U.S. and other donors, the credibility of the judicial system has improved in recent years, though serious problems remain. Bribery is a criminal act in Honduras and, depending on the degree of the offense, is subject to fines or incarceration. A bribe to a foreign official is also a criminal act under U.S. law (the Foreign Corrupt Practices Act).

Bilateral Investment Agreements
On July 12, 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 and the Dominican Republic. Honduras also has bilateral investment agreements with the United Kingdom and Spain.

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 July 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.

Other countries, including Germany, the United Kingdom, Taiwan, Spain, Italy, Switzerland and Japan provide insurance and guarantees for their companies doing business in Honduras. In addition, Honduras is a party to the World Bank's Multilateral Investment Guarantee Agency (MIGA).

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 are good. There are several concerns, however, in enforcement and efficiency of the application of these laws in the courts. Honduras has the lowest caseload of labor violations in the region and Ministry of Labor (MOL) 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, MOL, private sector) and other venues, MOL inspectors' access to maquila plants to enforce the labor code has improved, and MOL 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 MOL. 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.

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
Foreign Direct Investment (FDI) in Honduras declined significantly in 2009, following a period of sustained growth since 2002. According to Honduran Central Bank (BCH) data, FDI in 2009 totaled USD $484.5 million, accounting for 3.4 percent of GDP. It was down 46.2 percent from USD $900.3 million in 2008. However, 2008 was considered an atypical year since a mobile telecommunications operator made a one-time USD $450 million infrastructure investment upon entering the Honduran market. The year-on-year decrease can also be attributed to the combination of the global economic downturn and the domestic political crisis, which led to a reduction in both new investments and reinvestments of earnings and increased dividend distributions. The majority of FDI in 2009 was directed to the telecommunications, food, and consumer trade sectors. The United States is the largest principal with 51.3 percent of total 2009 FDI, followed by the United Kingdom, then Mexico.

The stock of U.S. investment in Honduras at the end of 2008, on an historical cost basis, was USD $700 million, according to the U.S. Department of Commerce. The United States continued to be the largest investor in Honduras in 2009, accounting for USD $342.4 million, or 70.7 percent, of the total inflow.

Table 1: Foreign Direct Investment Flows by Country of Origin
(Millions of Dollars)

2007 p2008 p2009 p
NORTH AMERICA682.8483.3354.6
COSTA RICA9.44.11.6
EL SALVADOR9.00.214.5
UNITED KINGDOM92.885.7-18.9

Source: Central Bank of Honduras, p/Preliminary

Table 2: Foreign Direct Investment Flows by Industry Sector Destination
(Millions of Dollars)

INDUSTRY SECTOR2007 p2008 p2009 p
Transport, Warehousing, and Communications280.9493.5294.4
Manufacturing Industry164.4118.874.3
Real Estate and Business Services142.6129.253.2
Mining and Quarries18.90.08.5
Agriculture and Fishing11.23.22.2
Electricity and Water9.315.22.1
Commerce, Restaurants, and Hotel71.513.1-16.4

Source: Central Bank of Honduras, p/Preliminary