VII. INVESTMENT CLIMATE A. OPENNESS TO FOREIGN INVESTMENT Honduras welcomes foreign investors, and can offer them a range of benefits. The ratification of the 1992 investment law, existence of free trade zones and reduction of trade barriers have made Honduras increasingly attractive to investors. The 1992 investment law guarantees national treatment to all private firms in Honduras. The law does not limit foreign ownership of businesses, except for those specifically reserved for Honduran investors, i.e., small firms with capital less than 150,000 lempiras (USD 18,000), or which require special government authorization. These are: - Basic health services. - Telecommunications. - Generation, transmission and distribution of electricity. - Air transport. - Tourism activities within the 40 kilometer exclusion zone established by the Honduran constitution and regulated in decree law 90/90 of August 14, 1990. - Fishing, hunting and aquaculture. - Exploitation of forestry resources. - Investigation, exploration, and extraction 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. - Private education services. According to the 1992 investment law, all local and foreign investment must be registered with the Ministry of Economy. Registration is to be carried out immediately and the investor is to be issued an investment certificate within twenty four hours of presenting the request. If the activity requires special government approval, the Ministry of Economy must submit the case to the appropriate agency which must recommend approval or disapproval of the registration within sixty days. If the opinion is favorable, the investment is to be registered immediately. In practice, registration can take much longer. Foreign investors face some discriminatory treatment in Honduras. To participate in public tenders, foreign firms are required to act through a local agent. By law, local agency firms must be at least 51 percent Honduran owned. Dividends paid to foreign investors are taxed at 15 percent, while local investors pay only a 10 percent tax on dividends. Finally, Honduran professional bodies heavily regulate the licensing of foreigners to practice law, medicine, engineering and other professions. While the law does not permit discriminatory or preferential export and import policies affecting foreign investors, some do exist. The 1992 investment law guarantees freedom to export and import to all foreign investors, and eliminates the requirement of prior administrative permits and licenses, except for statistical registries or customs procedures. In practice, however, the Government of Honduras has used phyto-sanitary requirements to prevent import of U.S. poultry and feed grains to Honduras. U.S. citizens wishing to travel to Honduras do not have to obtain a visa prior to arrival. Foreigners interested in working in the country must first apply and obtain a resident visa from the Honduran Ministry of Government. In addition, they must obtain a work permit from the Ministry of Labor. The time required to complete the resident visa and work permit process may take up to three months; however, there is no knowledge or evidence of discrimination against foreigners in the obtaining these documents. Although there is a clear preference on the part of the Government of Honduras for new foreign investment in export industries, there are no officially mandated requirements which foreign investors must satisfy as a condition for investing in Honduras. There is a requirement that a privately-operated industrial park must generate 5,000 new jobs within five years of start up, but this applies to all owners, foreign or national. Few investment incentives are currently in force. In the view of many senior Honduran officials, the country's natural resource base, freedom of entry, competitive exchange rate and political stability are the best incentives. The following special incentives are available. 1. Industrial Parks and Free Trade Zones. A company, either local or foreign, that locates in one of the specially designated areas enjoys the following benefits: - Duty-free import of machinery, equipment, fixtures, parts, raw materials and supplies needed for operations (except vehicles). - Exoneration from all income, export, sales, or consumer taxes. - Unrestricted repatriation of profits and capital, and on-site customs facilities. The principal free trade zone in Honduras is located in Puerto Cortes and is operated by the Government of Honduras through the National Port Authority. Privately-owned free trade zones are legal extensions of the free trade zones. In terms of operations and incentives, they are identical to the privately operated industrial parks. In addition, individual companies may obtain the benefits of free trade zone status if they are located in specially designated areas. The number of industrial parks has grown dramatically in the last five years. In addition to the incentives listed above, a company that locates in one of these parks can benefit from management services offered by the operators. These parks and zones are treated as if they were offshore operations, i.e., if products manufactured in them are sold in Honduras, customs duties must be paid on them; and, if Honduran raw materials are used to produce the products, these materials are treated as exports and must be paid for in dollars. Most of the companies that operate in these parks are involved in apparel assembly; however, park operators are seeking to attract other types of light industry, such as footwear, automotive parts, and electronics assembly, as well as data processing services. 2. The Temporary Import Law. This law allows exporters to introduce raw materials, parts, and capital equipment into Honduran territory without payment of customs duties or consular fees when the final product of the process is exported outside Central America. The law also provides a ten year tax holiday on profits from these exports. Interested parties may obtain authorization for this program through the Ministry of Economy. Companies that do not operate in free trade zones or export processing zones fall under the jurisdiction of the Temporary Import Law. According to the 1992 investment law, foreign investors are eligible for the same benefits as are local investors. Performance requirements linked to incentives established in certain laws apply equally to foreign and Honduran investors. B. 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. - Remittance of dividends and capital repatriation. In practice, there is a chronic shortage of foreign exchange in Honduras that often precludes foreign investors from obtaining the dollars they need within a reasonable period of time. One U.S. firm retains a full time foreign exchange specialist to acquire the foreign currency it needs to operate. Others spend weeks or months accumulating small sums to transfer. In a move to stop the continued devaluation of the lempira against the U.S. Dollar in the last few months, the central bank recently passed new measures to regulate the allocation of foreign exchange more tightly. While these measures fall short of becoming exchange controls, they have caused a great deal of concern within the local business community as the availability of foreign exchange continues to diminish. It is very likely that the lempira will continue to depreciate against the U.S. dollar in the coming months as a result of the difficult economic situation the country is currently facing. C. EXPROPRIATION AND COMPENSATION Negotiation is continuing on one case of expropriation of U.S. citizen property. Complaints to the U.S. Embassy about land invasions by squatters or property disputes with Honduran citizens have increased in recent months. Over 50 such cases are now registered with the U.S. Embassy. Many U.S. investors have encountered title problems on property purchased in Honduras, especially in the Bay Islands and along the Caribbean Coast. While the U.S. Embassy has been able to assist in the settlement of a few of these cases, little progress has been made in most others. Often these disputes are tied up in litigation for years. The embassy recommends extreme caution in any purchase of property in Honduras. D. DISPUTE SETTLEMENT Settlement of any contractual or property dispute involving the Honduran government or its citizens must take place in the Honduran courts. This process is generally slow and very expensive. Although dispute settlements usually take place in the Honduran courts, the U.S. government expects in mid-September to enter into Bilateral Investment Treaty negotiations which, upon Senate ratification, would establish the option of binding arbitration out of Honduran courts, most notably in the International Centre for the settlement of Investment Disputes (ICSID). The governments of the U.S. and Honduras anticipate beginning BIT negotiations in mid-September 1994 in Washington, DC. E. PERFORMANCE REQUIREMENTS/INCENTIVES Exporters that have applied for benefits under the temporary import law, including duty-free introduction of equipment and materials and a ten-year income tax holiday, must export their production outside Central America and generate a minimum number of permanent jobs. Export processing zones, on the other hand, must generate at least 5,000 new permanent jobs within five years after start up. In addition, firms that operate under this regime must comply with all Honduran labor and social security laws. While firms that operate in these zones do not pay income taxes and enjoy free repatriation of profits, they are now required to purchase the lempiras needed for their local operations from the Honduran commercial banks or foreign exchange trading houses. In the past, they were allowed to do so in the open market. The investment law of 1992 eliminated all local ownership requirements for foreign investments. However, as indicated above, there are certain economic activities that are reserved exclusively for Honduran firms, or that require prior government approval if foreign investment is to be recognized. F. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT The investment law guarantees both local and foreign investors the right to own property without limitations besides those established by the Honduran constitution and the corresponding laws. This guarantee includes the right to free acquisition, profit, use, disposition and any other right attributable to property. In addition, 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. Access to credit by private enterprises, however, has been limited as a result of the central bank's high legal reserve requirement on commercial bank deposits, which is being used to finance the government's fiscal deficit. This high reserve requirement makes loans relatively expensive and, according to businesses, puts them at a disadvantage against government entities. G. PROTECTION OF PROPERTY RIGHTS Protection of Intellectual Property Rights is handled by the Ministry of Economy. This Ministry is in the process of setting up an office which will handle registration of patents, trademarks and copyrights, as well as any complaints regarding the infringement of these. (Also see Section V.L.) H. REGULATORY SYSTEM: LAWS AND PROCEDURES Most of the Honduran laws dealing with business, trade, labor, and finance are old and outdated. The country lacks a basic/indexed legal code; laws are published in periodically circulated gazettes which lawyers and judges must maintain and index on their own. The Government of Honduras often lacks the resources to implement or enforce those laws on the books (or, more accurately, in the gazettes.) Property registration sometimes is not up to date, nor can the results of title searches be relied upon. There is no title insurance in Honduras. In an effort to update the legal system and bring the country on stream with modern business practices, the former Callejas administration created a state modernization commission. However, since the inauguration of the Reina administration in January of 1994, little has apparently been done by this commission to continue the work of its predecessors. As a result, bureaucratic red tape is still very common on many of the procedures and activities that require government approval. Nonetheless, significant progress has been made. The passage of the investment law in May 1992 is one of the best examples. As a result of the passage of the law, the Ministry of Economy and Commerce created a one-stop export and investment registration window to deal with procedures related to the registration of exports and investment in the country. The Government of Honduras, along with the interested parties, is currently discussing passage of new labor and financial sector legislation. However, no specific dates have been set for their final passage. I. 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 highly conservative and generally has limited credit available. The situation has been made much worse by a recent increase in the legal reserve requirement on commercial bank deposits. Therefore, local banks should not be considered a significant source of 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 or the Inter- American Development Bank. Otherwise, loans from banks tend to be short-term (one year or less) with substantial collateral and/or guarantee requirements. There is a limited number of credit instruments available in the local market, and two stock exchanges now operate in the country: the Honduran Stock Exchange (BHV) is located in the industrial capital of San Pedro Sula and started operations in 1990. The Central American Stock Exchange is headquartered in Tegucigalpa and began operations in 1993. Both stock exchanges are supervised by the Central Bank of Honduras. The instruments that are traded in these exchanges include bankers acceptances, reposition agreements, short-term promissory notes, and Government of Honduras private debt conversion bonds and land reform repayment bonds. While, in theory, any private business is eligible to trade in the stock exchanges, firms that participate in them are subject to a rigorous screening process. In addition, they generally have economic ties to the different business/financial groups represented as either shareholders of the stock exchanges or exchange trading houses. The Honduran Commercial Code is the main legislation that regulates the operations of businesses in the country. This code, however, is more than 50 years old and local lawyers often argue that much of it needs to be updated to bring it on line with current business trends. The application of the Commercial Code and its regulations fall under the jurisdiction of the Honduran civil court system. There is no regulatory body for the accounting profession in Honduras. The College of Public Accountants, however, is responsible for certifying practicing professionals. In general, Honduran businesses adhere to international Generally Accepted Accounting Principles (GAAP). These principles are normally applied following guidelines from the Ministry of Finance's General Directorate for Taxation. The five largest banks in the country hold an estimated USD 1 billion in total assets. About ten percent of the total asset base of all banks is classified as non-performing. The Honduran financial system is made up of almost 20 banks, most of which are associated with powerful economic groups. Most of these banks lend primarily to businesses owned by the economic group of which they are a part. The system has been criticized for permitting excessive amounts of unsecured lending to major stockholders or bank principals. A new financial system law has been proposed, which would restrict lending to stockholders and bank officers, permit more control by the superintendent of banks over the financial system, and institute a deposit insurance scheme. To date, the overwhelming opposition of Honduran banks has proven an insurmountable obstacle to passage of this law. Public ownership of business is almost non-existent in Honduras. The largest corporations in the country are usually owned by small groups of families. Admission of new stockholders to the firms must first be approved by the existing shareholders since the commercial code allows a company's incorporation charter to indicate how new owners will be admitted. Likewise, any mergers or acquisitions must also be approved following the same procedure. In general, there are no specific practices by local firms or government to restrict foreign investment participation in economic activities besides those specified in the Investment Law of 1992. J. POLITICAL VIOLENCE Acts of politically motivated violence have been rare in Honduras in recent years. In December 1991, a liquid storage facility owned by a local subsidiary of U.S.-based Castle and Cooke suffered an isolated attack with a rocket-propelled grenade. Following the early February 1993 firing of a number of workers in a corporate restructuring, the general manager of Exxon's local operations received death threats against himself and his family. His car was also badly damaged by unknown vandals. Exxon has retained a security firm to protect the general manager and his family. U.S. banana companies in Honduras employ upwards of 15,000 Honduran workers. With the E.U. decision to restrict Central American banana imports into Europe, the U.S. banana companies in Honduras may well be forced to cut their production -- and labor force. If this take place, some type of protest and perhaps isolated cases of violence could occur. As a result of deteriorating economic conditions, teachers' unions and other state workers unions have recently asked for substantial salary increases from the government. In most instances the government claims it cannot fully accommodate these demands and has offered salary raises well below the expectations of the unions. The largest federations of labor and peasant unions have also been pressing for economic reforms that would benefit their interests. In many cases their actions have resulted in the taking of some of the most important roads in the country for several hours thus halting all vehicular traffic in some of the most important economic areas of Honduras. K. BILATERAL INVESTMENT AGREEMENTS The U.S. - Honduras treaty of friendship, commerce and consular rights (1928) provides for most favored national 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. Honduras also has trade and preferential treatment agreements with other Central American countries, Panama, and several Latin American countries. Provisions for bilateral investment are included in the commercial treaties Honduras has signed with Costa Rica, El Salvador, Guatemala, and Panama. In addition, Honduras, along with Guatemala and El Salvador, are in the process of negotiating a free trade agreement with Mexico, Venezuela and Colombia. The agreement is expected to include investment provisions. In 1993 Honduras signed bilateral investment agreements with Great Britain and Spain. The governments of the United States and Honduras anticipate beginning Bilateral Investment Treaty negotiations in mid-September 1994 in Washington, D.C. L. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS The U.S. Overseas Private Investment Corporation (OPIC) currently offers financing for U.S. citizens who invest in Honduras as well as insurance against risks of war and expropriation. Other countries, including West Germany, the United Kingdom, Italy, Switzerland, and Japan provide insurance and guarantees for their companies doing business in Honduras. In addition, Honduras is a party to the Multilateral Investment Guarantee Agency (MIGA). M. LABOR Honduras has the best organized trade union movement in Central America, and cooperation among labor, employers, and the government has generally been good. Approximately 20 percent of the labor force is unionized. There are three major labor organizations, one of which is marxist-led and controls a key autonomous state agency, the Water and Sewage Company. The public health and educational sectors, along with the plantations of Chiquita Brands International, and most recently some of the companies that operate in free trade zones and private export processing zones, have been prone to strikes. In an effort to attract investment, the trade unions have an informal agreement with the free trade zones and the export processing zones, whereby labor provides a grace period before attempting to organize a union in a new company. The trade union movement is strongly opposed to management-employee associations ("solidarity organizations"). Nevertheless, there are over 15,000 Honduran members of such associations. The minimum wage in Honduras varies according to type of activity, number of workers, and area (urban or rural) where the work is done. It ranges from about USD 1.50 per day for unskilled agricultural workers to about USD 2.50 per day for low skilled workers and those in larger companies. In practice, the prevailing wage paid to workers by most U.S.-owned foreign companies is higher than the minimum. Apparel and tobacco workers are often paid on a piece-work basis. Honduran law provides for seven day wages for five and a half days of work for labor paid on a weekly basis. Salaried workers receive 13 month wages for 12 months of work. Almost all workers, even part-time, receive the 13th month bonus at the end of the year. The normal work week is 44 hours worked, 48 hours paid. The amount of indemnization for severance pay equals one month's wages for each year worked up to fifteen years. Multinational companies established for some time in Honduras have provided generous terms to their workers and therefore have some of the highest paid labor in the country. Overall, however, worker wages and benefits remain among the lowest in the hemisphere. Honduras suffers from a general shortage of skilled labor. Most workers have had only a few years of primary schooling. The Honduran educational system generally prepares students for employment in the professional, commercial, and service sectors of the economy. Very little emphasis is placed on industrial trades. The National Professional Training Institute (INFOP), the Honduran Ministry of Education, as well as some private organizations provide vocational training. However, many companies find that employees trained through in-plant programs are generally more effective than INFOP graduates. U.S. investors who have trained their own workers report good results in skills acquisition and productivity. N. FOREIGN-TRADE ZONES/FREE PORTS See A.5) above. O. CAPITAL OUTFLOW POLICY Given its economic condition and the need for export and job generation, Honduras is dependent on foreign capital. The Government of Honduras does not have a policy that promotes Honduran investment overseas. While, current government policies are designed to promote the return of flight capital many Hondurans have deposited in overseas banks, in practice, Honduras is an exporter of capital. Pension funds are obliged to invest only in Honduras. P. FOREIGN DIRECT INVESTMENT STATISTICS The following table provides an estimate of the stock of foreign investment in Honduras by country of origin. Foreign investment figures in Honduras are hard to obtain. Most of the data below have been obtained directly from the firms themselves or through publicly available documents. ESTIMATED DIRECT COUNTRY OF INVESTMENT ORIGIN (IN MILLION US DOLLARS) United States 375.0 Japan 35.0 El Salvador 30.2 Korea 25.0 Hong Kong 20.0 Taiwan 10.2 United Kingdom 8.7 Germany 5.5 Guatemala 4.5 Venezuela 3.8 Costa Rica 3.1 Other 20.7 ----- Total 541.7 There are no records kept on Honduran investments abroad. Q. MAJOR FOREIGN INVESTORS The following is a partial list of the major foreign investments in Honduras, with a description of the type of investment and country of origin. INVESTOR COUNTRY TYPE OF INVESTMENT Castle & Cooke U.S. Banana, pineapple, citrus; vegetable oil processing; bottling and brewing; carton box manufacturing Chiquita Brands Int'l. U.S. Banana, melons, winter vegetables, pineapples; vegetable oil processing; plastic products manufacturing Texaco U.S. Petroleum products marketing Domino's Pizza U.S. Fast foods Phelps-Dodge U.S. Electric wire and cable manufacturing U.S. Tobacco U.S. Cigars Kimberly-Clark U.S. Paper products; pharmaceutical products Sarah Lee Corp. U.S. Apparel assembly Cargill U.S. Animal feed, poultry and meat processing IBM U.S. Business machines and computer software Citibank U.S. Banking and financial services Xerox U.S. Business machine sales Citrus Development Corp U.S. Citrus production and processing Parker Tobacco U.S. Cigars Seaboard Corp. U.S. Winter fruits and vegetables; aquaculture; ocean freight RJR-Nabisco U.S. Food products CPC International U.S. Corn starch Pan American Life Ins. Co. U.S. Life insurance American Home Assurance U.S. Casualty insurance Scott Paper U.S. Paper products Oshkosh B'gosh U.S. Apparel assembly United Technologies - Automotive U.S. Automobile electronics assembly Van Ommeren-Ceteco Neth. Trading/retailing Breakwater Resources Corp. Canada lead/zinc/silver mining BAT industries U.K. Tobacco products Lloyd's Bank U.K. Banking Nestle Swit. Food products Pollo Campero Guat. Animal feed; poultry processing; fast food restaurants