2003 Investment Climate Statement for Honduras

UNCLAS SECTION 01 OF 16 TEGUCIGALPA 001923

SIPDIS

STATE FOR EB/IFD/OIA, WHA/CEN, AND WHA/EPSC
STATE PLEASE PASS TO USAID, EXIM, OPIC, TDA, USTR

E.O. 12958: N/A
TAGS: EINV EFIN ELAB ETRD KTDB PGOV HO OPIC
SUBJECT: 2003 Investment Climate Statement for Honduras

REF: SECSTATE 124894


1. Provided below is the 2003 Investment Climate Statement for
Honduras. Responses are keyed to reftel.

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A.1. Openness to Foreign Investment
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2. The Honduran government is generally open to foreign
investment and welcomes it. Restrictions and performance
requirements are fairly limited. U.S. companies tend to encounter
problems investing in infrastructure and a few visible large
projects like the airport, telecom and energy sectors, as domestic
companies seek ways to keep the competition out.


3. Since 1999, the Honduran government has taken steps,
including additional legislative measures, to create a more
favorable investment climate in key sectors including mining,
energy and tourism, although their potential has yet to be
realized. Relatively low labor costs, proximity to the U.S.
market and Central America's best Caribbean port have also made
Honduras increasingly attractive to investors. At the same
time, however, Honduras' investment climate is hampered by high
levels of crime, juridical insecurity, high levels of
corruption, low educational levels among the population, an
antiquated labor code, a troubled financial sector and limited
infrastructure.


4. The Constitution of Honduras requires that all foreign
investment complement, but not substitute for, national
investment. 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 must be majority-owned by Hondurans.


5. The 1992 Investment Law, which still largely governs
investment conditions in Honduras, guarantees national treatment
to foreign private firms in Honduras, with only a few exceptions.
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 (approx. USD 8,600).
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. Under the 1992 law, dividends to
foreign investors were taxed at 15 percent, while local investors
paid only 10 percent. However in 2002 a revised law was passed
which lowered this tax rate to 5 percent for both foreign and
local investors, and will eliminate this tax entirely by 2004.


6. 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.


7. Foreign firms are granted national treatment for public bids.
In practice U.S. firms complain about the mismanagement and lack
of transparency of government bid processes. Under the 2001 State
Contracting Law, all public works contracts over one million
Lempiras (USD 57,000) must be offered through public competitive
bidding. The government publishes tenders in Honduras' major
newspapers. To participate in public tenders, foreign firms are
required to act through a local agent. Local agency firms must be
at least 51 percent Honduran-owned, unless the procurement is
linked to a national emergency. Government purchases and project
acquisitions are generally exempted from import duties.


8. The 1992 Investment Law requires that all local and foreign
direct investment be registered with the Investment Office in the
Ministry of Industry and Trade. Upon registration, an investor is
issued an investment certificate which provides investment
protection under the law and guarantees investors' international
arbitration rights. The registration process is cumbersome and
companies can expect delays in registering their company.

9. In July 2002, the Government of Honduras ratified a law on
simplification of administrative procedures in establishing a
company. Through this new legislation, the government hoped to
streamline procedures and eliminate a series of administrative
obstacles involved in the process, reducing the steps for
establishing an office from up to six months to a maximum of 40
days. Foreign businesses setting up operations in Honduras are
subject to the Commercial Code, which is also undergoing various
important reforms. The Commercial Code recognizes several types
of mercantile organizations: individual ownership, general
partnership, simple limited partnership, limited liability
company, corporation and joint stock company.


10. 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.
A dispute over the financing of certain projects that the
consortium agreed to undertake soon developed, and a re-negotiated
agreement between the consortium and the government is expected to
be finalized soon.


11. A bid to privatize the national telephone company failed in
2001 and will not be attempted again until 2005. In late 2001,
the GOH decided to open the telecom market by bidding out one of
Honduras' available wireless bands. After several delays, the
government awarded one wireless system concession in April 2002,
and the company is expected to be in service by December 2003.
The Honduran government intends to allow private joint ventures
with Hondutel to improve coverage and service beginning in August
2003, and later to encourage private participation in the sale of
shares in Hondutel to private interests beginning in 2004 with the
goal of full privatization in 2005.


12. The National Electric Company (ENEE) turned over most of its
thermal energy generation to the private sector but retains
responsibility for electricity transmission and distribution, as
well as for almost all hydroelectric energy generation and
distribution throughout the country. The GOH is working on a
project to break up ENEE distribution and is working towards
privatization, though there is no firm timeline set.


13. The GOH hopes to begin privatizing some port operations in
September, 2003 and is working with the U.S. Trade and Development
Agency to expand and modernize Puerto Cortes. The ENP and the
World Bank are working to meet International Maritime Organization
requirements for port security by July 1, 2004, including the
creation of an autonomous unit which will be responsible for the
port security program.


14. A law is currently before Congress which would formally grant
municipalities the right to manage water distribution themselves,
and possibly to grant concessions to private enterprises. However
the law has generated a good deal of controversy from opposition
groups which claim that it amounts to "privatization" of water
distribution, and its progress through Congress has been slowed.

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A.2. Conversion and Transfer Policies
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15. 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.


16. The Central Bank uses an auction system to regulate the
allocation of foreign exchange. According to auction system
regulations, dollar purchases are conducted at 7 percent above or
below the base price established every 5 days. During recent
auctions, the Central Bank has adjudicated an average of USD 10.3
million per auction (held each business day). All individuals,
foreign residents or national, can participate in auction system
dollar purchases with a minimum investment of USD 5,000 and a
maximum of USD 300,000. Foreign exchange demand in 2002 was 99.9
percent covered, and the currency depreciated by 6.3 percent.

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A.3. Expropriation and Compensation
--------------


17. The Honduran government has the authority to expropriate
property for purposes of land reform (usually related to a land
invasion by farmer groups) or for public use such as construction
of an airport. Land disputes related to actions by the Honduran
National Agrarian Institute (INA) are common for both Honduran and
foreign landowners. According to the National Agrarian Reform
Law, idle land fit for farming can be expropriated and awarded to
landless poor. Generally, an INA expropriation case begins after
squatters target and invade unprotected property. The squatters
then file for the land with the INA under the Agrarian Reform Law.
In most cases, claimants have found that pursuing the subsequent
legal avenues is costly and time consuming, and rarely lead to
positive results. Compensation for land expropriated under the
Agrarian Reform Law, when awarded, is paid in 20-year government
bonds.


18. Land title disputes are extremely common in Honduras. Even
areas which have been subjected to a cadastral survey have not
been free of land disputes, as the lack of a single unified land
registry makes adjudication of land tenure difficult. As of July
2003, a proposal is before congress for a new property institute
which would combine the national land registry with the cadastral
survey and the geographic institute. The proposed property
institute would provide for more security in land titling and
ownership in Honduras, as well as allow for mortgages and home
loans. The national land survey project has been completed in the
Bay Islands and is close to completion in the Comayagua area.
Tegucigalpa and San Pedro Sula are scheduled for the next phase of
the project.

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A.4. Dispute Settlement
--------------


19. The Honduran Commercial Code is the main legislation that
regulates the operations of businesses in the country. This code,
though, is antiquated and needs to be updated. The application of
the Commercial Code and its regulations fall under the
jurisdiction of the Honduran civil court system.


20. 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 that the Honduran judicial system caters
to 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. U.S.
citizens also complain about the quality of Honduran attorneys.
The government frequently blames the poor quality of a U.S.
citizen's (Honduran) legal representative as the reason for an
unfavorable outcome in the courts.


21. The process to resolve squatter cases or title disputes
through the courts can be lengthy and frustrating. The legal
owner of land is at a disadvantage in a system that recognizes
adverse possession rights acquired by squatters, especially when
the disputed land is rural and idle.


22. Arbitration

Between 1997 and 2001, the Inter-American Development Bank worked
with the Chamber of Commerce and Industry to establish the
framework for commercial arbitration. Honduras' Conciliation and
Arbitration Law (Decree 161-2000),which seeks to encourage
arbitration and clarify the procedures under which arbitration
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. Since that time, the Center in Tegucigalpa has trained 17
arbitrators who work part-time, and they have completed 2
arbitrations and 18 conciliations. Approximately 5 arbitrations
and 20 conciliations are pending in the Tegucigalpa Center.
Arbitration and conciliation are generally considered swifter and
more cost-effective means of resolving disputes between commercial
entities, and there may be the additional advantage that the
arbitrator or mediator may have specialized expertise in the
technical area involved in the dispute. However the only U.S.
company to have gone through an arbitration process to date was
disappointed with both the procedure (which it regarded as lacking
in transparency) and the result (which was unfavorable to the U.S.
company).

Honduras is not a member of the ICSID (International Center for
the Settlement of Investment Disputes).

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A.5. Performance Requirements/Incentives
--------------


23. There are relatively few performance requirements in
Honduras. 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 and customs procedures.


24. Application procedures for service suppliers in all sectors
are generally simple, clear and non-discriminatory. There are
restrictions preventing foreign banks from taking deposits, and
foreign insurance companies may be subject to a more elaborate
administrative process than national providers per a new Insurance
Law (though the Embassy has not received any complaints).
Honduras' service sector is widely accessible to foreign
companies, including current U.S. participation in the Honduran
banking, insurance and accounting markets.


25. Honduran law prohibits discriminatory or preferential export
and import policies affecting foreign investors. In practice,
though, the Honduran government uses phyto-sanitary and
zoosanitary requirements to prevent imports of U.S. poultry, milk
products, pork, feed grains and rice to Honduras. The changes in
sanitary and phyto-sanitary requirements are seldom reported to
the WTO as required and create uncertainty among U.S. suppliers
and Honduran importers.


26. Honduran law requires that all imported processed food
products and medicines be labeled in Spanish or be accompanied by
a Spanish translation, show expiration dates and be registered at
the Division of Food Control in the Ministry of Public Health.
Additional import restrictions, based mainly on public health,
public morality, and national security grounds, remain in place.
For example, restrictions are imposed on the importations of
firearms and ammunitions, toxic chemicals and pornographic
material.


27. U.S. citizens wishing to travel to Honduras do not need a
visa prior to arrival. Foreigners interested in working in the
country must obtain a resident visa from the Honduran Ministry of
Government and a work permit from the Ministry of Labor. The time
required to process a request for a resident visa and work permit
may take up to three months.

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A.6. Right to Private Ownership and Establishment
-------------- --------------


28. The Investment Law guarantees both local and foreign
investors the right to own property without limitations, other
than those 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."


29. 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.

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A.7. Protection of Property Rights
--------------


30. Intellectual Property Rights

There is widespread piracy of many forms of copyrighted works in
Honduras -- movies, sound recordings and software. The
illegitimate registration of well-known trademarks has also been a
problem. Protection of Intellectual Property Rights (IPR) is
handled by the Ministry of Industry and Trade. In 1994, following
the passage of modern IPR legislation by the Honduran Congress,
the Ministry established an office to process the registration of
patents, trademarks and copyrights, as well as any complaints
regarding their infringement.


31. 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
adds more than 20 different criminal offenses related to copyright
infringement and establishes fines and suspension of services that
can be levied against offenders. The Law of Intellectual
Property, which covers both trademarks and patents, includes
modifications on patent protection for pharmaceuticals, extending
the term from seventeen to twenty years to meet international
standards. The term for cancellation of a trademark for lack of
use has been extended from one year to three years. As soon as
two new laws governing the designs of integrated circuits and
plant variety protection are approved by the National Congress,
Honduras will be in complete TRIPS compliance. Current
expectations are that no action will be taken on these two laws
until early 2004, but that the laws will then be included in a
larger bill that is likely to pass.


32. Honduras and the U.S. initialed a bilateral IPR agreement in
March 1999. Signing of this agreement is still pending.
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 does
not recognize second-use patents.


33. Land Rights:

Honduran laws and practices regarding real estate differ
substantially from those in the United States, and there are many
cases of disputed or fraudulent deeds and titles. In addition,
the Honduran judicial system is weak and inefficient, often
prolonging disputed cases for many years before resolution. There
have been claims of widespread corruption in land sales and the
registry and dispute resolution process, including claims against
attorneys, real estate companies, judges and local officials.
U.S. citizens have spent thousands of dollars in legal fees and
years of frustration in trying to resolve property disputes.


34. Article 107 of the Honduran Constitution prohibits foreign
ownership of property in Honduras that lies within 40 kilometers
(25 miles) of the Caribbean Sea, Gulf of Fonseca or the
international borders of Nicaragua, El Salvador and Guatemala and
on any of the islands and cays belonging to Honduras.


35. However, recognizing that the constitutional prohibition of
foreign property ownership in Honduras was a barrier to
development of tourism and the economic potential of Honduras'
coastal and island areas, the Honduran National Congress passed
Decree Law 90/90 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.
Foreigners or foreign companies seeking to purchase property in
designated tourism zones exceeding 3,000 square meters in size or
for tourism or other development projects must present an
application to the Honduran Tourism Institute at the Ministry of
Tourism. In addition to providing the requested personal
information, the potential buyer must also prove that a contract
to buy a specific property exists and that it is registered with
the Honduran Tourism Institute. The buyer must also present
feasibility studies and plans about the proposed tourism or
economic development project.


36. In 1999, the Honduran National Congress also passed a Tourism
Incentives Law which offers tax exemptions for national and
international investment in tourism development projects in
Honduras. The law provides income tax exemptions for the first ten
years of the project and permits 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. For example, restaurants were included as a duty-
free tourist activity in the 1999 law, but removed in the 2002
law. This change is due in large part to the current saturation
of the fast food and restaurant market, since many franchises
established locations in Honduras under the duty-free incentives
of the 1999 law. Other enterprises now excluded from the law's
benefits are casinos, night clubs and movie theaters. 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.

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A.8. Transparency of the Regulatory System
--------------


37. The Honduran government does not publish regulations before
they enter into force and there is no formal mechanism for
providing proposed regulations to the public for comment.
Regulations must be published in the official "Gazette" in order
to enter into force. Honduras lacks an indexed legal code and
lawyers and judges must maintain and index the publication of laws
on their own.

38. Foreign market participants who are represented locally and
are members of connected private sector groups essentially have
access to the same information as their Honduran counterparts.
The lack of a formal notification process excludes most non-
governmental groups, including foreign companies, from commenting
on regulations.

39. Application procedures for service suppliers in all sectors
are generally simple, clear and non-discriminatory. There are
restrictions preventing foreign banks from taking deposits, and
foreign insurance companies may be subject to a more exhaustive
administrative process than national providers per a new Insurance
Law (though the Embassy has not received any complaints).
Honduras' service sector is widely accessible to foreign
companies, including current U.S. participation in the Honduran
banking and insurance markets.


40. In both the banking and insurance sectors, the general rule
is that foreign companies operate on an equal footing with local
companies, so 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 reporting requirements and other
procedures which are very cumbersome. Furthermore, a Honduran
branch of foreign bank may only operate based on its capital in
Honduras, not on its global or regional capital.


41. Honduran labor laws and the civil procedures code are
outdated. The Honduran government often lacks the resources or
political will to implement or enforce existing laws. Property
registration often is not up to date, nor can the results of title
searches be relied upon. There is no title insurance in Honduras.
Procedural red tape to obtain government approval for investment
activities is still very common.

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A.9. Efficient Capital Markets and Portfolio Investment
-------------- --------------


42. 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. Interest rates have been steadily declining for several
years, but remain high. As of April 2003, the average lending
rate for a loan in Lempiras as was 21.1 percent, down from 23.1
percent a year earlier, and for a loan in dollars was 10.7
percent, down from 11.6 percent a year earlier. 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. Loans from banks tend to be short-
term, with substantial collateral and/or guarantee requirements.


43. There is a limited number of credit instruments available in
the local market. Two security exchanges operate in the country:
the Honduran Securities Exchange (BHV),in San Pedro Sula, and the
Central American Securities Exchange, in Tegucigalpa. Both
security exchanges are supervised by the National Banking and
Insurance Commission. The instruments traded in these exchanges
include bankers' acceptances, reposition agreements, short-term
promissory notes, Honduran government private debt conversion
bonds and land reform repayment bonds.


44. While any private business is eligible to trade its financial
instruments on the security exchanges, firms that participate are
subject to a rigorous screening process. Traded firms generally
have economic ties to the different business/financial groups
represented as either shareholders of the security exchanges or
exchange trading houses. Supervision of the security exchanges
has traditionally been inadequate, and even though a new law
regulating the security exchanges was passed in June 2001,
implementation has taken place slowly. By July 2003,
implementation was nearly complete and expected to be completed by
the end of the year. Nevertheless, investors should exercise
caution before putting money into the Honduran security exchange.


45. There is no regulatory body for the accounting profession in
Honduras. The Association of Public Accountants is responsible
for certifying practicing professionals. In general, Honduran
businesses adhere to international Generally Accepted Accounting
Principles (GAAP). These principles are normally applied per
guidelines from the Ministry of Finance's General Directorate for
Taxation.


46. The Honduran banking system, currently comprised of 18
private banks, is considered weak and in need of consolidation.
Most banks were originally founded primarily to service the
financing needs of family-run business conglomerates, rather than
provide full banking services to the public in a transparent
manner.


47. In recent years, the Honduran banking system has been shaken
by the bankruptcy of several major banking institutions. The first
bank to collapse was Bancorp in 1999. In response to this
collapse, the Honduran legislature enacted the Temporary Law of
Financial Stabilization in an attempt to help stabilize the
banking sector. Under this law, all bank deposits are insured by
the State regardless of the sum. Currently, the Honduran
government guarantees 100 percent of bank deposits, with the
deposit insurance program (FOSEDE) paying up to $10,000 or 150,000
Lempiras, and the government covering the remaining amount. After
September 30, 2003, however, the government's guarantee will drop
to 50 percent of the deposit. As in other countries, this deposit
insurance only covers qualified deposits in banks, not in
uninsured financial institutions.


48. When Banhcreser collapsed in 2001, the rules established in
the temporary law helped to protect the bank's customers. With
both the collapses of Banhcreser and Bancorp, allegations of
corruption and wrongdoing followed the investigations into the
causes of the bank's failures.


49. In December 2002, the National Banking and Insurance
Commission (CNBS) announced the forced liquidation of Banco
Capital, which had been under government supervision since May

2002. At nearly the same time another bank, Banco Sogerin, was
placed under the supervision of the Honduran Deposit Insurance
Fund (Fosede). With both Banco Sogerin and Banco Capital failing
at the same time, the CNBS delayed the initial sale of Banco
Sogerin for several months to prevent wider damage to the banking
system. The sale of Banco Sogerin was finally announced in July

2003.


50. The mixed success of CNBS's handling of the failed banks has
attracted some criticism. Certain Honduran banking officials have
criticized the CNBS for adding too many generalized rules with too
many loopholes and for not enforcing the established banking
regulations.


51. The Honduran financial system had total assets equivalent to
75 percent of GDP in 2002. The financial system is comprised of
commercial banks, state-owned banks, savings and loans and finance
companies. Banks account for 90 percent of total assets in the
financial system. There is limited off-shore banking in Honduras.


52. There are no legal barriers to entry in the banking sector,
but the small size of the market and weak financial situation have
discouraged greater foreign investment. Four banks have majority
foreign ownership as of 2002, accounting for 19 percent of total
bank capital.

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A.10. Political Violence
--------------


53. Honduras has not experienced major problems with domestic
political violence. Political demonstrations do occur
sporadically, and they can disrupt traffic, but they are generally
announced in advance and are usually peaceful. Most major
demonstrations occur in downtown Tegucigalpa. 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.

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A.11. Corruption
--------------


54. Two codes regulate justice and provide for penalties against
corruption: the Criminal Procedures Code (CPC) and the Penal Code
(PC). In a landmark reform, the National Congress approved a new
CPC in February of 2000, which entered into force in February

2002. The criminal judicial system has changed from a traditional
written inquisitorial trial system to an adversarial, oral, and
public trial system. The new CPC should improve justice and
accountability in a number of ways, including increased
transparency in the criminal process. The PC is currently under
review and faces challenges in terms of funding and support.

55. The main responsibility for fighting corruption lies with the
Public Ministry, under the direction of the Attorney General
(Fiscal General). In January 2002, the Government created a new
control entity, the Supreme Court of Accounts (TSC) which has
brought together the Comptroller General of the Republic (CGR),
the Directorate of Administrative Probity (Ethics office) and the
Office of State Assets under one roof and direction of three
members selected by the Congress. These three members are
appointed for a period of 7 years. The presidency of the TSC is
exerted in a rotating manner within the elected members for
periods of one year. In the past few years, there has been an
increase in the number of cases involving corruption adjudicated
by the courts.


56. In June 2002, new money laundering legislation entered into
force. The new bill expands the definition of the crime of money
laundering to encompass any non-economically justified sale or
movement of assets, including financing of terrorism, and calls
for the creation of a financial information unit to track
suspicious transactions. The bill also strengthens the powers of
prosecutors to investigate and prosecute. However, as of July
2003, not a single person has ever been convicted of money-
laundering in Honduras.


57. In May 1998, Honduras ratified, adopted and deposited its
signature for the Inter-American Anti-Corruption Convention at the
Specialized Conference of the Organization of American States
(OAS).


58. Historically, U.S. firms and private citizens have found
corruption to be a problem and a constraint to investment.
Corruption appears to be most pervasive in government procurement,
government permits, and in the buying and selling of real estate
(land titling). With considerable U.S. help, the government is
reforming Honduras' judicial system and reducing elite immunity
and corruption, though serious problems remain in these areas.
The U.S. and other donors, as part of the Hurricane Mitch
reconstruction effort, have contributed significant funding to
strengthen those institutions involved in the oversight of
government expenditures.


59. Bribery is a criminal act 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 (Foreign
Corrupt Practices Act).

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B. Bilateral Investment Agreements
--------------


60. On July 12, 2001, a Bilateral Investment Treaty (BIT) between
the U.S. and Honduras entered into force. The Treaty provides for
equal protection under the law for U.S. investors in Honduras and
permits expropriation only in accordance with international law
standards and accompanied by adequate compensation. U.S.
investors in Honduras also have the right to submit an investment
dispute to binding international arbitration. 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. Honduras signed a Tax Information Exchange
Agreement with the U.S. in 1992.


61. Provisions for bilateral investment are included in
commercial treaties between Honduras and Costa Rica, El Salvador,
Guatemala, Panama and the Dominican Republic. In 1993 Honduras
signed bilateral investment agreements with the United Kingdom and
Spain.

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C. OPIC & Other Investment Insurance Programs
-------------- -


62. The U.S. Overseas Private Investment Corporation (OPIC)
provides loan guarantees, which are typically used for larger
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.


63. 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).

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D. Labor
--------------


64. Honduras has a significant availability of labor for
industries with a demand for relatively low skilled workers, given
the low level of education of a significant portion of its
population. There is a limited supply of skilled workers in all
technological fields, as well as in medical and high technology
industries.


65. Union officials remain critical of what they perceive as
inadequate enforcement by the Ministry of Labor (MOL) of workers'
rights, particularly the right to form a union and bargain
collectively, and the reinstatement of workers unjustly fired for
union organizing activities. In November 1995, the MOL signed a
Memorandum of Understanding with the U.S. Trade Representative's
Office to implement 11 recommendations for enforcement of the
Honduran Labor Code and the resolution of disputes. The MOL has
implemented some of these recommendations, particularly as they
relate to inspection and monitoring of assembly-for-export
factories (maquilas). However, it has been slow to implement
others due to resource constraints. Also, the Honduran
Maquiladora Association initiated a code of conduct in July 1998
for the Maquiladora Association and its constituent companies.
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.


66. 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 of 20 workdays after four years. The
Constitution and Labor Code prohibit the employment of persons
under the age of 16, except that a 15-year old may be permitted to
work with the written permission of parents and the MOL. All
persons under 18 years of age are prohibited from night work,
dangerous work and full time work.


67. 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 15-year-old must certify that the young person has
finished or is finishing compulsory schooling. The MOL grants a
number of work permits to 15-year-olds each year. Document fraud
is prevalent among minors interested in working.

--------------

E. Foreign Trade Zones/Free Ports
--------------


68. There are no known export subsidies provided by the Honduran
government. 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
(ZIPS and ZOLIS) are exempt from paying import duties and other
charges on goods and capital equipment. In addition, the
production and sale of goods within the ZIPS and ZOLIS are exempt
from state and municipal income taxes for the first ten 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
now 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.


69. The principal free trade zone (FTZ) in Honduras is located in
Puerto Cortes and is operated by the Honduran government through
the National Port Authority. In 1998, the government extended FTZ
benefits to the entire country. Privately-owned free trade zones
are legal extensions of official free trade zones. In terms of
operations and incentives, they are identical to the privately
operated industrial parks.


70. There are 27 industrial parks currently operating in
Honduras. Over 80 percent of the parks are located in the North
Coast region, with close access to Puerto Cortes, Honduras' major
Caribbean port, and San Pedro Sula, a transportation crossroads.
Industrial parks and export processing zones are treated as
offshore operations. Subsequently, 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. Ninety
percent of the companies that operate in these parks are involved
in apparel assembly. The government and park operators are
seeking to diversify into other types of light industry, including
footwear, automotive parts, electronics assembly and data
processing services.


71. Privately-owned Tourism Free Zones (ZOLT) may be established
to promote the tourism industry development in Honduras. The law
allows the free importation of equipment, supplies, and vehicles
to the exclusive benefit of the ZOLT, with certain restrictions
(see the description of the tourism law in section A.7, above).

--------------
Maquila Industry
--------------


72. Honduras currently ranks as the third largest exporter of
textiles and apparel to the U.S., and the first among Central
American nations. However, the slowdown and sluggish recovery of
the U.S. economy during 2001 and 2002 continue to have a
depressing effect on the Honduran maquila sector, and the future
is clouded by fears of being unable to compete with China and
other Asian producers after the removal of quotas in 2005.
Benefits under the Caribbean Basin Trade Partnership Act (CBTPA)
have helped to establish the maquila industry in Honduras, but
officials in the maquila sector hope that improved market access
and rules of origin currently under negotiation for the Central
America Free Trade Agreement (CAFTA) will provide increased
opportunities.


73. Total investment in the maquila sector surpassed USD 1.5
billion in 2002, but employment in the sector has fallen by 15
percent from 2000 to 2002. One reason for this decrease in
employment is the closing of 13 maquilas in 2002 as a result of
the U.S. market slowdown and Honduran management problems.

--------------

F. Foreign Direct Investment Statistics
--------------


74. In Honduras, figures for investment in the maquila industry
are kept separately from figures for investment in the rest of the
economy. Table 1 below shows the flows of FDI into Honduras in
recent years, excluding the maquila industry. According to the
Central Bank of Honduras, total flows of non-maquila investment in
2002 totaled USD 142.9 million, down 27 percent from 2001. The
United States supplied 54.5 million, or 38 percent, of this
investment. A breakdown of this investment by industry was not
available.



75. TABLE 1
HONDURAS: FLOWS OF FOREIGN DIRECT INVESTMENT BY COUNTRY,
NOT INCLUDING THE MAQUILA SECTOR
(In Millions of U.S. Dollars)

COUNTRY 2000 2001 2002
-------------- -------------- -------------- --------------
United States 64.2 52.6 54.5
Canada 36.1 15.1 18.1
El Salvador 7.9 9.2 11.8
Costa Rica 21.2 24.1 9.8
Panama 15.1 18.1 8.8
Italy 13.6 7.6 6.2
Guatemala 11.1 10.8 6.0
Spain 7.8 9.8 5.4
United Kingdom 15.0 4.3 4.8
Japan 0.0 1.2 1.2
Switzerland -4.1 -1.3 0.5
Mexico -0.1 0.2 0.2
Germany 0.2 0.2 0.2
Other 94.1 43.1 15.2

TOTAL 282.0 195.0 142.9

Source: Central Bank of Honduras



76. TABLE 2
HONDURAS: GDP AND FOREIGN INVESTMENT FLOWS,
NOT INCLUDING THE MAQUILA SECTOR
(In Millions of U.S. Dollars)

2000 2001 2002
-------------- -------------- --------------
GDP 5,952.1 6,248.4 6,389.7
FDI Flows 282.0 195.0 142.9
FDI Flows as
percentage of GDP 4.7 3.1 2.2

Source: Central Bank of Honduras

--------------
Maquila Sector Statistics
--------------


77. In the maquila sector, total accumulated investment reached
USD 1.56 billion in 2002, up from 1.421 billion in 2001 and 1.237
billion in 2000. A detailed breakdown of investment by country of
origin for 2002 was not available; however, Table 3 provides this
information for the year 2001, and Table 4 shows investment origin
by number of companies established (not dollar value of
investment) for 2002.



78. TABLE 3
HONDURAS: ACCUMULATED INVESTMENT IN MAQUILA SECTOR, 2001
(In Millions of U.S. Dollars)

Amount Percent of
(USD millions) Total

Honduras 670.1 47.1
U.S. 370.2 26.0
Korea 145.5 10.2
Hong Kong 43.8 3.1
Taiwan 55.2 3.9
China 33.8 2.5
Singapore 18.8 1.3
Canada 49.2 3.5
Other 35.0 2.5
-------------- --------------
Total 1421.6 100.0

Source: Honduran Maquila Association



79. TABLE 4
HONDURAS: INVESTMENT ORIGIN IN MAQUILA SECTOR, 2002
(Number of Companies Established)

Number of Percent of
Companies Total

U.S. 87 40
Honduras 67 31
Korea 33 15
Hong Kong 9 4
Taiwan 4 2
Other 17 8
--- ---
TOTAL 217 100

Source: Honduran Maquila Association



80. There are no records kept on Honduran investment abroad.

--------------
Major Foreign Investors
--------------


81. The following is a partial list of foreign firms and
franchises of foreign firms operating in Honduras, with a
description of the type of investment and country of origin.

Investor Country Type of Investment

Agro Internacional de U.S. Agricultural
Honduras products

Alpha-Graphics U.S. Printing services

Alberti Food Co. U.S. Food products

Alimentos Concentrados U.S. Veterinary food
Nacionales

American Airlines U.S. Air services

Americar U.S. Car distributors
America's Favorite Chicken U.S. Fast food

American Home Assurance Co. U.S. Insurance services

American International Group U.S. Insurance services

Americatel U.S. Telecommunications

Antonino's Pizza U.S. Fast food

Applewoods United Kingdom Cosmetics

Applebee's U.S. Restaurant
Arthur Andersen U.S. General Business
Consulting

Astaldi, s.p.a.W.A. ITA Engineering
services

Azucarera "La Grecia" Guatemala Sugar mill

BAT Industries PLC United Kingdom Tobacco products

Bay Island Fish Co. U.S. Seafood

Bayer Germany Pharmaceutical
products

Benetton ITA Casual clothing

Bennigan's U.S. Restaurant

Best Western Hotel U.S. Hotel

Bojangles U.S. Restaurant

Breakwater Resources Corp. CAN/U.S. Mining

Bristol Myers Squibb U.S. Beauty products

Budget Rent a Car U.S. Car rental

Burger King Inc. U.S. Fast food

Candy Bouquet U.S. Candy Store

Cargill, Inc. U.S. Animal feed,
poultry & meat
processing

Castle & Cooke, Inc. U.S. Bananas and other
Agricultural
products; Bottling
and brewing

Caterpillar Tractors U.S. Spare parts,
accessories

Cerveceria Hondurena, S.A. U.S. Soft drinks and
beers

Chestnut Hill Farms U.S. Agricultural
products

Chiquita Brands International U.S. Bananas and other
Agricultural
products;
plastic products
manufacturing

Church's Chicken U.S. Fast food

Cinemark U.S. Entertainment

Citibank U.S. Banking and
financial services

Citrus Development Corp. U.S. Citrus production
and processing

Colgate-Palmolive U.S. Personal care
products

Congelados Holanda Mexico Ice cream

Continental Airlines U.S. Air services
CPC International U.S. Corn starch

Crowley American Transport U.S. Ocean freight
services

Crowne Plaza Hotel U.S. Hotel
services

Cultivos Marinos U.S. Shrimp farm

Cybex U.S. Health & fitness

Daimler Crysler Corporation U.S. Cars
Demahsa Mexico Corn flour

DHL U.S. Air freight
services

Domino's Pizza U.S. Fast food

Dos Pinos Costa Rica Ice cream and milk
products

Dry Cleaning USA U.S. Dry cleaning
services

Empacadora Cortes, S.A. U.S. Meat production;
packing

Electrical & Consulting U.S. Engineering
Petroleum Training Programs
Services, Inc.

Elektra Mexico Household
goods/appliances

Ernst & Young International U.S. Accounting &
auditing services

Espresso Americano U.S. Fast food

Exxon U.S. Petroleum products
marketing

Federal Express U.S. Air freight svcs.

Five Star Mining U.S. Mining exploration

From the Ground Up/Tippman U.S. Trading and
consulting

G.B.M. de Honduras U.S. Computer services

Glamis Gold, Ltd. U.S. Gold mining

Global One Communication U.S. Telecommunications

Gold's Gym U.S. Health & fitness

Grey Advertising Inc. U.S. Advertising
services

Grupo Granjas Marinas U.S. Shrimp farms

H.B. Fuller U.S. Adhesives; paints

Hertz Rent a Car U.S. Car rental

Holiday Inn Hotel U.S. Hotel

Hotel Intercontinental El Salvador Hotel
/Camino Real (Grupo Roble)

Hotel Princess Guatemala Hotel

House of Windsor U.S. Tobacco

IBM U.S. Business machines;
Computer software

Industrial Engineers, Inc. U.S. Repair &
construction,
naval vessels

Kimberly-Clark U.S. Paper products;
Pharmaceutical
products

KPMG Peat Marwick U.S. General business
consultants

La Costena Mexico Canned foods

Little Caesar's Pizza U.S. Fast food

Lloyd's Bank PLC United Kingdom Banking services

Lucent Technologies U.S. Telecommunications

Mail Boxes, etc. U.S. Courier services
and copy center

Martinizing U.S. Dry cleaning
services

McDonald's U.S. Fast food

McCann Erickson U.S. Advertising;
publicity

Midas International U.S. Automotive parts &
Services

Motorola U.S. Telecommunications

Moore Business Forms U.S. Business forms

Multiplaza Malls (Grupo Roble) El Salvador Shopping center
chain

Nestle Products Switzerland Food products

Oil Butler U.S. Oil change

Oracle U.S. Software

Pakmail U.S. Packaging and
Courier Services

Pan Bimbo Mexico Bread products

Pan American Life Ins. Co. U.S. Life insurance

Papa John's U.S. Fast food

Parker Tobacco U.S. Cigars

Payless U.S. Footwear

Paysen Germany Pharmaceutical
products

Peat, Marwick, & Mitchell U.S. Accounting and
auditing services

Phelps-Dodge U.S. Electric wire &
Cable
manufacturing

Pizza Hut International U.S. Fast food

Pollo Campero Guatemala Fast food; Animal
feed; Poultry
processing

Popeye's U.S. Fast food

PriceSmart U.S. Warehouse stores

Price Waterhouse U.S. Accounting &
auditing services

Quick Internet U.S. Telecommunications,
internet services


R. Rodriguez y Asociados U.S. General Business
consulting

Radio Shack U.S. Electrical
Appliances

RJR-Nabisco U.S. Food products

Rochez Brothers Entertainment U.S. Entertainment
Ruby Tuesday's U.S. Restaurant

Sabritas Mexico Snacks

Scott Paper, Inc. U.S. Paper products

Seaboard Marine Corp. U.S. Winter fruits &
vegetables;
aquaculture;
ocean freight
services

Sealand Service, Inc. U.S. Ocean freight
services

Sears U.S. Household goods

Select United Kingdom Convenience store

Shell United Kingdom Petroleum products
/Holland marketing

Siemens Germany Telecommunications

Smith-Kline Beecham United Kingdom Pharmaceutical

Sprint U.S. Telecommunications
products

Standard Fruit Co. U.S. Tropical fruits

Star Mart U.S. Convenience store

Stewart & Stevenson U.S. Electricity
generation

Subway U.S. Fast food

TAHSA United Kingdom Tobacco

TACA El Salvador Air services

TCBY U.S. Fast food

Technology Research Corp. U.S. Electrical
supplies

Texaco U.S. Petroleum products
marketing

TGI Friday's U.S. Restaurant

3M U.S. Office supplies

Tony Roma's U.S. Restaurant

Tropical Gas Company U.S. Appliance and
other equipment

Truly International U.S. Pest control

Unilever United Kingdom Cleaning Products,
/Holland Beverages, Food

United Marketing (Unimerc) U.S. Marketing services

United Parcel Services U.S. International
Courier

United Technologies Automotive U.S. Automobile
Electronics
assembly

U.S. Tobacco U.S. Cigars

Van Ommeren-Ceteco Netherlands Trading/retailing

Wellington Hall Caribbean, Inc. U.S. Furniture

Wendy's International U.S. Fast food

Witten International U.S. Apparel

Xerox Corp. U.S. Business machine
sales & services

Pierce