HONDURAS: 2005 INVESTMENT CLIMATE STATEMENT

UNCLAS SECTION 01 OF 13 TEGUCIGALPA 000404

SIPDIS

STATE FOR EB/IFD/OIA AND WHA/CEN
STATE PASS USTR
GUATEMALA FOR COMATT MLARSEN AND AGATT SHUETE
SAN SALVADOR FOR DTHOMPSON

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV HO OPIC USTR
SUBJECT: HONDURAS: 2005 INVESTMENT CLIMATE STATEMENT

REF: 04 STATE 250356

Per reftel, the following is Embassy Tegucigalpa's submission for
the 2005 Investment Climate Statement.

A.1. Openness to Foreign Investment
--------------

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.

In recent years, the Honduran government has taken steps to
create a more favorable investment climate, especially in key
sectors including energy and tourism. Relatively low labor
costs, proximity to the U.S. market, and Central America's
best Caribbean port (Puerto Cortes) have also made Honduras
increasingly attractive to investors. At the same time,
however, Honduras' investment climate is hampered by high
levels of crime, a weak judicial system, high levels of
corruption, low educational levels among the population, a
troubled financial sector, and limited infrastructure.

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.

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. $8,000). 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.

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 Government Contracting Law, which entered into force in
October 2001, all public works contracts over one million
lempiras (about $53,400 as of February 2005) must be offered
through public competitive bidding. Public contracts between
500,000 and one million lempiras ($26,700 and $53,400) can be
offered through a private bid, and contracts less than 500,000
lempiras ($26,700) are exempt from the bidding process.
Currently, to participate in public tenders, foreign firms are
required to act through a local agent (at least 51 percent
Honduran-owned). The Central America-Dominican Republic Free
Trade Agreement (CAFTA-DR),if ratified, will eliminate this
requirement. (For more on CAFTA-DR see section B, Bilateral
Investment Agreements, below.)

In theory, foreign firms are granted national treatment for
public bids. In practice, many U.S. firms complain about the
mismanagement and lack of transparency of government bid
processes. Under CAFTA-DR, U.S. suppliers will be granted non-
discriminatory rights to bid on contracts from most Central
American government entities, including key ministries and state-
owned enterprises. CAFTA-DR also requires fair and transparent
procurement procedures, such as advance notice of purchases and
timely and effective bid review procedures.
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.

In 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 recognizes several types of
mercantile organizations: individual ownership, general
partnership, simple limited partnership, limited liability
company, corporation and joint stock company.

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 the agreement
between the consortium and the government was re-negotiated in
2003, and approved by the Honduran Congress in February 2004.

In September 2003, the GOH opened the telecommunications market
for joint ventures with Hondutel, Honduras' state-owned telephone
monopoly. Under the new program, foreign and domestic carriers
can register with Honduras' regulatory body, Conatel, as sub-
contractors for Hondutel fixed telephony services. Though full
privatization is not anticipated until December 2005, this is a
positive step towards the liberalization of the telecom sector.
Cellular telephony services are open to full private ownership.

The National Electric Company (ENEE) has 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.

The GOH is working with the U.S. Trade and Development Agency to
modernize Puerto Cortes. The ENP met International Maritime
Organization requirements for port security by the July 1, 2004,
deadline, and has created an autonomous unit that will be
responsible for the port security program. Eventual
privatization of the port has been raised as a possible policy
objective, but no firm plans nor deadlines have been set.

A new law enacted in October 2003 grants municipalities the right
to manage water distribution themselves, and, if they wish, to
grant concessions to private enterprises. The law establishes a
transition period of five years from its date of publication,
after which the current national water service SANAA will be
disbanded and exist only to provide technical assistance to the
new service providers. As of February 2005, however, little
progress has been made in the implementation of the new law.

A.2. 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.

The Central Bank uses an auction system to regulate the
allocation of foreign exchange. According to auction system
regulations, dollar purchases are conducted within a band ranging
from 7 percent above to 7 percent below the base price
established every 5 days. All individuals, foreign residents or
national, can participate in auction system dollar purchases with
a minimum investment of $5,000 and a maximum of $300,000. In
2004 the Honduran currency, the Lempira, depreciated by 4.7
percent against the dollar.

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

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. 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 leads to positive results.
Compensation for land expropriated under the Agrarian Reform Law,
when awarded, is paid in 20-year government bonds.

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

The Honduran government has a poor record of handling investment
disputes, due to the outdated commercial code and the weak
judicial system.

The Honduran Commercial Code is the main legislation that
regulates the operations of businesses in the country. This
code, however, was written in 1950 and needs to be updated. 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 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. Many U.S. citizens have also complained about the
quality of legal representation they receive from Honduran
attorneys.

Land title disputes are extremely common in Honduras, due to the
problems with the Honduran judicial system and the lack of a
clear land tenure system: see Land Rights in section A.7, below.

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. 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 to date, U.S. companies and U.S. citizens who
have gone through an arbitration process have expressed
disappointment with both the slow pace and lack of transparency
of the procedure.

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

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

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.

Application procedures for service suppliers in all sectors are
generally simple, clear and non-discriminatory. Honduras'
service sector is widely accessible to foreign companies,
including current U.S. participation in the Honduran banking,
insurance and accounting markets. 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 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 phyto-sanitary
and zoosanitary 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
has agreed to apply the science-based disciplines of the WTO
Agreement on Sanitary and Phyto-sanitary Measures, and will move
towards recognizing export eligibility for all plants inspected
under the U.S. food safety and inspection system.

The Honduran government requires that sanitary permits be
obtained from the Ministry of Health for all imported foodstuffs,
and that all processed food products be labeled in Spanish and
registered with the Division of Food Control (DFC) of the
Ministry of Health. Some U.S. businesses have complained that
delays in the process of granting these permits hamper their
ability to import products into Honduras. U.S. companies have
also reported that these regulations are not always strictly
enforced for Honduran companies. If true, this lack of
enforcement on the part of the Honduran government places any
U.S. company that does comply with the regulations at a
disadvantage.

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.

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. To
process a request for a resident visa and work permit may take up
to three months.

Incentives:

In 1999, the Honduran National Congress 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.

For information on investment incentives offered in Free Trade
Zones, see Section E, Foreign Trade Zones/Free Ports, below.

A.6. 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 A.7, 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.
Private enterprises compete on an equal basis with public
enterprises with respect to access to markets, credit and other
business operations.

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

Intellectual Property Rights:

Although Honduras has yet to experience 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. Confiscation
has been erratic, and usually involves minor seizures of compact
discs. The illegitimate registration of well-known trademarks
has also been a problem. Success in protecting intellectual
property rights (IPR) rests primarily on the GOH's ability to
effectively implement its current laws, rather than a need for
further legislation. Protection of intellectual property rights
is handled by the Intellectual Property Division of the Ministry
of Industry and Trade.

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 establishes 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 seventeen to twenty years to meet
international standards. 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 after the ratification of CAFTA-
DR.

Honduras and the U.S. initialed a bilateral IPR agreement in
March 1999, but substantive issues arose during the language
conformity process. Instead, recent efforts to push the GOH for
additional IPR commitments were pursued as part of the CAFTA-DR
negotiations. If ratified, CAFTA-DR should significantly improve
the level of IPR protection in the region. Approval of CAFTA-DR
by the Honduran Congress in 2005 is considered very likely.

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.

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. 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. 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. 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. U.S. citizens have spent thousands
of dollars in legal fees and years of frustration in trying to
resolve property disputes.

A new property law passed in July 2004 should improve land
registration procedures and allow for more security in land
titling, and thus a reduction in land disputes. By providing
clearer land title, it should also allow more people to apply for
mortgages and increase land-related investments. However, the
purchase of land in Honduras by foreigners should still be
undertaken only with great caution.

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 development of tourism 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 new law,
thus permitting foreigners to continue to own littoral and
frontier property.

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.

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

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 government publication "The Gazette"
in order to enter into force. Honduras lacks an indexed legal
code and lawyers and judges must maintain and index the
publication of laws on their own. Procedural red tape to obtain
government approval for investment activities is very common.

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.

The Honduran legal system is not efficient or transparent: many
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. Many U.S.
citizens have also complained about the quality of legal
representation they receive from Honduran attorneys.

A.9. 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. Interest rates have been steadily declining for several
years, but remain high. As of November 2004, the average lending
rate for a loan in Lempiras as was 19.67 percent, down slightly
from 20.05 percent a year earlier, and for a loan in dollars was
8.47 percent, down from 9.20 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.

There is 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 (www.bcv.hn). (Another securities exchange, the
Honduran Securities Exchange (BHV) in San Pedro Sula, ceased
operations in 2004.) The Central American Securities Exchange is
supervised by the National Banking and Insurance Commission.
Instruments that can be traded theoretically 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 nearly 100%
composed of short-term government securities. No private firms
currently 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. Historically,
traded firms generally have had economic ties to the different
business/financial groups represented as shareholders of the
exchange, which has in the past led to lax risk management
practices and an enduring loss of public confidence in the
institution. Supervision of the exchange has traditionally been
inadequate, even though a new law regulating security exchanges
was passed in 2001. Investors should exercise caution before
putting money into the BCV.

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.

The Honduran financial system is comprised of commercial banks,
state-owned banks, savings and loans and finance companies.
There are currently 16 commercial banks operating in Honduras,
which account for roughly 90 percent of the assets in the
financial system. Of these 16 banks, 7 have majority foreign
ownership, accounting for 31 percent of total bank capital (as of
September 2004). There is limited off-shore banking in Honduras.

The Honduran banking sector is considered fragile and in need of
consolidation. Between 1999 and 2002, four Honduran banks either
collapsed or were liquidated. Bancorp collapsed in 1999 and
Banhcreser in 2001; in each case allegations of corruption and
wrongdoing emerged from the investigations into the causes of the
bank's failures. In 2002, the National Banking and Insurance
Commission announced the forced liquidation of Banco Capital, and
placed another bank, Banco Sogerin, under the supervision of the
national Deposit Insurance Fund. 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.

In September 2004, at the insistence of the IMF, the Honduran
Congress passed a set of four financial sector reform laws that
should lead to improved supervision of the banking system. The
four 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, establishes new and stronger penalties for financial crimes
including bank fraud.

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

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.

However, while political violence is not a major concern, levels
of crime and violence are high, and do represent a major
constraint on investment. In a World Bank survey conducted in
2002 of both Honduran and foreign firms operating in Honduras,
one in three firms surveyed reported having suffered a criminal
attack in the previous year. These attacks led to a loss of 0.9
percent of annual sales, and expenses devoted to security
measures (hiring security guards, installing alarms, etc.)
represented another 3.6 percent of annual sales. Total losses
due to a lack of security therefore added up to 4.5 percent of
sales - a significant proportion, second in the region only to
Guatemala.

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

Two codes regulate justice and provide for penalties against
corruption: the Criminal Procedures Code (CPC) and the Penal Code
(PC). In 2002, a reform of the CPC entered into force, changing
the criminal judicial system from a traditional written
inquisitorial trial system to an adversarial, oral, and public
trial system. The new CPC is improving justice and
accountability in a number of ways, including increased
transparency in the criminal process.
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 Supreme Court of Accounts (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 one roof and 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.

Historically, many U.S. firms and citizens operating in Honduras
have found corruption to be a serious problem and a constraint to
successful investment. In a World Bank survey conducted in 2002
of both Honduran and foreign firms operating in Honduras,
corruption was identified as the single largest constraint to
economic growth. In its 2004 perception survey of business
persons, Transparency International named Honduras as one of the
five most corrupt countries in the Western Hemisphere.
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. 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).


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

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.

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.

In August 2004, Honduras signed the Central America-Dominican
Republic Free Trade Agreement (CAFTA-DR),a multilateral trade
agreement with the United States, Guatemala, El Salvador,
Nicaragua, Costa Rica and the Dominican Republic. The Honduran
Congress is expected to ratify the agreement in the spring of
2005; however, the agreement will not enter force until the U.S.
Congress also ratifies the agreement.

When implemented, CAFTA-DR will not only liberalize bilateral
trade between the United States and the region, but will also
further integration efforts among the countries of Central
America, removing barriers to trade and investment in the region
by U.S. companies. CAFTA-DR will also require the countries of
Central America to undertake needed reforms to alleviate many of
the systemic problems noted above, in areas including protection
of intellectual property rights, openness of government
procurement, financial services market access and protection,
alleviation of sanitary and phyto-sanitary barriers, and others.


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

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 $100,000 to $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 treaty
with Honduras. The agreement updates one signed in 1966, and
should streamline OPIC support for U.S. investment in Honduras.
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).

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

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

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. 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 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.

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.

Additional information about Honduran labor legislation,
including copies of the laws themselves, can be found (in Spanish
only) at www.leylaboral.com.


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

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
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 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 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 Cortes, with close access to Puerto
Cortes, Honduras' major Caribbean port, and San Pedro Sula,
Honduras' major commercial city and 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. While
most companies that operate in these parks are involved in
apparel assembly, the government and park operators are beginning
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
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 in section
A.5, above).

F. Foreign Direct Investment Statistics
--------------
According to Central Bank data, FDI flows to Honduras in 2003
totaled $198 million, a 13 percent increase over 2002, though
still well off the historical high of $282 million reached in

2000. The U.S. continues to be the dominant source of FDI in
Honduras: from 1993-2002, 44 percent of all FDI to Honduras came
from the United States, and in 2002, the last year for which a
country breakdown is yet available, nearly 83 percent of all
direct foreign investment flows to Honduras were from the United
States.

Table 1: Honduras - Foreign Investment
by Country of Origin
in US$ million

2000 2001 2002
-------------- -------------- --------------
United States 50.7 60.5 144.6
Canada 18.1 18.7 21.8
Mexico 0.2 6.6 1.2
El Salvador 9.7 -1.2 15.0
Guatemala 11.4 6.3 9.7
Nicaragua 3.2 19.5 8.3
Costa Rica 13.7 5.2 4.5
Dominican
Republic 0.1 0.1 0.1
Spain 8.7 11.0 9.0
Japan 0.5 5.3 5.3
Others 165.7 61.1 -44.3
Total 282.0 193.1 175.2

Source: Central Bank of Honduras. Country breakdown
for 2003 and 2004 not yet available as of February 2005.


Table 2: Honduras - GDP and
Foreign Investment Flows

2000 2001 2002 2003
-------------- -------------- -------------- --------------
GDP in US$m 5,952 6,247 6,405 6,709
FDI Flows
in US$m 282.0 193.1 175.7 198.0
FDI Flows
as % of GDP 4.7% 3.1% 2.7% 3.0%

Source: Central Bank of Honduras. Figures
for 2003 and 2004 are not yet released as
of February 2005.


Table 3: Selected Foreign Investments in Honduras

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 Honduras U.S. Agricultural 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
Applewoods U.K. Cosmetics
Applebee's U.S. Restaurant
Arthur Andersen Consulting U.S. General business
services
Astaldi Italy Engineering
Azucarera "La Grecia" Guatemala Sugar
BAC (Banco de America
Central Honduras) Nicaragua Banking services
Banco Futuro Nicaragua Banking services
Banco Uno Nicaragua Banking services
Baskin-Robbins U.S. Ice Cream
BAT Industries PLC U.K. Tobacco products
Bay Island Fish Co. U.S. Seafood
Bayer Germany Pharmaceuticals
Benneton Italy Clothing
Best Western U.S. Hotel
BGA (Banco Grupo el Ahorro
Hondureo) Panama Banking services
Bojangles U.S. Restaurant
Breakwater Resources Corp. Canada/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
and meat processing
Castle and 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
Church's Chicken U.S. Fast food
Cinemark U.S. Entertainment
Cinnabon U.S. Fast food
Citigroup U.S. Banking 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
Cultivos Marinos U.S. Shrimp farm
Cybex U.S. Health and fitness
Daimler Crysler Corporation U.S. Cars
Demahsa Mexico Corn flour
DHL U.S. Air freight services
Dickies U.S. Textiles and apparel
Domino's Pizza U.S. Fast food
Dos Pinos Costa Rica Ice cream and
milk products
Dry Cleaning USA U.S. Dry cleaning services
Dunkin' Donuts U.S. Fast food
Empacadora Cortes U.S. Meat production,
packing
Elektra Mexico Household
goods/appliances
Ernst and Young International U.S. Accounting and
auditing services
Exxon U.S. Petroleum products
marketing
Federal Express U.S. Air freight services
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./Canada Gold mining
Global One Communication U.S. Telecommunications
Gold's Gym U.S. Health and 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/Camino
Real (Grupo Roble) El Salvador Hotel
Hotel Princess Guatemala Hotel
House of Windsor U.S. Tobacco
IBM U.S. Business machines;
computer software
Industrial Engineers, Inc. U.S. Repair and
construction, naval
vessels
Kentucky Fried Chicken U.S. Fast food
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
Lloyds TSB (Cuscatlan) El Salvador Banking services
Lucent Technologies U.S. Telecommunications
Maersk Sealand Denmark Shipping
Mail Boxes, etc. U.S. Courier services and
copy center
Marriott U.S. Hotel
Martinizing U.S. Dry cleaning services
Mayan Gold, Inc. U.S. Mining
McDonald's U.S. Fast food
McCann Erickson U.S. Advertising;
publicity
Midas International U.S. Automotive parts and
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
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
Parker Tobacco U.S. Cigars
Payless U.S. Footwear
Paysen Germany Pharmaceuticals
Peat, Marwick, and Mitchell U.S. Accounting and
auditing services
Phelps-Dodge U.S. Electric wire and
cable manufacturing
Pizza Hut International U.S. Fast food
Pollo Campero Guatemala Fast food; animal
feed; poultry
processing
Popeye's U.S. Fast food
Price Smart U.S. Warehouse stores
Price Waterhouse U.S. Accounting and
auditing services
Quick Internet U.S. Telecommunications,
internet services
Quizno's U.S. Fast food
Radio Shack U.S. Electrical appliances
RJR-Nabisco U.S. Food products
Rochez Brothers Entertainment U.S. Entertainment
Ruby Tuesday's U.S. Restaurant
Russell Corporation U.S. Textiles and apparel
Sabritas Mexico Snacks
Scott Paper, Inc. U.S. Paper products
Seaboard Marine Corp. U.S. Winter fruits and
vegetables;
aquaculture; ocean
freight services
Sears U.S. Household goods
Select U.K. Convenience store
Shell U.K./ Petroleum products
Netherlands
Siemens Germany Telecommunications
Smith-Kline Beecham U.K. Pharmaceuticals
Sprint U.S. Telecommunications
Standard Fruit (Dole) U.S. Tropical fruits
Star Mart U.S. Convenience store
Stewart and Stevenson U.S. Electricity
generation
Subway U.S. Fast food
TAHSA U.K. 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
Unilever U.K./ Cleaning products,
Holland beverages, food
United Marketing (Unimerc) U.S. Marketing services
United Parcel Services (UPS) 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 U.S. Fast food
Witten International U.S. Apparel
Xerox U.S. Business machine
sales and services

Pierce