Trade and Commercial Law Assessment - Honduras - Economic ...

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TRADE AND COMMERCIAL LAW ASSESSMENT DECEMBER 2004 HONDURAS ♦ Establish codes of conduct among judges and court staff ♦ Endeavor through training and statutory reform to address the overly formalistic aspects of the law and the judiciary ♦ Through outreach and demonstrable results, persuade the public that the courts in Honduras can be trusted to uphold their commercial agreements. Continued reforms in the courts and judicial system will help Honduras secure more benefits from increased regional trade. C. HELPING SMES ACCESS CAPITAL: AN IMPERATIVE FOR ECONOMIC GROWTH Businesses in Honduras—particularly SMEs—face numerous obstacles within the legal, bureaucratic, and trade environments that inhibit their ability to become formally established under the law and to grow and expand. That almost 50 percent of businesses in Honduras operate in the informal sector—compared with fewer than 17 percent in Organization for Economic Cooperation and Development (OECD) countries—reveals the difficulties enterprises face. 12 An entrepreneur seeking to establish a company in Honduras confronts procedural inefficiencies and corruption when trying to register, enormous restrictions in using collateral to secure debt, and grave threats to the property interest in the very parcel of land on which the new company may operate. Companies that wish to expand their opportunities through international trade face inefficiencies within the agencies that are charged with regulating and facilitating their transactions, along with constant threats to the security of their goods. These inefficiencies can raise costs significantly for smaller companies seeking to engage in trade. As reported herein, encumbrances specifically facing SMEs in Honduras include the following: ♦ SMEs, especially informal ones, have great difficulty obtaining credit because of a lack of lender confidence in their ability to collect on collateral. Microfinance institutions provide a potential alternative source of credit, but interest rates are often prohibitively high (up to 80 percent). Interviewees have stated that even banks charge approximately 35-percent to 40-percent interest or higher. ♦ Currently, no single entity is tasked with organizing the quality control standards to remain updated on international industrial standards. Because of their small size, SMEs do not individually have the resources to remain current on such topics. Creating such an entity would significantly increase the likelihood of SME participation in international commerce. This is also a basic requirement for global competitiveness. ♦ SMEs disproportionately bear the costs of institutional inefficiency and the politicization of institutions. In establishing registration and notary costs, along with other administrative fees, officials and notaries do not take into consideration the relatively greater impact that such fees have on small-sized companies. For example, current law requires the signature of a notary in many situations of questionable necessity. As small 12 See World Bank, Snapshot of Business Environment—Honduras, at http://rru.worldbank.org/DoingBusiness/ExploreEconomies/BusinessClimateSnapshot.aspx?economyid=86. II-4
TRADE AND COMMERCIAL LAW ASSESSMENT DECEMBER 2004 HONDURAS companies, SMEs have less resources and less liquid capital to spend on transaction costs. Throughout this report, obstacles facing SMEs are identified, and recommendations for change are suggested that would lessen the administrative burdens and unnecessary transaction costs forced on SMEs. The theme that emerges from these individual points is that even relatively small changes could result in significant improvements to the business environment. The costs and challenges involved in implementing the recommended changes vary, but each recommendation should be considered in the context of the overall environment for enterprise growth. As summarized recently in the Economist, Laggards sometimes argue that reforms would be difficult and costly to enact. But what could be simpler than scrapping a stupid rule? Simplifying procedures is harder, but not too hard. There are plenty of examples to learn from, and the World Bank estimates that the benefits of the reforms it advocates are 25 times the costs. 13 A nationwide effort to streamline procedures and otherwise remove damaging constraints on business start-up and operation would encourage more new businesses to formalize their operations, thereby increasing opportunities to do business and improving access to capital. The needs of SMEs—which employ at least 600,000 people in Honduras—should be considered at all junctures of the CLIR and trade facilitation process. D. FOREIGN DIRECT INVESTMENT The political stability of Honduras in recent years, along with its participation in a regional market of 36 million people, makes it a location of increasing interest to outside investors. Unfortunately, as noted throughout this report, foreign direct investment faces a number of constraints Specifically— ♦ Distribution and representation contracts are subject to a special law passed in the 1970s that is disproportionately protective of the interests of local distributors. To validate this type of contract, parties must register the contract at the Industry and Trade Ministry. If the contract is terminated by the foreign company, the local distributor is entitled to compensation equal to the average annual net income it has received over the past 5 years of the contract’s life. In addition, in cases of unilateral cancellation by the foreign company, the local distributor can obtain an injunction to prohibit further distribution of the products he was distributing before the contract was terminated. On the other hand, distribution contracts are not subject to foreign jurisdiction and cannot be governed by foreign entities. As a result, many foreign companies are reluctant to introduce their products in the Honduran market. ♦ The Law on Administrative Simplification, passed in 2000, requires companies to have a minimum of two shareholders. Thus, wholly owned subsidiaries are not possible. This limitation affects foreign investments, since most foreign companies operate through companies in which shares are wholly owned. 13 “Measure First, Then Cut,” The Economist (September 9, 2004) (summarizing World Bank, Doing Business in 2005: Removing Obstacles to Growth [2004]). II-5
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