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

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TRADE AND COMMERCIAL LAW ASSESSMENT DECEMBER 2004HONDURAS♦♦♦Establish codes of conduct among judges and court staffEndeavor through training and statutory reform to address the overly formalistic aspectsof the law and the judiciaryThrough outreach and demonstrable results, persuade the public that the courts inHonduras can be trusted to uphold their commercial agreements.Continued reforms in the courts and judicial system will help Honduras secure more benefitsfrom increased regional trade.C. HELPING SMES ACCESS CAPITAL: AN IMPERATIVE FOR ECONOMIC GROWTHBusinesses in Honduras—particularly SMEs—face numerous obstacles within the legal,bureaucratic, and trade environments that inhibit their ability to become formally establishedunder the law and to grow and expand. That almost 50 percent of businesses in Honduras operatein the informal sector—compared with fewer than 17 percent in Organization for EconomicCooperation and Development (OECD) countries—reveals the difficulties enterprises face. 12 Anentrepreneur seeking to establish a company in Honduras confronts procedural inefficiencies andcorruption when trying to register, enormous restrictions in using collateral to secure debt, andgrave threats to the property interest in the very parcel of land on which the new company mayoperate. Companies that wish to expand their opportunities through international trade faceinefficiencies within the agencies that are charged with regulating and facilitating theirtransactions, along with constant threats to the security of their goods. These inefficiencies canraise 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 lackof lender confidence in their ability to collect on collateral. Microfinance institutionsprovide a potential alternative source of credit, but interest rates are often prohibitivelyhigh (up to 80 percent). Interviewees have stated that even banks charge approximately35-percent to 40-percent interest or higher.Currently, no single entity is tasked with organizing the quality control standards toremain updated on international industrial standards. Because of their small size, SMEsdo not individually have the resources to remain current on such topics. Creating such anentity would significantly increase the likelihood of SME participation in internationalcommerce. This is also a basic requirement for global competitiveness.SMEs disproportionately bear the costs of institutional inefficiency and the politicizationof institutions. In establishing registration and notary costs, along with otheradministrative fees, officials and notaries do not take into consideration the relativelygreater impact that such fees have on small-sized companies. For example, current lawrequires the signature of a notary in many situations of questionable necessity. As small12 See World Bank, Snapshot of Business Environment—Honduras, athttp://rru.worldbank.org/DoingBusiness/ExploreEconomies/BusinessClimateSnapshot.aspx?economyid=86.II-4
TRADE AND COMMERCIAL LAW ASSESSMENT DECEMBER 2004HONDURAScompanies, SMEs have less resources and less liquid capital to spend on transactioncosts.Throughout this report, obstacles facing SMEs are identified, and recommendations for changeare suggested that would lessen the administrative burdens and unnecessary transaction costsforced on SMEs. The theme that emerges from these individual points is that even relativelysmall changes could result in significant improvements to the business environment. The costsand challenges involved in implementing the recommended changes vary, but eachrecommendation should be considered in the context of the overall environment for enterprisegrowth. As summarized recently in the Economist,Laggards sometimes argue that reforms would be difficult and costly to enact. But whatcould be simpler than scrapping a stupid rule? Simplifying procedures is harder, but nottoo hard. There are plenty of examples to learn from, and the World Bank estimates thatthe benefits of the reforms it advocates are 25 times the costs. 13A nationwide effort to streamline procedures and otherwise remove damaging constraints onbusiness start-up and operation would encourage more new businesses to formalize theiroperations, thereby increasing opportunities to do business and improving access to capital. Theneeds of SMEs—which employ at least 600,000 people in Honduras—should be considered atall junctures of the CLIR and trade facilitation process.D. FOREIGN DIRECT INVESTMENTThe political stability of Honduras in recent years, along with its participation in a regionalmarket 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 ofconstraints Specifically—♦♦Distribution and representation contracts are subject to a special law passed in the 1970sthat is disproportionately protective of the interests of local distributors. To validate thistype of contract, parties must register the contract at the Industry and Trade Ministry. Ifthe contract is terminated by the foreign company, the local distributor is entitled tocompensation equal to the average annual net income it has received over the past 5 yearsof the contract’s life. In addition, in cases of unilateral cancellation by the foreigncompany, the local distributor can obtain an injunction to prohibit further distribution ofthe 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 byforeign entities. As a result, many foreign companies are reluctant to introduce theirproducts in the Honduran market.The Law on Administrative Simplification, passed in 2000, requires companies to have aminimum of two shareholders. Thus, wholly owned subsidiaries are not possible. Thislimitation affects foreign investments, since most foreign companies operate throughcompanies in which shares are wholly owned.13“Measure First, Then Cut,” The Economist (September 9, 2004) (summarizing World Bank, Doing Business in2005: Removing Obstacles to Growth [2004]).II-5
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