BizCLIR

Along with the specific findings in the 13 subject matter areas, certain cross-cutting themes emerged with respect to CLIR and trade in Honduras. It is important to consider and incorporate these themes in any reform efforts, but not necessarily through stand-alone initiatives. Rather, it would be prudent to address these themes within the context of any reforms undertaken, as described further below.

A. MONITORING AND SUPPORTING CURRENT PROPERTY INITIATIVES

The crucial role that property plays in the ability of businesses to grow and expand has been of enormous interest since Hernando de Soto published his groundbreaking work The Other Path, in 1986. As summarized in an article published by the Center for International Private Enterprise,
"Mr. de Soto identified the barriers to private sector growth that had been invisible to others. The key barrier, he argued, has long been weak institutions . . . "

Perhaps the most important—and least noted—of these institutions is property rights. Owners of land, corporate shares, and even intellectual property are loathe to invest in the upkeep and improvement of their property if their rights as owners are insecure. Just as importantly, if property cannot be bought and sold with the confidence that the authorities will uphold the transaction, the market itself will fail to generate dynamic growth. Indeed, the absence of property rights is one factor that drives people out of formal markets into the informal sector.

Clear property rights represent a fundamental precondition for market-based economic activity. The grant of ownership rights in real property to rural or urban residents makes it possible to realize the full value of the property, both in its primary role (housing, infrastructure for business, garden plots, crop cultivation, etc.) and in its secondary role as collateral for consumer or commercial credit. Similarly, the registration of movable collateral in a state-sponsored institution reduces the risk of issuing credit, leading to increased availability of credit on improved terms.

In Honduras, only about 14 percent of the population occupies property legally. The remaining 86 percent holds property outside the scope of the law, amounting to $12.4 billion in extralegal land possession. Of properties held legally, only 30 percent are registered. Indicative of the vast gap in property registration is one department where, out of 146,000 lots, 45,000 are registered, and only 15,000 are registered correctly. Thus, only a very small percentage of the population in Honduras currently has access to credit through formal channels, since in most cases credit is only available to those individuals holding valid title to real property.

In response to these issues, major reforms in the area of real property are currently being implemented. The enactment of the Property Law, or Ley de Propiedad (LdP), which entered into force on June 29, 2004, and a $25 million interest-free loan from the World Bank to support real property rights, along with other initiatives geared at securing property rights, each warrant monitoring and support over the years to come.
The primary purpose of the LdP is to rationalize the country’s property system by recognizing settlers’ rights, resolving title disputes, and modernizing the Property Registry. The law includes the creation of a new entity in charge of property matters, Instituto de Propiedad, which, as early as January 2005, will have authority over real property registration and the national cadastre map. This new law creates a transition period during which information from current registries will be transferred into the new system.
The World Bank’s credit to Honduras was issued in February 2004 for the purpose of expanding access to formal land titling, surveying, registration, and conflict resolution mechanisms, as part of an integrated and decentralized land administration system. Called the Honduras Land Administration Program, the initiative is designed to support an integrated and decentralized land administration system that provides users with accurate information on urban and rural land parcels, as well as effective land administration services in a timely and cost-effective manner. The project specifically aims to benefit poor and non-poor urban and rural property owners in the departments of Choluteca, Comayagua, Cortés, and Francisco Morazán and to expand access to land titling and administration services to indigenous and Afro-Honduran populations on the Atlantic coast.

Specifically, under the auspices of the World Bank, Honduras recently initiated a project to automate, consolidate, and make public all property information. The project, Proyecto de Administración de Tierras de Honduras (PATH), has a duration of 12 years. PATH is meant to strengthen the Instituto de Propiedad and contains an experimental project to create a unified system of registration. This system, called Sistema Unificado de Registro (SURE), will be accessible online. With the new system, a data query, which previously took 6 to 9 months, was completed in 1 minute. Under PATH, it is expected that property information, currently dispersed among 26 entities, will be consolidated and accessible through SURE within 4 years.

The implementation of both the legislative reforms and the World Bank programs not only impact the real property market per se but also affect the extent to which businesses and individuals will be able to access capital in the future. The LdP aims to reform not only the Real Property Register and cadastre system but also the existing registry for movable property. Implementation of the LdP will make important demands on lawyers and the judiciary, who will need to recognize its authority and understand its provisions and impact. The willingness and ability of the judiciary to administer the LdP will directly affect the way that banks assess risk in the future, and thus will ultimately affect whether and to what extent capital is made more accessible in Honduras.

Vigilant donor monitoring and support will contribute to the realization of the goals of these property reform initiatives. Indeed, new reform programs pertaining to commercial law, support for SMEs, or rule of law and governance generally should be fully in step with these property-related initiatives already in progress. New programs should leverage resources and recognize the importance of avoiding duplication or conflict of effort. Properly implemented, these initiatives can serve as a model for other countries in the region and beyond.

B. URGENT NEED FOR JUDICIAL REFORM

In virtually every section of this report—contracts, collateral, real property, bankruptcy, flow of goods and services, and others—the difficulty of the Honduran courts to facilitate the prompt resolution of commercial disputes and the enforcement of its own judgments is identified as a problem. The many aspects of this issue include a low degree of confidence in judges, inefficiency and sluggishness of court processes, and a lack of significant automation in the courts.

In Honduras, more resources should be devoted to improve training opportunities for judges. Further, the lack of a career judiciary makes it more difficult to develop competence over a significant period. There is a judicial school under the authority of the Supreme Court, but its courses need updating.

Currently, reliable information transfer from local registries for use by the courts is relatively slow and bureaucratic. This impacts the degree of confidence that lenders will be able to enforce debts. In some instances, the use of collateral may be so restricted that even entrepreneurs with sound business plans could have difficulty finding access to capital.

Until the commercial community in Honduras trusts that the courts are capable of affording remedies in the event of defaults on loans and breaches of contracts, there will be fewer loans and fewer contracts than the market could otherwise support. In short, the great risks involved in extending credit or engaging in an arms-length transaction will result in less economic activity and less growth. Even the development of ADR mechanisms will be affected if decisions are not handed down in a clear and efficient manner, and if such delays erode confidence that parties can enforce ADR agreements and awards.

Thus, future programs in commercial legal and institutional reform need to address the judicial component of this issue. Addressing this element would include leveraging the resources of existing court reform programs to emphasize the relationship between court reform and economic growth and, where gaps remain, formulating technical assistance efforts that do the following:
• Develop a commitment to professionalism, competence, and integrity among judges through support for professional organizations, continuing education in skills pertaining to judging, and increased judicial independence
• Improve the commercial capacity of courts through administrative and automation processes that make the process of dispute resolution faster, more predictable, and more transparent
• Train judges in areas pertaining to commercial activity, particularly with respect to modern types of commerce and newer laws, such as competition law, potential laws pertaining to modern contracts or electronic commerce, and laws concerning money laundering
• 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. 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 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.

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.
• The Honduran chambers of commerce have proposed a reduction in the number of bureaucratic steps required to notarize powers of attorney granted from abroad, thus reducing the transaction costs borne by foreign investors. Steps have not been taken, however, to reduce or simplify these procedures.
• Most Honduran lawyers and judges are not well versed in international business transactions, leaving many foreign businesses unable to access sound local legal representation and unsure of trial outcomes.
• A perception of corruption and over-politicization in various commercial law and trade-related institutions affects foreigners’ interest in investing in Honduras.

Thus, future reform efforts, in addition to considering the interests of SMEs, should make the concerns of foreign investors a matter of continuous, cross-cutting concern.

E. CENTRAL AMERICA′S PREPAREDNESS

Continued progress in economic development and poverty reduction requires greater economic growth and productivity gains throughout Central America. Greater trade and investment provide an opportunity for stronger economic growth, and the Central American Free Trade Agreement can be a key part of this opportunity. Working together, the countries of the Central American market can achieve economies of scale. Central America’s prior efforts, through the Central American Common Market, provide a foundation on which CAFTA-related efforts can build.

To fully benefit from freer trade under CAFTA, member countries must face institutional, regulatory, and operational changes covering a range of critical issues, such as macroeconomic concerns, trade policy, education, health, environment, agriculture, trade facilitation, and the commercial environment. Without a favorable business environment, domestic entrepreneurs and interested foreign investors cannot seize new opportunities. Without a more efficient and secure trading system, these entrepreneurs and investors cannot efficiently and securely move their goods and services.

As detailed in this report, Honduras needs to better prepare some of its sectors, such as business and agriculture, for implementation of CAFTA. Examples include the following:
• Private sector representatives in Honduras claim that the government has not been active enough in modernizing and reforming the practices that diminish the relative competitiveness of Honduras. Although there seems to be significant political will to change, more urgency should be given to reform. More dynamic initiatives to decrease bureaucratic procedures and decentralize decision-making are required.
• Exporters could be better organized as a unified constituency. The export community appears splintered and polarized into various organizations. The lack of a single, representative organization inhibits the presentation of an effective collective voice on policy and procedures affecting the export community, particularly because there is little communication between the groups.
• Honduran people-flow institutions need improvement. Honduras could do more to simplify its system for handling highly skilled visitors seeking longer stays. Work permits now require more than 12 pieces of paperwork and involve five or more government agencies.
• Most of the private, and even the public sector, lacks a clear idea of what CAFTA is and what it will require of them.
One significant way in which Honduras can improve is through an ongoing effort to integrate regional practices and harmonize its laws with those of the other CAFTA countries. Although this report proposes solutions to various problems as they apply in their national context, the suggestions are all made against the vital backdrop of regionalism. That is, without harmonization of better commercial legislation and practices throughout the region, neither home-grown businesses nor outside investors will be able to seize the economic opportunities presented in this emerging market region of 36 million people.