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2010 saw the passage of the Law for the Promotion of Public-Private Partnerships (PPPs) in Honduras and in 2011 the Law for Promotion and Protection of Investments expanded tax incentives for domestic and foreign investors, offered them greater protections against legislative changes (especially regarding taxes), and established the validity of arbitration awards in the country. For those reasons and others, a large percentage of new investment is expected to be funnelled through the PPPs law in coming years....

2010 saw the passage of the Law for the Promotion of Public-Private Partnerships (PPPs) in Honduras and in 2011 the Law for Promotion and Protection of Investments expanded tax incentives for domestic and foreign investors, offered them greater protections against legislative changes (especially regarding taxes), and established the validity of arbitration awards in the country. For those reasons and others, a large percentage of new investment is expected to be funnelled through the PPPs law in coming years.

In the meantime, financial law in Honduras continues to be practised by both firms that are purely local and firms that are part of a regional Central American network. Both types of firms are representing bidders vying for government contracts involving highways, ports, and power generation plants. The bidding process is, for some of those firms, their first look at PPP creation in Honduras and, for their clients, a way into a market that some prospective investors see as promising, if undercapitalised. Many of these projects are slowed somewhat by the "wait and see" attitude the country has concerning the upcoming 2013 presidential election (in which former president Manuel Zelaya's wife Xiomara Castro de Zelaya is expected to run), but the process is moving forward for those willing to take the risks.

There may be more positive news on the horizon. In a move considered somewhat radical, the Honduran Congress approved a Constitutional amendment in 2011 that cleared the path for the creation of a Región Especial de Desarollo (RED) - essentially a free trade zone - in Honduras. The concept is based on NYU economics professor Paul Romer's idea of "charter cities" in which relatively poor countries allow another country or entity, with certain restrictions, to establish a nearly autonomous zone within the host country's borders. Legislative and judicial changes require the host country's approval, but the basic premise is that a country with the means and the expertise to promote stability and economic growth can provide both for a less developed country in a mutually beneficial arrangement.

The RED concept has yet to find a willing investor, but the government remains hopeful. In a country where governmental control, personal security, widespread poverty, and corruption are still very real concerns, a little outside help may be what is needed. Honduras has faced labour struggles in recent years and is still embroiled in a fight over a proposed mining law's implications towards both investors and the Honduran people. Honduras is indeed open for business, but it remains to be seen exactly what kind of business it will attract or how many investors will be willing to look past potential risks to seize what could be major profits.

CONTEXT AND TRENDS Still feeling the effects of the 2009 political crisis that saw then-President Manuel Zelaya ousted from office, the Honduran financial system remains subject to investor fears regarding the country's governmental stability. Current President Porfirio Lobo has taken numerous steps to restore investor confidence, leaving many with a feeling of optimism towards the future, albeit a guarded one....

Still feeling the effects of the 2009 political crisis that saw then-President Manuel Zelaya ousted from office, the Honduran financial system remains subject to investor fears regarding the country's governmental stability. Current President Porfirio Lobo has taken numerous steps to restore investor confidence, leaving many with a feeling of optimism towards the future, albeit a guarded one. The "Honduras Is Open for Business" marketing campaign is also still in full swing, but widespread investment seems a long way off. There are investments being considered, however, especially in the energy and infrastructure sectors, where the country's need is significant.

Much of the proposed growth of the Honduran economy is still in its infancy, so the market for financial and corporate work in 2011 and early 2012 reflected the slow recovery that the entire country has experienced since 2009. The US is by far Honduras's biggest trade partner, as well, so a sputtering American economy has had some effect on its Honduran counterpart.

The volume of transactional work was still fairly low last year, but has started to pick up a bit in early 2012 as more government projects are proposed and explored. One lawyer comments, "We have several infrastructure projects going now, especially due to the PPPs - it's something that's really moving. Power generation, too. In infrastructure, despite the fact that Honduras has such a big need, the agency to promote PPPs only started to work really actively about a year ago, so the results have been good."

M&A work, on the other hand, has been nearly non-existent, and there is a feeling that it won't be back anytime soon: "There was a big boom in M&A between 2006 and 2009," another partner reports. "We saw a wave of bank acquisitions and consolidation in several sectors. Over the last three or four years it's dried up - there just aren't that many companies left that didn't restructure back then."

Some attorneys point to larger fears about the Honduran government's stability as among the chief reasons for the sluggish market. One lawyer notes, "We run into problems sometimes because of bureaucracy and the government's lack of qualified people to review projects or to do feasibility studies. The biggest hamper to almost any project in Honduras is getting the permits."

Others are concerned that, despite numerous efforts to attract investors and create incentives for the private sector, the government is too cash-strapped to sustain a business-friendly atmosphere: "This government has been increasing the taxes and charges for companies, which hasn't helped foreign investment," says one attorney. "Investors think that the rules aren't very clear and can change with every government, which makes them nervous. We have a lot of new taxes, but it's nothing new here."

In spite of some difficult challenges, though, Honduras is creeping forward. After an economic contraction of approximately 2.1% of GDP in 2009, the country’s GDP grew by 2.8% in 2010 and is estimated to have grown between 3 and 3.5% of GDP in 2011 according to the World Bank. For growth on a broader scale, however, many Hondurans are counting on some of the legislative measures put in place in recent years to lead the way for major investment: “The new laws here are interesting,” one lawyer states. “The biggest has been establishing a private company’s ability to partner with the government in projects that involve some kind of public interest. We’ve seen it work in other Latin American countries, and if it goes right the first few times here it could open up a lot of opportunities.

MAJOR LATERAL HIRES

Lizzeth Villatoro
From: In-house position (HSBC)
To: Casco-Fortin Cruz & Asociados

MAJOR LEGISLATION CHANGES

Constitutional amendment allowing creation of REDs
Passed February 2011

Law for the Promotion and Protection of Investments
In effect as of July 2011