US embassy cable - 02TEGUCIGALPA2647

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 002647 
 
SIPDIS 
 
FOR EB/TPP/ABT, WHA/EPSC, WHA/CEN 
PASS TO USTR FOR ANDREA GASH DURKIN 
PASS TO OPIC, EX-IM, TDA 
 
E.O. 12958: N/A 
TAGS: ETRD, EINV, EFIN, EAGR, EAID, KTEX, HO 
SUBJECT: HONDURAS AND TEXTILES - DIVERSIFICATION WILL NOT BE 
EASY 
 
REFS: A) SECSTATE 160692, B) TEGUCIGALPA 1391 
 
1.  Summary.  Ref a requested that Post discuss the impact 
of the elimination of import quotas in 2005 on Honduras' 
textile and apparel industry and plans in the government and 
private sector to diversify into other industrial sectors. 
Embassy has been carrying on a dialogue with the GOH and 
Honduran private sector for the past year on the subject. 
The Honduran textile industry will try to survive through 
vertical integration and duty free status in the U.S. 
market.  The government hopes to attract new investment in 
other light manufacturing, tourism, agribusiness and 
forestry.  There is limited awareness of U.S. financing 
programs.  End summary. 
 
Textile and Apparel Industry Gearing Up for 2005 
--------------------------------------------- --- 
 
2.  As reported in ref b, Honduran maquila industry leaders 
recognize that quota elimination in 2005 presents a major 
challenge to the Honduran industry.  Unrestrained by quotas, 
companies operating in Asia (generally considered much more 
competitive) will drive down prices for textiles and apparel 
tremendously.  Industry leaders are gambling that Honduras' 
industry will survive based on duty free treatment in the 
U.S. and its close proximity to the U.S. 
 
3.  Companies are working to improve Honduran 
competitiveness by installing more efficient machinery and 
moving away from cut and sew operations to full package 
regimes.  Due to a lack of affordable financing in the 
Honduran banking system, U.S. companies (with access to 
financing from U.S. banks) are largely responsible for the 
implementation of full package operations in Honduras. 
 
4.  The rapid growth of the Honduran maquila sector over the 
last decade is due in part to an incentives program the GOH 
provides for apparel assembly plants operating in designated 
export processing zones.  Companies are exempt from paying 
import duties on goods and capital equipment and from state 
and municipal taxes.  The GOH will continue to provide 
incentives until 2010 per WTO rules allowing countries with 
GDP per capita under USD 1,000 to maintain free trade zones. 
The general manager of the Honduran Maquila Association 
(AHM) commented that in anticipation of the WTO-prohibition 
on government incentives programs, the AHM is already 
engaging the GOH on alternative ways to attract (and 
maintain) investment in the sector. 
 
5.  To date, Honduras has had limited success in 
diversifying its textile and apparel production.  One 
industry contact decried the poor job the sector has done in 
shedding the image of Honduras as primarily a t-shirt 
manufacturing center.  The contact suggested that the GOH 
and private sector make a more concerted effort to attract 
companies producing higher-value finished products like 
fashion wear and women's attire. 
 
Hopes Rest on U.S.-Central American Free Trade Agreement 
--------------------------------------------- ----------- 
 
6.  Industry representatives argue that a U.S.-Central 
American free trade agreement (USCAFTA) is essential for the 
sector to be able to compete in 2005 and beyond.  They hope 
that a USCAFTA will give Honduras NAFTA-like parity and at 
the very least, solidify the unilateral trade preferences 
Honduras now enjoys under the CBTPA.  Industry contacts 
report that Honduras, which is the largest manufacturer of 
knit apparel and t-shirts among CBTPA beneficiary countries, 
expects to benefit the most from recent provisions in the 
Trade Act of 2002 increasing the caps on quotas for these 
categories. 
 
Plans for Diversification 
------------------------- 
 
7.  The Maduro government's recently published economic plan 
focuses on the need to create an attractive climate for 
foreign investment.  The GOH's plan recognizes the need to 
facilitate the incorporation of a business in Honduras, seek 
out new trade and investment opportunities through free 
trade agreements, strengthen the judicial system and resolve 
land tenancy problems that hinder investment (especially 
along Honduras' Caribbean coast).  Septel will discuss 
current plans to attack the land tenure issues. 
 
8.  President Maduro created an entity called the 
Competitiveness Council to tackle investment climate issues 
in Honduras.  The Council, which is headed by Vice President 
Vicente Williams and includes private sector, labor, 
Congress representatives and local government officials, is 
charged with reviewing and drafting modifications to 
Honduras' existing legal framework to encourage new business 
development.  The Council recently succeeded in pushing 
through the National Congress the Administrative 
Simplification Law which reduces some bureaucratic hurdles 
to establishing a business in Honduras. 
 
9.  Maduro appointed Camilo Atala to a new position of 
Minister without Portfolio for Investment.  Atala (who is 
also the president of Bank Ficohsa) is responsible for 
promoting large investment projects with potential to create 
substantial numbers of jobs.  He is the point of contact for 
large international companies seeking meetings with the 
President and charged with clearing bureaucratic obstacles 
for these projects. 
 
10.  As advocated by consultant Michael Porter (a recent 
speaker in Tegucigalpa), the Maduro administration will 
concentrate on developing clusters - sectors with high 
potential to create jobs and related economic activity. 
This includes the attraction of other light industry 
(including electronics), developing Honduras' tourism 
potential, strengthening the agro-industry and exploiting 
Honduras' natural resources (primarily forestry and mining). 
 
11.  There has been limited success in attracting non- 
textile light assembly operations.  The ZIP Calpules 
industrial park (located in San Pedro Sula), for example, is 
already home to a biotechnology firm that propagates 
cultivars (primarily banana) for export and businesses 
producing wire harnesses and high-end doors and furnishings 
made from Honduran mahogany for export, among others. 
Recently, a U.S. company manufacturing wire harnesses for 
U.S. automakers announced plans to hire 1,500 new employees. 
The company has also expanded into building high cost mail 
sorters for major U.S. buyers and has plans to expand into 
other high-value assembly operations. 
 
12.  USAID has enjoyed success with its agricultural 
diversification program run by FINTRAC, an U.S. company 
working with small farmers to diversify into profitable 
nontraditional agriculture exports (primarily vegetables). 
Through the use of improved production and processing 
technologies, FINTRAC has helped many participating small 
farmers access the U.S. agricultural market. 
 
13.  A USDA-funded hot water treatment plant for mangos 
began operating in April 2002, permitting Honduran mango 
producers for the first time to meet U.S. med-fly 
phytosanitary requirements.  USDA expects the use of the 
plant to be expanded to include papayas during the mango 
growing season.  USDA has also worked with Honduran cheese 
producers to meet U.S. sanitary restrictions and qualify to 
export ethnic cheese products to the U.S. 
 
Challenges to Diversification 
----------------------------- 
 
14.  The challenges to improvement of the investment climate 
are formidable.  The judicial system continues to be weak 
and inefficient; the courts are easily manipulated and it is 
difficult to enforce contracts.  An August 2001 law 
permitting arbitration led to the creation of Honduras' 
first arbitration center in the Tegucigalpa Chamber of 
Commerce; however, only one case has been submitted for 
arbitration. 
 
15.  The GOH has been unable to envision a solution to 
existing land disputes and the greater problem of land 
tenancy in Honduras.  The Agrarian Reform Law, which 
resulted in the titling of land for hundreds of thousands of 
Honduras' landless poor, has encouraged land invasions in 
some cases.  The Maduro administration is in the process of 
developing a law to consolidate Honduras' land registries 
and modify the Agrarian Reform Law; however, it may be a 
long time before any progress is made on land issues. 
 
16.  A fragile Honduran banking system and high interest, 
short-term loans continue to stifle new investment. 
Attempts to privatize the electricity distribution system 
and telecom sectors have been met with resistance in the 
private sector and National Congress.  Meanwhile, 
electricity prices and telephone rates are among the highest 
in the region. 
17.  Recent minimum wage hikes, the implementation of double 
salary payments in June and December, high severance payment 
requirements and a government mandated increase in employer 
social security contributions have all contributed to an 
increase in the cost of doing business in Honduras. 
 
Role of USG Financing Programs 
------------------------------ 
 
18.  There is limited awareness of USG financing programs 
such as the Oversees Private Investment Corporation (OPIC), 
the Export-Import Bank and the Trade Development Agency 
(TDA).  The TDA is working with Honduras' telecom regulatory 
agency (CONATEL) on studies to strengthen and liberalize the 
telecom sector.  We are aware of little OPIC or Ex-Im 
financing at this time.  USDA recently put on a well- 
attended seminar on its agricultural financing programs.  A 
similar seminar on opportunities for OPIC, Ex-Im Bank and 
TDA opportunities would be welcome. 
 
Pierce