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Honduras’ decision to renounce the ICSID agreement is an act of economic self-sabotage, jeopardizing the country’s ability to attract new investments and foster economic growth, business leaders say. Here capital Tegucigalpa. (Photo: Vouasim)
Wednesday, April 3, 2024

Honduras ICSID Exit: The Business Impact

While Honduras cases soared at ICSID, exit jeopardizes investment and growth, experts warn.

Inter-American Dialogue

Honduras’ government informed the World Bank in February that it is withdrawing from its International Centre for Settlement of Investment Disputes, or ICSID, with the withdrawal taking effect in August. Honduras is withdrawing from the arbitration body over a nearly $11 billion claim by Honduras Prospera over economic development zones, known as ZEDEs, that President Xiomara Castro has sought to eliminate. The group claims that the zones’ partial repeal has discouraged investment and harmed its prospects. What will Honduras’ withdrawal from ICSID mean for the country and for companies doing business there? How will it affect investment in Honduras? After the withdrawal, how much confidence can companies in Honduras have that any disputes will be handled fairly?

Juan Carlos Sikaffy, former president of COHEP: The decision to renounce the ICSID agreement should be viewed as an act of economic self-sabotage, jeopardizing the country’s ability to attract new investments and foster economic growth. Membership in the ICSID is widely regarded as a hallmark of a stable business environment, demonstrating a commitment to safeguarding foreign investments and providing an impartial, rules-based mechanism for conflict resolution based on international standards. Honduras’ withdrawal from the ICSID pact, aligning itself with nations such as Venezuela, Bolivia and, formerly, Ecuador, in defense of national sovereignty, is likely to have a significant impact on its ability to attract Foreign Direct Investment. By comparison, Honduras may face similar challenges to Bolivia, which attracted $320 million in 2022, and Ecuador, with $832 million, figures significantly lower than investments received by countries like Costa Rica, Uruguay and Panama, all of which exceed $2.6 billion and are active members of the ICSID. This decision, coupled with Honduras’ domestic challenges such as insecurity, land encroachments and a costly and unreliable energy supply, could deter foreign investment, economic growth and national development. It is important to note that, despite this decision, existing investment contracts in Honduras containing ICSID clauses will continue to be enforced as agreed upon, with the Honduran government obligated to comply with such clauses. However, if Honduras takes a stance rejecting compliance with obligations arising from awards issued under the guise of national sovereignty, this could mean closing doors to future investments and sources of financing. This situation would further exacerbate distrust among investors, who seek assurances of respect for private property rights and impartial conflict resolution.

Allison Fedirka, director of analysis at Geopolitical Futures: The most important implication for Honduras’ future will be what its departure from the ICSID means in terms of the country’s standing within the free trade agreement with Central America, the U.S. and Dominican Republic (CAFTA-DR).  CAFTA-DR uses the ICSID as the default institution for settling investment disputes. At present, the move does not appear to risk adhesion to the agreement. By removing itself from the ICSID, Honduras will force Prospera to find a new avenue for going after the government. The repeal of the country’s ZEDE laws was a question of reclaiming sovereignty. Honduran ZEDEs were more than free-trade or duty-free zones. They were afforded a high level of autonomy that included control over local police, taxes, courts and laws. Secondly, Prospera suing the government could potentially bankrupt the country. For reference, the government’s 2024 budget totals $16.49 billion. In order to mitigate backlash from leaving the ICSID, Honduras needs to clearly present alternative, internationally recognized dispute mechanisms it will follow.  Investors don’t specifically need the ICSID; they just need a reputable, reliable and predictable mechanism for dispute resolution. Mexico and Brazil, for example, have not signed on to the ICSID, use other institutions and dispute settlements and still receive sizable international investments. This step is necessary to secure investor confidence and without it, the government jeopardizes future investments.

Juan José Alcerro Milla, partner at Aguilar Castillo Love: This recent withdrawal from ICSID may be understood in the context of Honduras currently facing 10 international investment claims, 9 of them filed in 2023. Prior to that, history shows that the State of Honduras hardly faced any. The private business sector through the Honduran Council of Private Enterprise (COHEP) has called the decision to withdraw from ICSID economic auto-sabotage that places risk not only to the current situation of the country,  but to future opportunities of growth and development. In its defense, the Honduran Government has just recently indicated that the ICSID has itself become a system that undermines the sovereign will of nations and one that prevents each country’s legal system’s ability to combat corruption within private-public initiatives. Honduran Officials have named Prospera-ZEDE as an example of this, calling it one that has conceded sovereign territory to private parties. In the end, as several experts and political commentators have emphasized, the notice to withdraw ICSID counts as another one of the several flawed decisions of the Castro Administration that are conveying a negative message to investors: it began with the repeal of both the ZEDE Law and the Hourly Employment Law, followed by a pretended tax reform bill and the Energy Sector Law reform that ultimately triggered several international investment claims. This last one in particular does not help: unless an ADR mechanism be agreed to, investors will certainly not be willing to risk their capital in a jurisdiction not known for a transparent and reliable judicial system.

Rodolfo Dumas, director of the Dumas Lex Abogados law firm: Honduras’ departure from ICSID presents more drawbacks than benefits. The reasons conveyed by the government are identical to those articulated in the past by Bolivia, Ecuador and Venezuela: loss of sovereignty, forfeiture of jurisdiction and a partiality to investor claims. These arguments lack any legitimacy or legal foundation. Sovereignty is not compromised by participating in international arbitration or by including it in trade agreements; it is justly an exercise of sovereign choice. There is no forfeiture of jurisdiction because states can require that national judicial or administrative procedures are exhausted before resorting to ICSID. Statistical evidence also disproves any bias in ICSID resolutions, which have been equitable for states and investors alike. Nonetheless, this decision will prove counterproductive, undermine investor confidence and raise serious concerns about regulatory reliability in Honduras. Increased uncertainty is bound to discourage investment and impede economic advancement. Additionally, the withdrawal raises concerns about the status of other contracts and trade agreements containing ICSID arbitration clauses. These will undoubtedly undergo thorough scrutiny, while we remain watchful for any government initiatives to withdraw from additional conventions, also asserting sovereignty. Despite the withdrawal, ongoing arbitrations will continue until August 24th, while additional cases may be expedited and submitted before that deadline. It is crucial for Honduras to reassess this decision due to its potentially detrimental consequences. Sustaining economic stability and attracting foreign investment requires a trustworthy dispute resolution framework. Reversing this decision would signal a commitment to fostering a favorable investment climate and economic prosperity.

Republished with permission from the Inter-American Dialogue‘s daily Latin America Advisor

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