Free Private City "Prospera" in dispute with the state: It is not continuing as it was planned.
The PROSPERA ZEDE project on Honduran island of Roatán is not continuing as originally planned, Maria Fernanda Rivera, Communications Director of Próspera ZEDE project confirmed. Partly independent special economic zone called “Próspera” (“Prosperous”) is being created on the Honduran island of Roatán.
Titus Gebel, a German businessman and promoter of the idea of free private cities, played a significant role in the preparation of the project. The economic zone was to have its own legal system.
Próspera was to be a private city and special economic zone on the northern island of Roatan in the Central American state of Honduras. The aim of the city was to be an autonomous zone with its own fiscal, regulatory, and legal architecture.
Próspera has gained some kind of partial autonomy from the Honduran government. The zone was to have its own regulatory powers and an autonomous system of administration, which was to ensure security and dispute resolution.
Based on an idea floated by former World Bank chief economist Paul Romer to emulate the success of city states like Hong Kong and Singapore, Próspera was launched in 2013 with the backing of Porfirio Lobo, the president of Honduras. Lobo took over the reins after the previous left wing government of Manuel Zelaya was ousted in a 2009 military coup.
During his four year tenure, a special law was passed that allowed Próspera to create its own laws and tax system on a 23 hectare plot on the Caribbean island.
Próspera ZEDE was launched in May 2020.
In 2020, seven years after the laws were changed, Próspera began to be build. Three years later it remains an unfinished project. Although an estimated $100 million has been committed, workers have been hired, buildings have been erected, few inhabitants have moved in.
In 2022, Xiomara Castro, the wife of the ousted president Zelaya, was elected president herself. Soon after she took over, the Honduran parliament embarked on the process of repealing the laws that allowed Próspera to bypass national laws and taxes. Fernando Garcia, a local lawyer, was commissioned by the Honduran government to work out the legal details.
This has triggered alarm among the investors in Próspera who worry that they could lose their money.
Próspera, a company based in the U.S. state of Delaware, has invoked an investor-state dispute settlement treaty to try to force the government of Honduras to pay US$11 billion for outlawing the company’s plan to operate a privately run city on the island of Roatán.
Roatan Island, Honduras
In September 2022 with the help of Francisco Jijón and Ank Santens, partners at New York law firm White & Case, Próspera challenged the government of Honduras under the Dominican Republic-Central America free trade agreement to enter into arbitration, a legal system that exists outside of nation states.
“The illegal conduct of the national government in attacking treaty and constitutionally-guaranteed legal stability for the zone has greatly hindered Prospera’s ability to serve as a near-shoring hub for businesses and investment, which was anticipated to be the principal draw for investment capital and job-creation,” said Maria Fernanda Rivera, Communications Director of Próspera project to FREEEDOM REPORTER.
“The constant libel and defamation issuing from national government officials has also contributed to significant damages. Due to such hindrances, we have only been able to raise about 25% of the investment capital we anticipated at this time. Consequently, our business model now places greater emphasis on supporting business development in construction, finance, and health care, which do not depend as greatly on the national government fulfilling its international and domestic legal obligations,” stated Rivera further.
→ You can read more about the development of this project in the interview of the FREEDOM REPORTER
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Answers of the PROSPERA ZEDE project to the questions of the FREEDOM REPORTER
(Answers of the PROSPERA ZEDE project has been mediated by Maria Fernanda Rivera, Communications Director of Prospera.)
FREEDOM REPORTER: What is the current status of the PRÓSPERA ZEDE project on the Honduran island of Roatan?
PRÓSPERA ZEDE:
Existing ZEDEs, such as Prospera, are protected for a minimum period of 50 years from any changes to the ZEDE regime. Próspera ZEDE enjoys special legal stability guarantees under the Dominican Republic – Central American Free Trade Agreement (CAFTA-DR) and the Bilateral Investment Treaty between the Republic of Honduras and the United States of America. Among other things, this is accomplished through the ZEDE Organic Law, which provides a minimum transition period of the greater of 10 years or the duration of any legal stability agreement during which the rights of the residents are protected, and the mechanism for abolishing ZEDEs that it creates (i.e., 2/3 qualified majority vote in National Congress and a referendum in certain cases). A formal legal stability agreement, which was congressionally-authorized by Article 11 of the ZEDE organic law, reinforces the minimum 50-year legal stability guarantee. Significantly, the repeal of the constitutional authority for Prospera ZEDE failed, thus maintaining the constitutional grounding of Prospera’s authorities. Moreover, the Honduran Supreme Court previously upheld the ZEDE organic law two times (one time expressly and implicitly in June 2021 when it created the ZEDE court system). Although political pressure and interference by officials of the Castro administration are clearly aimed at causing the Supreme Court to reverse these rulings, any future ruling that the ZEDE regime is unconstitutional would not have retroactive effect and, pursuant to established Honduran law, would not impact the constitutional autonomy already recognized to existing ZEDEs.
Is this project continuing as originally planned? Or has it stopped because of a dispute with the Honduran state authorities and is waiting to see how the resulting dispute turns out?
The project is not continuing as originally planned. The illegal conduct of the national government in attacking treaty and constitutionally-guaranteed legal stability for the zone (discussed below) has greatly hindered Prospera’s ability to serve as a near-shoring hub for businesses and investment, which was anticipated to be the principal draw for investment capital and job-creation. The constant libel and defamation issuing from national government officials has also contributed to significant damages. Due to such hindrances, we have only been able to raise about 25% of the investment capital we anticipated at this time. Consequently, our business model now places greater emphasis on supporting business development in construction, finance, and health care, which do not depend as greatly on the national government fulfilling its international and domestic legal obligations. We believe we are mitigating our extensive damages as best we can despite the following illegal obstructions by the Honduran national government:
- Removing Customs Personnel: Próspera ZEDE has a Customs Post in Roatán through which all tax-exempt imports and exports are to be made. Companies in Próspera ZEDE were using the Customs Post to import materials for development projects such as the DUNA towers. The National Customs Administration has removed the customs personnel required to operate our Customs Post, even though Próspera ZEDE has paid the corresponding fees. The removal of customs personnel took place after U.S. investors based in Próspera ZEDE filed an arbitration claim against the State of Honduras in the ICSID. Without customs personnel, companies in Próspera ZEDE have been illegally forced to pay import taxes, while at the same time the customs administration has taken a discriminatory policy against Próspera because the the customs service to other ZEDEs in Honduras has been maintained.
- Refusing to Open Customs Post in La Ceiba: The Customs Administration is refusing to establish a Customs Post in mainland La Ceiba, where Próspera ZEDE operates a prosperity hub. Honduras Próspera, Inc. secured a Letter of Intent from a multinational manufacturing company wanting to near shore its Chinese plants into La Ceiba, Atlántida, Honduras via the Próspera ZEDE special regime. Próspera received the investors and they expressed to the national government, via the Investment Ministry, that they would invest $25M to transfer their Chinese operations into La Ceiba, if the government confirmed to them that the legal guarantees enshrined in article 329 of the Honduran Constitution and the ZEDE Organic Law would be respected. The government did not care to answer, and the customs administration is refusing to authorize the establishment of a customs post in La Ceiba, which would be required for Honduras to seize this investment opportunity.
- Blocking Access to the National Financial System: The government has blocked access to the Honduran financial system by companies set up in Próspera ZEDE. Due to pressure from the CNBS, institutions in the national financial system no longer open bank accounts to entities formed under Próspera ZEDE law. Próspera ZEDE entities had opened around 60 bank accounts in Honduran banks, but these were all shut down due to governmental pressure. National banks that were interested and even promised funding for projects in Próspera ZEDE will no longer do so due to the political risks created by the government.
- Refusing to Recognize Sales Tax Exemptions: All purchases made to the national Honduran market by companies set up in the Free Zone, ZOLITUR or ZEDE regime are legally exempt from the national sales tax (15%-18%). However, the national tax administration (SAR) has refused to recognize the right of companies operating in Próspera ZEDE to enjoy a sales tax exemption on all purchases made to the national market. Companies in Próspera ZEDE have been illegally forced to pay undue taxes, such as the national sales tax, substantially and unlawfully increasing the costs of development projects pushed forth in Próspera.
- Denying Entry Permits to International Artists: The National Government of Honduras, via the Ministry of Interior, has denied that Próspera ZEDE has the right to authorize public events such as concerts, conferences, conventions, and others, despite the fact that article 329 of the Constitution of Honduras grants Próspera ZEDE autonomy on all areas not related to sovereignty, justice, defense, foreign relations, and electoral matters. Próspera organized an international concert and was unlawfully forced to conduct the concert outside of Próspera ZEDE territory and pay all sorts of fees, permits, and licenses which are not legally required, under threat of the government not allowing the performing artists to enter the country if Próspera did not secure legally unrequired permits.
- Refusing to Issue Municipal Cadaster Certificates: The Municipality of Roatán and the Municipality of Santos Guardiola have illegally refused to issue cadastral records certificates for real estate properties that have been incorporated into the Próspera ZEDE regime. The issuance by the Municipality of a cadastral certificate is a legal right of all property owners. However, the municipalities have illegally denied this right to property owners associated to Próspera ZEDE and hampered the administrative process required to transfer the real estate title seats to the Próspera ZEDE Property Registry.
Refusal to Register Board and Shareholder Minutes: The Commercial Registry of Honduras (Roatán office) has unlawfully refused to register shareholder and board of directors’ minutes in which commercial and investments matters surrounding the Próspera ZEDE regime have been discussed. The Commercial Registry sees that the shareholders and directors of the company are discussing and authorizing deals under the Próspera ZEDE regime and, because of it, refuses to allow the company to register such minutes in the commercial registry, as required by law.
- Municipality of Roatán Unlawfully Forces Businesses to Pay Undue Taxes and Fees: The Municipality of Roatán has harassed retail businesses operating in Próspera ZEDE by unlawfully demanding that they obtain a Business Operating Permit and pay taxes and fees to the Municipality of Roatán. Próspera ZEDE enjoys a constitutional grant of municipal autonomy that makes it the only public authority with the right regulate and collect taxes from the businesses operating within its jurisdiction.
What exactly or what consequences did the decision of the Honduran Parliament of April 21, 2022, which annulled the previously adopted legislation that legally anchored the creation of the Próspera/ZEDE project, have for the PRÓSPERA / ZEDE project?
It is unclear whether the Honduran congress was lawfully organized in 2022 due to various illegal acts conducted in the establishment of its presiding officers. Consequently, the congressional decree purporting to repeal the ZEDE organic law is subject to challenge as void. Further, the sister decree that aimed at repealing the constitutional authority for the ZEDE regime failed to be ratified in the subsequent congressional session, and thus was not effective to annul the constitutional amendments that define the ZEDE authority. Therefore, the constitutional grounding of Prospera ZEDE remains unchanged. Of course, these dubious efforts to unsettle the ZEDE framework violated treaty and congressionally-authorized guarantees of legal stability for Prospera. They also emboldened lawless elements of the national government to engage in the obstructions and interferences with the legal authorities of Prospera ZEDE which are discussed above. The consequences are extensive damages to the business model of the U.S.-based promoter and organizer of Prospera ZEDE.
What above-standard business or other freedoms/conditions did the Roatan/Prospera/ZEDE project offer until April 2022 and what does it offer currently?
The removal of customs services, which followed the decrees that were passed on April 2022, was a heavy blow to Prospera’s business model, causing immense damage to the attraction of investment capital, which continues to this day. The denial of tax exemptions and access to the financial system outside of the ZEDE, which started shortly after April 2022, were nearly as damaging to the attraction of investment as well. But where interfacing with the national government is avoidable, the Prospera ZEDE business environment continues to support a level of freedom and innovation not found anywhere else in the world. Key aspects include:
- A choice between common law liability, Honduran or Best Practice Peer Country regulations, as well as self-proposed regulations approved by Próspera ZEDE. This creates a regulatory reciprocity framework that is very attractive to businesses looking for the best regulatory options available in the world. You can do business in Prospera as if you were in any of more than 30 countries in the world, or you can build your own better regulation quickly and easily with expert oversight.
- Regulatory enforcement by competing insurance companies, ensuring that an optimal level of regulatory enforcement is achieved because insurance companies lose money if compliance is too loose or too strict.
- A world-class financial regulator for fintech entreprises, including oversight from a former Honduran Central Bank regulator, the former Deputy General Counsel of U.S. Dept. of Homeland Security, and the co-founder of the Dubai financial center.
- The adoption of U.S. common law restatements and model U.S. business codes as the baseline legal framework.
- The adoption of English and Spanish as official languages enabling far greater access to investment capital.
- The adoption of Bitcoin, ETH and other major cryptocurrencies as the functional equivalent of legal tender.
- Rule-of-law dispute resolution through the expert arbiters of the Prospera Arbitration Center, including esteemed retired jurists and legal experts from around the world.
Why is PRÓSPERA asking the Honduran government for compensations in the amount of $10.8 billion? How was this amount determined/calculated?
That’s not the claim. Prospera is asking the Honduran government to honor its legal stability commitments and thereby avoid causing further damages in an amount that could easily reach $10.8 billion. Currently, damages are estimated at several billion dollars, depending on the success of our efforts to mitigate our damages through continued operations within the scope of the authorities that do not require interfacing with the national government. However, it is still entirely possible that these damages could be mostly avoided or mitigated. The Honduran national government needs simply to honor the law and cease its obstruction of incoming investment in the near future. But time is not on our side. Every day that the national government chases away investment opportunities and damages Prospera’s reputation, is possibly the last time we will see significant investment opportunities attracted to our zone. Currently, one of the world’s largest medical manufacturers (CIGA) wants to invest in the near future nearly $30m in a new manufacturing plant. This would be just the beginning of ever greater investments. But they need the customs authorities to which the zone is entitled restored. There are dozens of similar examples like this over the past several years. At some point, even if we build the best governance platform in Prospera, investors will stop coming if the Honduran government does not moderate its behavior.
In your opinion, what are the chances that Próspera will win the $10.8 billion lawsuit?
Our world-class litigation firm, White & Case LLP, is very confident in the merits of our case. However, it is misleading to call it a $10.8 billion lawsuit. That assumes the Honduran national government does not moderate its behavior, which is yet to be seen.
What are your arguments in the dispute about the said amount? That is, on what basis does Prospera demand this amount?
Keep in mind that the Prospera governance platform is designed to deliver the best possible governance for attracting world-class jobs and investment to Honduras. Despite all of the adversity pummeling the zone from the Castro administration, more than $120m has been raised so far (far short of the $500m we expected by 2025 under conditions of legal stability but large enough to prove our projection was credible). If legal stability guarantees were honored through at least 2064, many experts expect the Prospera platform would have generated investment and growth trajectories approaching or even exceeding Hong Kong, Singapore, Dubai, as well as the SEZs of China and UAE, as well as many other similar jurisdictions. There are many reasons for this that must await legal briefing, but just imagine the damages that a hypothetical promoter and organizer of Singapore or Hong Kong or Dubai could claim over 50 years if lawless conduct prevented those jurisdictions from developing.
Don’t you think it was a mistake to rely on the fact that the political development / system in Honduras will sometimes (it was a matter of time) not produce a political representation for which the ROATAN/PROSPERA/ZEDE project will become a controversial political issue and for which the goal will be to cancel this project and thereby increase popularity among voters?
There are false premises in this question. Poll after poll shows that no more than 3.1% of the Honduran electorate was ever moved by the ZEDE issue. Currently, the number is likely below 1%. There were and are geopolitical influences from the PRC, Cuba, Venezuela, Iran, and Russia that astro-turfed the ZEDE issue through various NGOs to create the false appearance of controversy. The biggest mistake made was our failure to appreciate the extent to which we were caught in a broader struggle between nation states and the contested emerging ideological realignments of governments in Central and South America.
Wouldn’t it make sense to set up ZEDE anywhere there is no risk of political strife turbulence? So, for example, in the territory under the jurisdiction of countries where there is no democracy, but where local rulers are inclined to economic development?
There are false premises in this question. Establishing a ZEDE-like zone is always a challenge everywhere it is tried. You only get to pick your challenge. For every “stable” authoritarian country that has established a successful zede-like framework, there are dozens that were later overturned, or which quickly abused their power vis a vis investors in ways similar to the behavior of the Castro administration. Similarly, stable democratic countries that lack political strife or economic problems are not interested in the deep local reforms that enable a ZEDE to flourish. Special interests are too strong and the argument for unsettling their grasp on public policy is too weak politically because the population is too complacent to care.
