If it was a country, Prospera Village would be the ninth most competitive business location in the world, according to consultancy EY. Located on an initial 58-acre stretch of coastal land on the tourist island of Roatán, the development is a blueprint for the concept of semi-autonomous cities, and has ambitions to become the Hong Kong of Central America.

The only caveat: Roatán Prospera, as the whole project is known, is part of Honduras, a country not known for its business opportunities. It ranks 133th out of 190 countries in the latest World Bank’s Ease of Doing Business report, and has been plagued with violence and instability for years. 

However, Roatán Prospera is set apart legally from the rest of Honduras: as its first zone for economic development and employment (Zede), the development enjoys a large degree of self-governance. Fully private, it can have its own laws, tribunals and security guards, as well as its own taxes and budget – as long as it pays the Honduran state about 15% of its revenues. It is in Honduras, yet not fully in Honduras. 

With the first investors chipping in, and another such Zede taking its first steps in Choloma, the country’s light manufacturing hub, Zedes are gaining momentum after failing for years to become the expected catalyst for investment, and a proof of concept for private, alternative forms of governance able to lift the whole country. 

Creating Zedes 

Hungry for investment in the aftermath of a coup d’état in 2009, the Honduran government worked with US economist Paul Romer (co-recipient of the Nobel prize in economics in 2018) to test the concept of ‘charter cities’ under the name of special development regions (REDs). Mr Romer dropped out of the process, however, due to what he saw as a lack of transparency, and the government had to tweak and rebrand the programme to clear the supreme court.

The reform was finally approved in 2013, when Zedes were “authorised to set up their own policies and laws in order to [...] allow the country to enter the global markets through competitive and stable rules”, according to the government decree. 

Roatán Prospera, then known as Zede North Bay, became the first authorised Zede in late 2017. 

“I would characterise Roatán Prospera as a public-private partnership between a private group of investors and the government of Honduras, with the key intention being a better environment in which to do business,” says Erick Brimen, the US investor who proposed the project and is now serving as its CEO.  

Less bureaucracy

Roatán Prospera has designed an environment that minimises red tape and volatility to attract investment into prospective residential properties and businesses. Income tax does not exceed 10%, plus an annual resident fee of $1300 for foreigners ($260 for Hondurans).   

Legal disputes will be handled by default through arbitration or local courts applying the principles of English common law, mirroring a model pioneered by the Dubai International Financial Centre (DIFC). A technical secretary proposed by the operator or the residents will act as the main governing authority, while the Honduran supreme court retains the power to vet the Zede’s courts and judges. 

Mr Brimen believes that the project will be sustainable in the long term if it can attract 10,000 inhabitants and workers. EY, one of the project’s partners, believes it can mobilise private investment in the order of $500m in its first phase, which includes a hospital, a university, an innovation centre and residential properties. Officially launched in May, so far Roatán Prospera has sold 20 of 100 planned residential units in pre-sale. 

A second Zede is shaping up in a 20-hectare area in Morazán, an area in northern Honduras known for its light manufacturing industry. The Zede Morazán has the same degree of autonomy as Roatán Prospera but their markets differ. Roatán Prospera will cater to affluent residents and spark a high value-added economy based on tourism and services such as healthcare and education, with an industrial component to be developed down the line in La Ceiba, while Zede Morazán plans to offer a better environment for manufacturing companies and blue collar workers already active in the area. 

Proposed by Centroamerican Consulting and Capital (3C), Zede Morazán plans to attract some 7000 residents and develop industrial land to accommodate the production of medical equipment, personal protection equipment, and possibly pharmaceuticals. Budgeted investment is in the order of $100m, says 3C founder and CEO Massimo Mazzone. Works are scheduled to break ground by the end of 2020. 

“The Zede legislation is one of the most advanced of its kind in the whole world,” Mr Mazzone says. “The idea of such an advanced law in a country like Honduras has always stirred scepticism. I was also sceptical, but now [have started] believing in it as permits come through.” 

Proof of concept 

Besides its development dividend, the Zede programme also has a strong ideological element. 

The Committee for the Adoption of Best Practices (Camp), the state authority in charge of approving the establishment of new Zedes, as well as vetting its technical secretary, include free-market intellectual Richard Rahn, a former Cato Institute fellow; tax-reform advocate Grover Norquist; and Barbara Kolm from the Austrian Economics Centre.

“We are looking for good governance, not anarcho-capitalism,” says Camp secretary Carlos Pineda. “Within Camp, we all agree the state should not play such a big role in the life of people. It has to facilitate their life, not weigh it down.” 

For Zedes to demonstrate that alternative, autonomous governance models are feasible is as important to their promoters as economic success, particularly with regards to sparking an upgrade in governance beyond their own borders. 

“It’s like injecting the economy with a vaccine, hoping that it can expand to the rest of the country,” Mr Pineda says. “Ideally, one day Zedes will cease to exist because through their success they push the rest of the country to be governed and administered in the same way.”

Possible downside

Not everyone agrees. José Luis Palma Herrera, a researcher at the National Autonomous University of Honduras, highlighted the risk that traditionally weak Honduran institutions will never catch up, and will lose any leverage over flourishing business enclaves. It happened in the past, and it might happen again, he wrote in a 2020 paper.

“Looking at all the enclaves that existed in the Republican era since 1846, private concessions constantly generated parallel governments in regions where the national government cannot do anything to prevent developments that don’t bring any benefit to the country.” 

However, Mr Brimen says other such experiments elsewhere in the world eventually lifted governance standards across the whole country. 

“What happens in the surrounding areas is that everybody ups their game,” he says. “This is what happened in the surrounding areas of Singapore, with Malaysia being the prime example. This is what happened in Shenzhen as a result of Hong Kong’s success. Surrounding areas tend to be better off through a competitive dimension.”

Zedes have put Honduras at the cutting edge of economic development reforms. The success of its initiatives will determine whether the country can really set a blueprint for other such zones to spring up across the region – or whether they will become just another story of failed reforms.

This article first appeared in the August - September edition of fDi Magazine.