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Photos credits: https://www.iucn.org/content/bhutan-happiness-policy-and-tiger-numbers-are-rise Cover Design and Text layout: Duina Reyes ECONOMIC OVERVIEW covery has been sustained by a combination of ac- celerated investments in hydropower, good agricul- ture harvests, and supportive fiscal and monetary Table 1 policy to boost the implementation of five-year- plan. On the demand side, private consumption has 2015 been supported by a resumption of credit (20 per- Population, million 0.8 cent y/y as of June 2016), with services, automo- GDP, current US$ billion 2.0 biles and personal loans showing strong growth. GDP per capita, current US$ 2,532 Investments remained robust in hydropower through construction and services. The improved Poverty rate ($1.9/day 2011 PPP terms)a 2.2 growth performance has been accompanied with Poverty rate ($3.1/day 2011 PPP terms)a 13.5 macroeconomic stability. Inflation has been be- Gini Coefficient a 0.4 low 5 percent, exchange rate has marginally de- School enrollment, primary (% gross) b 102 preciated, and international reserves covered 11 Life Expectancy at birth, years b 69 months of goods and services imports in the first Sources: National Statistics Bureau, Bhutan, World Development Indicators 2016. half of 2016. Although there have been high current Notes: a/ most recent value (2012), b/ 2014 account deficits (higher than 25 percent of GDP), these are related to hydropower projects and thus Bhutan has maintained solid macroeconomic per- are mostly financed by loans from India. formance in the first half of 2016. Large ongoing in- vestments in hydropower projects, supportive fiscal In 2012, Bhutan reduced extreme poverty to 2 and monetary policy have been contributing to the percent, measured by the international poverty growth momentum. The single-digit inflation, rela- line of US$1.90 a day (PPP). This is among the low- tively stable exchange rate and accumulating inter- est rate in the South Asia region and substantially national reserves attest to a stable macroeconomic lower than the regional poverty rate of 19 percent. environment. Rapid growth in a relatively calm mac- Even using a higher international poverty line of roeconomic context is likely to continue for the next US$3.10 a day, Bhutan still shows an impressive few years, which should result in a steady reduction poverty reduction from 29 percent in 2007 to 13 of poverty. However, Bhutan’s structural challenges percent in 2012. During the same period, expendi- remain: large current account deficits, elevated pub- tures of households at the bottom 40 percent of the lic debt, an underdeveloped private sector and high distribution grew virtually at the same rate as the youth unemployment rates. To address these chal- overall average and the income share held by the lenges, the Royal Government of Bhutan (RGoB) is in the pro- Figure 1: Bhutan / GDP growth cess of revising the Economic Development Policy (EDP) and has started preparatory work 14% on the 12th five-year plan 12% (FYP) which will commence in 10% 2018. 8% Recent developments 6% 4% Bhutan’s economy has been 2% steadily recovering from the aftermath of the short- 0% age of the Indian Rupee of 2013 2014 2015 2016 2017 2018 2012. GDP growth revived Agriculture Industry Services GDP from a low of 2.1 percent in 2013 to about 6 percent Source: National Statistics Bureau, World Bank (estimated) in 2015. The re- Bhutan Country Snapshot 1 bottom 40 percent of the population remained at relationship with its southern neighbor, a positive 17 percent. Equally impressive improvements have economic outlook in India will also help Bhutan’s been made in access to basic services and asset growth to accelerate. Low global commodity prices ownership. The Gross National Happiness Survey, and the pegged exchange rate against the Indian Bhutan’s unique measure of economic, social and Rupee are expected to anchor a stable inflation spiritual development, showed further improve- rate. While high current deficits are likely to con- ments in 2015. Ninety-eight percent of the house- tinue due to imports associated with hydropower holds own mobile phones and 99 percent have ac- constructions, these are expected to be covered by cess to electricity. The overall unemployment rate secured financing sources. Projections based on fell from an already low level of 2.9 percent in 2013 GDP growth indicate steady and continuous pov- to 2.5 percent in 2015. However, youth unemploy- erty reduction since 2012, the last year for which ment rate exceeds 10 percent. survey-based estimates are available. Poverty headcount rate is projected to fall to 10.9 percent Outlook by 2015 and 6.0 percent by 2018 at the US$3.10 a day line. Growth is expected to accelerate in 2016-2018 period. Construction will start at three hydro- Risk and Challenges power projects in the next three years and two hydropower dams will become operational in The construction and commissioning of hydro- 2018. Macroeconomic stability would allow fiscal power projects is likely to stimulate domestic and monetary policy flexibility to keep support- demand, which would result in additional pres- ing economic activities. Given the close economic sure on the overall balance of payments. To mea- TABLE 2: BHUTAN / MACRO POVERTY OUTLOOK INDICATORS (ANNUAL PERCENT CHANGE UNLESS INDICATED OTHERWISE) 2013 a 2014 a 2015 e 2016 f 2017 f 2018 f Real GDP growth, at constant market prices 2.1 5.5 6.1 7.3 9.8 11.6 Private Consumption 13.1 18.0 7.1 7.5 7.0 6.5 Government Consumption -10.1 2.4 10.1 5.4 1.8 0.2 Gross Capital Investment -35.7 38.3 6.1 11.7 11.0 13.5 Exports, Goods and Services 3.9 -6.0 -0.2 -2.0 6.0 8.0 Imports, Goods and Services -1.8 -3.5 4.3 5.5 3.2 3.3 Real GDP growth, at constant factor market prices 2.1 5.5 6.1 7.3 9.8 11.6 Agriculture 2.4 2.4 3.0 3.4 3.5 3.6 Industry 3.9 3.1 6.1 8.5 14.0 17.0 Services 1.6 8.2 8.1 8.2 8.3 8.4 Inflation (Consumer Price Index) 8.8 8.3 5.2 4.6 4.3 4.0 Current Account Balance (% GDP) -23.1 -24.6 -30.0 -29.4 -23.7 -15.7 Fiscal Balance (% GDP) -0.2 2.7 -0.7 -4.2 -3.0 4.1 Debt (% GDP) 98.1 96.4 98.2 102.1 103.2 97.7 Primary Balance (% GDP) 2.0 4.4 0.8 -2.8 -1.9 6.2 Poverty Rate ($1.9/day PPP terms)a,b,c 2.1 2.1 1.9 1.7 1.3 0.9 Poverty Rate ($3.1/day PPP terms) a,b,c 13.2 12.4 10.9 10.5 8.5 6.0 Source: World Bank, Macroeconomics and Fiscal Management Global Practice, and Poverty Global Practice Notes: e=estimate, f=forecast (a) Calculations based on SARMD harmonization, using 2012-BLSS (b) Projection using natural distribution (2012) with pass-through =0.7 based on GDP per capita constant PPP (c) Projections are from 2013 to 2018 2 Figure 2: Bhutan / Actual and estimated poverty rates and GDP per capita (PPP) 35 120,000 30 100,000 25 80,000 20 60,000 15 40,000 10 5 20,000 0 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 GDP per capita (constant LCU, right) Poverty rate (%, $1.9/day PPP, left)) Poverty rate (%, $3.1/day PPP, left) Source: World Bank (see notes to table 2). sure these risks, credit growth and international employment and a scarcity of high-paying jobs for reserves will have to be carefully monitored. In- urban youth reflect a supply and demand gap in the creasing foreign direct investment (FDI) and remit- labor market. The country is therefore in urgent tance will be more important to finance the current need of private sector development to diversify its account deficits. The impact of the slowdown of the economy, building on the foundation created by global economy on Bhutan’s economy is expected the hydropower industry. The development of the to be modest due to the country’s limited linkage private sector will also help curtail its urban youth with the rest of the world other than India. Never- unemployment theless, deceleration of the global economy will be felt through its effect on the Indian economy or the tourism sector. The latest debt sustainability analy- RECENT SECTOR sis (DSA) in mid-2016 concluded that Bhutan’s ex- ternal debt risk is moderate, as much of the exter- DEVELOPMENTS nal debt is linked to the India hydropower project loans. Besides the challenges related to hydropow- Monetary and financial sectors er, a large current account deficit, underdeveloped private sector and high youth unemployment are The financial sector and the regulator’s super- the other major challenges. The implementation visory capacity need to be developed. Follow- of the new Economic Development Policy (EDP) is ing the external imbalances with India in 2012 expected to improve the business climate, which in turn would expect to create jobs especially for youth. Bhutan remains largely rural, with an esti- mated 61 percent of population living in rural ar- eas in 2015. The urban-rural gap is evident in many areas, including poverty, food security and access to services. While poverty incidence is low, urban areas face a higher unemployment rate (6.3 per- cent) than rural areas (1.0 percent). Youth unem- ployment in urban areas is high and increasing: 21 percent in 2010, 23 percent in 2013 and 28 percent in 2015. Long lines for those seeking public sector Bhutan Country Snapshot 3 have increased by 31 percent (March Figure 2: Credit distribution (as of May 2016) 2016, year-on-year). The Statutory Li- quidity Requirement (SLR) of the banks has been comfortably met and surplus Agriculture 2% 6% 0% 1% liquidity in the system increased to 14% Service & Tourism US$0.27 billion in March 2016 com- 14% Manufacturing pared to US$0.15 billion in March 2015. 5% Building & Construction Banks continue to rely heavily on cor- Trade & Commerce porate deposits (46 percent of total 13% deposits) as the key source of funding Transport and thus are left with funding their 21% Personal loan portfolios with short term commit- Loan against Shares 24% ments. Credit Card Others There is a need to increase price competition (interest rate), lending to priority sectors, as well as compe- tition for the best customers’ govern- and rising pressures on the demand for Indian ment deposits, and long-term deposits. How- Rupees (INR), the Royal Monetary Authority ever, compared to the past years of stickiness in (RMA) temporarily suspended access to INR to interest rates, the financial sector has experienced finance imports of vehicles and construction some movement in interest rates in the past three materials. These restriction were lifted in 2014, years following the introduction of “base rate” but credit quality appears to have been adversely mechanism (now in its fourth year of implementa- impacted. The financial sector and the RMA’s su- tion) and tight liquidity in the financial system. pervisory capacity are underdeveloped, major- ity of the transactions are cash backed, there is a Banking sector profitability declined in the lack of investment avenues, an asset-liability mis- first quarter of 2016. While year-end results re- match, and a heavy reliability on traditional (land cord profits of Nu 2.8 billion for 2015, a 25 percent as property) collateral-based lending. Bhutan has increase over the previous year (Nu 2.25 billion), undertaken several measures in 2015 and 2016 to the financial institutions incurred a loss for the first address these weaknesses. A Financial Inclusion quarter in 2016 owing to an increase in provisions Policy has been drafted for adoption and the Macro to cover loan losses that resulted from an increase Prudential Regulations on Disclosure requirement in non-performing loans (NPL). The NPL ratio has has been implemented. The government has issued increased from 10.2 percent in March 2015 to 11.4 Investment Guidelines for Insurance Business, a percent in March 2016. As a result, Return on As- directive on Abandoned Property, and Credit In- set (ROA) deteriorated from -.05 percent in March formation Bureau Regulations. A Financial Sector 2015 to -1.83 percent and Return on Equity (ROE) Development Action Plan (FSDAP) has been devel- from -0.27 percent to -0.31 percent during the same period. oped for approval by the cabinet in 2016. Bank credit to the private sector stood at 47.5 The liquidity position of Bhutan’s banking sec- percent of GDP as of 2014/15, which is similar tor has improved but continues to be volatile, to the levels of FY2012/13 (48 percent) and fueled by credit expansion. Liquidity in the finan- FY2013/14 (47 percent). Credit restrictions were cial system has been erratic. The overall Credit-to- put in place after FY2011/12 to prevent a liquid- Deposit Ratio (CDR) jumped from 59 percent in De- ity crunch. However, the ratio is slightly above the cember 2010 to a range of 82–87 percent between South-Asia Region average of 45.8 percent of GDP. December 2011 and December 2013 and eased to 72 percent in March 2016. Total credit increased Bhutan has been gripped by erratic move- by 18 percent (March 2016, year-on-year) mainly ment in its liquidity position since early 2012. driven by strong demand for housing, personal Measures undertaken by RMA were focused on loan and in the trade/commerce sector. Deposits containing rapid credit growth. In terms of credit 4 concentration, the building/construction (hous- man resource mobilization, industry participation, ing), trade/commerce and personal loans make up feedback loops, monitoring and evaluation, and ac- around 59 percent of the loan portfolio. countability mechanisms. It is difficult to conduct monetary policy effectively without an adequate The banks continue to face challenges in asset supply of Treasury bills (T-bills). The government and liability management from balance sheets plans to address this problem by adopting a new comprised of traditional forms of lending (fixed public debt policy that will allow for some gov- rate, medium and long term) and increasingly ernment borrowing to meet monetary policy and short term, mobile and individually large de- capital market development purposes as well as to posits. Retail deposits, considered more stable meet cash needs. than corporate deposits, account for 54.8 percent in March 2016 compared to 43.5 percent in March The World Bank has been supporting the RGoB to 2015. The total financial sector deposits increased develop and implement the Financial Sector De- by 31.3 percent in March 2016 over March 2015 velopment Action Plan (FSDAP) prepared in the driven by Demand Deposit and Time Deposit, which context of Bhutan’s Vision 2020 document and the grew by 41.2 percent and 19.4 percent respectively. 11th Five Year Plan (2013-2018) objectives and However, the share of short term deposits in the to- priorities. The FSDAP has been approved by the tal deposits increased from 54.5 percent in March Royal Monetary Authority (RMA) Board and is ex- 2015 to 58.6 percent in March 2016 while the asset pected to be adopted by the Cabinet by the end of side of banks’ balance sheet remains dominated by September 2016. The FSDAP aims to address key long-term lending. The resulting mismatches have financial sector issues. As Bhutan’s future becomes given rise to significant liquidity and interest rate increasingly linked to a globalized world, building risks in the banking system. and maintaining a sound and effective financial sector is fundamental to achieving satisfactory While the capital market activity improved dur- economic growth with equity which is a main pil- ing 2014 and 2015 with various new issues of lar of Gross National Happiness. Among issues in rights, bonus and off market transactions and the FSDAP, RMA has requested Bank’ assistance in new IPO, Bhutan does not have an adequate supply the areas of an organization review of RMA, finan- of either longer-term public sector debt (bonds) cial deepening, building capacity in the regulation/ or short-term T-bills with market-based pricing supervision of Non-Bank Financial Institutions (in- to reflect demand, market conditions and maturi- surance and pensions) and strengthening the SME ties. The Royal Stock Exchange of Bhutan Limited sector. (RSEBL) established in 1993 is now registered un- der the Companies Act with brokers holding a 51 percent share, 21 listed companies as of January Poverty and Statistical Capacity Building 2016, a small total market capitalization of US$0.33 billion (up from US$0.32 billion previous year, and Bhutan is a star performer in poverty reduction, 62,991 shareholders (slightly up from 62,687 in with only 12 percent of the population below the the previous year). While the secondary market national poverty line in 2012, compared to 23 per- traded volume and value increased by 37 percent cent in 2007. Bhutan ranks third among least poor and 6 percent respectively in December 2015 over December 2014, there have been virtually no new listings since 2010, and inadequate opportunity to create commission-based income for market par- ticipants. Consequently, highest priority is being given to actions that will increase the number and value of listings on the exchange and, hopefully, increase the level of secondary activity. A Capital Market Master Plan, with this objective in mind, was approved in late 2013 but there has been little progress toward its implementation. It called for RSEBL to adopt a 5-year strategy that covers hu- Bhutan Country Snapshot 5 countries in South Asia behind Maldives and Sri ture remains dominant, and the tourism sector is Lanka, with only 2.2 percent of the population be- heavily regulated. State-owned enterprises (SOEs) low the $1.90 international poverty line in 2012, operate in key strategic areas of the economy, in- compared to 8 percent in 2007. This remarkable cluding energy, banking, manufacturing, transport, progress is founded on high per-capita annual GDP telecommunications, and infrastructure. SOEs con- growth of 5 percent. Bhutan outpaces comparable tributed 42 percent of government revenues in countries in poverty reduction in the world. FY2014/15. There were about 30,000 formal pri- vate sector businesses in 2015, of which 99 percent Bhutan’s statistical system has limited human re- were micro and small. There are about 350 limited sources, an absence of legal framework, data weak- liabilities companies (LLC), and a handful of joint- nesses and limited data coordination. However, stock companies and partnerships. The remaining notable progress has been made in selected areas businesses are de-facto sole proprietors, with or such as price data collection and dissemination without employees. using a map portal. The National Statistics Bureau (NSB) successfully completed the update of the Bhutan has comparative advantages in a num- National Statistics Development Strategy (NSDS) ber of areas. They include in hydropower, tour- in December 2014. The NSB has also successfully ism, agribusiness, a stable and low-corruption po- switched to Computer-Assisted Personal Interview litical environment, a wide-spread knowledge of (CAPI), paperless surveys to improve the efficien- English, an educated workforce, access to low-cost cy and quality of data collection. The tablets have and reliable electricity, preferential access to the been used for the collection of Bhutan Labor Force large Indian market, and easy access to skilled and Survey (2014 and 2015), Gross National Happi- unskilled labor from India. Against these advan- ness Survey (2015) and Enterprise Survey (2015). tages, private-sector development is limited due to The World Bank is supporting the implementation the size of the economy, limited access to finance, of the NSDS and the country move to CAPI-based mismatched skills of the labor force, weak invest- technology for surveys. It is also the key partner for ment climate, and lack of adequate infrastructure. poverty assessments. Despite ongoing reforms, Bhutan’s ranking in the Private Sector ease of doing business remains almost unchanged between 2015 (70th) and 2016 (71th). This sug- The private sector remains small. While 15-to- gests that there is room for improving the business 24-year-olds represent a fifth of the Bhutanese climate. Bhutan ranks 105th of 140 countries in the population, youth unemployment remains relative- World Economic Forum’s Global Competiveness re- ly high at above 10 percent. Bhutan’s private-sector port, which shares the finding of the World Bank’s potential is still to be realized, with industry con- 2015 Enterprise Surveys that access to finance is centrated in ferro-alloys and a few food and bever- the greatest constraint to doing business. Inad- age manufacturing activities. Subsistence agricul- equate infrastructure and restrictive labor regula- tions are the next most commonly cited constraints by executives. To spur private-sector development, a number of policies and laws have been formulated. They include: the Economic Development Policy (EDP); the FDI policy and rules and regulations; the Re- newable Energy Policy; the Micro, Small, and Me- dium Enterprises (MSME) Policy; the Licensing Policy; the amended Company Act and the Public Private Partnership (PPP) policy. An enterprise registration bill and the Movable and Immovable Property Act Amendments have been approved by Cabinet and are awaiting parliamentary approval. Forthcoming policies and laws include the indus- 6 trial infrastructure development policy which will ment Goals (MDGs) in education. Bhutan has es- govern economic zones, the mineral development tablished and built up an organized public educa- policy, and the consumer protection bill. With the tion system since the 1960s. This diversified sector support of the World Bank, Bhutan launched its now includes over 650 schools and institutes, more first Information Technology Park in 2012 as a PPP. than 180,000 students and nearly 9,000 teach- To improve the business environment, the National ers. Notably, gender parity has been achieved up Land Commission recently introduced a new com- to Grade 10. Females constitute nearly 50 percent puterized land information system connecting the of enrollment in higher secondary education and Thromde with the cadaster1 and the Bhutan Power nearly 40 percent at tertiary level. The gross enroll- Corporation improved process efficiency for ob- ment ratio was 78 percent at secondary level and taining electricity connections. 30 percent at tertiary level in 2013. The World Bank is supporting government efforts A key issue is that despite high enrollment and to further improve the investment climate, through significant levels of public financing, learning a comprehensive programmatic technical assis- levels remain low. Poverty remains key among tance and development policy lending, including constraints on enrollment and attendance, as cor- in the areas of business registration and land reg- roborated by data from the Poverty Analyses, dem- istration (through the introduction of new eGov- onstrating that Gewogs, where fewer children at- ernance solutions); the usage of movable assets as tend school, tend to be those with comparatively collaterals through the Central Registry for Secured higher poverty rates. This is mainly due to the high Transaction; the revision of the Bankruptcy Act; out-of-pocket expenditure for households. Sector- improvements of the existing financial infrastruc- wide, the majority of education service delivery is ture, and strengthened legal rights for creditors through the public sector. The exception is higher and borrowers; as well as a strong financial sector secondary education (HSS, Grades 11-12), where development strategy. 50 percent of the students are in private institu- tions. The Royal University of Bhutan is the main Education reference point for the quality assurance and ac- creditation framework The 11th Five Year Plan Bhutan’s education expenditures are strong. (FYP-11) expansion targets for tertiary education Public education expenditure stood at 7.5 per- are ambitious, but essential for Bhutan to build up cent of GDP and 15.2 percent of total government a human resource base to support a knowledge- spending in 2013-2014 (Ministry of Finance, June based economy. Student intake is to increase to 2015). These figures are among the highest in the 15,000 (from just over 5,000 currently). To keep South Asia region. The Constitution (2008) pro- this from overburdening public expenditures, a vides for the state to ensure free education up to greater role for the private sector is seen, but this Grade 10 for all children of school-going age, and to raises new issues of quality and relevance. make technical and professional education gener- The World Bank is not directly engaged in the ally available, and higher education equally acces- health and education sectors in Bhutan. A recent sible to all on the basis of merit. At the same time, this progress has led to a refocus by development partners on other priorities, which may make it dif- ficult to sustain high education spending. Bhutan has achieved the Millennium Develop- 1  “Thromde” is a municipality. The National Land Commis- sion has an online land transaction system which was initially introduced for the rural area. The system is capable of process- ing land transaction in its entirety, along with the cadastral map and scanned copied of the legal documents. Of recent, the NLC has cloned the rural system for the urban as well. The system is currently functional in four Thromdes (municipalities). Bhutan Country Snapshot 7 World Bank public finance study notes that health es is growing, the health services continue to spend and education will be among the fastest growing most of their resources at district level on the tra- sectors in Bhutan in terms of needs and demand, ditional infectious diseases such as common cold, and that fruitful partnership with the private sec- diarrhea, skin diseases, and conjunctivitis. In addi- tor both for service provision and purchasing need tion, alcoholism remains a significant health chal- to be explored. lenge. Although there has been progress against malnutrition and stunting in recent years, rates Health are nevertheless still high. The RGoB finalized the draft of the National Food and Nutrition Security Bhutan has sustained investment in health over policy during 2012. The final report of the “Nutri- the last two decades and made remarkable tion in Bhutan: Situational Analysis and Policy Rec- progress. In FY2014/15, public health expendi- ommendations” was published in June 2014. tures stood at 8.8 percent of the total expenditures, Overall, based on the most recent Gross National higher than other South Asian countries. The ex- Happiness (GNH) survey, the health of the people pansion of health facility networks now ensures has improved. The number of healthy days2 on an that 90 percent of the population live within three average has increased from 26.2 days in 2010 to hours walk of a health facility, there are 25 tradi- 28.4 days in 2015. The government has launched tional medicine units at Basic Health Units, and the National Health Promotion Plan and strategy there are more than two functioning ambulances at and is in the process of reviewing the Medical and each district hospital. For the FY2016/17 budget, US$67.16 million is allocated for the sector. Health Council Act. Access to health services is satisfactory, though Social Protection still room for improvement. The Constitution provides for free basic public health services to In addition to social programs like free health and all citizens. As of now, all health services (barring education services, the RGoB has in recent years a handful of dental, cosmetic, and other services) introduced a range of social protection programs. continue to be provided by the government for free. Social protection programs include both large uni- Some outreach centers are very remote and require versal programs and a few smaller targeted ones. health workers, the unsung heroes of the country’s The largest targeted programs are the civil service public health system, to endure long walking hours pensions and the Kidu fund which was set up under (or even days) prior to reaching the remote facili- the aegis of the Office of the Gyalpoi Zimpon (Office ties. There has been an increase in the demand for for People’s Welfare and Wellbeing). Civil society traditional medicines. Farmers are encouraged to organizations such as Tarayana also provide social grow medicinal plants to meet this demand and services to the elderly, the disabled, the destitute, thereby also, generate additional income. and other poor or vulnerable groups. About 0.9 percent of Bhutan’s GDP is spent on social protec- Although the burden of non-communicable diseas- tion. Continued effort is needed to expand social pro- tection support. The coverage of social protection provisions ranges from less than 1 percent (entre- preneur support and homes for the elderly) to 58 percent (rural electrification subsidy), depending on the scheme. More than 85 percent of the coun- try’s labor force is outside the existing retirement benefit scheme. Bhutan is still an agrarian country: most of the population resides in rural areas and 2  The number of healthy days is an aggregation of good physi- cal and mental health as reported in the past 30 days. 8 employers to contribute to a provident fund. How- ever, the implementation of these regulations has been lagging and has not been closely monitored. As a result, many employers have, for instance, not deducted the contributions for the provident fund from their workers’ salaries or have not matched their employees’ contributions to the fund. Social protection for most people in the informal economy (including small-scale and subsistence agriculture) is inadequate, leaving those who are most vulnerable most at risk. Workers in the infor- mal economy often have less education and lower earnings. They are also likely to lack private pro- tection against risks such as ill health, accidents, a majority of workers engage in agriculture, often death and old age. The provision of public social small-scale and subsistence agriculture. A majority protection programs for workers in the informal of Bhutanese are thus frequently affected by cli- economy thus presents a complex challenge. Most mate- and nature-related shocks. Fourteen percent of the poorest 20 percent have no social protection of households reported a decline in income due to a coverage. Other support to the elderly exists only shock in the last 12 months. Poor households, rural through family and social networks, and through households, and households attached to informal the kidu program. This program has been able to jobs experience more shocks, with many of them provide for some of the country’s most vulnerable related to climate. However, existing formal social population. protection support mechanisms offer only limited The RGoB has been drafting a social protec- support for such shocks. As a result, many shocks tion framework for workers, which attempts to trigger high losses in income, assets and food con- equalize options and opportunities for workers sumption that can be catastrophic. in different segments of the private sector, in- While social protection coverage cuts across a cluding informal work. These efforts are in addi- range of categories, its availability is limited. In tion to those aimed at improving social protection Bhutan, the type of a worker’s contract as well as for workers in the formal economy and employees his or her location, gender and level of education of private companies. Among other things, the draft determine his or her access to social protection. social protection framework suggests the introduc- Workers who are male, have regular contracts, live tion of pensions that are easily portable across in urban areas, and have a high level of education different types of work and greater use of existing have better access to social protection than other insurance schemes (like those offered by the Royal workers. Coverage of work-related fringe benefits Insurance Corporation of Bhutan) that are in prin- and social assistance benefits is particularly good ciple open to all but in practice used mostly by spe- for public sector employees and their households cific groups. and have increased in recent years. This has to be Opportunities to develop human capital and con- one of the main factors so many strive to get public sector jobs in Bhutan. In the private sector, the implementation of work-related social protection programs is of- ten lacking. Since 2007 the Ministry of Labor and Human Resources (MoLHR) has introduced a range of regulations meant to improve access by private sector workers to social protection programs and benefits. Newly-introduced benefits include access to different types of leave and the requirement for Bhutan Country Snapshot 9 nect people to productive employment have been work across different sectors, and to provide sup- expanded as part of the RGoB’s efforts to lower port to senior citizens outside of the formal sector. unemployment. Social protection programs close- ly linked to the labor market—such as training, The World Bank has been preparing an in-depth scholarships and enterprise development grants— study of the labor market, which will soon be re- mostly reach beneficiaries who live in urban ar- leased. eas, are well-educated, and come from households with at least one public sector worker. This pattern Agriculture aligns closely with the group of people who are un- employed, who are for the most part concentrated Bhutan is predominantly an agriculture-based among urban, well-educated youth. Although the society. The agriculture sector is dominated by new opportunities to develop human capital and smallholder subsistence farmers who occupy the connect people to productive employment have majority of the arable land and produce most of the reached this group and certain others that struggle crop and livestock products. The agriculture sec- to find their place in the labor market, they do not tor provides a livelihood for 57 percent of the total reach individuals from poorer households or those population, contributing to 17 percent of GDP. who engage in relatively unproductive, unpro- tected employment in small-scale and subsistence While the contribution of the agriculture sec- agriculture and other segments of the informal tor to GDP has been declining, it continues to be economy. The Gross National Happiness Commis- an important sector. It is particularly important sion (GNHC) is in the midst of designing the first as a source of employment and a force in reducing poverty targeted households program (THPP). poverty. However, the sector’s growth remained insufficient to adequately address poverty and at- Employability of Bhutanese youth is a key pri- tain food security. Immigration from rural to urban ority. Employment opportunities for youth are lim- areas, particularly by youth and men looking for a ited. There is a particular problem with access to more modern life style, has resulted in the femini- higher-level managerial jobs due to a skills and job zation of the agriculture sector particularly in the mismatch in the market. Many people seek a white lagging areas. collar job, one that is in an urban area and in the public sector, but such opportunities are limited. A range of policies is needed to improve rural As a consequence, the unemployed are relatively life. Physical access to rural areas and between better educated and come from wealthier families. rural areas and markets needs to be improved. There are indications that a number of other, less The dispersed and small-scale production hinders obvious and well-documented but nevertheless adoption of good agricultural practices. Greater pressing challenges exist. In particular, informal access to credit and technology is needed, as well employment (over 75 percent, according to the lat- as sustainable approaches to pest and wildlife en- est Bhutan Labor Force Survey (BLFS)) and under- croachment. Other issues include loss of agricul- employment appear to be widespread, especially in ture land for other development, lack of infrastruc- rural areas. Additionally, chronic or long-term un- employment might be a problem for certain parts of the Bhutanese labor force. The government target is to bring down the youth unemployment rate to 5 percent or less by the end of the current plan period (2013-2018). In 2015, the overall un- employment rate slightly dropped to 2.5 percent from 2.6 percent in the previous year. However, the youth unemployment rate increased from 9.4 percent to 10.7 percent. Urban unemployment has also slightly increased, especially among women, the young and well educated. Within this context, MoLHR has decided to develop a strategy to pro- vide more equity of social protection to those who 10 ture such as irrigation, farm roads and post-harvest include illicit forest harvesting, human-wildlife storage, labor shortage, and the scarcity of market conflict, poaching, and habitat fragmentation aris- traders and wholesalers. ing from land development. The agriculture sector needs to grow at 4 per- A particularly important element is the need cent. To achieve eradication of national poverty for integrated water management. Despite the to less than 5 percent and rural poverty below 10 positive outlook for water availability, incipient percent, the sector needs to grow at an annual rate challenges relate to the sustainability of urban wa- of 4 percent. The 11th FYP is expected to adopt a ter supply systems and functionality of existing ru- multi-dimensional approach to develop the lagging ral water supply schemes. Ongoing soil erosion and regions. To achieve this, the Ministry of Agriculture deforestation threaten watershed conditions and and Forestry has a mandate to improve food secu- their functional integrity. Concerns about water rity and nutrition, rural livelihoods to overcome quality stem from the rise in domestic and indus- poverty and sustainable management and use of trial waste generation, along with improper dis- natural resources. posal and runoff from agricultural fields and urban centers. The World Bank is supporting rural development through an IDA-financed Remote Rural Community The government has taken several important Development Project (RRCDP), which focuses on steps to preserve the environment. Bhutan’s increasing agriculture productivity and access to environment policies include: (i) mandating in the community assets in remote areas. A Food Security Constitution a minimum forest cover of 60 percent and Agricultural Productivity project funded by the of the country’s total land area; and (ii) increasing Global Agriculture Food Security Program (GAFSP) the proportion of land under protected area status is being prepared. to around 50 percent at present from 26 percent in 2000. The Bhutan Trust Fund for Environmen- Environment tal Conservation (BTFEC) is working towards the adoption of more modern governance and business practices. With grants made possible by BTFEC, Environmental conservation is a cornerstone conservation projects began to be implemented of Bhutan’s development approach. Bhutan in the high-altitude northern areas that form part remains endowed with dense and virtually un- of the fragile eastern Himalayan ecosystem. The touched forests, abundant water resources and wildlife crime unit within the Department of For- diverse wild species. Nevertheless, it confronts est and Park Services is in the process of upgrad- chronic pressures primarily related to land degra- ing the Bhutan Forest Enforcement Database into dation and biodiversity loss due to development an online reporting system on wildlife offenses and and population growth. Land degradation can stem expanding programs for raising public awareness from inappropriate agriculture production and and sensitivity to forest and wildlife crime. Envi- mining practices, overgrazing, and excessive forest ronmental sustainability is at the core of Bhutan’s harvesting, as well as solid waste disposal in and five-year plans, including the 11th Plan currently around population centers. Threats to biodiversity under implementation. The World Bank is providing support: (i) through a Global Environment Facility (GEF) project, the improvement of the operational effectiveness and institutional sustainability of the BTFEC and the management of the conservation of high-altitude northern areas; (ii) through a regional IDA project, the building of capacity, institution, knowledge and incentives to collaborate in tackling regional wild- life conservation threats; and (iii) the Reducing Emissions from Deforestation and Forest Degrada- tion (REDD+) agenda and through it the National Bhutan Country Snapshot 11 Forest Inventory (Bhutan REDD Readiness). tural assets, by stewarding not only monuments and cultural expressions, such as handcrafts and Cultural Heritage and Tourism music, but also the wider social, environmental, and economic settings – traditional villages and their surroundings – in which physical structures are located and expressions have been shaped and performed for centuries. The government is also in the process of re- viewing its tourism policy. Despite its worldwide reputation as a “high-value, low impact” destina- tion, overarching issues of limited accessibility, high seasonality, lack of product diversity, ineffec- tive marketing, travel packaging, and the dual tariff system for international and regional tourists are negatively affecting the sector competitiveness and performance. Action and changes at all levels are Bhutan has taken important steps to preserve felt to be required to ensure that Bhutan remains a its cultural heritage. The country’s rich cultural sustainable, inclusive, and high-quality destination assets, both tangible and intangible, are highly val- in the long-term. ued as intrinsic sources of community vitality and socioeconomic development, and their protection The World Bank is providing support to prepare a is a key focus of Bhutan’s Gross National Happiness, plan for the implementation of the Cultural Heri- as well as the government’s five-year development tage Bill and to review the draft tourism policy, plans, its “Vision 2020”, and the Constitution. with a focus on preserving traditional ways of life, environmental conservation, and distribution Despite that, non-monumental cultural assets such of cultural and tourism benefits to some of the as traditional villages, their immediate natural poorest communities in the country, which tend landscapes, and the skills and ways residents have to live in traditional houses and villages across the been using both to build and maintain community country. life for centuries are increasingly under threat from a number of unprecedented challenges and influ- ences. These range from unplanned urban expan- Disaster Risk Management and a Changing sion and adoption of imported materials and meth- environment ods for building construction to neglect or simply abandonment through urban migration. Such loss Bhutan is highly prone to disasters and climate- has had a direct impact on people’s happiness. Ac- related risks. Its rugged topography, geographic cording to the 2015 GNH Index, only 38 percent of and climatic features make it prone to flooding, people in rural areas report being happy. The fac- landslides, glacial lake outburst floods, drought, tors that contribute most to the happiness of rural and earthquakes. Over the past 40 years, several Bhutanese are cultural diversity, community vital- ity, and good governance. It may also have major economic implications for the country, given the decay of valuable human, cultural, and environ- mental attributes of Bhutanese traditional villages, and the loss of their future economic workforce. To combat the socioeconomic and cultural loss of such assets and the resulting weakening of com- munity vitality, the government is in the process of approving the Cultural Heritage Bill. The bill represents a significant new approach to how the country defines, promotes, and protects its cul- 12 management system. The act decentralizes di- saster management activities, empowers the nodal institutions with the legal status to implement di- saster reduction strategies, and emphasizes a con- sultative process at the village level. The Depart- ment of Disaster Management under the Ministry of Home & Cultural Affairs as the national coor- dinating agency is formulating a comprehensive National Disaster Risk Management Strategy for Bhutan. Key challenges include: (i) strengthen- ing preparedness and early warning systems: (ii) mainstreaming disaster risk management, includ- earthquakes above a magnitude of 6 on the Richter ing in construction; and (iii) strengthening disaster scale have occurred. According to the World Bank response capacity. report on Natural Disaster Hotspots (2005), 31.3 An important aspect of disaster risk mitigation, percent of Bhutan is in risk areas, and 60.8 percent climate adaptation, and early warning systems is of the population is at high mortality risk from a improved capacity for hydro meteorological moni- number of hazards. Between 1994 and 2011, ap- toring and forecasting. Importance of hydromet proximately 87,369 people were affected by natu- services is well recognized in FYP-11. In Bhutan, ral disasters and 304 people were killed. the main agency responsible for these services and With climate change, the frequency and inten- for weather, hydrological, and flood forecasting is sity of extreme weather events is expected to the Department of Hydromet Services (DHMS) un- increase. The country has become increasingly der the Ministry of Economic Affairs. DHMS was vulnerable to glacial lake outburst floods, other established in 2011. It is a relatively new agency in flooding, drought, forest fires, and loss of vegeta- significant need of capacity strengthening. At pres- tion/biodiversity. Heavy seasonal monsoon rains ent, there is no legal or regulatory framework for and glacial melt contribute to flooding and land- delivering hydromet services or a national frame- slides. Most of Bhutan’s productive infrastructure work for climate services. Most of the existing ob- (hydropower plants, roads, airports, and so on), servation network is manual with limited capacity fertile agricultural land, and over 70 percent of the for real-time monitoring. Capacity for snow, perma- settlements are located along the main drainage frost, and glacier monitoring within DHMS is only basins, which puts them at high risk of flooding. now beginning. Bhutan at present features only This poses not only a threat to the development of 24-hour weather forecasts; there is a need to im- hydropower in the country but also a threat to food prove the lead time to better prepare communities. security. Also, the current practice issues flood warnings only when the water level is high. While DHMS’s The performance of Bhutan’s key economic sec- activities are being supported by several develop- tors also depends on managing weather and ment partners, such as the U.N. Development Pro- disaster risks. Some of the key economic sectors gram and Japan International Cooperation Agency, driving Bhutan’s economy, such as agriculture, there is substantial room for strengthening DHMS hydropower, tourism, water resources, and infra- to support its transformation into a modern service structure, are heavily dependent on weather, water, delivery agency that can support disaster risk miti- and climate-related information. However, such in- gation, and also provide climate services in various formation is highly limited. Therefore, in addition sectors such as agriculture, water resources, and to strengthening community resilience, improved hydropower. development of hydromet-based information ser- vices can make important contributions to the per- The World Bank is active in this area through: (i) formance of key economic sectors in Bhutan. a Policy and Human Resources Development grant for improving resilience to seismic risk; (ii) Hy- The government adopted the Disaster Manage- dromet Services and Disaster Improvement Re- ment Act in 2013 to strengthen the disaster gional Project – a grant funded project to strength- Bhutan Country Snapshot 13 en Bhutan’s capacity for hydromet services and tial planning is also needed, as lack of affordable disaster preparedness (iii) supporting the govern- and housing for lower-income groups is becoming ment in preparing a Strategic Program for Climate a critical issue. Another important issue related to Resilience under the Pilot Program for Climate Re- the rapid urbanization is to provide jobs for an in- silience (PPCR). creasingly urban youth population. Urban Development The World Bank is supporting the government through the Second Bhutan Urban Development Project and its additional financing. That provides resources for sites and services development in northern Thimphu and for municipal finance and management systems development in the four cit- ies, as well as for related capacity building. The World Bank is also supporting the formulation of an inter-governmental resource framework for urban local governments. Finally, the World Bank is sup- porting improving green urban public transport. Energy Hydropower development has underpinned Bhutan is undergoing a rapid transition from the rapid growth of Bhutan’s economy. The total a rural economy to an urban society. The aver- installed capacity of existing hydropower plants is age annual urban population growth rate has been 1,606 megawatts (MW). Of total annual power gen- around 4 percent since 2007. The Bhutan National erated, the overwhelming majority is exported to Urban Strategy (NUS, 2008) projects that by 2020, India after meeting domestic consumption. Power the country will be most likely 60 percent urban- exports account for the largest source of national ized. As Bhutan evolves into a more urbanized so- revenue in the form of taxes and dividends, cur- ciety, the government has recognized the country’s rently generating 40 percent of government rev- unique challenges in urban development – the rap- enue. This is expected to increase to 60% by 2025. id rate of urbanization and the limited availability Hydropower contributes currently 25 percent of of serviced land. GDP, and its contribution to economic growth will further increase as the RGoB plans to commission The urbanization rate across the country is close to 12,600 MW of new hydropower over the skewed toward the Western region. Thimphu next decade. and Phuentsholing are the two most favored des- tinations for migrants. These cities, especially Bhutan’s hydropower generation potential raises Thimphu, are experiencing urban sprawl and den- the prospect of tremendous development opportu- sification with consequent rise in demand for mu- nities for the country: fast-increasing export reve- nicipal services. Through the enactment of the Lo- nue, sustained economic growth, and rapid poverty cal Government Act (2009) and the approval of the reduction. Municipal Finance Policy (2012), the government has established four autonomous cities (Thimphu, Generation projects have been implemented in Phuentsholing, Gelephu and Samdrup-Jokhar). Un- partnership between the Government of Bhutan der the proposed National Urban System, these ur- and the Government of India under three different ban centers would play an important role as future development models: engines of growth. • The Inter-Governmental model: The Govern- Bhutan is relatively well positioned to meet the ment of India is responsible for mobilizing challenge of rapid urbanization, given its low the project’s funding and implementing the population. Nevertheless, urban institutional and project until the time of commissioning. The governance systems need to be strengthened. Spa- project ownership is then transferred to the 14 and future hydropower development in Bhutan, and is currently providing technical assistance to formulate national guidelines for the preparation and construction of hydropower projects. The re- quested assistance to the sector aims to help the government prepare a realistic action plan for implementation of hydropower projects based on absorptive capacity of the economy and social- economic impacts. The World Bank has also been asked by RGoB to support the development of a strategic roadmap for future hydropower develop- ment in Bhutan, and to conduct preparatory stud- Government of Bhutan, with a certain amount ies and design for one hydropower project. of debt repayment to the Government of India. The Government of India buys all the electric- Transportation ity generated in surplus of domestic consump- tion, at a price determined on a cost-plus basis, Transportation remains one of Bhutan’s foremost guaranteeing a net return of 15 percent to the development challenges in both rural and urban Bhutanese government above debt repayment areas. and the project’s operating cost. In rural areas, transport connectivity is a key • The Joint-Venture model: Projects are devel- determinant of affordable access to basic so- oped and commissioned under a Joint venture cial and economic services. The Bhutan Living of Bhutan and India Public Sector Undertak- Standards Survey (2012) reports that transpor- ings (PSUs) under a 50/50 percent owner- tation services alone account for approximately ship, with 70 percent being financed by loans 23 percent of the cost incurred when households raised by the PSUs, and 30 percent equity par- sought health care to address sickness or injury. In ticipation, out of which the Bhutanese share is the broader economic context, roughly 40 percent financed from grants provided by the Govern- of all firms and 70 percent of large firms surveyed ment of India. had experienced losses due to ground transporta- • The PPP model: So far, two PPP projects have tion difficulties. Bhutan’s landlocked geography, been developed with the support of the ADB absence of rail connections, and limited air connec- and the Government of Austria. tivity make the road and bridge network’s reliabil- ity particularly vital to providing the access that Bhutan has also begun to develop renewable en- households and businesses require. ergy to diversify the energy supply base through wind, solar, biomass, and small and micro hydro- The World Bank is supporting Bhutan’s Depart- power. Wind-power projects have the potential to ment of Roads (DOR) efforts to get more out of ex- generate clean energy to supplement hydropower penditures on road maintenance and to improve in winter dry seasons. Bhutan also has biogas development potential as an alternative energy source to replace fuel wood for cooking in rural areas. Rural households depend heavily on fuel wood, which emits indoor air pollutants and poses a health hazard. To promote renewable energy, a national policy must be established and financial and fiscal incentives provided to help overcome the entry and financial barriers for development. The World Bank has supported the government in carrying out an assessment of the macroeconomic, environmental and social (E&S) impacts of current Bhutan Country Snapshot 15 Bhutan’s urban areas are also undergoing a significant transition that requires upgraded transport services. Between 1990 and 2010, the number of Bhutanese living in urban areas nearly tripled. Increasing rates of motor vehicle owner- ship and use have accompanied this trend bringing impacts on the urban environment. In response, RGoB has both limited the import of private vehicles at times and increased taxes on vehicle purchases. These measures have helped curtail the growth of private vehicle ownership but their long term effec- tiveness has been limited by the lack of alternatives to private transport. Restrictions on vehicles have the resilience of roads and bridges. In 2016, it com- also resulted in unmet needs for urban mobility. pleted a technical assistance initiative that helped Bhutan’s urban public transport systems are still the DOR develop a road and bridges asset manage- developing to meet increasing demand and cus- ment system and assess the condition of 1,800 km tomer expectations for a higher quality of service. of Bhutan’s national highways. This activity used a As a result, less than one third of urban households grant from the Global Facility for Disaster Risk Re- in Bhutan reported using public transport in a giv- duction (GFDRR) and was unique both for what it en month in 2012. Improving the availability and accomplished and how it accomplished it. The ap- quality of urban transport services in Bhutan offers proach to developing DOR’s new system relied on an opportunity to meet the expanding demand for low cost and open source technologies to conduct urban mobility through services that both meet the condition assessments. It involved adapting low needs of lower income households and offer envi- cost GPS-equipped cameras that were originally ronmental benefits compared to private transport. intended for recording extreme sports, for exam- ple from a skydiver’s helmet). The cameras pro- The Bank is targeting two interventions that vide a video record of road conditions along with will support improvements in urban transport a synchronized GPS track that can be loaded into in the capital city of Thimphu. These include (i) Google Earth or other open-source GIS systems. a US$ 2.5 – 3 million investment in bus shelters and Engineers populate an excel-based database with accessibility improvements for people with disabil- information from video recorded condition assess- ities that will endeavor to tap a grant from the Glob- ments. Google Nexus tablets provide a template for al Partnership on Output-Based Aid (GPOBA); and bridge condition assessment along with the capa- (ii) an urban transport master plan for Thimphu. bility to take and store pictures on site. Each set of A concept note for investments in bus shelters and hardware costs less than US$ 1,500 and does not accessibility improvements has been developed. It require an incremental fee for software use. The is awaiting consideration by the GPOBA Panel of database is excel-based and requires no special Experts, which is tentatively planned for fall 2016. A detailed Terms of Reference has also been devel- software training to use or adapt. The DOR is now oped for Thimphu’s urban transport master plan. conducting condition assessments for an addition- The goal of this plan will be to position Thimphu for al 400 km of roads using this system. Results will a step change in the use of public transport services enable DOR to develop an investment program for and non-motorized forms of transport. The Team maintenance from the “assets up” whereas this was is pursuing funding sources that could support the previously not possible. The Bank is continuing to urban transport master plan’s implementation. mentor this process and may provide additional training or assistance to support DOR as it begins There is growing recognition of the benefits of eco- to develop more sophisticated planning and bud- nomic integration in South Asia particularly among geting approaches for Bhutan’s road network. The the BBIN (Bangladesh, Bhutan, India, and Nepal) envisaged impacts of this work are improved use countries. Removing obstacles to trade through of financial resources and more effective mainte- improved transport connectivity, logistics facilita- nance of roads and bridges. tion measures and lowering tariffs and other trade 16 barriers has become a high priority for these coun- $5 million). It supports the RGoB’s revised Eco- tries. This is shown by recent sub-regional agree- nomic Development Plan and 11th Five-Year Plan ments, notably the BBIN Motor Vehicle Agreement, and is a priority in the Bhutan Country Partner- and the renewed Protocol on Inland Water Transit ship Strategy (CPS) for FY15-19 and the South Asia and Trade signed between Bangladesh and India, Regional Strategy of the World Bank. The Project but with potential to benefit all BBIN countries. In is scheduled to be presented to the Board for ap- addition, there is evidence that limited regional proval in November 2016. broadband connectivity is currently hampering the development of ICT-enabled regional services, Governance, Public Financial Management including efficient cross-border trade. The South Asian Telecommunications Regulators’ Council is and Procurement pursuing various initiatives to harmonize policies and address some of the regulatory restrictions to Bhutan outperforms its neighbors on Trans- greater infrastructure and services integration. parency International’s Corruption Perception Index. In 2012, Bhutan moved up the index, from Bhutan as a landlocked country stands to ben- 38th to 33rd, in recognition of additional steps it efit significantly from greater regional inte- has taken to strengthen its anti-corruption legal gration. Bhutan suffers from typical problems af- framework, including passage of the 2011 Anti- fecting landlocked countries, notably dependence Corruption Act, the establishment of an Anti-Cor- on sea ports in neighboring countries, inefficien- ruption Commission (ACC), and further strength- cies at land border crossings, and limitations on ening of rules governing asset declaration by public routes for transit cargo. Partly as a result, Bhu- servants in 2012. In 2015, Bhutan rose to 27th in tan is among the poorer performers in the World the index. A key element for improving governance Bank’s Logistics Performance Index, placing 135 has been an ambitious government-to-citizen pro- out of 160 countries. Bhutan’s landlocked status gram to provide services electronically through also has affected the reliability and affordability of community centers, a particularly important de- its international telecommunications connectivity. velopment in light of geographical barriers. Simi- The distance between Bhutan’s borders and the larly, with support from the International Finance coastal landing stations of the submarine cables Corporation (IFC), the government has developed presents a significant challenge for operators and a government-to-business e-portal to provide a Internet Service Providers (ISPs) attempting to ac- comprehensive inventory of licenses and other in- cess low-cost bandwidth. Bhutan currently relies formation on business processes. on international telecommunications connectivity through two gateways - Phuentsholing-Siliguri and Public financial management (PFM) reforms Gelephu-Bongaigaon - both of which have a single are part of national priorities. Bhutan over the point of potential failure at the narrow Siliguri Cor- years has been making progress in the area of ac- ridor (or Chicken’s Neck). The price of internation- counting, budget execution oversight, control, and al broadband services in Bhutan is nearly ten times reporting. Parliamentarians increasingly pay at- that of India and double that of Nepal, and repre- tention to the budget approval process and also in sents a key deterrent to improved digital connec- tivity. This affects digitally enabled trade in both goods and services, private sector development and job creation. The World Bank is supporting the Government to address some of the main contributing factors to Bhutan’s high trade costs and inherent risks and high costs of IT broadband connectivity through a Bhutan Regional Connectivity Project under prepa- ration. This project is a $55 million operation fi- nanced through regional and national IDA ($50 million total) and government contribution (up to Bhutan Country Snapshot 17 reviewing the audit observations through public fund to the Royal Monetary Authority (RMA) to accounts committee. Recently, the National Assem- support the implementation of International Stan- bly Act of Bhutan was amended to allow reference dards for Supreme Audit Institutions. of Budget Bill to a committee. The government continues to take steps to strengthen PFM in the Building on this progress, the World Bank is mov- country. The public at large has also become more ing toward use of country systems for all procure- demanding in terms of transparent and efficient ments up to the International Competitive Bidding government. Nevertheless, further improvement Thresholds in Bhutan from end FY2014/15. The is needed on oversight of public-sector entities, Alternative Dispute Resolution Act of Bhutan, 2013 predictability in funds available for expenditures, has come into being and formal arbitration exper- the quality and timeliness of budget reports and fi- tise needs to be built in the country. In endeavoring nancial statements, implementing the standards on to professionalize the procurement function, Bhu- auditing and accounting, PFM information systems, tan has enrolled more than 300 government staff availability of professionally qualified staff, and ef- in the World Bank’s Certificate Program in Public fectiveness of internal audits. Procurement. Significant progress has been achieved on pub- To get an update on the progress made since the lic procurement reforms. Among the outcomes last Public Expenditure and Financial Accountabil- are: (i) introduction of the procurement rules and ity (PEFA) Assessment of 2010, a PEFA update as regulations and standard Bidding Documents for per the latest 2016 Framework is currently being Goods, Works and Services in April 2009; (ii) es- undertaken by Bhutan. This activity is being led tablishment of the Public Procurement Policy Divi- by World Bank. The World Bank is supporting the sion in August 2008 which is now fully functional establishment of a Multi-Donor Fund for Public Fi- with qualified staff; (iii) establishment of a central nancial Management in the country, co-funded by procurement web portal where all rules/regula- the European Commission and the Austria Devel- tions, standard bidding documents, and relevant opment Agency. This fund will serve a program- procurement news are available for the stakehold- matic approach to PFM reforms in Bhutan. ers; (iv) system development for the first phase of electronic government procurement (e-GP) which THE WORLD BANK PROGRAM IN BHUTAN includes electronic tendering; (v) the putting in place of career path and recruitment tools for a procurement profession – procurement cadre ser- vice; (vi) the generally well-functioning procure- The Board endorsed the Country Partnership ment market; (vii) a strong framework for control Strategy (CPS) in September 2014. The over- and audit, spearheaded by the Royal Audit Author- arching goal of the CPS (FY2015-2019) is to sup- ity and the ACC; (viii) set up and full operation of port Bhutan’s aspirations to achieve sustainable the Government Procurement and Property Man- and inclusive growth. The CPS is aligned with the agement Division to conduct centralized procure- 11th FYP and WBG activities are organized under ment and framework agreement of common items; three results areas: (i) improving fiscal and spend- and (ix) formation of an independent review body ing efficiency; (ii) increasing private-sector growth to handle procurement grievances. and competitiveness; and (iii) supporting green development. IDA financing is expected to continue World Bank’s support. The World Bank has pro- mainly in the form of development policy lending, vided an Institutional Development Fund (IDF) supplemented by a limited number of specific in- grant to help the government improve financial vestments in key areas, particularly infrastructure, management in the public and private sectors by and a robust analytic program. strengthening internal audit in the public sector, assisting in the implementation of Bhutanese Ac- Bhutan’s IDA17 allocation is about $56 million over counting Standards, and supporting the govern- three years, given that Bhutan has one of the high- ment in establishment of Bhutanese Institute of est Country Policy and Institutional Assessments in Chartered Accountants. The World Bank has also the IDA cohort. Although Bhutan is not yet cred- provided a grant from a global multi-donor trust itworthy for the IBRD, it has exceeded the gross 18 national income per capita threshold a couple of tistical Strategy and implementation of the World years ago and will move toward a blend status. . Bank-developed CAPI technology which assists in The program is small but active, with four IDA op- conducting surveys; Update of the Information and erations under implementation: (i) Development Communications Technology Roadmap; Enterprise Policy series of two operations ($20 million each); Survey 2015; Support the development of Bhutan’s (ii) Urban Development II ($12 million) and addi- Social Protection Strategy ; Technical research on tional financing ($17 million); (iii) Remote Rural electric vehicles and international experiences Community Development ($9 million); and (iv) it is with EV incentives; Study on the environmental a participating country in the regional IDA wildlife and social impact of hydropower and financial sec- project ($2.9 million). The total net commitment tor Development Action Plan. value is $41.9 million plus $20 million of devel- opment policy credit. Bhutan also has about 12 Ongoing FY17 analytic work includes an in-depth trust funded-operations, including a GEF sustain- labor market study, an agribusiness note and an able financing for biodiversity and several grants investment climate assessment, review of Bhutan’s on disaster management, REDD+, hydromet, cor- tourism policy, technical analysis of hydromet, di- porate governance, PFM, intergovernmental fis- saster management and climate change, technical cal relations, ICT, tourism and cultural heritage, assistance on tax reforms and a social assistance hydropower environmental and social impact as- technical assistance. The World Bank is also work- sessment, urban public transport, financial sector ing on a procurement review to allow Thimphu (FIRST), South-South knowledge exchange, statisti- municipality to use Alternative Procurement ar- cal capacity building. rangements (APA) per the World Bank new Pro- curement Policy. Two IDA operations are being prepared. The first Development Policy Credit (of a series of two) became effective in July 2015 for a total of $20 mil- INTERNATIONAL FINANCE lion. The next IDA operations are: (i) the regional connectivity project (National IDA of $8 million, CORPORATION (IFC) with additional regional IDA of $42 million) and (ii) the second Development Policy Credit. These The IFC has a total committed investment port- operations will be presented to the Board for ap- folio in Bhutan of about $34 million as of June proval in Q2 FY2017. 2016. The portfolio consists predominantly of IFC’s equity participation in Bhutan National Bank Bhutan Portfolio performance is moderately (BNB) which was the largest FDI in Bhutan and satisfactory with no problem projects. Imple- support for the expansion of a local hotel which mentation challenges relate to the capacity of civil was the first cross border commercial loan availed servants being stretched in the absence of dedi- by a fully Bhutanese privet entity. IFC, using some cated project management units. Significant prog- of its own funds and mobilizing funds from the ADB ress has been made in the enhanced use of coun- and GAFSP, will provide $12 million assistance to try systems. We are increasingly moving toward a a hazelnut plantation project in Bhutan. IFC’s first programmatic approach in managing our portfolio, debt assistance of $10 million to a local hotel was consolidating around a few themes, task team lead- made in 2003 and successfully liquidated in June ers and joint missions. 2015. This investment had a profound demonstra- tion effect in promoting tourism in Bhutan. The World Bank also provides key knowledge support to Bhutan. Recent analytic work includes The advisory portfolio includes advice in structur- a Public Finance Note - a Just In Time Note to assess ing PPPs, improving Bhutan’s investment climate the short, medium and long term impact of hydro- and enhancing access to financial services. IFC suc- power development on the Bhutanese macro-econ- cessfully completed a post-transaction advisory omy and the role of public finance in addressing engagement with the Thimphu Municipality for the related challenges; Poverty assessment, a green development of a multi-level car park PPP project growth study; Assistance to build a public expendi- which was amongst the first professionally struc- ture database (BOOST); Update of the National Sta- tured PPPs in the transport sector. The engagement Bhutan Country Snapshot 19 involved advising municipal and government offi- and enhancing financial inclusion and SME devel- cials in managing PPP projects using the case of the opment is expected to continue. ongoing project. IFC is also providing assistance to the Ministry of Economic Affairs and Druk Holding and Investments to help them consider setting up a MULTILATERAL INVESTMENT power trading company in India. GUARANTEE AGENCY (MIGA) IFC continues to explore areas of assistance in the hydropower, tourism, manufacturing, agribusiness, On October 21, 2014, Bhutan became the 181st climate change, and education sectors, among oth- member of MIGA. In light of Bhutan’s recent mem- ers. IFC’s advisory support on investment climate bership, MIGA has not provided guarantee cover- reforms, infrastructure development through PPPs age for investment in Bhutan to date. 20 BHUTAN: SECOND URBAN DEVELOPMENT PROJECT AND ADDITIONAL FINANCING (BUDP2) KEY DATES: Initial: Additional: Approved: April 29, 2010 May 16, 2014 Effective: August 24, 2010 Closing: December 31, 2015 June 30, 2019 FINANCING IN MILLION USDOLLARS*: Financier Financing Disbursed Undisbursed IDA 12.01 6.23 5.39 Royal Government of Bhutan 0.7 Project Cost 12.71 Additional financing 17.4 Total Project cost 30.11 *As of August 23, 2016 BACKGROUND AND OBJECTIVES: The Kingdom of Bhutan has been experiencing rapid social and economic development over the past two decades, and this socio-economic transition is fueling rapid urbanization. Meeting the challenges of urban development, management, and finance is now a key developmental agenda of the government of and its international development partners. The World Bank started its support with the Bhutan Urban Development Project (1999-2006), which helped develop urban infrastructure systems in 10 secondary towns. The government showed strong interest and appreciation of the Bank’s policy advice through the project and technical assistance to prepare the National Urbanization Strategy (2008) and the Thimphu City Development Strategy. On the government side, the Local Government Act of 2009 and Municipal Finance Policy (2012) provide the framework for the roles and responsibilities of urban local governments. In that context, the ongoing BUDP2 focuses on supporting urban/municipal development in Thimphu (the capital and Bhutan’s largest city) and Phuentsholing (second largest city and a commercial hub), as well as technical assistance for the urban local governments and the Ministry of Works and Human Settlement. The project development objectives are to (i) support Bhutan’s municipal reform program by strengthening municipal finance and management services in Thimphu and Phuentsholing; and (ii) improve infrastructure services in northern Thimphu where no formal services are currently available. The original BUDP2 as well as the Additional Financing consists of three components: municipal finance and management, Thimphu Northern Area Development, and capacity building. ■■ Component 1 aims at strengthening the institutional systems of Thimphu and Phuentsholing Thromdes, or city corporations. The support for the city-specific reforms is being done broadly through strengthening both the local revenue administration systems and processes, and the expenditure management systems and financial management systems and processes of the two city corporations. Two new towns (Gelephu and Samdrup Jongkhar) will also be covered under the Additional Financing. This component also supports government policy reforms aimed at setting up a policy framework for municipal financing. ■■ Component 2 supports the development of basic infrastructure systems in two “local area plans” in northern Thimphu, including roads, storm-water drainage, water supply, sewerage, and street lighting, as well as support for increasing low-income housing units in these areas. ■■ Under Component 3, resources are being provided for training programs, equipment, technical assistance, and studies based on the needs of Thimphu and Phuentsholing Thromdes as well as preparation and implementation of urbanization-related policies by the Ministry of Works and Human Settlement. This com- ponent aims to significantly upgrade each city corporation’s capacities in various aspects of their internal work processes and service delivery to citizens through training of operational staff and provision of relevant equipment. KEY ACHIEVEMENTS AND EXPECTED RESULTS: ■■ Increase in local revenue collection: 50 percent by Thimphu and 40 percent by Phuentsoling. ■■ New building permits issued for serviced plots: 175 (in two Thimphu “local area plans” being developed). ■■ Number of households with new piped water and sewerage connections: 600 (in two Thimphu “local area plans”). ■■ Number of municipal staff trained: 250 (with 150 in Thimphu and 100 in Phuentsholing) KEY PARTNERS: Ministry of Works and Human Settlement, Ministry of Finance; Thimphu, Phuentsholing, Gelephu and Samdrup Jongkhar Thromdes. Bhutan Country Snapshot 21 BHUTAN: REMOTE RURAL COMMUNITIES DEVELOPMENT PROJECT (RRCDP) KEY DATES: Approved: October 2, 2012 Effective: November 15, 2012 Closing: May 31, 2018 FINANCING IN MILLION USDOLLARS*: Financier Financing Disbursed Undisbursed IDA 9.00 6.025 2.9 Total Project Cost 9.00 *As of August 23, 2016 PROJECT BACKGROUND: The Remote Rural Communities Development Project (RRCDP) project area covers 26 gewogs, or village administrative units, and six dzongkhags or districts, in southwestern and south central Bhutan. The RRCDP is designed to improve living conditions and incomes in the poorer and more remote rural areas. The populations in these areas currently rely on subsistence agriculture, and lack roads, irrigation, technologies, and community and social infrastructure that would allow them to improve their incomes and social integration. The main objective of the project is to increase agriculture productivity in remote rural areas by improving access to markets, irrigation, agricultural technologies, and community infrastructure. Improvement in market access would be achieved by investments in farm roads and marketing infrastructure. Agricultural productivity and rural incomes would increase through promotion of improved irrigation and agronomic practices, and rehabilitation of productive assets for key commodities. Community-led investments will improve the access of the poorest people to the critical and missing infrastructure in the selected area. The RRCDP consists of three components: ■■ Rural Infrastructure: Connects the communities to larger roads and regional markets and to improve production potential through improved availability of ir- rigation. ■■ Community, Marketing and Productive Infrastructure: Covers investments in marketing and post-harvest infrastructure, critical community-level infrastructure, and investments identified by producers to increase agricultural productivity. ■■ Project Management and Institutional Strengthening: Supports project management, including the monitoring and evaluation functions. It covers technical and financial management; procurement; and supervision of compliance with environmental and social safeguards. KEY ACHIEVEMENTS AND EXPECTED RESULTS: ■■ Formation cutting and construction of permanent works on all five farm roads are in progress. ■■ 34 irrigation schemes have already been completed or near completion. ■■ A total of 76 sub-projects have been financed benefitting 27,387 persons in 4,393 households (13,829 males and 13,558 females). ■■ A total of 78,223 grafted seedlings and 258,248 cardamom suckers have been supplied.A total of 225 cows and 15,662 pullets have been distributed. Farmers from the five project supported dzongkhags have been able to earn a cash income of Nu 12.444 million and Nu 7.231 million from the sale of 1,387,074 eggs and 2,98,413 liters of milk respectively. ■■ The project has supported 33 community forest groups benefitting 2520 households in 22 gewogs from 6 dzongkhags. Plantation area covered is now 77.25 ha and 5.35 ha under nursery. KEY PARTNERS: Ministry of Agriculture and Forests 22 BHUTAN: IMPROVING BHUTAN INVESTMENT CLIMATE KEY DATES: Approved: April 6, 2015 Effective: April 6, 2015 Closing: June 30, 2017 FINANCING IN MILLION USDOLLARS*: Financier Financing Disbursed Undisbursed IBRD 0.235 0.115 0.12 IDA Government of Other 0.19 0.14 0.05 Total Project Cost 0.425 0.255 0.17 *As of August 23, 2016 PROJECT BACKGROUND: This programmatic Technical Assistance (TA) seeks to improve the investment climate of Bhutan across two pillars. The first pillar supports the DPC2 operation by addressing key constraints in the investment climate, in the areas of: business registration, property registration, and insolvency. These constraints were highlighted and prioritized by the Government in the 2013 Investment Climate Reform Memorandum and the ensuing Action Plan. The second pillar consists of an enterprise survey that updates and expands the 2009 survey, and policy notes on competitiveness issues and agribusiness. The support provided to RGoB to meet the investment climate policy triggers includes: Revision of the Bankruptcy Act to provide a framework for businesses to resolve insolvency and strengthen the rights of secured creditors. Introduction of a single window for online business registration. Improvements of the electronic property and land registration system KEY ACHIEVEMENTS AND EXPECTED RESULTS: The first pillar of the Technical Assistance is currently in progress. The WBG has delivered to the Government ICT and workflow assessments of the company registry and the land registry. Based on those, the Government has hired two vendors that will develop the updated system solutions. The Enterprise Survey was conducted in 2015, and the results are publicly available in the Enterprise Survey website. The policy notes on the competitiveness of the agribusiness sector, and the broad investment climate are currently being drafted. IMPLEMENTING AGENCY: National Statistics Bureau (enterprise survey), Ministry of Economic Affairs (the rest of the TA). KEY PARTNERS: Ministry of Information and Communication, National Land Commission, Ministry of Agriculture; G2C Office Bhutan Country Snapshot 23 BHUTAN: IMPROVING RESILIENCE TO SEISMIC RISK KEY DATES: Approved: Feb 4, 2013 Effective: May 23, 2013 Closing: May 30, 2017 FINANCING IN MILLION USDOLLARS*: Financier Financing Disbursed Undisbursed PHRD 1.28 0.81 0.48 Total Project Cost 1.28 *As of August 23, 2016 BACKGROUND AND OBJECTIVES: Bhutan lies in a high risk seismic zone in the fragile Himalayan ecosystem. The earthquake in September 2009 (magnitude 6.1 on the Richter scale) which caused damages estimated at approximately $52 million followed by floods throughout the country again revealed Bhutan’s vulnerability to adverse natural events. The earthquake caused 12 deaths and 47 injuries in three eastern districts. Nearly 91 educational institutions, including schools, 25 basic health units, 3 hospitals, 50 local government offices, and numerous cultural and religious structures such as monasteries and temples were damaged during this earthquake. In total, 4,614 individual houses were damaged, out of which 446 houses were classified as beyond repair. Major challenges faced during the 2009 earthquake were the unavailability of a standard post disaster assessment format, manuals for reconstruction of traditional structures with incorporation of seismic resilient techniques. The unavailability of adequate information on seismic activities in Bhutan was mentioned as a challenge for developing adequate building codes for the Bhutan. The Policy and Human Resources Development Grant (PHRD) for $1.285 million was approved in February 2013 to address the above challenges. The objective of the Project is to improve the understanding of earthquake risk in Bhutan as well as opportunities and challenges associated to its mitigation. The Project consists of the following Components: ■■ Investigations and mapping for improved understanding of seismic risk: $0.29 million (implemented by the Department of Geology and Mines under the Ministry of Economic Affairs ) ■■ National vulnerability assessment and retrofitting: $ 0.55 million (implemented by the Department of Engineering Services under the Ministry of Works and Human Settlement) ■■ Improving Seismic Resilience of Traditional Bhutanese Buildings: $0.20 million (implemented by the Department of Culture under the Ministry of Home and Cultural Affairs) ■■ Development of emergency structural assessment capacity: $0.05 million (implemented by the Department of Engineering Services under the Ministry of Works and Human Settlement) ■■ Project Management, Monitoring and Evaluation: $0.1955 million (implemented by the Department of Disaster Management under the Ministry of Home and Cultural Affairs) KEY ACHIEVEMENTS AND EXPECTED RESULTS: ■■ Strengthen the seismic network with installation of 6 seismic stations across the country including communication items ■■ Work on site for retrofitting of all four public buildings started ■■ Typology survey of rammed earth buildings in Bhutan completed and first draft of General guideline for seismic resilient construction techniques for the rammed earth structures in Bhutan prepared IMPLEMENTING AGENCY: Department of Disaster Management, Ministry of Home and Cultural Affairs; Department of Geology and Mines, Ministry of Economic Affairs; Department of Engineering Services, Ministry of Works and Human Settlement; Department of Culture, Ministry of Home and Cultural Affairs. 24 BHUTAN: HYDROMET SERVICES AND DISASTER IMPROVEMENT REGIONAL PROJECT KEY DATES: Expected Effective: September 15, 2016 Expected Closing: June 30, 2020 FINANCING N MILLION USDOLLARS*: Financier Financing Disbursed Undisbursed Global Facility for Disaster Reduction and Recovery 3.30 South Asia Water Initiative (SAWI) 0.50 Total Project Cost 3.80 *As of August 23, 2016 BACKGROUND AND OBJECTIVES: Bhutan is highly exposed to natural disasters and climate risks. Some of the major hydrometeorological hazards facing Bhutan include riverine floods, glacial lake outburst floods (GLOFs), flash floods, landslides, forest fires, and windstorms. These have significant economic and social consequences. The 2009 cyclone Aila alone resulted in damages of approximately $17 million (roughly 1.7 percent of Bhutan’s GDP in 2009). However, at present, Bhutan faces significant challenges in terms of providing accurate weather forecasts and early warnings to communities. Flood-affected communities or infrastructure operators get flood warnings but do not get flood forecasts with sufficient lead time. Some of the key economic sectors driving Bhutan’s economy, such as agriculture, hydropower, tourism, aviation, water resources, and infrastructure, are heavily dependent on weather, water, and climate-related information. However, information products tailored to these sectors are highly limited. Despite the severity of natural hazards, Bhutan also faces significant challenges in its disaster response and emergency preparedness capacity. In the past decade, Bhutan has demonstrated steady and pro-poor economic growth and a strong commitment to peace and democratic governance. For it to maintain and build on its development gains and economic reforms, it must strengthen disaster preparedness and improve development of hydromet and climate services. The project development objective is to strengthen Bhutan’s capacity for hydromet services and disaster preparedness. It has three main Components: ■■ Hydromet Services Improvement: $1.60 million (implemented by the Department of Hydromet Services under the Ministry of Economic Affairs ) ■■ Disaster Preparedness and Response Capacity Improvement: $2.00 million (implemented by the Department of Disaster Management under the Ministry of Home and Cultural Affairs) ■■ Design of an Agromet Decision Support System: $0.2 million (implemented by the Department of Agriculture under the Ministry of Agriculture and Forests) EXPECTED RESULTS: ■■ The project is expected to support increase in the number of hydromet services provided to users such as wind advisories for aviation sector and flood forecasts to vulnerable communities. ■■ The project will also result in improved capacity for disaster preparedness through construction of a national emergency operating center and strengthened emergency communications capacity at the district level. IMPLEMENTING AGENCIES: Department of Disaster Management, Ministry of Home and Cultural Affairs; Department of Hydromet Services, Ministry of Economic Affairs; Department of Agriculture, Ministry of Agriculture and Forests. Bhutan Country Snapshot 25 BHUTAN: STRATEGIC PROGRAM FOR CLIMATE RESILIENCE KEY DATES: Expected Effective: October 01, 2016 Expected Closing: October 30, 2017 FINANCING N MILLION USDOLLARS: Financier Financing Disbursed Undisbursed Climate Investment Funds 1.50 Total Project Cost 1.50 *As of August 23, 2016 BACKGROUND AND OBJECTIVES: Even though Bhutan is a net sequester of greenhouse gases (GHG), the effects of climate change and variability are becoming increasingly visible. Bhutan is highly exposed to hydro-meteorological hazards such as floods, flashfloods, landslides, Glacier Lake Outburst Floods (GLOF), windstorms and cyclones. According to the International Disaster Database, the 10 most significant natural disasters in Bhutan have all occurred in the last twenty years in terms of casualties and number of people affected. With climate change, the frequency and intensity of major hydro-meteorological hazards is expected to increase and this will have a major impact on all key socio-economic sectors such as agriculture, hydropower, tourism, transport, infrastructure and water, particularly affecting marginal and poorer communities. The country is also increasingly experiencing prolonged and extreme droughts which in turn increases the risk of loss of biodiversity, crop yield, agricultural productivity, as well as forest fires. To address these risks, the Royal Government of Bhutan (RGoB) is undertaking a variety of actions with support from different agencies and sectors in Bhutan. However, what is unclear is how they are embedded in a long term vision, how adaptation in Bhutan can be understood in the context of a low carbon development path, which sectors to prioritize or what the role of the private sector can play in supporting climate resilience. Bhutan’s National Adaptation Action Plan focused on identifying “urgent and immediate projects and activities that can help communities adapt to climate change,” and the Intended Nationally Determined Contributions put a broad spectrum of priorities for both mitigation and adaptation for low GHG emission development and broadly describes how this will be implemented. But there is a need to take a more long term and strategic view of how Bhutan can position itself for addressing climate related risks. In order to develop such a strategic vision, Bhutan has been selected as a participating country for support through the Climate Investment Funds (CIF). This pipeline project supports the development of this strategic vision and the Strategic Program for Climate Resilience (SPCR). The project development objective is to strengthen the capacity of the RGoB for improving climate resilience. The output of the process will be the SPCR document which is expected to develop a programmatic approach outlining country priorities and capacity development, and articulate a program of investments to achieve climate resilience. It will also inform the formulation of the National Adaptation Plan (NAP) and inform the 12th Five Year Plan (July 2018-June 2023) now being prepared. The Project will consists of the following Components: Development of the SPCR: $1.10 million Project Management, Capacity building and Institutional coordination: $ 0.40 million EXPECTED RESULTS: ■■ Improved capacity to mainstream climate issues into national development plans ■■ Strategic Climate resilience investment plan developed and agreed by RGOB IMPLEMENTING AGENCY: Gross National Happiness Commission KEY PARTNERS: National Environment Commission, Department of Hydromet Services, Department of Engineering Services, Watershed Management Division, Department of Disaster Management 26 BHUTAN: FOREST CARBON PARTNERSHIP FACILITY (FCPF) READINESS AND IMPLEMENTATION KEY DATES: Effective: March 19, 2015 Closing: June 30, 2020 FINANCING IN MILLION USDOLLARS*: Financier Financing Disbursed Undisbursed Forest Carbon Partnership Facility 3.8 Total Project Cost 3.8 *As of August 23, 2016 BACKGROUND AND OBJECTIVES: Bhutan is a FCPF member country. The Grant Agreement for REDD+ Readiness Preparation was signed between the WB and the Ministry of Finance in March 2015, and the REDD+ Readiness Preparation project was launched officially on May 27, 2015. The REDD+ Secretariat in the Watershed Management Division, MoAF has a strong team and is delivering the REDD readiness activities on schedule ensuring to develop a robust in-house capacity for leading on a number of readiness analytical studies. Keeping the current pace of delivery disbursements are likely to reach if not exceed 50% by mid-term, one of the eligibility main criteria for the $5 million in additional funding. As part of the Readiness activities, the RGoB has completed data collection for the National Forest Inventory. One of the underlying studies under the REDD+ Readiness - to assess the drivers of deforestation and forest degradation- is ongoing with plans to contract a number of consultancies in Q2. As part of the Readiness, the Secretariat is in the process of developing a pilot PES system for the Bhutan Sustainable Hydropower Development Policy that has a provision to support Environmental Services. KEY PARTNERS Ministry of Agriculture and Forests Bhutan Country Snapshot 27 BHUTAN: SUSTAINABLE DEVELOPMENT OF HYDROPOWER KEY DATES: Approved: September 9,2015 Closed: June 30, 2016 FINANCING IN MILLION USDOLLARS: Financier Financing Disbursed Undisbursed South Asia Water Initiative, Energy Sector Management 0.5 $0.5 Assistance Program Total Project Cost 0.5 *As of August 23, 2016 BACKGROUND AND OBJECTIVES: In February 2015, the RGoB requested the World Bank’s assistance to carry out an assessment of the environmental and social impacts of the current and future hydropower development in Bhutan. The requested assistance aimed to support the RGoB to prepare a realistic plan for action for implementation of hydropower projects based on absorptive capacity of the economy and social-economic impacts. The study complemented the Macro-economic impact assessment of the Government’s planned 10,000 MW hydropower development initiative, also led by the World Bank, thereby providing the RGoB with a complete sustainability analysis and assessment of its planned hydropower development. The development objective was to support sustainable hydropower development in Bhutan at the strategic level through an assessment of Bhutan’s policy framework, institutional capacity, and the expected high-level impacts of hydropower development. The immediate objectives of the ESW are to: ■■ Apply the Hydropower Sustainability Assessment Protocol for one hydropower project in Bhutan, ■■ Conduct a geographic analysis of potential environmental and social impacts of hydropower in Bhutan ■■ Conduct a review of the Bhutanese policy framework and the institutional capacity for hydropower development ■■ Provide advice on how Bhutan could improve environmental and social practices for hydropower development. KEY ACHIEVEMENTS: ■■ The project has identified and documented main gaps in the current planning and management, including the absence of basin planning and cumulative impact assessments of hydropower development in Bhutan. The interim results of the study (Interim Report, November 20, 2015) was an important input to a 2-day discussion on the country’s capacity to develop hydropower in the 16th Session of the National Council (the Lower Chamber) of RGoB. ■■ The identification of these gaps led to concrete recommendations, which were presented at a workshop on April 12-13, 2016, for more than 50 participants from key ministries, hydropower developers, and NGOs. Key recommendations, including urgently conducting national studies relating to cumulative impacts and im- proving guidelines for preparation and implementation of hydropower, were agreed, and were summarized in the Final Project Report: Managing Environmental and Social Impacts of Hydropower in Bhutan (June 15, 2016) ■■ A request for conducting planning studies for hydropower development, including the cumulative impact assessments on the national scale and improved guidelines, has been requested by the RGoB (Letter to World Bank January 15, 2016), which led to a new technical assistance project. The new Hydropower Policy, currently being drafted by the Department of Hydropower and Power Systems (DHPS), is being informed by the results of this project; IMPLEMENTING AGENCY: Department of Hydropower and Power Systems, National Environmental Commission, Gross National Happiness Commission. 28 BHUTAN: HYDROPOWER SUSTAINABILITY SUPPORT KEY DATES: Approved: May 19, 2016 Closing: January 31, 2018 FINANCING IN MILLION USDOLLARS: Financier Financing Disbursed Undisbursed Water Partnership Program 0.7 0.1 0.6 South Asia Water Initiative 0.3 0 0.3 Total Project Cost 1.0 *As of August 23, 2016 BACKGROUND AND OBJECTIVES: The recent review of management of environmental and social (E&S) impacts of hydropower in Bhutan concluded that despite awareness and a good regulatory framework, challenges remain in upstream planning and in the implementation of the assessment and mitigation of impacts, mainly due lack of capacity among key governmental institutions to quality assure and enforce good practices. The focus on developing hydropower as the main revenue for the RGoB has also given concern of being too dependent on only one sector. The Bhutan Development Update 2015 highlighted that the low growth rate of only 2 percent in 2013 was partly caused by delays in the construction of some of the major hydropower projects due to geological challenges. This indicates that technical sustainability of the hydropower development is important for the economic growth. Given the significance of hydropower for the economy of the country, and the rapid pace with which Bhutan intends to develop its hydropower potential, the RGoB has therefore realized that it must ensure that the hydropower investments are durable, safe and sustainable to deliver expected power and revenues. The Department of Hydropower and Power Systems (DHPS) is the main governmental authority responsible for hydropower development in Bhutan. With the rapid development of hydropower now occurring, DHPS must establish rules and ensure that these are followed. As part of this role, DHPS is currently updating the Hydropower Policy for Bhutan. To support the update of the regulatory framework for hydropower development in Bhutan, the RGoB has requested the World Bank for assistance for preparation of guidelines for preparation of hydropower and strengthening and building of institutional capacity. The development objective is to support sustainable hydropower development in Bhutan by providing guidelines and strengthening institutional capacity for preparing and implementing new hydropower projects. The main outcome will be informed policies and practices for hydropower development in Bhutan. The new Hydropower Policy in Bhutan, being formulated during 2016, will give the overall direction for the guidelines and be influenced by them in turn. The guidelines will provide more details than the Hydropower Policy, especially focused on implementation of the policy advices KEY ACHIEVEMENTS AND EXPECTED RESULTS: ■■ The main technical consultant has been procured and project inception has been conducted. A first workshop for a broad range of stakeholders was held in August, 2016, focusing on the methodology and approach for the work. ■■ Draft guidelines are expected to be presented in February 2017. IMPLEMENTING AGENCY: Department of Hydropower and Power Systems, under the Ministry of Economic Affairs PARTNERS: A task force has been created including key stakeholders, such as Druk Green Power Corporation, Bhutan Power Corporation, National Environmental Commission, and Bhutan Electricity Authority Bhutan Country Snapshot 29 BHUTAN: IFC’S INVESTMENT IN ZHIWA LING HOTEL KEY DATES: Approved: June 16, 2015 Effective: Closing: FINANCING IN MILLION USDOLLARS: Financier Financing Disbursed Undisbursed IBRD IDA Other – IFC 3.5 1.5 0 Total Project Cost 3.5 *As of August 23, 2016 BACKGROUND AND OBJECTIVES: Zhiwa Ling Hotel has been operational since 2005. It is a locally owned and operated 45-room five-star property located in Paro. The investment of $3.5 million to expand the Zhiwa Ling Hotel is the first external commercial borrowing by a private-sector entity in Bhutan and has involved significant legal work and very close government engagement. EXPECTED RESULTS: The project will contribute to the development of the tourism sector in Bhutan. More specifically it will: ■■ Have a catalytic effect with regard to attracting private investment into Bhutan in general and to high-end hotels in particular; ■■ Help create jobs; ■■ Support the government’s ”high value - low impact” approach to expanding the tourism sector in Bhutan by attracting high spending, environmentally conscious and culturally interested visitors to the country; ■■ Transfer international best practices in hotel management – including service and quality standards, occupational health and safety, and environmental manage- ment – from an experienced sponsor to the emerging Bhutanese tourism industry; ■■ Encourage utilization of a significant proportion of goods and services required by the resort guests from local sources, which will help develop the local supply base and encourage the growth of SMEs; KEY PARTNERS: Zhiwa Ling Hotel, Paro. 30