Regions and Countries

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p. 10 of 20 BACK | NEXT I. Country Performance Assessment II. Country Operational Strategy III. Sector Strategies A. Agriculture B. Infrastructure C. Social Infrastructure and Environment D. Governance Dimensions of ADB Operations E. Gender Dimensions of ADB Operations F. Private Sector Development IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Bhutan : III. Sector Strategies

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B. Infrastructure

1. Energy

53. Bhutan is endowed with considerable hydropower resources whose exploitation has supported the growth of energy-intensive industries, expansion of the Government's revenue base, and a rise in exports. Parallel to the expansion of the domestic transmission and distribution system, the key objectives in the energy sector are (i) financial viability and sustainability of power operations through the corporatization of the Department of Power (DOP); (ii) revision of the tariff structure; (iii) private sector participation in the construction of power facilities and, potentially, in their ownership; and (iv) expansion in power generation for export.

54. ADB approved the first loan for Rural Electrification in the sector in 1995 together with a TA for Institutional and Financial Development of DOP. The loan was closed on 31 December 1999. A Sustainable Rural Electrification Project together with a TA for Corporatization of DOP approved last year in Bhutan was the first infrastructure project at ADB with classification of poverty reduction as primary objective. Close monitoring and supervision is necessary to ensure that the desired development impact is realized. Efforts in the energy sector to reduce poverty will continue through rural electrification and good governance in planning and management. This is done through commercialization and corporatization of the DOP. In addition, the ADB is preparing the groundwork for private sector participation in developing power generation plants. This is one of the most promising sectors for subregional cooperation. While ADB remains the lead multilateral donor in the sector, coordination with other bilateral donors financing construction and/or feasibility studies of generation plants will be essential.

55. Feasibility studies for large hydropower projects are currently undertaken with donor assistance: Punatsangchu Hydropower Project of 874MW financed by the Japanese International Cooperation Agency (JICA) and Mangdichu Hydropower Project of 360MW financed by the Government of Norway. This would require a large investment including cofinancing. ADB has included an ADTA in 2001 to help mobilize private sector participation in hydropower development. A Power Sector Review is also included in 2002 to assess the achievement and progress of the power sector reforms including the development impact of pro-poor interventions and necessary improvements to further enhance efficiency in the power sector. Based on the findings and recommendations of the sector review, a PPTA for rural electrification network expansion is planned for 2003 to prepare a possible ADB investment.Ashuganj Power Station.

2. Transport

56. In the transport sector, the focus is on the maintenance of the road transport network. The Government's objectives in the sector are to develop a sustainable and regionally balanced transport system that is safe, convenient, and economical, to maintain past investment, and to develop road construction capabilities in the private sector. Other alternative modes of transport like ropeways and domestic airlinks etc. were explored in previous studies financed by UNDP. The main issue revolves around the economic and financial viability of investments in these modes of transport. Lack of an efficient road network to markets has been constraining development of both agriculture and industry. The establishment of a road network that connects production bases and markets, especially to foreign markets, will enhance significantly the development of agriculture and industry. However, due to formidable natural constraints that make road construction extremely expensive when incorporating the costs of sustaining the delicate environment balance, limited institutional capacity, and relatively light vehicle traffic, the focus of the Government has been on maintenance of existing roads instead of construction of new roads.

57. The Government of India has played a major role in road construction and maintenance in Bhutan. Bank's assistance in the road subsector will continue to focus on main roads and highways with close coordination with donors to ensure consistency and no overlapping of activities. The Bank's policy dialogue has focused on: (i) institutional strengthening of the Department of Roads (DOR) to improve maintenance management; (ii) more efficient allocation of budgetary funds for road maintenance; (iii) development of the domestic contracting industry; and (iv) improvement in cost recovery. A performance audit is being undertaken for the recently completed ADB-financed East-West Highway Maintenance Project and two ADTAs, which helped to address the above issues. Lessons learnt from past assistance will be incorporated in the proposed loan for Road Improvement.

58. While ADB's assistance will continue to focus on the rehabilitation and maintenance of the main highway network, as well as on transport network planning and management, the World Bank is involved in the development of feeder roads, which complements ADB's efforts without duplication. Past ADB interventions have been instrumental to gradually develop capacity of local contractors. ADB's support for the formulation of a master plan of road transport is an important initiative to consolidate the progress made in strengthening the road maintenance system and the road network as a whole. In addition, intersectoral linkages are most evident in road improvement particularly in enhancing accessibility to health, education, and other social services, which has the potential of generating substantial social benefits.

59. ADB assistance also includes an ADTA in 2000 for Road Planning and Management Strengthening, which will help in (i) planning and financing of the road sector; (ii) technology transfer; and (iii) legislation for roads and road transport. A Road Sector Master Plan will be prepared particularly on main and feeder roads with potential for private sector participation and subregional cooperation. Based on the findings of the study, a loan for Transport Network Improvement is included for 2003 with PPTA in 2002. ADB is also planning a Transport Sector Review in 2003 to assess the poverty impact and achievements in sector development objectives in past interventions and identify necessary policy, institutional, and investment requirements to further develop the sector particularly in enhancing private sector development and subregional cooperation.

3. Finance

60. Over recent years, substantial expansion of the financial sector and monetization of the economy have been achieved. Since 1980, the financial sector's contribution to GDP in real terms increased by an average of 12 percent per annum compared to GDP growth of 6.4 percent annually. Accompanying this rapid growth, several financial institutions have been established. Today, in addition to the Royal Monetary Authority (RMA) which fulfills the role of a central bank, there are four major financial institutions. In order to adequately regulate banking institutions in the country, the Government enacted the Financial Institutions Act in 1992 and RMA introduced its Prudential Guidelines in 1995. Despite these developments, there are still weaknesses and inefficiencies in the financial sector, which hinder efficient allocation of resources as well as savings mobilization.

61. The Bank's strategy for supporting financial sector development involves several thrusts: (i) promoting private sector participation in the banking sector; (ii) deregulating interest rates through abolition of interest rate ceilings; (iii) strengthening the banking supervision function of Royal Monetary Authority (RMA); and (iv) initiating the development of an incipient capital market to provide diversified sources of financing.

62. ADB has been the major donor in the sector since our first intervention in the sector back in 1988. Past and ongoing interventions focus on increasing the market orientation and efficiency of the financial institutions and the financial sector as a whole. The sector development program approved in 1997 aims to support the Government's efforts to provide an enabling environment for private sector development through enhancing financial sector intermediation. The World Bank is planning to extend its "knowledge-based" assistance to formulate a financial sector strategy, which will be undertaken in collaboration with ADB's financial sector review programmed for 2001. Efforts are also being made to collaborate with all concerned stakeholders to pursue the exercise.

63. The ADB has provided the first policy-based lending to the country to establish the necessary policy environment in the financial sector to facilitate private sector development. The first tranche was released in 1998 and the release of second tranche was not possible by 20 December 1999. Good progress has been made in complying with the second tranche release conditions. Release of the second tranche can be expected in August 2000. However, the credit line of $4.0 million has been utilized very slow since 1998, which is affecting the overall country portfolio performance. The Government is assessing the possible utilization of the credit line before loan closing of June 2002 and cancellation of the residual.

64. ADB has provided other support to the financial sector of Bhutan, including the establishment of the second commercial bank, Bhutan National Bank; BDFC; and the Royal Stock Exchange of Bhutan (RSEB). Bank assistance is also underway to establish a pension fund and to strengthen the banking supervision function of RMA. Future assistance in the sector will build on the progress, achievement, and lessons learnt in ongoing and past assistance. Based on the Bank's post evaluation findings and recommendations on past assistance to BDFC's industrial lending operations, necessary restructuring of BDFC to establish financial viability and sustainability in its overall operations will be supported under an ADTA included in 2002 after the Financial Sector Review in 2001. The Financial Sector Review will assess the achievements and requirements to further develop the sector and support private sector development, particularly in the formulation of the long-term human resources and institutional development framework. Subject to the findings and recommendations of the Review and progress of ongoing assistance, ADTAs for Institutional Development of Royal Insurance Corporation of Bhutan and Strengthening of RMA are planned for 2001 and 2002 respectively.

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