Countries and Regions

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p. 2 of 4 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Assistance Levels

Country Strategy and Program Update 2003-2005: Bhutan

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II. Implementation of the Country Strategy and Program

A. Progress under the Poverty Partnership Agreement

13. On 23 October 2001, the Government and ADB signed a poverty reduction partnership agreement that aimed to improve living standards and promote social equity. While it is too early to assess progress toward agreed-upon goals, improvements have been made.

14. Considering Bhutan's development philosophy—maximizing "gross national happiness,"—poverty must be measured carefully. The Household Income and Expenditure Survey 2000 is Bhutan's first effort to determine poverty thresholds in accordance with internationally recommended methodologies. An ongoing follow-up technical assistance (TA)⁴ will help monitor poverty indicators for the achievement of long-term goals. However, until statistical capabilities have been strengthened, monitoring the impact of poverty reduction programs may have to be mainly qualitative rather than quantitative.

15. To implement the medium-term poverty reduction strategy in the partnership agreement, the Government incorporated the strategy into the Ninth Plan and launched the personal income tax in January 2002. Since July 2001, ADB has focused on medium-term poverty reduction by supporting basic skills development, rural electrification, social protection, and private sector development.

B. Progress in the Country Strategy and Program Focus Areas

1. Private Sector Development

16. The Government’s efforts to stimulate private sector activity appear more closely integrated into the Ninth Plan than previous plans as shown in the Government's strategy to (i) improve rural infrastructure and thus stimulate rural small-scale private initiatives; (ii) improve public services; (iii) strengthen technical and vocational education at the district level, and provide professional employment services; (iv) expand agricultural extension activities; (v) raise labor productivity; and (vi) continue to solve the widespread shortage of high-level business, commercial, and technical skills. The Government also announced that 50% of the Ninth Plan human resource development budget would be allocated to the private sector.

17. To create an enabling environment for the private sector, the Government is planning a number of initiatives during the Ninth Plan. In February 2002, the Government approved the proposal to build a 7.8-acre (around 32,000 square meters) dry port at Phuentsholing to provide trade facilities and services that are generally offered in seaports in other countries. To solve the acute shortage of land for industrial development, five industrial estates have been identified while service centers have been proposed for all townships.

18. The Government is preparing draft legislation and procedures for foreign direct investment (FDI). The FDI policy is likely to be discussed and adopted at a meeting of the Committee of Council of Ministries (CCM) in early July 2002. The Government will also finalize the delayed industrial legislation; establish a foreign investment promotion division; conduct feasibility studies on 15 potential industrial projects; carry out investment opportunity studies in all districts; revise the Industrial Master Plan; and start business development services, business advisory services, and a revolving fund and business incubator. The departments of trade, tourism, and power are supporting private sector development. The health and education minister signed memorandums of understanding with private sector representatives, urging them to create jobs for Bhutanese nationals. The Government is also developing a national labor administration policy and a labor administration system, as well as employment related legislation.⁵

19. The ADB-supported Financial Sector Review⁶ prepared medium- and long-term strategies to develop the financial sector, private sector, and small and medium-sized enterprises. The World Bank has been conducting a private sector survey in collaboration with the Government since September 2001. The Government incorporated the interim findings of these activities into the country development plan, including the Ninth Plan. ADB and other development partners will incorporate the findings into future support to develop a payment system and non-bank financial institutions (insurance, lease, venture capital, etc.); strengthen the financial legal framework; and develop a dry port and industrial estates.

2. Energy

20. ADB assistance to the power sector includes rural electrification and the institutional and capacity development for sector restructuring. ADB supported⁷ the establishment of a policy and legal framework to restructure the power sector and recommended dividing the Department of Power (DOP) into three agencies: Bhutan Electricity Authority (BEA, regulatory); Bhutan Power Corporation (BPC, operational); and Department of Energy (DOE, policy-making). BEA will be established under the Electricity Act, which was passed by the National Assembly in July 2001. Under an ADB TA, DOP will be corporatized into BPC by July 2002, transferring DOP's regulatory functions to BEA and policy-making functions to DOE. As BEA will play a key role in commercializing the sector, assistance for its capacity building is urgently needed. ADB also recommended that the Druk Hydropower Corporation (DHPC) be established to consolidate all government-owned power stations as profit centers. DHPC will include system dispatching and trading as a distinct division or profit center and facilitate private sector participation in hydropower generation once appropriate policies and a legal framework are in place.

21. The commissioning of Kurichu hydropower project (60 megawatts [MW]) and upper stage of Basochu hydropower plant (24 MW) augmented the power supply capacity to 444 MW. Hydropower generation contributes over 45% of government earnings. With assistance from India and Austria, 2 new hydro power stations (Tala and Basochu Lower) are under construction and will add around 1,060 MW to installed capacity. The eastern transmission grid was completed to light up 8 eastern and south-central districts with power from Kurichu. New sub-stations were established in 6 rural areas and improved power supply. Only 35,000 households (about 30% of the total) have access to electricity. Under the Ninth Plan, the Government plans to electrify 15,000 households in 20 districts to achieve 100% electrification by 2020. ADB plans to cover 8,000 households; Austria, 1,000; and the Netherlands, 2,000. For the exchange of electricity among neighboring countries, the United States Agency for International Development (USAID) promotes cross-border bilateral cooperation, while the South Asia Subregional Economic Cooperation (SASEC) promotes regional electricity exchange.

3. Transport

22. An ADB financed TA⁸ has encouraged planning and institutional strengthening in the transport sector. The Road Sector Master Plan, completed in March 2001 under the TA, was used in the Ninth Plan. The master plan provides an improved road policy and management system that facilitates efficient budget allocations for road sector development and maintenance. Introduction of an off-budget arrangement to fill the resource gap between allocations and road maintenance is also being considered. The Government intends to present the Road Act, drafted under the TA, for approval by the CCM and then for consideration by the National Assembly this year.

23. As a land-locked country seeking access to markets abroad, Bhutan supports regional cooperation in the transport sector. ADB focuses on a core network that links neighboring countries and provides access to international markets. Bhutan is participating in dialogues on multi-modal transport and communication through the ADB-assisted SASEC.

4. Social Development

24. The Government prepared a national housing policy in 2002, setting out a broad policy framework to provide safe and affordable shelter to all, particularly to middle- and low-income groups. The policy provides general guidelines for land acquisitions and uses, building standards and design, private sector participation, legislation, subsidies, and access to housing. As migration accelerates to urban areas that have limited housing, the Government is building about 700 houses in Thimphu and 60 in Phuentsholing, mainly for low-income government staff. The Government is considering expanding this scheme to accommodate nongovernment low-income groups and establishing a corporation to efficiently implement housing projects.

25. The Ninth Plan will bring basic education in Bhutan up to grade 10, from the present grade 8. As school facilities expand and the quality of the education improves, more and more students are completing primary education and continuing on to secondary education. Secondary schools must meet demand, and the quality of education must be improved. As the labor force grows rapidly at 11% per annum and the agricultural labor force declines at 1.3% per annum, the Government must emphasize vocational skills development, creation of off-farm jobs, and development of employment and labor policies.

5. Subregional Cooperation

26. In pursuing SASEC under an ongoing regional technical assistance (RETA), ADB has focused on five sectors identified by the participating countries: energy and power; transport; environment; tourism; and trade, investment, and private sector cooperation. Bhutan is participating in all five-sector working groups, leading the environmental working group, and having hosted its finalization meeting in April 2002. Bhutan will significantly benefit from the Energy and Power Working Group's work on regional interconnectivity and rural electrification best practices, because they will facilitate power sales from Bhutan to its neighbors and complement its effort for universal access to electricity by 2020. Under a new RETA,⁹ ADB will continue to help governments institutionalize sector working groups and the participation of senior officials to promote subregional cooperative dialogue.

C. Highlights in Coordination of External Funding and Partnership Arrangements

27. Coordination among multilateral and bilateral development partners, including ADB, International Monetary Fund (IMF), World Bank, United Nations agencies, India (Bhutan's largest development partner), Japan, and Switzerland, continues (Appendix 1, Table A1.5). In 2002, development partners formed potential thematic groups in five areas: improving statistical database, decentralization, workers' conditions, girls' education, and improving the development partner database. The World Bank, which provided loans of $22 million in 1999, is not planning to lend during FY2000–2002 but will explore options for financing social and physical infrastructure and forestry high-priority projects that will greatly improve the living standards of the poor and develop the private sector.

28. In 2001, the Basic Skills Development Project was cofinanced with the Government of Germany through the German Agency for Technical Cooperation (GTZ) which provided $2.5 million. ADB is also actively coordinating with other development partners to assist the Government in meeting its target of electrifying 15,000 households under the Ninth Plan.

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