Bhutan : Green and Resilient Affordable Housing Sector Project

Water and other urban infrastructure and services / Urban housing

The project is aligned with the following impact: livability, safety, and sustainability of human settlements ensured. The project will have the following outcome: access to green and resilient affordable housing for low-income households improved.

Output 1: Climate- and disaster-resilient, energy-efficient, and affordable housing units and public facilities for low-income households constructed. Output 1 will support the National Housing Development Corporation Limited (NHDCL) in building about 1,000 rental units, three integrated community service centers, and two recycled waste stations connected to services, in support of the Sustainable Development Goal 1. The government selected high-priority investments as subprojects. The increase in the supply of affordable rental housing is expected to immediately relieve the housing shortage and benefit lower-income civil servants (about 10%) and non-civil servants (about 90%), including marginalized municipal waste workers. The building designs incorporate gender-inclusive features; enhanced safety against earthquake and fire hazards; and resource efficiency, making greater use of locally available materials. The building structures will employ reinforced-concrete frames and innovative pre-engineered structures. The project design has identified and incorporated climate and disaster resilience features, considering multiple hazards. The project will support green building certification through the International Finance Corporation's Excellence in Design for Greater Efficiencies (EDGE). The housing designs reflect local cultural heritage values and traditional architecture. Additional subprojects will be selected during project implementation in line with the National Housing Policy, 2020 (NHP) using the eligibility criteria set out in the project administration manual.

Output 2: Institutional capacities, policy, and regulatory framework of the housing sector strengthened. This output will (i) strengthen the NHDCL's housing design, construction, and management capacity; (ii) review the building code and regulations; (iii) develop climate- and disaster-resilient building designs and related solutions to improve safety, resource efficiency, and gender and disability inclusiveness; (iv) conduct awareness training and a capacity building program for key project stakeholders on climate- and disaster-resilient design and the building code; (v) enhance the NHDCL's business model, strengthening its operation and maintenance capacity, and developing partnerships with the private sector; (vi) strengthen the housing management information system of the Ministry of Works and Human Settlement by expanding it to include tenancy data; (vii) develop a gender and socially inclusive national homeownership strategy, including a rent-to-own mechanism; and (viii) provide project implementation support, including supervision, and set up a safeguard unit in the NHDCL.

Country macroeconomic context. Bhutan is steadily urbanizing. The share of the urban population increased from 30% in 2005 to 42% in 2021, driven by an average annual growth rate of 1.9% over that period. The urbanization rate is projected to reach 56.8% by 2047. Urban population growth is fuelled by rural migration, mostly to the four largest urban centers of Gelephu, Phuentsholing, Samdrup Jongkhar, and Thimphu, which account for 59.0% of the total urban population. While 58.0% of the Bhutanese population still lives in rural areas and engages in small-scale and subsistence agriculture, the constant flow of rural migration to urban centers is exerting mounting pressure on urban services. Bhutan has a chance to be proactive and focus on housing development. Economic growth in the capital city, Thimphu, has been fuelled by expansion in construction, services, and manufacturing. Bhutan has a current overall unemployment rate of 2.4%, which is low relative to neighboring South Asia countries. The Government of Bhutan's Twelfth Five Year Plan, 2018-2023 calls for developing the economy by fostering growth in the private sector, which will create jobs and contribute to sustainable poverty reduction and the country's transition to green and resilient development.

Housing demand. Affordable housing development in Bhutan has not kept pace with population growth, particularly in urban areas where the demographic increase puts pressure on the limited usable land and pushes house prices up, making it increasingly unaffordable. The estimated shortfall of housing nationwide is 21,156. The affordable housing shortage is particularly acute for low-income households, which spend on average more than 40% of their income on housing greater than the recommended 30%. Nearly 64% of urban households rent, and only 19% of households own their homes. Housing options are becoming increasingly unaffordable for low-income households and vulnerable groups, including women, leaving them in (i) overcrowded conditions in shared accommodation, and (ii) residing in informal settlements.

Sector challenges-planning constraints, limited housing supply, and lack of access to finance. Unclear and onerous land use planning and zoning constrain the timely conversion of agricultural land for housing in Bhutan. The supply of appropriately zoned land for residential development limits the potential for affordable housing development. The private sector faces challenges in increasing housing stock because of high development costs and the difficulty of acquiring land located near services and employment centers. Key commercial housing finance constraints that limit housing development include high land prices and maximum lending terms capped at 20 years. Despite these limitations, mortgage lending for housing has increased significantly from 17% of total loans in 2018 to 27% in 2020. This reflects continuing high demand for housing credit, and is perceived as a medium-term risk by domestic banks because of their high exposure in a vulnerable housing sector and the possibility of leading to a real estate bubble. For home loans, microfinance is nascent in Bhutan and no microfinance institutions offer housing finance to households. Low-income earners are unable to access housing credit without verifiable income statements linked to formal employment. While making housing finance more accessible to households is necessary to address demand-side challenges, the government needs to intervene to increase housing supply.

Climate and disaster vulnerability. Bhutan is highly vulnerable to climate change and natural hazards. Flooding is considered the most significant climate-related hazard affecting the built environment. The country is also exposed to other hazards such as earthquakes, glacial lake outburst floods, forest fires, and landslides. The intensity of heavy rainfall events is projected to increase. Making housing and infrastructure more resilient to the impacts of climate and disaster events is essential to protect the urban population, especially the vulnerable communities.

Government policy. Bhutan's Twelfth Five Year Plan, 2018-2023 prioritizes the government's strategic thrust for economic stability, economic diversification, poverty reduction, and affordable housing provision. The government approved the National Housing Policy (NHP) in 2020. The objectives of the NHP are (i) providing safe, affordable, and adequate rental housing for all; (ii) promoting home ownership; (iii) encouraging partnership among private and government entities to provide affordable housing; (iv) establishing a robust governance system; and (v) promoting green and energy-efficient housing. The government's Low Emission Development Strategy, 2017 reinforces the government's commitment to developing green and resilient affordable housing.

The Ministry of Works and Human Settlements represents the government in human settlement matters and is responsible for the NHP. The NHDCL, a state-owned enterprise, is focused on providing and maintaining public housing. The NHDCL units are leased at below market rates, and more than half of them are leased to lower-income households. Of its 2,496 units, civil servants account for 84% of tenancies, while non-civil servants account for 15%. Only 1% of NHDCL units are owner-occupied. A preliminary assessment of the NHDCL indicates that it operated successfully from 2015 to 2019, averaging annual growth of 9.9% in rental revenue, 15.9% in profit after tax, and 8.5% in its asset base. The NHDCL plans to construct 2,500 housing units in a phased manner, of which 1,000 are proposed to be built under this project.

ADB intervention in the sector. The ADB has adopted a holistic, long-term approach to the "housing crunch" in Bhutan. Initial upstream analyses paved the way for a policy-based loan (PBL) to develop financial markets using a programmatic approach. Subprogram 1 of the PBL, approved in 2019 for the Financial Market Development Program, focused on reforms to enhance the efficiency, stability, and inclusiveness of the finance sector and supported updating the NHP. In October 2020, ADB approved subprogram 2 of the PBL to support the development of a long-term strategy for public housing, including recommendations for fiscal measures and actions to improve women's access to finance. Subprogram 3 of the PBL, approved in October 2021, will support a housing survey across urban areas and the implementation of financing schemes. Complemented by reforms tied to the PBL, this project will support government efforts to improve sector performance. The government has indicated its intention to approach ADB for additional financing to expand affordable housing based on satisfactory performance and lessons from the project implementation. ADB will coordinate with development partners-the World Bank and the Japan International Cooperation Agency-that are providing assistance for urban development, and climate change and disaster risk reduction.

The following lessons are incorporated in the project design: (i) technical assistance support is needed to achieve sector reforms; (ii) strengthening of the implementing agency's capacity will ensure financial sustainability, adequate operation and maintenance, and improved asset management; and (iii) a viable business model will be developed.

Sector lending modality. The project meets sector lending requirements as (i) the government has an NHP and implementation program, which provide a framework for sector investments; (ii) the NHDCL has the capacity to implement the sector development plans; and (iii) the existing policies are appropriate, and assistance provided under the project will support their implementation. The government has identified affordable rental housing subprojects, which are at different stages of readiness, so the sector approach adds flexibility and is suitable. Additional subprojects will be guided by detailed eligibility criteria agreed with the government for the project.

Livability, safety, and sustainability of human settlements ensured

Access to green and resilient affordable housing for low-income households improved

Climate- and disaster-resilient, energy-efficient, and affordable housing units and public facilities for low-income households constructed

Institutional capacities, policy, and regulatory framework of the housing sector strengthened

The Project Implementation Assistance Consultant (PIAC) was engaged on 9 August 2022 for a contract period of 72 months. The PIAC is expected to provide implementation support, technical knowledge and capacity-building services to NHDCL.

Package CW-01: Trashiyangtse Site Development was advertised on 1 September 2022. The deadline was initially set on 29 September 2022 but was extended until 13 October 2022

Review of the Bid documents of other major packages are underway and are expected to be advertised in Q4 2022.