for official use only report no. 110736 ‐ bt...

Document of

The World Bank Group

FOR OFFICIAL USE ONLY

Report No. 110736 ‐ BT

INTERNATIONAL DEVELOPMENT ASSOCIATION

INTERNATIONAL FINANCE CORPORATION

MULTILATERAL INVESTMENT GUARANTEE AGENCY

PERFORMANCE AND LEARNING REVIEW

OF THE

COUNTRY PARTNERSHIP STRATEGY

FOR

THE KINGDOM OF BHUTAN

FOR THE PERIOD FY2015‐2019

May 8, 2017

Bangladesh, Bhutan, and Nepal Country Management Unit South Asia Region

The International Finance Corporation South Asia Region

The Multilateral Investment Guarantee Agency

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank Group authorization.

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The last Country Partnership Strategy was discussed by the Board on September 23, 2014.

FISCAL YEAR July 1 – June 30

CURRENCY EQUIVALENTS (Exchange Rate Effective May 8, 2017)

Currency Unit = Bhutanese Ngultrums (BTN) US$1.00 = Nu 64.31

IDA IFC MIGA

Vice President: Director: Country Manager: Resident Representative: Task Team Leader:

Annette Dixon Qimiao Fan Yoichiro Ishihara Yoichiro Ishihara/Juri Oka

Dimitris Tsitsiragos Mengistu Alemayehu Wendy Werner Pia Trivedi / Om Bhandari

Keiko Honda Merli Baroudi Petal Jean Hackett

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank LAP Local Area Plans

APA Alternative Procurement Arrangement MDF Multi‐Donor Fund

ASA Advisory Services and Analytics M&E Monitoring and Evaluation

BIPS Bhutan Immediate Payment Service MIGA Multilateral Investment Guarantee Agency

BNB Bhutan National Bank MIPA Movable and Immovable Property Act

CIB Credit Information Bureau MoF Ministry of Finance

CPS Country Partnership Strategy MoHCA Ministry of Home and Cultural Affairs

CRT Cheque Truncation System MoWHS Ministry of Works and Human Settlement

CSO Civil Society Organization MSME Micro, Small and Medium‐sized Enterprise

DPC Development Policy Credit MT Metric Ton

DPR Detailed Project Report MW Megawatt

DSA Debt Sustainability Analysis NCD Non‐communicable disease

EDP Economic Development Policy PDNA Post Disaster Needs Assessment

e‐GP Electronic Government Procurement PEFA Public Expenditure and Financial Accountability

ESMS Environmental and Social Management System

PFM Public Financial Management

FCPF Forest Carbon Partnership Facility PforR Program‐for‐Results

FDI Foreign Direct Investment PG Payment Gateway

FIG Financial Institution Group PLR Performance and Learning Review

FIRST Financial Sector Assessment Program PPP Public‐Private Partnership

FSDAP Financial Sector Development Action Plan

RMA Royal Monetary Authority

FSDIP Financial Sector Development Implementation Plan

REDD Reduced Emissions from Deforestation and forest

FY Fiscal Year SCD Systematic Country Diagnostic

FYP Five‐Year Plan SME Small and Medium‐sized Enterprise

GAFSP Global Agriculture and Food Security Program

SORT Systematic Operations Risk‐rating Tool

GDP Gross Domestic Product SPCR Strategic Program for Climate Resilience

GNH Gross National Happiness T&C Trade and Competitiveness

GNHC Gross National Happiness Commission TA Technical Assistance

HA Hectare TF Trust Fund

ICT Information and Communications Technology

UNFPA United Nations Population Fund

IDA International Development Association WB World Bank

IFC International Finance Corporation WBG World Bank Group

JICA Japan International Cooperation Agency WFO World Food Program

IMF International Monetary Fund WHO World Health Organization

KM Kilometer WWF World Wildlife Fund

THE KINGDOM OF BHUTAN

PERFORMANCE AND LEARNING REVIEW OF THE COUNTRY PARTNERSHIP FRAMEWORK

Table of Contents

I. OVERVIEW ........................................................................................................................ 1

II. MAIN CHANGES IN COUNTRY CONTEXT ............................................................................ 2

III. SUMMARY OF PROGRAM IMPLEMENTATION ................................................................... 6

IV. EMERGING LESSONS ....................................................................................................... 12

V. ADJUSTMENTS TO THE COUNTRY PARTNERSHIP STRATEGY ............................................ 13

VI. RISKS TO THE COUNTRY PARTNERSHIP STRATEGY PROGRAM ........................................ 17

Annex 1: Bhutan Updated CPS Results Matrix – Outcome and Milestones

Annex 2: Bhutan CPS Results Matrix – Summary of Proposed Changes to the Original Results Framework

Annex 3: Bhutan CPS FY2015‐2019 Original Results Matrix – Status Update

Annex 4: Bhutan Indicative Activities (Financing and ASA – FY2017‐2019)

Annex 5: Summary of the Joint Consultation Meetings on the PLR

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I. OVERVIEW

1. This Performance and Learning Review (PLR) assesses the implementation progress of the World Bank Group (WBG) Country Partnership Strategy (CPS) for the Kingdom of Bhutan in FY2015‐2019, which was discussed by the Board of Executive Directors on September 23, 2014. The CPS focuses on three results areas: (a) improving fiscal and spending efficiency, (b) increasing private sector growth and competitiveness, and (c) supporting green development. The CPS is closely aligned with the Government’s 11th Five‐Year Plan (FYP) and supports Bhutan’s aspirations to achieve sustainable and inclusive growth. The PLR does not propose that the implementation period of the CPS be extended. 2. Bhutan’s political environment has been stable and economic conditions have improved in recent years. However, key development challenges remain. Since Bhutan became a democratic constitutional monarchy in 2008, the country has developed a solid development management system based on the Constitution, long‐ and medium‐term development strategies, an annual budget process, and an annual performance agreement founded on the principles of Gross National Happiness (GNH). The four pillars of GNH are (a) good governance, (b) sustainable socio‐economic development, (c) preservation and promotion of culture and (d) environmental conservation. Prudent fiscal and monetary policies as well as investment in the hydropower sector helped accelerate GDP growth from 2.1 percent in 2013 (in the aftermath of the 2012 Rupee shortage) to 6.5 percent in 2015. This has been accompanied by a stable macroeconomic environment with single digit inflation, a stable exchange rate and greater international reserves. However, reliance on hydropower, dominance of state ownership and a weak private sector remain key development challenges. In 2015, current account deficits reached 30 percent of GDP and the youth unemployment rate exceeded 10 percent. 3. The WBG is making progress toward achieving the expected CPS outcomes, although there are constraints in implementing some projects. Bhutan’s GNH principles present a unique dimension where the country continues to be grounded in its rich traditions and desire to remain carbon‐neutral, while it also seeks to position itself as a modern 21st century economy. During the first half of the CPS period, there was a deliberate effort to strategically focus World Bank (Bank) activities to make better use of available resources. However, implementation of some investment projects has been delayed, primarily due to insufficient government capacity and delays in procurement process. On balance, progress is being made to varying degrees in the three CPS results areas.

Fiscal and spending efficiency. Through budget support operations and advisory services and analytics (ASA), the WBG has contributed to strengthening fiscal management and maintaining macroeconomic stability. There has been progress in enhancing tax rationalizing measures, formulating prudent debt policy and strengthening public financial management and procurement systems.

Private sector growth and competitiveness. The WBG has supported the streamlining of the business registration process; improving the efficiency of, and access to, financial services; and improving the investment climate for private sector growth and job creation. It has also strengthened the institutional and legal framework of the financial infrastructure. However, the regulatory environment governing businesses operations still needs to be improved. The evolution of the state from a market participant to a policy maker is still ongoing. The Bank and IFC have collaborated closely in the areas of sector policy developments, investment climate and financial services.

Green development. The results have been mixed. There has been progress in the areas of disaster risk management, hydromet, and climate resilience, although it is too early to measure the results.

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Implementation of Bank support for rural irrigation was delayed. Efforts to improve urban infrastructure management are also taking time.

4. The WBG program is expected to expand and intensify its engagement across the three CPS results areas. Discussions are under way with the government to build a pipeline of activities in conjunction with the preparation of the 12th FYP that is expected to start in mid‐2018. Initial discussions suggest that economic diversification, job creation, human capital development, decentralization, and urbanization are priority areas. Under IDA17 period (FY2015‐2017), US$58 million in IDA financing was committed. Bhutan’s indicative IDA financing envelope for IDA18 period (FY2018‐2020) is expected to be SDR70‐80 million1. The Bank will use additional resources to support the government’s priorities. In the area of fiscal and spending efficiency, it will build on its current efforts to support the government in strengthening fiscal management. In private sector growth, the WBG, particularly through IFC, will focus more on financial inclusion, small and medium‐sized enterprise (SME) development, tourism, housing and infrastructure, which is particularly important for a land‐locked country like Bhutan. IFC remains focused on private sector growth and competitiveness through investment and advisory services. In green development, building on the existing technical assistance, the government has been seeking more WBG engagement in the hydropower sector. The WBG will also look for opportunities to re‐engage in development of human capital (i.e. education and health) and address labor market challenges and the jobs agenda. The preparation of a Systematic Country Diagnostic (SCD) will start in FY2018, which will provide a more detailed analysis for addressing Bhutan’s development challenges. 5. Since the beginning of the CPS period, there have not been any major changes in the country context. The operating environment for the remainder of the CPS period is expected to be stable, and the three results areas remain relevant. The WBG expects progress across the three results areas to continue. Bhutan’s overall country risk remains moderate. The political environment remains stable and the third national elections for both houses of parliament are expected to be held in 2018. Continued effort is needed to strengthen the government’s institutional capacity, which is important for project implementation. The Bank will increase its efforts to strengthen the government's systems by applying the Alternative Procurement Arrangement (APA) and directly supporting the government's own program through Program‐for‐Results (PforR) and development policy lending. Given its economic size and geography, Bhutan remains vulnerable to exogenous shocks, in particular to developments in India’s economy, and to natural disasters and climate change impacts such as the 2016 flooding.

II. MAIN CHANGES IN COUNTRY CONTEXT

A. New and Emerging Country Development Issues

6. The political environment remains stable. The country’s development management system has become more results‐based with the operationalization of annual performance agreement which accompanies the annual budget. Bhutan plans to hold the third elections2 for both houses of parliament in 2018. While few shifts in national development policy direction are anticipated, there are likely to be changes in how decisions are made. Bhutan maintains strong economic and strategic relationships with

1 In US dollars this is approximately $95‐110 million. This amount is indicative, and actual allocation will depend on (a) the total IDA resources available; (b) the country’s performance rating, per capita gross national income, and population; (c) the terms of IDA assistance (grants/credits); (d) the performance and other allocation parameters; and (e) the number of IDA eligible countries. 2 The country’s first and second elections were held in 2008 and 2013, respectively.

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India particularly as a trading partner, as a source of foreign aid, and as a financier and buyer of hydropower.

7. The 12th FYP is expected to start in mid‐2018. The Gross National Happiness Commission (GNHC) is leading the preparation of the 12th FYP. Consultations were held with stakeholders including ministries, sector agencies and local governments, members of parliament, civil society organizations (CSOs) and representatives from the private sector. In addition, to elaborate policy direction on private sector development, the government revised its Economic Development Policy (EDP) in early 2017 under its FYP framework. The EDP recognizes the need to systematically address constraints in the business environment and support private sector development. This is critical for job creation, especially for young people, and for diversifying the economy beyond hydropower.

8. Bhutan is vulnerable to natural disasters and climate‐related risks. The country is highly prone to seismic shocks and vulnerable to weather and climate‐related hazards such as floods, flash floods, glacier lake outburst floods, landslides, windstorms and cyclones. Most recently in July 2016, torrential rain caused flooding and landslides, damaged roads and homes, cut off communities and left several people dead. Total damage and loss was estimated at US$22 million.

B. Recent Economic Developments and Outlook

9. Bhutan’s economy has grown steadily over the last three years. The government has focused on developing hydropower, agriculture, tourism, cottage and small industries, and mining. A combination of prudent fiscal and monetary policy, as well as robust investments in hydropower contributed to the acceleration of growth from 2.1 percent in 2013 to 6.8 percent in 2016 (estimate). Inflation was 3.2 percent in 2016 (estimate) and the exchange rate against the US dollar was mostly stable. The current account deficit increased from 25 percent of GDP in 2014 to 39 percent of GDP in 2016 (estimate) reflecting large investments related to hydropower projects financed mainly by loans from India. Despite the higher current account deficits, adequate financing meant gross international reserves remained stable, covering 10.5 months of goods and services imports as of December 2016. The Royal Monetary Authority (RMA) introduced a new policy allowing the RMA to exchange hard currency (U.S. dollars) for Indian Rupees to help effectively manage domestic liquidity.

10. The government’s recent expansionary fiscal policy reflects an expenditure drive in the final year of the 11th FYP. Bhutan’s fiscal deficit was 1.3 percent of GDP in FY2015/16, and is expected to increase in FY2016/2017 (to about 2.5 percent) and FY2017/2018. The deficit largely reflects an increase in capital expenditures for infrastructure development such as roads. The tax to GDP ratio declined from 16.1 percent in FY2011/2012 to 14.1 percent in FY2015/2016. While tax revenues rose in absolute terms, the gains have not kept pace with GDP growth led by increased hydropower, as hydropower does not contribute directly to tax revenues. Hence, domestic revenue excluding hydropower increased marginally between FY2010/2011 and FY2014/2015, from 13.0 percent to 13.6 percent of GDP respectively. The total domestic revenue was 15.4 percent in FY2010/2011 and 14.5 percent in FY2014/2015. 11. The risk of debt distress is deemed moderate. The 2016 World Bank‐International Monetary Fund (IMF) joint Debt Sustainability Analysis (DSA)3 considers the risk of debt distress moderate, which is unchanged from the 2014 DSA. The external debt to GDP ratio increased from 96 percent in 2014 to 107 percent in 2015. It has started to decline in 2016 at 102 percent (estimated), and is projected to be 95 percent in 2019. The rapid hydropower development has led to a substantial increase in external debt,

3 http://www.imf.org/external/pubs/ft/scr/2016/cr16206.pdf

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with external debt ratios breaching all indicative thresholds for high‐debt distress. However, given the structure of the hydropower loans4 that mitigates financial risk and with elevated official reserves, debt risk remains moderate. 12. The medium‐term economic outlook remains favorable, although it faces some vulnerabilities. Solid growth is projected in 2017 and 2018, and then growth is expected to accelerate in 2019 when three hydropower projects are commissioned (table 1). The stable macroeconomic environment will allow fiscal and monetary policy flexibility to support economic activity. Given Bhutan’s close economic relationship with India, a positive economic outlook in India will also contribute to accelerated growth. Low global commodity prices and the pegged exchange rate against the Indian rupee are expected to support a stable inflation rate. However, the current account deficits are projected to increase due to delays in hydropower construction, although the overall balance of payments is projected to be mostly positive, supported by hydropower grants and loans. Once the projects become operational in 2018/2019 the current account deficits are expected to decrease. Table 1. Key Macroeconomic Indicators

2014 a 2015 a 2016 e 2017 f 2018 f 2019 f

Real GDP Growth, at constant market prices 5.7 6.5 6.8 6.8 7.7 10.5 Expenditure Account Private Consumption 18.0 7.2 7.0 7.0 7.0 10.0

Government Consumption 24.0 10.8 13.2 10.8 9.3 9.3 Gross Capital Investment 38.3 12.9 23.0 27.6 23.0 12.4

Exports, Goods and Services ‐6.0 ‐5.0 0.1 1.0 2.0 5.0

Imports, Goods and Services ‐3.5 10.1 20.0 25.0 20.0 10.0

Production Account Agriculture 2.4 3.0 3.0 3.0 3.0 3.0

Industry 3.1 8.1 8.0 8.3 8.3 15.0

Services 8.2 8.3 7.5 8.0 8.0 8.0

Inflation (Consumer Price Index) 8.3 4.5 3.2 4.0 4.0 4.0

Current Account Balance (% GDP) ‐24.6 ‐29.1 ‐38.8 ‐51.8 ‐61.0 ‐60.7

Fiscal Balance (% GDP) 2.7 1.3 ‐2.5 ‐8.6 ‐5.6 ‐3.4

Debt (% GDP) 96.4 106.5 102.1 103.2 97.7 95.0

Primary Balance (% GDP) 4.4 1.6 ‐1.4 ‐8.5 ‐7.1 ‐3.9

Poverty Rate ($1.9/day PPP terms) 2.1 1.9 1.7 1.3 0.9 0.5

poverty Rate ($3.1/day PPP terms) 12.4 10.9 10.5 8.5 6.0 4.3

Source: Ministry of Finance, Royal Monetary Authority, National Statistics Bureau and World Bank.

13. The dominance of the hydropower sector will continue to affect the trajectory of macroeconomic variables. The three hydropower projects at various stages of development are likely to stimulate domestic demand, resulting in additional pressure on the balance of payments. As capital spending accelerates in the final years of the current FYP, the projected increase in hydropower export receipts needs to be managed to avoid overheating the economy. To manage expected excess revenues from hydropower projects, the government is exploring whether to establish a stabilization fund5. Credit growth and international reserves will have to be carefully monitored. Foreign direct investment (FDI) and remittances need to be promoted as important financing sources. As the exchange rate is pegged to the

4 India covers financial and construction risks for all hydropower projects, allowing Bhutan to treat hydropower loans from India like FDI, on exceptional basis. This unique mitigating measure is still in place. 5 The Bank is providing advice on stabilization fund, which is still at the early stages of discussion.

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Indian Rupee, monetary policy has little flexibility. Thus, fiscal policy will need to play a prominent role in macroeconomic development by increasing domestic revenues, improving the effectiveness and efficiency of public expenditures and maintaining debt sustainability. 14. The economy continues to face the structural challenge of an underdeveloped private sector. The public sector remains dominant in the economy. It accounts for almost half of all jobs outside agriculture. State‐owned enterprises (SOEs) operate in key strategic areas of the economy, including energy, banking, manufacturing, transport, telecommunications, and infrastructure. SOEs contribute to about 40 percent of government revenues. The public sector dominates in the development of hydropower, and the private sector may expand its engagement and contribute to the development of the sector. Private sector participation in power has mostly been in sub‐contracting during the construction phase. However, it may also support non‐core activities such as maintenance or IT services that may promote increased service efficiencies. More broadly, the private sector in Bhutan is concentrated in limited areas (e.g. ferro‐alloys, a few food and beverage manufacturing enterprises, tourism, subsistence farming). There were about 30,000 formal private sector businesses in 2015, out of which 99 percent were micro and small. There are currently about 350 limited liability companies (LLC), and a handful of joint‐stock companies and partnerships. The remaining businesses are de‐facto sole proprietors, with or without employees. Continued effort is needed to realize the private sector potential, which would contribute to job creation and economic growth. C. Poverty Reduction and Shared Prosperity

15. Bhutan has achieved remarkable results in reducing poverty. With expected acceleration in growth, the poverty headcount rate is projected to be 1.9 percent by 2015 and 0.5 percent by 2019, compared to 2 percent in 2012 using the international poverty line of US$1.90 per person a day6. Using the higher international poverty line of US$3.10 a day, the poverty headcount rate declined from 29 percent in 2007 to 13 percent in 20127, and is projected to be at 10.9 percent in 2015 and 4.3 percent in 2019. This is among the lowest in South Asia and is substantially lower than the regional average of 15 percent. During the same period8, household expenditures of the bottom 40 percent of the population grew virtually at the same rate as the overall average, and the income share held by this group remained at 17 percent. 16. Bhutan has made impressive progress in gender equality in education, reaching a level comparable to upper middle‐income nations. Notably, gender parity has been achieved up to Grade 10 and females make up nearly 50 percent of enrollment in higher education and nearly 40 percent in tertiary education. Women’s labor force participation is almost on par with men, although gender gaps persist in agricultural land holdings, inheritance practices, and job quality.

17. Despite significant improvements, attention is needed to ward off inequality. An urban‐rural gap is evident in many indicators, including in poverty, food security and access to services. While poverty incidence is low, urban areas face a higher unemployment rate (6.3 percent) than rural areas (1.0 percent). Given that 58 percent of the population rely on agriculture for their livelihoods9, there is a need to increase the value‐added and productivity of this sector. In education, despite a high level of enrollment and

6 At 2011 Purchasing Power Parity conversion factors. 7 http://iresearch.worldbank.org/PovcalNet/povDuplicateWB.aspx 8 Based on data between 2007 and 2012 9 Bhutan Labor Force Survey 2015

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significant public funding, learning levels remain low in Gewogs (sub‐districts) where fewer children attend school and where there are comparatively higher poverty rates. In health, while infant mortality and under‐five mortality have declined, there are regional differences10. The under‐five mortality in rural areas is twice that in urban areas. In addition, 5.9 percent of children under five were severely malnourished while 33 percent of children in this age group were stunted. Moreover, new health challenges such as non‐communicable diseases11 (NCDs) are emerging with changing lifestyles, rapid urbanization, internal migration and increased unemployment. 18. Job creation and addressing unemployment, particularly for youth is especially important to boost shared prosperity. While the overall unemployment rate is low at 2.5 percent, youth unemployment exceeded 10 percent in 2015. Moreover, youth unemployment in urban areas is especially high and has increased from 21 percent in 2010 to 28 percent in 2015. Given that youths (ages 15‐24) represent one‐fifth of the population, the country needs to find ways to expand job opportunities. As noted in a recent World Bank study on Bhutan’s labor market 12 there are limits to the public sector creating new jobs, even though the public sector is the preferred employer given its compensation structure, job security, and benefits. Globally, the private sector is the main engine for job creation and is generating about nine out of ten new jobs. However, in the case of Bhutan, the large public sector has limited the emergence of a vibrant nonfarm private sector. There is also a need to address the incentives and perceptions of educated youths who consider government jobs to be more attractive than private jobs. Moreover, there is an expectation of continued expansion in government hiring with better wages and benefits, given the expected increase in revenue from the hydropower project. As noted in paragraph 14 it is important to redefine the balance between the public and private sectors.

III. SUMMARY OF PROGRAM IMPLEMENTATION

A. Overall Portfolio Performance

19. The Bank portfolio is small yet active. During the CPS period the portfolio has become more strategically aligned to government priorities, with two IDA operations with a total net commitment of US$38 million, plus a series of development policy credits. The second Development Policy Credit (DPC2) of US$24 million was approved by the Board in December 2016. During IDA17 period, US$58 million was committed. One ongoing project – the Second Urban Development project – is rated moderately unsatisfactory due to slow implementation of one project component related to municipal finance and management. Trust funds (TFs) have been a significant part of the Bank’s support to the country. The Bank has increasingly been more selective on TF activities so that they are linked and complement IDA financing, to reduce the fragmentation of Banks’s support and deliver results to Bhutan where counterpart resources and implementing capacities are limited. There are 12 active trust‐funded operations totaling US$17 million for natural resource management, climate and disaster risk management, public financial management (PFM), intergovernmental fiscal relations, tourism and cultural heritage, hydropower, urban public transport, the financial sector and statistical capacity. 20. IFC has a total committed investment portfolio of US$21 million as of February 28, 2017. The portfolio consists of an equity participation in Bhutan National Bank (BNB), a loan to help finance the

10 Bhutan Multiple Indicator Survey 2010 11 Hypertension, diabetes, cancer and cardiovascular disease. 12 World Bank (2016) “Bhutan’s Labor Market: Toward Gainful Quality Employment for All”.

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refurbishment and expansion of a world class tourist hotel, Zhiwa Ling, and an equity investment to support a hazelnut plantation, nursery and processing operation in the poorer, eastern part of the country. IFC has made five investments in Bhutan from the time the country became an IFC member in 2003. IFC’s first investment in Bhutan was a 2005 debt instrument for a tourism project, followed by two Global Trade Finance Program lines to two banks. IFC’s equity stake in BNB was made in FY2013 and was the largest FDI into Bhutan at that time. IFC reduced its equity stake in BNB by half in 2016 in the first major equity buy‐back in Bhutan’s corporate sector. As a follow‐on to IFC’s support for Bhutan’s tourism sector, IFC invested in Zhiwa Ling Hotel in 2015, marking the first cross‐border commercial loan taken by a fully private Bhutanese company. IFC partnered with the Asian Development Bank (ADB) to support the largest agribusiness project in Bhutan – a US$30 million investment in a hazel nut plantation of which IFC invested US$9 million on its own account and through the Global Agriculture and Food Security Program (GAFSP). Given the market realities of Bhutan, IFC’s investment program has been modest and is likely to remain so for the rest of the CPS period. 21. In October 2014, Bhutan completed the requirements for joining MIGA, becoming the Agency’s 181st member country. MIGA guarantees are now available to support projects in the country. 22. ASAs have played a central role in encouraging the policy dialogue around Bhutan’s development. They have influenced policy reform and sector dialogue, and supported institutional capacity building as follows:

Reform agenda and policy dialogue. The Bank prepared policy notes on the impact of hydropower development on the economy and the role of public finance in addressing related challenges. A programmatic Investment Climate technical assistance (Bank and IFC) provided recommendations to improve competitiveness, attract investment and create jobs. A just‐in‐time Green Growth Policy provided recommendations and raised awareness among key stakeholders of the importance of green growth in the major economic sectors.

Sector diagnostics. A review of the labor market was carried out for the first time, providing evidence of the underlying challenges in the labor market. The report informed the government’s social protection and labor strategies. A policy note on agribusiness is being prepared to support the government’s plan to transform the sector into an engine for economic growth, poverty reduction, and greater private‐sector investment. The 2016 Public Expenditure and Financial Accountability (PEFA) assessment provided the basis for a comprehensive Public Financial Management reform program and action plan to be supported through a PFM Multi‐Donor Fund (PFM MDF). The Bank report on Modernizing Weather, Water and Climate Services helped the government establish an independent national agency on hydrology and meteorology.

Capacity building. A programmatic technical assistance is supporting the government in the design of a new program targeting the poor, as well as improving the statistical capacity to monitor and measure poverty and welfare conditions. Bank’s technical assistance helped the government shift from paper‐based surveys to more efficient and accurate tablet‐based surveys, such as the Bhutan Labor Force Survey 2015. The World Bank has also provided technical assistance to prepare guidelines for implementing the Cultural Heritage Bill and Tourism Policy.

23. IFC’s multisector advisory services helped strengthen Bhutan’s investment climate. IFC provided advisory services that helped inform a Licensing Policy, which was approved by the government in the CPS period. IFC also provided technical assistance to Thimphu municipality’s first major Public‐Private Partnership (PPP) project. This is a key urban infrastructure PPP initiative that is expected to help reduce

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traffic congestion in Thimphu, and improve the transit system. IFC’s risk management advisory support to BNB resulted in the creation of a robust risk management framework (see para. 29). 24. Gender equity is being integrated in relevant WBG initiatives. Bhutan has made notable strides in closing the gender gap, including in economic empowerment, higher education and participation in the labor force (see para. 15). Some gaps still persist, particularly in employment and job quality. The WBG is focusing on strengthening the development of skills, and access to finance and productive assets by women through activities such as the Urban Development Project, the Youth Employment Initiative and the Remote Rural Communities Development Project.

B. Overview of Program Implementation

25. The WBG is on track to achieve the CPS objectives in most areas (Table 2). The CPS identified 14 indicators across three CPS results areas: improving fiscal and spending efficiency, increasing private sector growth and competitiveness, and supporting green development. These results areas are aligned to the 11th FYP that is guided by the four pillars of GNH – good governance, sustainable socio‐economic development, preservation and promotion of culture, and environmental conservation. Of the 14 indicators, 5 have been achieved, 7 others are on track to achieve targets identified in the original CPS13, and 2 indicators are off‐track.

Table 2. Assessment of Progress against CPS Results Indicators

CPS Results Areas Number of Results Indicators

Achieved On track Not on track

Total

Results Area 1: Improving Fiscal and Spending Efficiency

Outcome 1: Strengthened fiscal efficiency 2 2

Outcome 2: Strengthened system for public financial management and procurement performance

2 2

Results Area 2: Increasing Private Sector Growth and Competitiveness

Outcome 3: Improved regulatory framework for business environment

1 1 2

Outcome 4: Increased efficiency and access to financial services

1 1 2

Results Area 3: Supporting Green Development

Outcome 5: Increased agricultural productivity in targeted remote areas

1 1

Outcome 6: Improved urban infrastructure management 1 1 2

Outcome 7: Improved management of natural capital and strengthened resilience to climate change/disaster risks

2 2

Total 5 7 2 14

13 The Results Matrix in Annex 3 summarizes recent progress against the original indicators and milestones in the CPS.

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Results Area 1. Improving Fiscal and Spending Efficiency

26. WBG’s support to strengthen fiscal efficiency is on track. With WBG support, the government has introduced measures to improve revenue and expenditure performance through fiscal consolidation and prudent debt policy approved in August 2016 and supported by a series of DPCs. Tax collection has improved through a Tax Public Notification that raises custom duties, sales taxes and green taxes on selected items. This helped increase tax revenues by 16 percent from Nu 15.8 million in 2013 to Nu 18.4 million in 2015. In addition, to operationalize the revised EDP, the cabinet is pursuing tax rationalization measures through the Revised Rules and Regulations on Fiscal Incentives 2016, which is expected to further improve the efficiency of tax collection. The RMA introduced a new policy on reserve management in 2015, which allows the RMA to convert hard currency reserves into Indian Rupees. 27. Progress is being made in strengthening PFM and procurement systems. The CPS program is on track to achieve the targets related to PFM and procurement. The 2016 PEFA assessment report shows improvements in PFM over the 2010 assessment including budget credibility, oversight of aggregate fiscal risk and the quality and timeliness of budget reports. The first phase of the electronic Government Procurement (e‐GP) system is at an advanced stage of development; the phase I pilot started in January 2017 and it will go live from July 2017. Thimphu City Corporation became eligible under the World Bank’s APA to use the city’s own procurement system and regulations in World Bank‐financed projects. It is the first government counterpart in the world to qualify for use of its own procurement system. Results Area 2. Increasing Private Sector Growth and Competitiveness 28. While progress has been achieved toward improving the business regulatory environment, continued effort is necessary. The private sector in Bhutan is in early stages of development. Its potential to engage in sectors that are currently dominated by the state with an appropriate regulatory and policy environment is yet to be realized. The government, with the support of the WBG, has taken important steps in formulating policy reforms to simplify business procedures and spur private investment. The amendment of the Company Act, the Enterprise Registration Bill, the new Insolvency Bill and other ICT‐related institutional reforms are expected to provide a more predictable and transparent investment climate. Business processes are being streamlined through the adoption of the licensing policy, and the implementation of a single online website is expected to improve the overall framework for licensing permits and business operations. The cumulative FDI inflow increased to US$101 million in 2015 with eight new FDI projects approved, taking the total number of projects to 56 since 2014. This includes IFC’s $29 million equity investment in BNB in FY2013, which was the largest one in the country at that time. FDI is estimated to have created 3,258 regular and 241 seasonal jobs. While Bhutan’s 2017 Doing Business ranking is the highest among South Asian countries, its drop in ranking from 71 to 73 (out of 190 countries) suggests that continued effort is needed to improve the business climate, such as providing better access to credit, building a skilled domestic labor force, improving the construction‐permitting process and strengthening the protection of minority investors.

29. Good progress has been achieved in increasing efficiency and expanding access to financial services. With the support of the Bank’s DPC series, a Financial Sector Development Action Plan (FSDAP) was approved in 2016 to address gaps and vulnerabilities in the financial system in a cost effective way. The plan included a comprehensive review of RMA’s capacity to serve as a central bank. RMA’s capacity has lagged behind the increasing demands associated with a more complex economy and a developing financial sector. The implementation of the FSDAP is expected to improve financial inclusion, which is

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low14. In addition, the legal, regulatory and supervisory framework of the RMA is being strengthened for the effective monitoring and supervision of the Credit Information Bureau (CIB), which is also supported by an IFC Advisory Service. The CIB coverage has increased from 16 percent in 2014 to 26 percent of the adult population in 2016. Two utility companies and one micro finance institution have started using information from the CIB after its system was upgraded to enable the sharing of credit information from utility companies. This reform15 will assist those consumers previously excluded from banking services. Those excluded consumers will now be able to use their on‐time utility payments histories as “reputational collateral” to help them secure access to formal financial services.

30. Progress has been made in improving the financial infrastructure. WBG’s advisory program supports the strengthening of the legal, regulatory and institutional framework through the revised Movable and Immovable Property Act (MIPA) for secured financial transactions. In addition, through IFC advisory service operations, BNB’s risk management capability has been strengthened and has enabled it to create a separate risk management function and institute a robust risk management and credit scoring framework in its day‐to‐day operations. Modernization of payment and settlement systems is ongoing as part of the Bank’s follow‐up on Financial Sector Development Action Plan. RMA has taken the initiative in drafting the procedural guidelines for the Cheque Truncation System (CRT) and e‐money for authorized entities. In addition, RMA has issued guidelines for Payment Service (BIPS) and Payment Gateway (PG). IFC is also providing financial infrastructure advisory services to increase access to finance MSMEs. 31. Regional connectivity project was delayed. The World Bank has been supporting the Department of Roads to improve road and bridge management, including maintenance. Given the importance of regional connectivity for a landlocked country, an IDA regional connectivity project to facilitate regional trade was prepared in FY2017. However, the government decided to defer the project until the 12th FYP, in part to prioritize rehabilitation following the 2016 floods.

Results Area 3. Supporting Green Development

32. Results in improving agriculture and rural livelihood have been uneven. The WBG has been supporting the agricultural sector through irrigation schemes to improve crop production, community‐led infrastructure activities and advisory services. Progress is moderate in improving irrigation facilities in the poorest and most remote parts of the country. So far, 23 out of the planned 47 irrigation schemes were completed and 46716 hectares (ha) have been provided with improved irrigation and drainage services. The limited number of technical staff and procurement capacity of the Ministry of Agriculture and Forests delayed further progress. Due to the slow progress in improving the irrigation facilities, the change in irrigated cereal productivity (one of the CPS indicators) could not be measured. Steady progress has been observed in improving 48 critical community‐led infrastructure assets where 20,445 beneficiaries have access to improved drinking water and sanitation, rice processing mills, drip irrigation, food processing mills and nursery facilities for cardamom. In addition, 2,387 farmers (of whom 1,101 are female) have benefitted from improved technology through advisory services on managing orchards and plantations, ensuring disease‐free seedlings as well as harvesting, storing and marketing citrus fruit and cardamom. IFC’s investment in a hazelnut plantation is expected to benefit 15,000 farmers’ households in the poorer Eastern part of the country by 2018.

14 As of 2014, 34 percent of people over 15 years of age have bank accounts. 15 Only a few CIBs in Asia collect utility bills information. 16 Target of 984.

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33. Progress in improving urban infrastructure management has been mixed. The project faced some implementation challenges including shortage of engineers in Thimphu Thromde, changes in project management, coordination issues between implementing agencies, delays in procurement decisions and personnel constraints. There have been improvements in developing infrastructure in northern Thimphu, with construction completed in two Local Area Plans (LAPs) and work continuing on a third. At the time of writing, 73 new households have access to piped water and 85 new households have access to sewage facilities, but this is less than 10 percent of the targeted increase. The target for road construction has been achieved. Significant steps have been taken to improve municipal financial management services with the upgrading of revenue systems in the Thimphu and Phuentsholing Thromdes (municipalities) for tax collection. Thimphu Thromde has already started collecting taxes and efforts are underway to roll out collection systems in two other Thromdes17. In addition, support is being provided to the Department of National Budget to design and implement an intergovernmental fiscal transfer system from the central government to the Thromdes that is transparent and equitable.

34. The expected outcome in improving natural resource management has been achieved, but continued effort is critical. The CPS target to expand areas under protected area management was achieved. As of October 2016, 1.3 million ha were brought under enhanced biodiversity protection, exceeding the target of 900,000 ha. This included the development and repair of trails and bridges to enable park officials to effectively patrol and monitor biodiversity hot‐spots. Steps have been initiated to mainstream sustainable forest and natural resource management in national policies. The World Bank has contributed to building the government conservation institutions and systems, the capacity for carbon‐trading through, for example the IDA regional project to strengthen wildlife protection, Reduced Emissions from Deforestation and Forest Degradation (REDD) initiatives, and financing to the Bhutan Trust Fund for Environmental Conservation from the Global Environment Facility. ASAs are looking into the causes of deforestation and forest degradation, as well as prospects for improved forest management and natural capital accounting. The World Bank is also supporting implementation of a new mineral development policy by carrying out a technical assessment of gaps and outdated content in the current policy in an attempt to promote good international practices. 35. Progress is being made to promote an integrated approach to improve climate and disaster resilience. The Bank has developed a comprehensive and long‐term program to support the government in strengthening disaster and climate resilience18. A road map19 is in place to help the National Center for Hydrology and Meteorology modernize the country’s hydromet and climate services. Bhutan’s capacity for hydromet services and disaster preparedness is further supported through the enhancement of weather and flood forecasting, aviation meteorology and design of an agromet decision support system. However, the program has been in place for only about six months and it is too early to see improvements in weather forecasting. In addition, support for Bhutan’s cryosphere monitoring and management capacity is underway. On seismic resilience, there has been progress on preparing a Contingency Plan for the Thimphu Thromde, work on vulnerability assessment guidelines for buildings and on guidelines to improve the resilience of traditional buildings, pilot retrofitting for small public buildings and training of local engineers. The government is also preparing a Strategic Program for Climate Resilience (SPCR), which will outline a vision and lay out a long‐term plan for mainstreaming disaster and climate resilience to be

17 Gelephu and Samdrup Jhonkhar Thromdes. 18 Enhancement of Hydromet and Climate Services in Bhutan is part of the South Asia Program on Strengthening Hydromet Services and Resilience. 19 Modernizing Weather, Water and Climate Services (TA).

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integrated into Bhutan’s national development planning20. IFC is a key partner and the process is expected to identify important opportunities for private sector engagement in climate resilience. C. Evolution of Partnership and Leveraging

36. The WBG is seen as an important development partner for Bhutan and coordinates its efforts with others. IFC’s engagement has been central in supporting private sector development, particularly in enabling PPPs, improving the business environment and strengthening the financial sector. The Bank and IFC have been collaborating in those areas through DPCs and technical assistance, which will continue. The Bank and IMF hold regular consultations on macroeconomic issues and closely collaborate on debt management and financial issues mainly through a programmatic budget support operation. The WBG also coordinates with the ADB in hydropower, and in financial and private sector development where the ADB provides a variety of technical assistance services. IFC collaborated with the ADB on the mountain hazelnut project and the Credit Information Bureau, which is seen positively by stakeholders. IFC is also exploring opportunities to work with other multilateral and bilateral partners. The Bank is working with the European Union and the Austria Development Agency on a PFM MDF for implementation in 2017. In the agriculture sector, the Bank complements the International Fund for Agricultural Development activities that are concentrated in the eastern provinces, by focusing its activities in the southern provinces. The Bank’s engagement with the civil society organizations and academia is being strengthened.

IV. EMERGING LESSONS

37. Programmatic development policy lending, combined with relevant analytical work and technical assistance, has been effective in supporting government policy reforms. DPCs have enabled the WBG to better respond to the government’s demands to support key policy reforms to address the structural constraints in public finance and private sector development. They have provided a platform for bringing together analytical work, technical assistance and policy dialogue. The DPCs have been complemented with analytical work and technical assistance, and as a package this has also contributed to strengthening government capacity. Furthermore, DPCs have provided an important platform for the WBG to collaborate across Global Practices as well as between the Bank and IFC. 38. Strategically linked ASA have a wider impact, including to support WBG collaboration. IFC provided hands‐on technical support to develop the Thimphu Car Park project, the country’s first PPP project in the transport sector. The project supports the reduction of traffic congestion and future improvement of transit systems. Lessons from the project informed the formulation of the PPP policy which was supported by DPC2 prepared jointly by IFC and the Bank. The WBG’s engagement in PPP exemplifies the transformative collaboration between IFC and the Bank. The precedent set by the Thimphu Car Park project should encourage the government to explore PPP opportunities in other sectors 39. Consistent Bank support is necessary to address program implementation challenges especially capacity constraint. For example, the Second Urban Development Project faced a shortage of engineers in Thimphu Thromde, changes in project management, coordination issues between implementing agencies, delays in procurement decisions and personnel constraints. These factors delayed the implementation of the computerized municipal management system. The Bank provided consistent support to the implementing agencies, including for the technical design of the water scheme, guidance

20 It is a joint Multilateral Development Bank activity where the Bank is the lead agency.

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on procurement issues and continuous follow‐up with the relevant agencies on pending tasks and potential problems. The importance of strengthening the government’s capacities by working closely with counterparts was emphasized during the consultations with government and development partners to review the implementation of the CPS. 40. Bank needs to focus on activities of strategic relevance to make the best use of its resources and those of its counterparts. The CPS program consists not only of lending but also a large number of ASA activities and trust‐funded activities that have stretched the capacity of both the counterparts and the WBG to manage and monitor implementation. While technical capacity exists in the public sector, the number of qualified personnel is limited given the country’s small size. It is important for the WBG not to overstretch capacities and resources of its counterparts by financing too many, relatively small initiatives, including ASA activities. The Bank program needs to be tailored to the small country context; to prioritize, sequence, and target appropriately; and to avoid ad hoc activities that do not link clearly to the broader, strategic focus areas of engagement that contribute to inclusive growth and development. As IDA financing to Bhutan is expected to significantly increase under IDA18, striking a balance between the increase in IDA financing and capacity constraint will be important.

V. ADJUSTMENTS TO THE COUNTRY PARTNERSHIP STRATEGY

41. The overall CPS structure and strategic focus remain relevant to Bhutan’s development challenges and government priorities. The overall political and economic context is stable and no fundamental changes are proposed to the CPS results areas. The WBG will continue to focus on the sustainability of the reform program. In view of slower implementation in some areas such as in urban initiatives and agriculture, some adjustments are being proposed to the program (annex 2). 42. While the CPS results areas remain unchanged, the WBG aims to intensify support in existing areas and re‐engage in new areas. In view of the key development challenges related to high reliance on hydropower, dominance of state ownership and the weak private sector that affect job creation, and in line with the 12th FYP starting in 2018, the WBG will explore the potential to increase support to the government in these areas. Key areas for engagement include infrastructure and the hydropower sector. Other areas being considered are diversification of assets (e.g., investment in human capital and economic institutions); employment creation in private sector, especially for young people through agriculture and tourism; and decentralization and support for urban development outside Thimphu municipality. In addition, building on the in‐depth labor report, there may be a possible re‐engagement in the health and education sectors to strengthen human capital for future job growth through technical assistance. During IDA18 (FY2018‐2020), Bhutan’s indicative IDA financing envelope is expected to be SDR70‐80 million21, to support the government’s priorities. As a small state, Bhutan will benefit from favorable lending terms under IDA18.22

43. The Bank will be deliberate in using a mix of financing instruments to effectively and efficiently support the government, given concerns about implementation capacity and constraints in government

21 In US dollars this is approximately $95‐110 million. This amount is indicative, and actual allocation will depend on (a) the total IDA resources available; (b) the country’s performance rating, per capita gross national income, and population; (c) the terms of IDA assistance (grants/credits); (d) the performance and other allocation parameters; and (e) the number of IDA eligible countries. 22 Bhutan is eligible for IDA credits on terms for small states ‐ 40 year, with principal repayable at 2 percent per annum for years 11‐20 and 4 percent per annum for years 21‐40 ‐ as opposed to blend terms. In addition, Bhutan is also eligible for 20 percent cap under the Regional IDA program.

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and Bank resources. This involves a three‐pronged approach. The first is to be strategic in financing a limited number of investment projects. The second is to intensify support for the government’s key policy reforms through DPCs together with required analytical work and technical assistance to strengthen government capacity. The next DPC series will focus on key policy reforms to address the country’s development challenges such as competitiveness, fiscal management, job creation, and private sector development. The third is to use the Program‐for‐Results (PforR)23 financing instrument to support the government’s own program and by doing so contribute to strengthening the government’s systems, including monitoring results. In addition, the Bank will be more selective in the use of trust fund resources to ensure that they are aligned with lending operations. 44. Infrastructure, in particular hydropower development, is a priority for the government. At the request of the government, the Bank is financing the preparation of a Detailed Project Report (DPR) for Chamkharchhu‐II Hydropower Project (590 MW) and the formulation of a strategic roadmap for hydropower development beyond 10,000 MW. A parallel technical assistance is being provided to develop guidelines and build institutional capacity for the preparation and implementation of new hydropower projects. This engagement will build on the ongoing support for sustainable hydropower management. IFC will look for opportunities to engage with the government and the private sector in the hydropower sector, to help create a vibrant private sector. MIGA is also prepared to engage in the sector where project structures allow. More emphasis will also be put on developing regional infrastructure connectivity and roads maintenance, which is vital for improving trade and investment. 45. The Bank will seek opportunities to support the government’s own program using the PforR instrument. The instrument is expected to contribute to strengthening their systems and capacities, including the country’s results‐based development management system. Bhutan is a good fit for the instrument as the country has a sound governance environment. The adoption of APA and the results of the PEFA assessment demonstrate a reliable financial management system. The Bank will discuss with the government the use of a PforR in the financial sector. The WBG has been engaged in financial sector development (e.g., the formulation of FSDAP), and there is strong demand for WBG’s support to the sector. Also, access to finance and financial inclusion are a key binding constraint to private sector development. Thus, Bank support for the sector is expected to directly contribute to addressing the country’s development challenge.

46. IFC will support private sector growth by sharpening its focus on financial inclusion, SME development, tourism, housing and diversification to other sectors and services. It appreciates the unique country context, to maintain Bhutan’s traditions and stay carbon neutral, in line with the GNH principles. IFC will work with the Bank to provide specific assistance to tourism and agribusiness policies. It will explore possible further technical assistance to help the government implement its recently agreed Licensing Policy. IFC will continue to provide technical assistance to BNB to further enhance its risk management capabilities. This is expected to allow the bank, which has over 30 percent of market share, to unlock more credit to micro, small and medium‐sized enterprises (MSMEs). In addition, support will be provided to CIB and the Central Registry to enable more credit to be extended to existing clients and to clients that were previously ineligible for financing.

23 Program‐for‐Results (PforR) finances the government’s own program, and the disbursement is linked to achievements of agreed results under the government’s program.

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47. MIGA has no current exposure in Bhutan, but will work to support the country’s private sector development efforts under this CPS when suitable opportunities arise. MIGA will work with IFC and other partners to support productive inward investment in Bhutan via its political risk guarantees. 48. ASA’s will be strategically realigned based on priorities to be laid out in the government’s 12th FYP and WBG’s comparative advantage. The planned ASA activities are expected to fill existing knowledge gaps, enhance capacity, inform evidence‐based policy‐making and lay the building blocks for the preparation of the SCD, which will start in FY2018. Formulating a few larger programmatic ASA activities under a common umbrella will be explored. For example, the Bhutan Development Report aims to provide selected sector diagnostic reports to policymakers in implementing the revised EDP and formulating the 12th FYP. The PFM MDF will support a programmatic approach to strengthening performance, transparency and accountability in PFM. On job creation, the Bank plans to establish a job technical assistance platform. The platform will address key factors that impact employment, such as health and education/skills development. Also, building on existing work on labor and social protection as well as statistics, the Bank will support the government in designing and implementing its social protection strategy, updating national poverty estimates and producing new poverty maps. IFC and the Bank will complement this effort by preparing a policy note on Investment Climate Assessment and Private Employment Growth Policy. In addition, the Bank plans to carry out analytical work to deepen the understanding of the drivers and constraints of agricultural productivity, rural growth and urban development that is climate‐smart and preserves the natural environment. 49. A few adjustments are being made to the results matrix to reflect the implementation status of the WBG program of activities (See Annex 2 for detailed information). While no major changes are proposed to the outcome objectives under the three results areas, some indicators are being adjusted to reflect the implementation of ongoing programs or availability of data. For example, outcome indicators related to fiscal efficiency are being revised to be in line with the revised government data and the DPC approved in 2016. The outcome indicators related to agricultural productivity and urban infrastructure were revised given the actual implementation status of the associated projects. Some milestones were dropped because they were not monitored through ongoing WBG activities or because the data is not available to monitor their achievement.

50. The financing program is being updated for the remaining CPS period to take into consideration the expected increase in IDA resources. The indicative financing program in the CPS in FY2017‐2019 includes DPC in FY2017 (US$20 million) and FY2019 (US$20 million), as well as the regional connectivity project (US$25 million). Table 3 reflects the indicative IDA financing program for the remaining period of the CPS including the expected increase in IDA allocation, the introduction of the PforR instrument, and the enhanced engagement in hydropower.

Table 3. Indicative IDA Financing (FY2017‐2019)

FY2017 (Jul 16‐Jun 17) FY2018 (Jul 17‐Jun 18) FY2019 (Jul 18‐Jun 19)

DPC2 (IDA, US$24 million) (delivered in Dec 16)

New development policy credit series (IDA, US$30 million)* Hydropower TA (IDA, US$4 million) Regional Connectivity Project (US$25 million (incl. regional IDA))

New development policy credit series (IDA, US$30 million)* A PforR operation in the financial sector*

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Note: Annex 4 provides detailed table of the indicative IDA and Trust Fund financing, and ASAs. “*” indicates new activities that were not in the original CPS.

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VI. RISKS TO THE COUNTRY PARTNERSHIP STRATEGY PROGRAM

51. The overall risk to the program remains moderate, and mitigation measures are in place where risks are considered to be substantial. As summarized in the Systematic Operations Risk‐rating Tool (SORT) (Table 4), despite the overall stable country context, there are a number of risks facing the WBG program including the technical design of project and program, institutional capacity for implementation and sustainability, and others related to natural disasters.

Table 4. Summary of Systematic Operations Risk Rating Tool

Risk Categories Ratings (H, S, M or L)

Political and Governance M

Macroeconomic M

Sector Strategies and Policies S

Technical design of project and program S

Institutional capacity for implementation and sustainability S

Fiduciary M

Environment and Social M

Stakeholders M

Other (natural disasters) S

Overall rating M

52. Sector Strategies and Policies. The dominance of the public sector crowds out the private sector, and limits employment growth opportunities, especially for educated youths. To address this key development challenge, there is a need to achieve coherence among various sector‐level strategies and policy reforms, and improve the coordination among ministries and agencies, to achieve the objective of private sector development. Despite the government’s strong commitment to reforms, the weak coordination has meant that progress in strengthening the private sector has been slow. As the WBG continues to support key reforms to support private sector development through DPCs, it will also engage in analytical work and technical assistance to help link the strategy, systems and processes. Key ASAs such as the Bhutan Development Report, investment climate work (Bank and IFC), and a job platform technical assistance will contribute to this effort. 53. Technical Design of Project and Program. As the WBG increasingly engages in key policy reforms, the program design may become more complex. For example, policy reforms supported through the ongoing DPC operations are critical for inclusive growth and development. Yet, many technical aspects of policy reforms are new to the government and require careful sequencing. To mitigate the risk posed by complex technical design that may lead to slow and ineffective implementation, the WBG provided extensive technical and analytical support to formulate PPP rules and regulations, bringing in external support. In the future, the WBG will maintain hands‐on technical assistance and analytical work. 54. Institutional Capacity for Implementation and Sustainability. Bhutan has limited institutional capacity, including stretched counterpart staff resources, limited technical capacity, a complex organizational structure and weak interagency coordination. These could undermine CPS program implementation and project outcomes. The Bank will continue to work with the government to strengthen its institutions and capacities through ongoing operations complemented by technical support. This includes, for example, the DPC operations that are accompanied by technical assistance and support for capacity development and coordination across various implementing agencies. In addition, the Bank is

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providing technical assistance and analytical work for public financial management and procurement. The introduction of a Program‐for‐Results instrument would partly address capacity constraints and focus on building the government’s own capacity. 55. Preparing for natural disasters. Bhutan is highly prone to natural disasters and climate change related risks. The country has experienced natural disasters, including flash floods, earthquakes, windstorms and forest fires. Depending on the magnitude of the disaster, the entire economy may be affected, including the supply of food, raw materials and energy, and it may also impact project implementation. While natural disasters cannot be predicted or avoided, disaster preparedness and response readiness are critical. The Bank will continue to provide capacity‐building support to the government for handling seismic risk, strengthening the capacity of hydromet services, disaster preparedness and climate resilience.

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Annex 1: Bhutan Updated CPS Results Matrix – Outcome and Milestones

CPS Outcomes and Indicators Indicative Milestones Ongoing and Indicative WBG Program


Outcome 1: Strengthened fiscal efficiency Indicator 1: Ratio of domestic revenues to total expenditure Baseline: 60 percent (FY2013) Target: 62 percent (FY2019) Indicator 2: Fiscal Deficit Baseline: below 4.2 percent (FY2013) Target: below 6.0 percent (FY2019)

Fiscal rules adopted for managing public finance.

PPP policy approved and PPPs identified

Financing Closed: DPC 1 Ongoing: DPC 2 (ongoing); TFSCB (ongoing) Indicative: New DPC Series, ASA Delivered: Public Finance Think Piece; DSA; TA on drafting PPP Policy; PPP Infrastructure Capacity Building; Ongoing: Macro‐fiscal monitoring; tax rationalization TA; Bhutan Economic Update; Bhutan Development Report; Statistical Capacity Building

Outcome 2: Strengthened systems for public financial management and procurement performance Indicator 3: PEFA PI‐9. Oversight of aggregate fiscal risk from other public sector entities D+ (2010) to C+ (2019); PI‐24. Quality and timeliness of in‐year budget reports D+ (2010) to C+ (2019); PI‐27 Legislative scrutiny of the annual budget law D+ (2010) to C+ (2019)

Indicator 4: Procurement time

Baseline: 110 days (2010), Target: 65 days (2019)

PFM strategy and PFM committee in place

E‐procurement core module in place

Financing Closed: PFM IDF Indicative: PFM MDF ASA Delivered: PEFA assessment Ongoing: APA assessment of Thimphu Thromde


Outcome 3: Improved regulatory framework for business environment Indicator 5: Number of days to start a business Baseline: 32 days (2014), Target: 10 days (2019)

Implementation of Enterprise registration bill

Online registration of companies operational

FDI policy revised

Licensing policy adopted

Financing Closed: DPC 1 Ongoing: DPC 2

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Indicator 6: Foreign direct Private investment Baseline: US$21 million (2014), Target: US$50 million (2019)

Indicative: New DPC Series, Regional connectivity project; Support hotel expansion to promote tourism (IFC) ASA Delivered: Trade and Transport Facilitation Ongoing: Investment Climate TA Indicative: PPP TA; A Job Platform; Hotel Expansion to promote Tourism (IFC)

Outcome 4: Increased efficiency and access to financial services Indicator 7: Increase in the share of credit to manufacturing, agriculture, service and tourism, trade and commerce Baseline (2013): 45 percent; Target: 50 percent (2019) Indicator 8: Increased coverage of credit information bureau: Baseline: 0 percent (2014); Target: 35 percent (2019)

A comprehensive Financial Sector Development Implementation Plan (FSDIP) developed and approved

Improved regulatory framework for CIB

Number of loans secured with movable property increased by 6,000 (including SMEs and micro‐enterprises)24

BNB risk management framework operational

Financing Closed: DPC 1 Ongoing: DPC 2 Indicative: New DPC Series; PforR ASA Delivered: Off‐load half of IFC ownership in BNB‐ increase efficiency Ongoing: Investment Climate TA; Financial sector strategy TA (FIRST TF), Monitor and Support Existing Portfolio: BNB and ESM (IFC); Financial Infrastructure TA (IFC); Supporting RMA for financial inclusion workshop (IFC); Support to Credit Bureau (IFC) Indicative: RMA on Corporate Governance (IFC); Assisting SME fund for Bhutan (IFC)

Results Area 3: Supporting spatial and green development

Outcome 5: Increased agricultural productivity in targeted remote areas Indicator 9: Cereal yields in targeted irrigation system (MT/acre) Paddy: Baseline: 1.1 (2012); Target: 1.32 (2019).

Area provided with irrigation and drainage services – New (ha) Baseline: 0 (2012); Target: 60 (2017)

Financing Ongoing: Remote Rural Community Development Project Indicative: Food Security and Agriculture Productivity (TF); Generating Youth Employment and Community Based Enterprise Development (TF); AF of Remote Rural Community Development Project

24 The baseline is 0, to be consistent with the Implementation Plan under IFC’s advisory services to the Royal Monetary Authority that was approved in April 2016.

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Indicator 10: Number of female clients who

adopted an improved agriculture technology

Baseline: 0 (2012); Target: 190 (2017)

ASA Delivered: Supporting Bhutan’s Social Protection and Labor Strategy; Targeted Household Poverty Program; Indicative: Poverty Assessment; Agriculture Sector Review; A Job Platform

Outcome 6: Improved urban infrastructure management Indicator 11: Number of new household with piped water and sewage connections and kilometers of internal roads constructed in the targeted cities Water: Baseline: 20,000 (2014); Target: 20,500 (2019); Sewage: Baseline: 0 (2010); Target: 250 Roads: Baseline: 0 km (2010); Target: 8.34 km (2019) Indicator 12: Upgraded municipal finance systems in four city corporations Building permits for service plots Baseline: 115 (2010); Target: 200 (2019)

Human settlements strategy in place

Number of buildings with new traditional architectural guidelines

Cultural Heritage site Bill approved and implementation started

Financing Closed: Strengthening intergovernmental systems (IDF) Ongoing: Second Urban Development Project and Additional Financing ASA Delivered: Action Planning for Bhutan's Heritage Sites Bill Implementation and Review of Bhutan's draft Tourism Bill; Public Transport Access TA; Ongoing: Monitor Progress of PPP Parking Project (IFC) Indicative: Urban Policy and Development Review; Affordable Housing Options (IFC)

Outcome 7: Improved management of the natural capital and resilience to climate change/disaster risks Indicator 13: Areas under protected area management (ha) Baseline: Zero (2013); Target: 900,00 ha (2018) Indicator 14: Improved Disaster preparedness and delivery of weather and Climate Services Baseline: 1 day subjective weather forecasting (2014); Target: 3 day weather forecasting with verification system (2019)

Forest inventory completed and forest monitoring with data management system established

Roadmap for Hydro met Modernization prepared

Updated guidelines for building vulnerability implemented

Financing Closed: Strengthening Regional Cooperation for Wildlife Protection in Asia; Ongoing: Sustainable Financing for Biodiversity Conservation and Natural Resource Management; Hydromet Services and Disaster Resilience (TF); Strategic Program for Climate Resilience (TF); PHRD for Improving Resilience to Seismic Risk (TF) Indicative: FCPF/REDD, Hydropower TA ASA Delivered: Bhutan REDD Readiness; Hydromet Modernization and Resilience TA; Minerals for Development Bhutan; Green growth policy note;

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Indicator 15: The number of Hydromet Services developed Baseline: 0; Target: 2 (2019)

Disaster and Climate Resilience TA; Ongoing: Cryosphere Monitoring and Capacity Development; Formulation of Strategic Roadmap for Remaining Untapped Hydropower Potential in Bhutan; Hydropower Sustainability Support; Hydropower TA

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Annex 2: Bhutan CPS Results Matrix – Summary of Proposed Changes to the Original Results Framework

Original CPS Indicators and Milestones Revision Comments


Outcome 1: Strengthened fiscal efficiency Indicator 1: Ratio of domestic revenues to total expenditure Baseline: 65 percent (FY2013) Target: 85 percent (FY2019) Indicator 2: Fiscal Deficit Baseline: below 5 percent (FY2013) Target: below 3 percent (FY2019) Indicative Milestones


Power trading company established


Revised Indicator: Indicator 1: Ratio of domestic revenues to total expenditure Baseline: 60 percent (FY2013) Target: 62 percent (FY2019) Indicator 2: Fiscal Deficit Baseline: below 4.2 percent (FY2013) Target: below 6 percent (FY2019) Dropped Milestone:


Baseline and target for indicator 1 were revised. The new baseline for domestic revenue for FY2012/2013 changed from 65 percent to 60 percent based on the latest government data. Likewise, the target is also being revised from 85 percent to 62 percent.

Baseline and target for indicator 2 were revised. The baseline was revised from 5 percent to 4.2 percent based on the latest government data. The target was also revised from 3 percent to 6 percent to reflect the current expansionary fiscal policy. The increase in expenditures is mainly due to infrastructure development.

The milestone on the establishment of a power trading company was dropped. Despite Cabinet support for its establishment and the completion of a feasibility study, implementation has been delayed due to a lack of clarity on the Cross Border trade electricity guidelines and regulations of the government of India. The government will need time to discuss the guidelines and thus it is highly unlikely that the Power Trading Company by Bhutan will be established in India within the remaining CPS period.

Outcome 2: Strengthened systems for public financial management and procurement performance Indicator 3: PEFA PI‐9. Oversight of aggregate fiscal risk from other public sector entities D+ (2010) to C+ (2019); PI‐24. Quality and timeliness of in‐year budget reports D+

Dropped milestone:

Professional Accountancy Organization established

The milestone on the establishment of a Professional Accountancy Organization was dropped since the preparation of the draft Act on Professional Accountancy Organization will take time.

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(2010) to C+ (2019); PI‐27 Legislative scrutiny of the annual budget law D+ (2010) to C+ (2019) Indicator 4: Procurement time Baseline: 110 days (2010), Target: 65 days (2019)

Indicative Milestones:





Outcome 3: Improved regulatory framework for business environment Indicator 5: Number of days to start a business Baseline: 32 days (2014), Target: 7 days (2019) Indicator 6: Foreign direct Private investment Baseline: $21 million (2014), Target: $50 million (2019) Indicative Milestone:

Implementation of Enterprise registration bill


FDI policy revised

Telecom policy adopted


Revised indicator: Indicator 5: Number of days to start a business Baseline: 32 days (2014), Target: 10 (2019) Dropped milestone:


The target for indicator 5 was revised from 7 to 10 days. While steps have been taken to streamline business registration to start a business, more needs to be done to improve the business environment. The revised target reflects a more realistic view of the investment climate and is also consistent with the target in DPC2.

The milestone related to telecom policy was dropped. It was approved in December 2014, and the Bank does not have any engagement to support the milestone.

Outcome 4: Increased efficiency and access to financial services Indicator 7: Increase in the share of credit to manufacturing, agriculture, service and tourism, trade and commerce

Revised Indicator: Indicator 8: Increased coverage of credit information bureau Baseline: 0 percent (2014); Target: 35 percent (2019)

The target for Indicator 8 was revised from 50 to 35 percent to take into account the delay in implementation of ongoing reforms and upgrade of credit information bureau.

The milestone for “% of all movable collateral backed loans registered” was revised to

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Baseline (2013): 45 percent; Target: 50 percent (2019) Indicator 8: Increased coverage of credit information bureau: Baseline: 0 percent (2014); Target: 50 percent (2019) Indicative Milestone:

A comprehensive Financial Sector Development Implementation Plan (FSDIP) developed and approved

Improved regulatory framework for CIB

% of all movable collateral backed loans registered


Revised Milestone:

Number of loans secured with movable property increased by 6,000 (including SMEs and micro‐enterprises)

“number of loans secured with movable property increased by 6,000” to reflect Central Registry’s current data monitoring tracking system, which is more reliable than referring to a percentage.


Outcome 5: Increased agricultural productivity in targeted remote areas Indicator 9: Cereal yields in targeted irrigation system (tons/hectare) Paddy: Baseline: 2.20 (2012); Target: 2.60 (2017). Maize: Baseline: 1.70 (2012); Target: 2 (2017) Indicator 10: Number of female clients who adopted

an improved agriculture technology

Baseline: 0 (2012); Target: 190 (2017)

Indicative Milestones:

Area provided with irrigation and drainage services – New (ha)

Baseline: 0 (2012)

Target: 60 (2017)

Community participatory consultations completed and all sub‐projects (rural

Revised Indicator: Indicator 9: Cereal yields in targeted irrigation system (MT/Acre) Paddy: Baseline: 1.1 (2016); Target: 1.32 (2019). Dropped Milestone:

Community participatory consultations completed and all sub‐projects (rural infrastructure) activities identified and selected by communities in targeted districts

Indicator 9 was adjusted in line with the ongoing Remote Rural Community Development Project. The progress in irrigation scheme has been delayed. As a result, the progress on cereal yields could not be measured. The baseline and target for paddy is being revised based on the recent project baseline survey which reflects more accurate information.

The milestone for community participatory consultations is being dropped as this is a project milestone rather than a milestone for the CPS outcome.

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infrastructure) activities identified and selected by communities in targeted districts

Outcome 6: Improved urban infrastructure management Indicator 11: Number of new household with piped water and sewage connections and kilometers of internal roads constructed in the targeted cities Water: Baseline: 20,000 (2014); Target: 20,850 (2019); Sewage: Baseline: 0 (2010); Target: 850 Roads: Baseline: 0 km (2010); Target: 8.34 km (2019) Indicator 12: Upgraded municipal finance systems in four city corporations Building permits for service plots Baseline: 115 (2010); Target: 250 (2019) Indicative Milestones:

Human settlements strategy in place



# of beneficiaries from green transport initiatives increase

Revised indicator: Indicator 11: Number of new household with piped water and sewage connections and kilometers of internal roads constructed in the targeted cities Water: Baseline: 20,000 (2014); Target: 20,500 (2019); Sewage: Baseline: 0 (2010); Target: 250 Roads: Baseline: 0 km (2010); Target: 8.34 km (2019) Indicator 12: Upgraded municipal finance systems in four city corporations Building permits for service plots Baseline: 115 (2010); Target: 200 (2019) Dropped Milestone: # of beneficiaries from green transport initiatives increase

The targets for indicator 11 were revised from 20,850 to 20,500 (new household with piped water) and from 850 to 250 (household with sewage connections). The changes reflect the current status of the ongoing urban program in Bhutan due to the slowdown in building construction and connections to the water and sewage lines in the two completed local area plans of Thimphu Thromde.

The target for indicator 12 was revised from 250 to 200, which reflects the ongoing implementation of the program.

The milestone on the number of beneficiaries from green transport initiatives was dropped. The Green Urban Transport program is unlikely to be implemented during the CPS period.

Outcome 7: Improved management of the natural capital and resilience to climate change/disaster risks Indicator 13: Areas under protected area management (ha) Baseline: Zero (2013); Target: 900,00 ha (2018) Indicator 14: Improved Disaster preparedness and delivery of weather and Climate Services

Added indicator: Indicator 15: The number of Hydromet Services developed Baseline: 0; Target: 2 (2019) Dropped Milestone:

A new indicator 15 on number of hydromet services developed was added, to be consistent with the ongoing program, which is expected to strengthen Bhutan’s capacity for hydromet services and disaster preparedness.

The milestone on M&E system was dropped as the Bank program did not monitor it.

The milestone on number of engineers trained for seismic vulnerability assessment was dropped as it was a project level indicator.

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Baseline: 1 day subjective weather forecasting (2014); Target: 3 day weather forecasting with verification system (2019) Indicative Milestones:

M&E system that effectively monitors conservation investments




Number of engineers trained for seismic vulnerability assessment and retrofitting Baseline: 0; Target: 50



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Annex 3: Bhutan CPS FY2015‐2019 Original Results Matrix – Status Update

CPS Outcomes and Indicators Targets:FY2019 unless specified

Indicative Milestones Status Milestones Comments


Outcome 1: Strengthened fiscal efficiency Indicator 1: Ratio of domestic revenues to total expenditure Baseline: 65 percent (FY2013) Target: 85 percent (FY2019) Progress: On track In FY2014 domestic revenue covered 73 percent of the total expenditure. Indicator 2: Fiscal Deficit Baseline: below 5 percent (FY2013) Target: below 3 percent (FY2019) Progress: On track In 2014 the overall balance was a surplus of 2.7 percent and swung to a deficit of ‐1.7 percent of GDP in 2015 and estimated at ‐1.2 percent of GDP in 2016.




Partially Achieved Partially Achieved Partially Achieved

The Cabinet approved a debt policy in 2016 setting debt limits to improve fiscal sustainability. The Cabinet approved tax rationalization measures in 2016 to improve efficiency and broaden the tax base. Fiscal rules have been submitted to cabinet for approval in March 2017. The Cabinet has supported the establishment of a Power Trading Company in India. The feasibility study is completed and accepted by Druk Holding and Ministry of Economic Affairs. The Cabinet approved the PPP Policy. The Ministry of Finance approved PPP rules and regulations and established a PPP unit within the ministry.

Outcome 2: Strengthened systems for public financial management and procurement performance Indicator 3: PEFA



Partially Achieved Achieved

PFM Strategy is under preparation and PFM governance group is in place. E‐procurement developer is on board and core module has been developed. Pilot has started and

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PI‐9. Oversight of aggregate fiscal risk from other public sector entities D+ (2010) to C+ (2019); PI‐24. Quality and timeliness of in‐year budget reports D+ (2010) to C+ (2019); PI‐27 Legislative scrutiny of the annual budget law D+ (2010) to C+ (2019) Progress: On track PI‐9. Oversight of aggregate fiscal risk from other public sector entities moved to B in 2016 which has surpassed the target. PI‐24: Quality and timeliness of in‐year budget reports has improved to C+ in 2016 which is the CPS target. PI‐27 Legislative scrutiny of the annual budget law D+ remains same as in 2010. Indicator 4: Procurement time

Baseline: 110 days (2010), Target: 65 days

(2019)

Progress: On track As of 2016 the procurement time is 70 days.


Not achieved

the core module is expected to go live on July 2017. The initial step of drafting the Act for the establishment of the Professional Accountancy Organization has been completed. However, it will take at least 2 years for Parliament to pass the Act and for the Professional Accountancy Organization to be established.


Outcome 3: Improved regulatory framework for business environment Indicator 5: Number of days to start a business Baseline: 32 days (2014), Target: 7 days (2019) Progress: On track

Implementation of enterprise registration bill


FDI policy revised

Achieved Partially Achieved Achieved

The Cabinet approved an enterprise registration bill. The bill was discussed at the Parliament lower house in 2015 (summer session). Online company registration is in progress. While the information is available online, registration is still physical. With the issuance of the new Companies Act, this is expected to progress further. FDI Policy was revised in July 2014.

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It now takes 15 days to start a business according to Doing Business Report –FY2017. Indicator 6: Foreign direct Private investment Baseline: US$21 million (2014), Target: US$50 million (2019) Progress: Achieved By end of 2015, cumulative FDI inflow to Bhutan was US$101 million.



Achieved Achieved

The Telecom and Broadband Policy was adopted in December 2014. It should be noted that the WBG does not have any direct engagement to measure this indicator. This is a significant milestone towards improving Bhutan’s overall licensing and permitting framework.

Outcome 4: Increased efficiency and access to financial services Indicator 7: Increase in the share of credit to manufacturing, agriculture, service and tourism, trade and commerce Baseline (2013): 45%; Target: 50% (2019) Progress: Achieved As of September 2016, the total loan portfolio size is Nu 84.97 billion and the share of credit to manufacturing, agriculture, services and tourism and trade and commerce is 53.43% of the total portfolio. Indicator 8: Increased coverage of credit information bureau: Baseline: 0% (2014); Target: 50% (2019) Progress: On track 26 percent (136,383 individuals) of adult population has access to credit information bureau.

A comprehensive Financial Sector Development Action Plan (FSDAP) developed and approved

Improved regulatory framework for the CIB

% of all movable collateral backed loans registered


Achieved Achieved Partially Achieved Achieved

The Cabinet approved the FSDAP in September 2016. RMA approved regulatory framework for CIB in 2015.The CIB currently collects and distributes information from financial institutions and utility companies. Two utility regulators issued directives in January and March 2016 to share data with CIB. An estimated 12,000 loans backed by movable collateral are active. However, the data as percent of collateral backed loans are not yet available with the Central Registry. BNB has created a separate Risk Management function, instituted a robust Risk Management framework including risk reporting, and integrated credit scoring architecture in their day to day operations.

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Outcome 5: Increased agricultural productivity in targeted remote areas Indicator 9: Cereal yields in targeted irrigation system (tons/hectare) Paddy: Baseline: 2.20 (2012); Target: 2.60 (2017). Maize: Baseline: 1.70 (2012); Target: 2 (2017) Progress: Not on track The impact of the irrigation systems on paddy and maize yields could not be measured at this point. As of now 23 out of 49 irrigation sites have been completed and others are ongoing. No data has yet been collected. The project is in the process of restructuring. Indicator 10: Number of female clients

who adopted an improved agriculture

technology

Baseline: 0 (2012); Target: 190(2017)

Progress: Achieved This target has been met and exceeded. Over 1101 women have been benefitted from improved technology.

Area provided with irrigation and drainage services – New (ha) Baseline: 0 (2012); Target: 60

(2017)

Community participatory consultations completed and all sub‐projects (rural infrastructure) activities identified and selected by communities in targeted districts

Not on track On track

The activity has not yet started. 57 percent of all community consultations and sub‐projects have been completed.

Outcome 6: Improved urban infrastructure management Indicator 11: Number of new household with piped water and sewage connections and kilometers of internal roads constructed in the targeted cities

Human Settlements Strategy in place

Partially Achieved

Final draft Human Settlements Strategy (and Planning Act) has been presented to MoWHS. Stakeholder meetings for further consultations and sensitization are planned prior to finalization in FY2017.

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Water: Baseline: 20,000 (2014); Target: 20,850 (2019); Sewage: Baseline: 0 (2010); Target: 850 Roads: Baseline: 0km (2010); Target: 8.34 km (2019) Progress: Not On track (watch) Water 73 households; Sewerage: 85 households; internal roads: 11.05 km (achieved) Indicator 12: Upgraded municipal finance systems in four city corporations Building permits for service plots Baseline: 115 (2010); Target: 250 (2019) Progress: On track (watch) 179 new building permits for service plots.



# of beneficiaries from green transport initiatives increase

Partially Achieved Achieved Not on track

No accurate information on number of such buildings are yet available. The MoWHS has provided the required training to engineers and architects of various thromdes and Dzongkhags on the subject. The Heritage Site Bill was reviewed by the Government and given its significance, the MoHCA was requested to expand it to include intangible heritage management. The Bill therefore was renamed to Cultural Heritage Bill. The Bill is under review and the MoHCA is preparing the tools for its implementation. TF program Green Urban Transport is not expected to materialize during the CPS period. Therefore, no progress on number of beneficiaries can be reported. However, the government made progress on preparing the institutional framework in this sector and developing infrastructure designs.

Outcome 7: Improved management of the natural capital and resilience to climate change/disaster risks Indicator 13: Areas under protected area management (ha) Baseline: Zero (2013); Target: 900,00 ha (2018) Progress: Achieved 1,319,424 ha was brought under enhanced biodiversity protection through demarcation and expansion, development and repair of trails and bridges for effective mobility of park officials and biodiversity




Not on track Achieved Partially Achieved

The indicator could not be measured as the Bank program did not monitor it. A road map for Hydromet Modernization was published and posted on government website. Guidelines for vulnerability assessment is finalized and it has been rolled out in Gelephu Thromde, Engineers from Gelephu Thromde, Sarpang Zhemgang, Tsriang, Pema gatshel, Dagana and Samdrupiongkhar are trained.

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hot‐spot protection through continuous patrolling and monitoring. Indicator 14: Improved Disaster preparedness and delivery of weather and Climate Services Baseline: 1 day subjective weather forecasting (2014); Target: 3 day weather forecasting with verification system (2019) Progress: Achieved 3 day weather forecasting is being provided and further support is being provided through the recently signed Hydromet Services and Disaster Resilience Project.



Partially Achieved Achieved

National Forest Inventory has been prepared and report on forest cover mapping was published in December 2016. 27 Engineers were trained from various thromde and districts. 50 more are being trained from the remaining Thromdes and districts in the current FY.

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Annex 4: Bhutan Indicative Activities (Financing and ASA‐FY2017‐FY2019)

CPS Results Area IDA/TF financing ASA IFC Engagement

Improving Fiscal and Spending Efficiency

Delivered Second Development Policy Credit (US$24 million) ( Dec 16)

Indicative New development policy credit series*

PFM MDTF

Bhutan Development Report

Bhutan Economic Update

Poverty assessment APA assessment of Thimphu Thromde

Increasing Private Sector Growth and Competitiveness

Delivered Second Development Policy Credit (US$24 million) ( Dec 16)

TFSCB (TF, US$0.8 million) ( Feb 17)

Indicative New development policy credit series*

A PforR operation in financial sector* (s)

Investment Climate TA (with IFC)

Financial Infrastructure Bhutan (with IFC)

A job platform*

Off‐load half of IFC ownership in BNB – increases efficiency (e.g. return on capital) in BNB.

Supporting RMA to conduct an international financial inclusion workshop; Advisory

Monitor and support existing portfolio.(e.g., ESMS and Risk Management of BNB) Advisory

Support hotel expansion to promote tourism

Develop financial infrastructure by supporting the credit bureau, central registry Advisory

Work with RMA on a Corporate Governance program for FI’s

Work with World Bank on DPC elements supporting Private and Financial Sector Development Advisory

Re‐explore assisting the setting up of an SME Fund for Bhutan investment and Advisory*

Supporting Green Development

Delivered Hydromet Services and Disaster Resilience Regional Project (TF, US$3.8 million) (Sep 16) Strategic Program for Climate Resilience (TF, US$1.5 million) (Feb 17)

Formulation of Strategic Roadmap for Remaining Untapped Hydropower Potential in Bhutan*

Hydropower Sustainability Support

Cryosphere Monitoring and

Explore options to assist in affordable housing. Investment and Advisory

Monitor progress of PPP Parking project

Advisory

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CPS Results Area IDA/TF financing ASA IFC Engagement

Indicative Food Security and Agriculture Productivity (US$8 mil)

Generating Youth Employment and Community Based Enterprise (TF‐grant)

Hydropower TA (US$4 million)*

FCPF/REDD (US$5 million) *

Capacity Development

Urban policy and development*

Agriculture sector review*

Note: “*” Indicates new activities, which were not indicated in the original CPS

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Annex 5: Summary of the Joint Consultation Meetings on the PLR Thimphu, Bhutan March 9‐10, 2017

On March 9‐10, 2017 the World Bank and IFC held three consultation meetings ‐ with government counterparts, with development partners, and with the private sector and civil society organizations. Below is a summary of main issues raised at the meetings. Financing support. Participants welcomed the expected increase in IDA resources under IDA18 (FY2018‐2020). They noted the importance of making the most out of the available resources, especially in light of Bhutan’s GDP per capita, which is above IDA threshold. More information on the IDA graduation process was requested. Bhutan’s conservative approach to borrowing linked to concerns about high accumulation of debt was noted. In this regard, it was observed that the country’s debt level excluding that related to hydropower is not exceptionally high. Areas of support. A number of potential areas of support were identified:

Infrastructure, where it was noted that no single development partner could fill the gap; this has been identified as a priority area for IDA support under the Bhutan Country Partnership Strategy (CPS). The potential for further development of the hydropower sector was discussed.

Private sector development, especially for job creation. While appreciating the government effort to improve the investment climate, it was felt that more could be done, including access to finance. Concern about jobs was noted, given the large youth population and limits of the public sector to create jobs. The importance of consulting the private sector to strengthen the investment climate and increase its participation in the economy was emphasized.

Tourism as a key area for further growth. In this connection, the government expressed disappointment with the independent review funded by the World Bank.

Agriculture, where 59 percent of the population continue to be employed. The opportunities for improving productivity to reduce reliance on food imports, and value addition were highlighted.

Trade facilitation, with specific mention of technical support to establish the trade information portal.

Health and education to strengthen the country’s people and their employability. In this regard, developing skills to match the needs of future economic growth areas was emphasized.

Capacity development, including finance practitioners. Some participants noted the need to take into consideration social issues such as domestic violence, and social impacts of development initiatives (e.g. the emerging social issues in the hydropower sector). World Bank and IFC partnership and support for advisory services related to PPP, and support to the financial sector was appreciated. Strengthening project implementation. The issue of project implementation was raised in all meetings. These included lack of coordination across the government institutions at the local level, lack of adequate human resources and frequent changes in project teams. Recommendations for strengthened project implementation included involving implementing agencies upstream during the preparation phase, identifying resource requirements for particular projects upfront, and advancing support for capacity building. The introduction of the Alternative Procurement Arrangement by the Bank that focuses on using the country’s own system was welcomed. The importance for development partners to enhance coordination was noted.

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Table 1. Participants List

1. Joint consultation with the Royal Government of Bhutan, March 9, 2017 Name Position and Agency

1 Mr. Khandu Dorji Planning Officer, Ministry of Information and Communication

2 Mr. Icharam Dulal Specialist Ministry of Works and Human Settlement

3 Mr. Sonam Tobgay Analyst

4 Mr. Ashok Sunwar Project Engineer, Thimphu Thromde

5 Mr. Lekzang Dorji Director, Department of Macroeconomic Affairs

6 Mr. Yeshey Lhendup Program Officer, Department of Macro Economic Affairs, Ministry of Finance

7 Ms. Chimi Pem Program Officer, Department of Macro Economic Affairs, Ministry of Finance

8 Mr. Damcho Rinzin Marketing Officer, Tourism Council of Bhutan

9 Mr. Sonam Phuntsho Chief, Department of Information Technology and Telecom, Ministry of Information and Communication

10 Mr. Tshering Dorji Director, Department of Public Accounts, Ministry of Finance

11 Mr. Sonam Tobgyel Chief Accounts Officer, Department Public Accounts, Ministry of Finance

12 Ms. Lhaden Lhotey Dy Chief Accounts Officer, Department Public Affairs, Ministry of Finance

13 Mr. Tshering Wangchuk

Program Officer, Department of Disaster Management, Ministry of Home and Cultural Affairs

14 Ms. Yangchen Tshogyel

Dy Governor, Royal Monetary Authority

15 Ms. Tashi Pem Director, Royal Civil Service Commission

16 Mr. Pema Tenzin National Council, member of Parliament

17 Mr. Yeshi Samdrup Sr. Architect, Department Of Culture, Ministry of Home and Cultural Affairs

18 Mr. Ugyen Penjore DG, Department of Agriculture and Marketing Cooperatives, Ministry of Agriculture and Forest

19 Mr. S. Norbu Department of Agriculture and Marketing Cooperatives, Ministry of Agriculture and Forest

20 Mr. Jayendra Sharma Chief Program Officer, Policy and Planning Division, Ministry of Health

21 Mr. Pema C Wangyel Chief Program Officer, Policy and Planning Division, Ministry of Home and Cultural Affairs

22 Mr. Ugyen Namgyel Director Finance, Druk Green Power Corporation

23 Mr. Phub Tshering Engineer, Department of Hydro Power Systems, Ministry of Economic Affairs

24 Ms. Tashi Dema Assistant Officer, National Council Secretariat

25 Ms. Sonam Pem Duba Assistant Officer, National Council Secretariat

26 Mr. Passang Dorji Executive Secretary, Thimphu Thromde

27 Mr. Trashy Namgyel Engineer, National Center for Hydrology and Meteorology

28 Mr. Sonam T Dorji Dy Chief, Policy and Planning Division, Ministry of Economic Affairs

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2. Meeting with the Development Partners, March 9, 2017 Name Position and Agency

1 Yamada Koji Chief Rep, Japan International Cooperation Agency (JICA)

2 Sho Takano Deputy Representative, JICA

3 L.P. Gupta Attaché (E&C) Embassy of India, Thimphu

4 Kanokpan Lao Araya Country Director, Bhutan Asian Development Bank (ADB) Country Office

5 Suraj Shrestha Medical Officer, World Health Organization

6 Tshewang Norbu Country Coordinator Officer

7 Binai Lama Senior Advisor, SNV Netherlands Development Organization

8 Dungkar Drukpa National Program Officer, World Food Program

9 Krishna Subba Senior Program Officer, JICA

10 Tashi Jamtsho Director, CEP, World Wildlife Foundation

11 Dechen Chime WFP, UNFPA

3. Meeting with the private sector/CSOs/NGOs, March 10, 2017

Name Position and Agency

1 Mr. Sonam Dorji Executive Director. Association of Bhutanese Tour Operators)

2 Mr. Kiran Parajuli Private Sector,, Bhutan Chamber of Commerce and Industry

3 Mr. Kipchu Tshering Managing Director, BNB

4 Mr. Dorji Tashi Loden Foundation

5 Ms. Deki Choden Head Training, Financial Institutions Training Institute

6 Ms. Meenakshi Rai Director, Community and outreach Department, Respect Educate Nurture Empower Women

for official use only report no. 110736 ‐ bt...

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