1

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 70588 v1

RESTRUCTURING PAPER

ON A

PROPOSED PROJECT RESTRUCTURING

OF THE

BHUTAN PRIVATE SECTOR DEVELOPMENT PROJECT

June 20, 2007

TO THE

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KINGDOM OF BHUTAN

JUNE 21, 2012

3

ABBREVIATIONS AND ACRONYMS

ATM Automated Teller Machines

AWP Annual Work Plans

BoB Bank of Bhutan

BT Bhutan

DITT Department of Information Technology & Telecom

DPA Department of Public Accounts

EA Environmental Assessment

EFTCS Electronic Fund Transfer Clearing System

EIA

EMP

Environmental Impact Asessment

Environment Management Plan

FA Financing Agreement

FIP

FRSD

Financial Inclusion Policy

Financial Regulation and Supervision Department

FY Fiscal Year

HV High Voltage

IA Implementing Agency

IDA International Development Association

IPO Initial Public Offering

IT Information Technology

IT/ITES IT/Information Technology Enabled Services

M&E Monitoring and Evaluation

MOF Ministry of Finance

4

MOIC

MOLHR

Ministry of Information and Communications

Ministry of Labour and Human Resources

PAD Project Appraisal Document

PDO

PSC

Project Development Objective

Program Steering Committee

PSD Private Sector Development

RGOB Royal Government of Bhutan

RMA Royal Monetary Authority of Bhutan

RSEBL

RUB

Royal Securities Exchange of Bhutan Limited

Royal University of Bhutan

TA Technical Assistance

WB World Bank

Vice President : Isabel M. Guerrero

Country Director : Robert Saum

Sector Director : Sujata Lamba

Sector Manager : Ivan Rossignol

Task Team Leader : Cecile Thioro Niang

BHUTAN

Restructuring Status: Draft

Restructuring Type: CD Approval

Last modified on date : 6/15/2012

5

1. Basic Information

Project ID & Name P073458: BT – Bhutan Private Sector Development (PSD) Project

Country Bhutan

Task Team Leader Cecile Thioro Niang

Sector Manager/Director Ivan Rossignol

Sector Director Sujata Lamba

Country Director Robert Saum

Original Board Approval Date 06/20/2007

Current Closing Date 06/30/2012

Proposed Closing Date [if applicable] 06/30/2013

EA Category B- Project based

Revised EA Category na

EA Completion Date 25 February, 2010

Revised EA Completion Date na

2. Revised Financing Plan (US$)

Source Original Revised

RECIPIENT 0.00 0.0

IDA GRANT 8.00 8.0

Total 8.00 8.0

6

3. Borrower

Organization Department Location

Ministry of Finance Department of Public Accounts

(DPA)

Bhutan

4. Implementing Agency

Organization Department Location

Ministry of Information and

Communications

Department of Information

Technology & Telecom (DITT)

Bhutan

5. Disbursement Estimates (US$m) (both credit and grant)

Actual amount disbursed as of 09/30/2010, IDAH 307-BHU: 32%[Grant]

Fiscal Year Annual Cumulative

2008 0.50 0.50

2009 1.00 1.50

2010 1.50 3.00

2011 2.50 5.50

2012 2.50 8.00

Total 8.00

7

6. Policy Exceptions and Safeguard Policies

Does the restructured project require any exceptions to Bank policies? No

Does the scale-up of restructured projects trigger any new safeguard policies? If yes, please select

from the checklist below.

No

7a. Project Development Objectives/Outcomes

Original/Current Project Development Objectives/Outcomes

The objective of the project is to increase productive employment in Bhutan through promotion of enterprise

development in the IT/ITES sector, enhanced IT skills, and improved access to finance.

7b. Revised Project Development Objectives/Outcomes [if applicable]

na

8

BHUTAN PRIVATE SECTOR DEVELOPMENT (PSD) PROJECT

RESTRUCTURING PAPER

1. The closing date for Bhutan, Bhutan Private SECTOR DEVELOPMENT, [Grant No H307-

BHU], P073458 will be extended from June 30, 2012 until June 30, 2013, as per the

Kingdom of Bhutan’s request.

2. Implementation Progress and Achievement of Project Development Objective. The

Bhutan PSD Project achieved its project development objective (PDO) in March 2012.

Project implementation has been satisfactory since effectiveness, except for a one time

downgrade to moderately satisfactory due to a disbursement lag in June 2011, now resolved.

The project has been given considerable due importance by the implementation agencies1

within their portfolio. Annex 1 presents more detail on implementation status, based on the

Project’s Tenth Implementation Support Mission conducted from May 28 to June 8, 2012.

Except for the undergrounding works of high voltage power lines over the IT Park under

Component 1 and a financial literacy campaign under Component 3 of the Project, all

activities are expected to be concluded by June 30, 2012.

3. Relevance and Achievement of Project Development Objective (PDO). The project has

achieved, and in some cases, exceeded its implementation targets, which confirms a

satisfactory progress towards achieving the development objectives. Progress against the

June 2012 outcome indicator was reached in March 2012 and is now exceeding its final

target: the number of Bhutanese graduates hired under the Project is now 778. Most Bhutanese

employed with support from the Project are between 19 and 24 years old, with equal representation

between young men and women from across Bhutan’s 20 districts. The cost to RGOB per job created

under the Project has been estimated by the Royal Government in the range of US$900, which is

highly satisfactory as per regional and global standards. Annex 1 depicts the status of all

indicators of the Monitoring and Evaluation Framework against targets.

4. The proposed extension is necessary to complete the undergrounding of a high voltage

transmission line in the IT Park, implemented by the Bhutan Power Corporation (BPC).

Background. This activity has been under implementation since August 2011, as part of the enabling

works provided by RGOB to build infrastructure for the IT Park (Component 1). During the Project’s 2010

restructuring, a fund reallocation of USD 450,000 from Component 3 to Component 1 was approved to

support the undergrounding of a 1-km high voltage power transmission line above the IT Park, as part of

government support to enabling infrastructure works of the Park. The power line had been identified as

a hazard. In addition, rerouting was necessary as the overhead line passed at the edge of the IT building,

1 Project implementation is led by the Ministry of Information and Communications. Other implementation agencies

include the Royal University of Bhutan, Ministry of Labour and Human Resources, Royal Monetary Authority and

Bank of Bhutan.

9

when Bhutanese regulations do not allow any residential or commercial buildings in an 18-meter wide

right of way below the lines. Options considered to reroute the transmission line included the

undergrounding and the overhead line re-alignment and re-routing of the line. The undergrounding was

favored as it remained on government land. Works started following the clearance by the World Bank of

the amendment to the Project’s Environmental and Social Impact Assessment to include the impact of

the transmission line.

Reasons for Delay. BPC committed to complete the undergrounding by end May 2012 but, due to

technical issues and coordination challenges, works have been delayed. These have included:

Technical issues. The undergrounding of the 66kV high voltage power line is the first

undergrounding undertaken by BPC. As implementation progressed, BPC was challenged

by technical complexities including meeting additional safety and safeguard measures as

per international norms.

Coordination issues. An unforeseen landslide occurred in early 2012 along a portion of

the cable trenching works being undertaken by BPC between towers CT188-CT190 in

Babesa, due to a site excavation work being undertaken by a private individual for

construction of his building beside the cable trenching right of way. Thimphu Thromde

had issued clearance for the cable trenching work as well as the private building

construction. A meeting was held on Jan 18, 2012, to resolve this issue. It was agreed that

a retaining wall would be constructed along the affected area. BPC highlighted the

impacts of the incident on the overall work progress and implementation timelines. In

addition, the implementation of this activity faced challenges arising from parallel road

expansion works including a series of retaining walls that needed to be constructed along

certain segments of the cable trenching right of way (road expansion along with retaining

walls were financed with RGOB funding).

While a number of deliverables have been completed, completion of the remaining works is not

expected before end November 2012. Annex 3 presents the revised implementation schedule for the

works.

10

Annex 1: Project Status

The Bhutan PSD Project achieved its project development objective (PDO) in March 2012. It is currently

rated as Satisfactory in terms of both progress toward the Project Development Objective and

Implementation Progress. The Project’s Tenth Implementation Support Mission conducted from May 28

to June 8, 2012 concluded the following:

Project Performance. The project has been under implementation for almost five years and is scheduled

to close on June 30, 2012. Project implementation has been satisfactory since effectiveness, except for a

one time downgrade to moderately satisfactory due to a disbursement lag in June 2011, now resolved.

The project has been given considerable due importance by the implementation agencies2 within their

portfolio.

Relevance and Achievement of Project Development Objective (PDO). The project has achieved, and in

some cases, exceeded its implementation targets, which confirms a satisfactory progress towards

achieving the development objectives. Progress against the June 2012 outcome indicator was reached in

March 2012 and is now exceeding its final target: the number of Bhutanese graduates hired under the

Project is now 778. Most Bhutanese employed with support from the Project are between 19 and 24

years old, with equal representation between young men and women from across Bhutan’s 20 districts.

The cost to RGOB per job created under the Project has been estimated by the Royal Government in the

range of US$900, which is highly satisfactory as per regional and global standards. Annex 2 depicts the

status of all indicators of the Monitoring and Evaluation Framework against targets.

Relevance of Project Design. The institutional and implementation arrangements; social and

environment safeguards arrangements, M&E and reporting; funds flow and; disbursement methods are

all relevant and do not require any changes.

Grant Covenants. The project is in compliance with all grant covenants included in the Financing

Agreement.

Progress of implementation and Achievement of Outputs Indicators. Except for the undergrounding

works of high voltage power lines over the IT Park under Component 1 and a financial literacy campaign

under Component 3 of the Project, all activities are expected to be concluded by June 30, 2012.

2 Project implementation is led by the Ministry of Information and Communications. Other implementation agencies

include the Royal University of Bhutan, Ministry of Labour and Human Resources, Royal Monetary Authority and

Bank of Bhutan.

11

Component 1. Development of IT/ITES Sector ($5.30m). The disbursement rate for this component at

the implementation agency’s level was 92%, as of June 7, 2012. The IT Park was inaugurated on

November 1, 2011. While Progress on Component 1 activities has been satisfactory, the overall progress

of Component 1 has been rated by the task team as moderately satisfactory, since no tenancy

agreements have been signed to date in the IT Park. Progress on the implementation of the Bhutan

Innovation and Technology Center (BITC) is satisfactory with the signing up of 9 incubatees (and 7

already set up) and progress on the Data center. The Data centre is ready to commence operations with

their initial clientele including the DRC business of BoB. Progress on IT Park construction is satisfactory

but some internal finishes, roof level mechanical equipment and external works including the

landscaping remain to be completed. Commercial tenancy negotiations with a major international

tenant have taken place. However, formal tenancy contract signing is subject to the company securing a

BPO contract in the TechPark, in the context of worldwide pressure on BPO activities due to the global

economic slowdownThis includes a Government contribution for the IT Park of US$2 million paid in Oct.

2011 to Thimphu TechPark Ltd (TTPL)3, the Park Developer for the 10,000 sq ft of leased space, allocated

for the BITC. As of June 1, 2012, RGOB has also paid a further US$950,000 to TTPL towards the initial set

up cost, management of the BITC ($100,000) and the seed fund for the BITC incubator ($100,000).

Progress against output indicators under Component 1 is as follows:

Cumulative leads generated for new investments in the IT Park - progress as of 31 May 2012: 201, equivalent to the 200 June 2012 target (see Annex II).

Number of companies incubated in the IT Park is 7, above the contractual target of 5. This was achieved by May 2012 with the launch of BITC operations on May 7, 2012. MOUs have been signed with 9 potential incubatee companies. (see Annex II).

Percentage of lettable commercial space leased out again will remain at zero, while two international companies (Wipro, NIIT) and a local company (Green Dragon Media) are in discussion with TTPL on space commitments and tenancy agreements.

Component 2. Development of an IT Skills Program (US$2.00m). The progress of Component 2 is

satisfactory. The Component’s disbursement at the implementation agency’s level stood at 78% as of

June 7, 2012. As of early June 2012, the Component had trained 1030 secondary education (Class XII)

graduates and college graduates and employment of 778 candidates - 389 male and 389 female – in

global ITES companies4 and in various sectors of the Bhutanese economy. The Ministry of Labour and

Human Resources (MOLHR) has launched several skills development programs: i) a graduate training

program (GTP) aimed at incentivizing local training firms selected competitively to train tertiary

graduates, and ii) an employment training program (ETP) aimed at supporting in-house training and

employment of class XII students. In both programs, firms are responsible for mobilizing candidates and

3 TTPL is a joint venture between Assetz Property Group, a global economic zone developer located in Singapore,

and Druk Holding and Investments, the national holding company managing 16 of the 20 state-owned enterprises in

Bhutan. 4 These include Infosys, Genpact and Wipro.

12

required to employ at least 50% of the trained individuals, while being provided a larger matching grant

for higher employment rates. The private sector-led skills development programs have been highly

successful, both in terms of percentage of trainees employed (74%) and cost per job created. In the case

of linkages with global IT/ITES companies, Project funds were leveraged to raise additional investments

by leading private sector companies covering tuition and accommodation of the trainees. Additional

activities under Component 2 implemented by the Royal University of Bhutan include the introduction

of new curriculum developed with feedback from the industry. These include (i) an analytical skills, (ii)

language enhancement course and (iii) entrepreneurship development course. The Project also

supported the launch of a Virtual Learning Environment across RUB colleges.

Progress against output indicators under Component 2 is as follows:

Per cent of students clearing ITES industry competency assessment that is widely

recognized (Progress as of May 31, 2012: 55% against a target of 35% by June 2012)

Per cent of students trained successfully employed by private sector (Status: 78% against

a target of 50% by June 2012).

Employment sector wise: ETP Employment sector wise: GTP

191

7 20

3

36

3 8 16 5 0

50

100

150

200 46 39

25

10 14

5 8

41

0

10

20

30

40

50

13

ETP: Student representation by Districts GTP: Student representation by Districts

Component 3. Strengthening the Financial Sector through IT Use (US$.7m). The overall disbursement

rate of this component was 95% at the implementation agency’s level as of June 7, 2012. Progress on

this component has been satisfactory, though one activity – the last part of the financial literacy

campaign - is at high risk of non completion by the end of June 2012. The Component was restructured

in December 2010, to reflect evolving priorities within the Royal Government and include financial

inclusion in the Project’s scope. The IT system upgrade in the Bank of Bhutan (BoB) has been highly

satisfactory and the sub-component has been fully disbursed since 2011. BoB’s procedures are

modernized and positioned BoB to benefit from the inter-bank Electronic Fund Transfer and Clearing

System (EFTCS). Other activities implemented by RMA under this component include: financial inclusion,

financial literacy and the IT upgradation of the Royal Securities Exchange of Bhutan Limited (RSEBL).

RSEBL’s new IT System was launched on April 23, 2012. The final draft of the Financial Inclusion Policy

(FIP) is ready and under screening by GNHC and the Cabinet for endorsement and implementation.

Several regulations were also drafted in order to create an enabling regulatory and supervisory

framework for MFIs and branchless banking. Finally, several programs were launched under the

Financial Literacy Program (FLP), including mass media communications. However, one activity under

implementation - the broadcast of TV soap operas and reality shows - may face a delay, and may not be

completed by end-June 2012, mainly due to implementation issues. The activity has been procured but

11

20

24

2

3

4

20

34

21

36

19

27

32

30

22

21

53

13

18

30

13

0 20 40 60

Bumthang

Chhukha

Dagana

Gasa

Gelephu

Haa

Lhuntse

Mongar

Paro

Pema Gatshel

Punakha

Samdrup Jongkhar

Samtse

Sarpang

Zhemgang

Tashi Yangtse

Trashigang

Thimphu

Trongsa

Tsirang

Wangdiphodrang

6

8

12

0

1

13

18

20

18

10

10

23

30

9

7

24

28

13

22

10

0 10 20 30 40

Bumthang

Chhukha

Dagana

Gasa

Haa

Lhuntse

Mongar

Paro

Pema Gatshel

Punakha

Samdrup Jongkhar

Samtse

Sarpang

Zhemgang

Tashi Yangtse

Trashigang

Thimphu

Trongsa

Tsirang

Wangdue phodrang

14

the drafting of the script for the media programs took longer than expected. Progress against output

indicators is as follows:

1. Percentage of district coverage for financial literacy campaign (Progress: 100%, meeting

the June 2012 target)

2. Percentage automation of stock exchange trading, settlement, and delivery with straight

through processing (Progress: 100%, against a June 2012 target of 100%) 3. Number of financial transactions by using ATMs at BOB per year (Progress: 1.1m as of

December 2011, against a June 2012 target of 900,000)

Compliance with Environmental and Social Safeguards. This is a category B project due to the triggering

of the Environmental Assessment OP/BP/GP 4.01. The Environmental Assessment (EA) and

Environmental Management Plan (EMP) were completed and disclosed to the public by the Royal

Government of Bhutan (RGOB) on February 25, 2010. The Project’s safeguards category remains B under

the proposed closing date extension. Construction of the 1 kilometer underground electric power

transmission line under Component 1 (see Section C) is not expected to cause any significant

environmental and/or social impacts. Before work on the under-grounding of the HV transmission lines

commenced, a baseline environmental impact assessment (EIA) along with public consultations was

carried out, and an Environmental Management Plan (EMP) was prepared. The EIA/EMP was cleared by

the National Environment Commission in June 2011 and by the World Bank in November 2011.

Implementation of the EMP for the underground transmission lines would be monitored during

construction. Any adverse impacts identified during construction would be mitigated in accordance with

Bank’s environment and social safeguard policies.

Disbursement and Financial Management. Financial management performance of the Project has been

Satisfactory. Against the original grant allocation of SDR 5.3 million (equivalent of USD 8million), IDA

disbursements as of 4-Jun-2012 stand at SDR 4.948 million (equivalent to USD 7.75 million), reflecting

approximately 93.38% disbursement. Excluding the DA advance, the disbursement percentage is

currently approximately 91%5. The audit report of the Royal Audit Authority (RAA) included an

observation with regard to the open advances of Nu. 65.725. Substantial part of these advances related

to undergrounding works for the HV transmission lines over the IT Park, most of which were adjusted in

early June 2012.

Procurement. The Project’s procurement rating has been satisfactory. There is no procurement pending

under the existing activities.

5 Percentage calculated on the basis of expenditure recoded in the books of the accounts of the project. Will reflect

in the client connection once the IUFR for the quarter ending June 2012 is recorded by the Loan Department.

15

Annex 2: Arrangements for Results Monitoring

[Achieved]/Target Values Data Collection and

Reporting

Project Outcome Indicators Baseline YR1 YR2 YR3 YR4 YR5 Frequency

and Reports

Data Collection

Instruments

Responsibility for Data

Collection

Cumulative job creation in the

IT/ITES sector in the IT Park or

related activities

0 0 0 175 [269]/350 [778]/700 Annual MIS reports of PIA PIA

Output Indicators

Component 1 - Development of the IT/ITES Sector

1. Cumulative leads generated

for new investments in the IT

Park

0 25 50 100 [140]/150 [201]/200 Annual MIS reports of PIA PIA

2. Number of companies

incubated in the IT Park

0 0 0 0 [0]/5 [7]/5 Annual MIS reports of PIA PIA

3. Percentage of lettable space

leased out

0 0 0 25% [0%]/50% [0]/50% Annual MIS reports of PIA PIA

Component 2 - Development of IT Skills Program

1. Per cent of students clearing

ITES industry competency

assessment that is widely

recognized

0 10% 20% 25% [61%]/35

%

[55.5%]/3

5%

Annual NAC results RUB

2. Per cent of students trained

are successfully employed by

the private sector.

0 <5% 10% 25% [78%]/40

%

[74.8%]/5

0%

Annual Trace study RUB

Component 2 - Strengthening Financial Sector through IT Use

16

1. Number of financial

transactions at BOB by using

ATMs per year

40,000 42,000 44,000 467,430/4

6,000

[871,247]/

600,000

[1,100,00

0]/900,00

0

Annual

statements

provided by

RMA

Report sent to RMA

by commercial banks

RMA

2. % of district coverage for

financial literacy campaign

0% - - -

[30%]/50

%

[100%]/10

0%

Annual

statements

provided by

RMA

Report sent to RMA

by commercial banks

RMA

3. % automation of stock

exchange trading, settlement,

and delivery with straight

through processing.

25% - - - [25%]/75

%

[100%]/10

0%

Annual

statements

provided by

RMA

RMA internal report

on the payment system

RMA

17

Annex 3: Construction Schedule of Undergrounding of HV Power Transmission Line

Construction milestones Initial

Start

Dates

Initial

Completion

Dates

Revised

Completion

Dates

Deposit Work

Advance (Nu)

Expenditure

Till Date (Nu)

Completed

Y/N

Cable trenching civil and associated

works (1.015km) 1-Aug-11 31-Mar-12 30-Sep-12

27,115,735.39 16,408,257.56

N (ongoing)

Laying of HV lines along the cable

trench and associated works

(1.015km)

1-Apr-12 15-May-12 15-Nov-12 N

Construction of retaining wall along a

segment of the cable trenching route

(approx 30 m)

7-Feb-12 31-Mar-12 30-Sep-12 N

Testing and commissioning 16-May-

12 31-May-12 30-Nov-12 N