The World Bank Bhutan DPF with Cat DDO (P173008)
Document of The World Bank
Public Disclosure Authorized FOR OFFICIAL USE ONLY Report No: PGD166
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRAM DOCUMENT FOR A
PROPOSED CREDIT
IN THE AMOUNT OF SDR10.9 MILLION (EQUIVALENT TO US$14.8 MILLION)
Public Disclosure Authorized TO
THE KINGDOM OF BHUTAN
FOR THE
DEVELOPMENT POLICY FINANCING WITH CAT DDO
April 15, 2020
Public Disclosure Authorized
Urban, Disaster Risk Management, Resilience and Land Global Practice South Asia Region
Public Disclosure Authorized 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 authorization. . The World Bank Bhutan DPF with Cat DDO (P173008)
Kingdom of Bhutan GOVERNMENT FISCAL YEAR July 1 – June 30
CURRENCY EQUIVALENTS (Exchange Rate Effective as of April 6, 2020) Currency Unit: Bhutanese Ngultrum US$1.00 = BTN 76.24
ABBREVIATIONS AND ACRONYMS APA Alternative Procurement Arrangements INR Indian Rupee BTN Bhutanese Ngultrum JEE Joint External Evaluation CAD Current Account Deficit JICA Japan International Cooperation Agency Cat DDO Catastrophe Deferred Drawdown Option MoF Ministry of Finance CDA Construction Development Authority MoH Ministry of Health CDB Construction Development Board MoWHS Ministry of Works and Human Settlements CPF Country Partnership Framework NCHM National Center for Hydrology and Meteorology CPS Country Partnership Strategy NDMA National Disaster Management Authority DDM Department of Disaster Management NEC National Environmental Commission DES Department of Engineering Services NIPPP National Influenza Pandemic Preparedness Plan DHS Department of Human Settlement NKRA National Key Result Area DM Disaster Management NLC National Land Commission DMEA Department of Macroeconomic Affairs NPL Non-Performing Loan DPF Development Policy Financing NPRP National Preparedness and Response Plan DRM Disaster Risk Management BPPRP Bhutan Pandemic Preparedness and Response Plan DSA Debt Sustainability Analysis PDO Program Development Objective EA Environmental Assessment PEF Pandemic Emergency Financing Facility FY Fiscal Year PFM Public Financial Management FYP Five Year Plan RAA Royal Audit Authority GDP Gross Domestic Product RGOB Royal Government of Bhutan GLOF Glacial Lake Outburst Flood RMA Royal Monetary Authority GNH Gross National Happiness SCD Systematic Country Diagnostic GNHC Gross National Happiness Commission SDR Special Drawing Rights GRS Grievance Redress Service SOP Standard Operating Procedure GST Goods and Services Tax TA Technical Assistance HEDCP Health Emergency and Disaster Contingency WB World Bank Plan IDA International Development Association WBG World Bank Group IHR International Health Regulations WHO World Health Organization IMF International Monetary Fund
.
Regional Vice President: Hartwig Schafer Country Director: Mercy Miyang Tembon Regional Director: John Roome Practice Managers: Christoph Pusch, Gail Richardson Armando Guzman Escobar, Rianna Mohammed-Roberts, Task Team Leaders: Naho Shibuya
The World Bank Bhutan DPF with Cat DDO (P173008)
TABLE OF CONTENTS
SUMMARY OF PROPOSED FINANCING AND PROGRAM ...... ERROR! BOOKMARK NOT DEFINED.
1. INTRODUCTION AND COUNTRY CONTEXT ...... 5 2. MACROECONOMIC POLICY FRAMEWORK ...... 7 2.1. RECENT ECONOMIC DEVELOPMENTS ...... 7 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ...... 10 2.3. IMF RELATIONS ...... 14 3. GOVERNMENT PROGRAM ...... 14 4. PROPOSED OPERATION ...... 15 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION ...... 15 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS ...... 18 4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY ...... 23 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS ...... 24 5. OTHER DESIGN AND APPRAISAL ISSUES ...... 24 5.1. POVERTY AND SOCIAL IMPACT ...... 24 5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS ...... 26 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS ...... 26 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY ...... 28 6. SUMMARY OF RISKS AND MITIGATION ...... 28 ANNEX 1: POLICY AND RESULTS MATRIX ...... 30 ANNEX 2: FUND RELATIONS ANNEX ...... 32 ANNEX 3: LETTER OF DEVELOPMENT POLICY ...... 36 ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE ...... 39 ANNEX 5: HOW THE PANDEMIC EMERGENCY FINANCING FACILITY (PEF) WORKS...... 40
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This operation was prepared by an IDA team consisting of Armando Guzman (Task Team Leader, SSACD), Rianna Mohammed- Roberts (Co-TTL, HSAHP), Naho Shibuya (Co-TTL, SSACD), Dechen Tshering (DRM Specialist, SSACD), Arati Belle (Sr. DRM Specialist, SSACD), Manav Bhattarai (Sr. Health Specialist, HSAHP), Sandrine Boukerche (Climate Change Specialist, SURGP), Florian Michael Blum (Sr. Economist, ESAMU), Suiko Yoshijima (Sr. Env. Specialist, SSAEN), Sabah Moyeen (Sr. Social Development Specialist, SSAS1), Shariful Islam (Social Consultant, SSAS1), Hiska Noemi Reyes (Sr. Social Development Specialist, SSAS1), Rocío Schmunis (Sr. Health Specialist, HHNGE), Savinay Grover (Sr Financial Management Specialist, ESAG2), David Mason (Urban Development Specialist, SSAU1), Vidya Venugopal (Counsel, LEGES), Mohammad Baharul Alam (Senior Executive Assistant, SACBD), and Rosemary Birungi Kyabukooli (Program Assistant, SSACD).
This operation was prepared under the general guidance of Mercy Miyang Tembon (Country Director, SACBB), Sameh Naguib Wahba Tadros (Global Director, SURDR), John Roome (Regional Director, SSADR), Christoph Pusch (Practice Manager, SSACD), E. Gail Richardson (Practice Manager, HSAHP), and Tenzin Lhaden (Acting Country Representative, SACBT). Peer reviewers were Rashmin Gunasekera (Sr. Disaster Risk Management Specialist, SLCUR), Artessa Saldivar-Sali (Sr. Municipal Engineer, SEAU1), and Mickey Chopra (Lead Health Specialist, HHNDR).
The team wishes to acknowledge the collaboration with the Royal Government of Bhutan in the preparation of this Development Policy Financing operation.
The World Bank Bhutan DPF with Cat DDO (P173008)
SUMMARY OF PROPOSED FINANCING AND PROGRAM
BASIC INFORMATION
Project ID Programmatic P173008 No
Proposed Development Objective(s)
To support the Royal Government of Bhutan in enhancing its technical and institutional capacity to manage the risk of climate change and natural disasters including disease outbreaks.
Organizations
Borrower: THE KINGDOM OF BHUTAN
Implementing Agency: MINISTRY OF FINANCE
PROJECT FINANCING DATA (US$, Millions)
SUMMARY
Total Financing 14.80
DETAILS
International Development Association (IDA) 14.80
IDA Credit 14.80
INSTITUTIONAL DATA
Climate Change and Disaster Screening
This operation has been screened for short and long-term climate change and disaster risks Overall Risk Rating Moderate
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The World Bank Bhutan DPF with Cat DDO (P173008)
. Results
Indicator Name Baseline (2020) Target (2023) 50% of the country’s construction The interim Engineering Council of Bhutan is professionals registered and established under the DES for registering and certified by the interim Engineering certifying construction professionals based on 0% Council of Bhutan, providing technical qualification criteria. gender-disaggregated data
60% of the works above BTN10 A construction quality compliance mechanism for million (US$130,000) and 10% enforcing safe, resilient and green construction is below BTN10 million monitored established and implemented by the Construction 0% and a construction quality Development Board (CDB) compliance mechanism established and implemented by CDB for enforcement. State land for resilient, affordable and energy 3 state land sites in Thimphu and 1 state land site in Phentsholing efficient housing development is identified. 0 identified for resilient, affordable
and energy efficient housing Draft National Meteorology and Hydrology Policy is 0 1 prepared for submission to the GNHC MoH carries out simulations and mock drill exercises 0 3 in accordance with the BPPRP and SOPs
.
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The World Bank Bhutan DPF with Cat DDO (P173008)
IDA PROGRAM DOCUMENT FOR A PROPOSED DPF WITH CAT DDO TO THE KINGDOM OF BHUTAN
1. INTRODUCTION AND COUNTRY CONTEXT 1. The proposed operation will provide the Royal Government of Bhutan (RGOB) access to immediate liquidity in the aftermath of natural disasters through an IDA US$14.8 million1 Development Policy Financing (DPF) with Catastrophe Deferred Drawdown Option (Cat DDO). This Cat DDO is closely aligned with the RGOB’s 12th Five Year Plan (FYP) for FY2018–23, which recognizes the urgency in enhancing the country’s climate and disaster resilience. 2. Addressing Bhutan’s vulnerability to natural disasters and climate-related hazards requires integration of resilience into infrastructure planning and development. The country is exposed to a diversity of natural hazards, including floods, landslides, cloudbursts, windstorms, cyclones, river erosion, earthquakes, glacial lake outburst flood (GLOF), wildfire and droughts. Between 1994 and 2016, some 87,000 people were affected and over 380 deaths occurred due to natural disasters in Bhutan. In 2009, Cyclone Aila brought unprecedented rainfall and floods, affecting farmland and infrastructure with damages of approximately US$17 million (1.2 percent of GDP). In 2010, landslides and flash floods damaged more than 2,000 acres of agricultural land and farm roads and irrigation channels, damaged and washed away 40 acres of pastureland with a loss of over a thousand livestock, and affected more than 4,100 households.2 In 2009 and 2011, Bhutan was struck by two high-magnitude earthquakes with a damage and loss of US$52.6 million3 (4.3 percent of GDP) and US$24.5 million4 (1.4 percent of GDP) respectively. The majority of the country’s infrastructure is located along drainage basins that are highly vulnerable to flooding, particularly riverine flooding caused by heavy monsoon rains and glacial melt. The country’s urban areas are vulnerable to urban flooding, and extreme heat in the south. According to historical data, flooding occurs most frequently and is responsible for the largest percentage of mortality.5 As Bhutan’s urban population is projected to increase from 37.8 percent in 2017 to 56.8 percent by 2047 driven by rural-urban migration, 6 people, assets, jobs, and economic potential will increasingly concentrate in urban areas. Failures in integrating resilience into the built environment could pose a catastrophic impact on the country’s ability to sustain growth, and undermine the efforts that the RGOB is making towards development. 3. Natural disasters and climate change impacts can pose a threat to lives and livelihoods, requiring a robust and timely emergency preparedness and response system. Climate change could impact the intensity and frequency of hydrometeorological hazards, and it is expected to affect the country’s water resources through a loss of storage in the form of ice and changes in precipitation and flow patterns, causing more floods and droughts. The risk of potential disasters induced by GLOF is pronounced, as the
1 Funded by 50 percent from the country’s concessional resources (PBA) and 50 percent from IDA overall resources. 2 World Bank Climate Change Knowledge Portal – Bhutan Country Brief. 3 RGOB, World Bank, and UN. 2009. Bhutan Earthquake September 21, 2009: Joint Rapid Assessment for Recovery, Reconstruction and Risk Reduction. 4 RGOB, World Bank, and UN. 2011. Bhutan Earthquake September 18, 2011: Joint Rapid Assessment for Recovery, Reconstruction and Risk Reduction. 5 https://www.preventionweb.net/ 6 National Statistics Bureau of Bhutan. 2019. Population Projections Report 2017-2047.
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The World Bank Bhutan DPF with Cat DDO (P173008)
country is home to 700 glaciers and 2,674 glacial lakes, of which 17 are expected to pose medium to high risks.7 A study shows that reducing the exposure of the poor through universal access to early warnings prevent well-being losses in times of disaster. 8 In 2016, the National Center for Hydrology and Meteorology (NCHM) was formally established and delinked from the Ministry of Economic Affairs as the RGOB’s autonomous scientific and technical organization for generating information and delivering products and services on weather, climate, cryosphere and water resources. Being a nascent organization, the NCHM requires a clear mandate and significant institutional capacity strengthening to support impact- based forecasts and early warning services to enable the country’s emergency preparedness and response to natural hazards such as floods, cyclones, and GLOF. 4. While Bhutan has recently revised its national legislation and policies to incorporate International Health Regulations (IHR) 2005 core capacities, its implementation capacity still needs to be strengthened. The increasing frequency of movements of people and goods globally increases the risk of rapid cross-border disease transmission. On March 6, 2020, Bhutan announced its first confirmed COVID- 19 (coronavirus) case. Given the import of COVID-19 and the potential difficulties in preventing and controlling both spread of this outbreak and the economic and social impact on the population, the RGOB is aware of the urgent need to strengthen its health emergency preparedness and response systems.9 Variations in climate, coupled with a suboptimal disease surveillance system, porous border with India, frequent exchange of poultry products, and the fact that Bhutan is a roosting ground for a large number of black-necked cranes and other wild birds that migrate to Bhutan, from across its borders, can also establish the environmental conditions ripe for outbreaks such as avian influenza—a disease with catastrophic financial impacts that can span sectors as diverse as livestock, trade, and health care. Consequently, improving preparedness to health emergencies is a national priority. 5. Despite development challenges, Bhutan has seen significant poverty reduction. The official poverty headcount declined from 23.2 percent in 2007 and to 8.2 percent in 2017. Extreme poverty, measured at US$1.90 per day, fell below 2 percent in 2017. Poverty reduction was likely driven by improvements in agricultural productivity and better prices for cash crops. However, poverty is highly concentrated in rural areas, and there is wide variation in poverty across districts. Bhutan performs relatively well with regards to shared prosperity, measured as the per capita consumption growth of the bottom 40 percent, although progress has slowed in recent years. Between 2007 and 2012, for example, the consumption growth of the bottom 40 percent grew by an annualized rate of 5.2 percent, but the consumption growth rate fell to 2.6 percent between 2012 and 2017. This stands in contrast to the acceleration of average consumption growth across all households from 4.2 percent during 2007-2012 to 4.8 percent during 2012-2017. Despite large improvements across broad measures of monetary and non-monetary welfare, vulnerability is high, partly because rural households are exposed to various uninsured risks.
7 NCHM. 2019. Bhutan Glacier Inventory 2018. 8 Hallegatte, Stephane; Vogt-Schilb, Adrien; Bangalore, Mook; Rozenberg, Julie. 2016. Unbreakable : Building the Resilience of the Poor in the Face of Natural Disasters. Washington, DC: World Bank. 9 As a first step, a National Preparedness and Response Plan (NPRP) for COVID-19 has been developed to detect, control and prevent, respond, investigate and recover from a COVID-19 outbreak in the country. This plan is aligned with the Bhutan Pandemic Preparedness and Response Plan, the Health Emergency and Disaster Contingency Plan and the Disaster Management Act. The NPRP is being implemented by Technical Advisory Group for COVID-19, Outbreak Investigation and Surveillance Teams, Clinical Management Teams, Isolation and Quarantine Teams, and Media and Risk Communication teams.
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The World Bank Bhutan DPF with Cat DDO (P173008)
2. MACROECONOMIC POLICY FRAMEWORK 6. Bhutan’s economy is shaped by its special relationship with India. The completed and on-going hydropower development projects are financed through commercially priced loans and capital grants from India, on average, in the ratio of 70:30. The hydropower projects are implemented under an intergovernmental agreement between Bhutan and India in which the Government of India covers both financial and construction related risks to the projects and commits to buy all surplus electricity at a price reflecting cost plus a 15 percent net return. In addition, debt service begins only after the projects are on- streamed. This arrangement has supported debt sustainability in Bhutan. The government of India also provides grants to finance a part of the spending undertaken in each Five-Year-Plan (FYP). These grants flow into the budget and are linked to the progress in implementing the FYP projects. Imports from India are not taxed because of the bilateral free trade agreement between the two countries. Therefore, despite very high imports linked to the construction of hydropower projects, import duty collections are negligible in Bhutan.
2.1. RECENT ECONOMIC DEVELOPMENTS 7. Growth is estimated to have remained subdued in 2018/19 as hydropower production declined and is expected to have been further impacted by the COVID-19 pandemic starting in the third quarter of 2019/20. After slowing to 3.8 percent in 2017/18 as a result of reduced hydropower production, growth is expected to have remained subdued at 3.9 percent in 2018/19. The hydropower sector experienced a further decline in production in 2018/19 due to prolonged maintenance work at the Tala hydropower plant, lower than expected rainfall, and delays in the commissioning of the Mangdechhu hydropower project.10 The other main growth driver, tourism, showed mixed results. While tourist arrivals increased, tourism receipts declined significantly from 3.7 percent of GDP in 2017/18 to 2.9 percent in 2018/19, reflecting lower average spending by tourists. Output expansion during the year was primarily driven by the services sector, including retail trade, transport and communication. While no quarterly GDP estimates are available, growth in the third quarter of 2019/20 is expected to have been substantially impacted by the global COVID-19 pandemic, following policy measures to contain the spread of the virus. Most prominently, the latter includes a ban on foreign arrivals starting in early March 2020, social- distancing measures and import restrictions on select agricultural produce. 8. In 2018/19, average annual inflation decreased to its lowest level since 2003, reflecting a rapid decline in food prices. With 85 percent of Bhutan’s imports coming from India and with the exchange rate pegged to the INR, Bhutan’s inflation rate is closely linked to that of India, albeit with a time lag. The annual inflation rate decreased by almost one percentage point from 3.7 percent in 2017/18 to 2.8 percent in 2018/19. The deceleration was largely driven by food prices, which account for about 40 percent of the Consumer Price Index (CPI) basket. Growth of food prices decelerated from 6.5 to 3.5 percent during the period. In January 2020, inflation was still moderate at 2.4 percent. However, food prices have been increasing since mid-year (3.9 percent in January 2020), in line with the increase in food prices in India.
10 The other two mega hydro projects which are under construction (Punatsangchhu II and I) are likely to be completed by 2022/23 and 2023/24, respectively. The completion has been delayed because of geological complexities.
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The World Bank Bhutan DPF with Cat DDO (P173008)
9. Monetary policy is anchored by the peg to the Indian Rupee (INR). The Bhutanese Ngultrum is pegged to the INR at par. The peg, introduced in 1974, served Bhutan well for macroeconomic stability, as India is Bhutan’s largest trading partner. The government continues with its efforts to enhance monetary management through the introduction of a new policy framework and a broadening of monetary policy instruments. This includes improved liquidity management and forecasting capabilities, establishing an interest rate corridor and supporting the development of the interbank market. Currently, the Royal Monetary Authority (RMA) relies on administrative instruments for managing liquidity and market conditions. The RMA does not have an explicit inflation target and uses the cash reserve ratio and the statutory liquidity ratio to manage credit growth and interventions in the foreign exchange markets targeted at maintaining the exchange rate peg. The cash reserve ratio has remained constant at 10 percent in recent years. The RMA manages its foreign exchange reserve position by investing in short- term Indian T-Bills and using a credit line facility at the Reserve Bank of India. 10. The Current Account Deficit (CAD) widened in 2018/19 on the back of lower electricity and tourism receipts. The CAD increased from 19.6 percent of GDP in 2017/18 to 23.9 percent in 2018/19. Falling imports–reflecting slowing construction activity of hydropower projects and fuel imports–could not offset a decline in electricity exports. The latter was a result of a combination of factors, including maintenance work in existing power plants, lower than expected rainfall, and delays in the construction of the Mangdechhu hydropower project. Exports in services dropped significantly from 7.2 percent of GDP in 2017/18 to 5 percent of GDP in 2018/19 due to a decrease in tourism receipts. The CAD was mainly financed by capital flows from India. International reserves have grown steadily over the recent years and reserve adequacy measures are met by a wide margin. Gross international reserves stood at US$1,137 million in October 2019, which is equivalent to 11.7 months of imports of goods and services. 11. The gross Non-Performing Loan (NPL) ratio increased to 18.4 percent in 2019. Growth in bank lending to the private sector remained strong in 2018/19 (16.7 percent, YoY). The NPL ratio, however, increased to 18.4 percent in September 2019, vis-à-vis 10.4 percent in December 2018. At the same time, provisions for NPLs decreased by 11.7 percentage points to 56.9 percent. The banking sector’s (risk weighted) capital adequacy ratio stood at 12.8 percent in September 2019 compared to 15.1 in December 2018, with the minimum regulatory requirement at 12.5 percent. Earnings of the financial sector decreased, mainly due to an increase in interest and operating expenses (commercial banks) along with an increase in NPLs and subsequent increase in provisions for the bad loans (in the non-banking sector). 12. While the increase in NPLs partially reflects mid-year cyclical factors (a feature with a strong effect in the Bhutanese financial sector), 11 the NPL and provisioning ratios have overall been negatively impacted in recent years. The increase in NPLs is largely attributable to the non-banking sector,12 which, given limited investment opportunities in Bhutan, is permitted to undertake retail lending activities. The non-banking sector is, however, subject to more pronounced maturity mismatches and weaker supervision, and has a lower loss absorption tolerance.13 Going forward, it will be crucial to address this challenge by bolstering prudential oversight, especially for non-banks, and the insurance sector in particular. It is equally important to develop a medium to long-term strategy for the non-banking sector,
11 The financial sector experiences significant fluctuations in its NPL ratio as repayments are depended on the borrowers’ seasonal activities, and financial instruments are not well aligned to the borrowers’ expected cash flow distribution. 12 The NPL ratio to total loans stood at 12.3 percent for banks, and 48.7 percent for non-banks by end-September 2019. 13 A systemic insurance company, in particular, is experiencing significant balance sheet pressures.
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The World Bank Bhutan DPF with Cat DDO (P173008)
including options to diversify investment opportunities and improve asset-liability management. The World Bank is engaging with the RMA to support the supervision of the non-bank financial sector. 13. The fiscal balance improved in 2018/19 due to a sharp decline in capital spending. The fiscal balance improved from a deficit of 3.3 percent of GDP in 2017/18 to a surplus of 0.8 percent of GDP in 2018/19 due to a large decline in capital expenditure, which more than offset a decrease in revenues. The decline in capital expenditure is typical at the beginning of a Five-Year-Plan cycle, during which key capital projects are still at the planning stage. 14 Hydropower revenues decreased as a result of lower hydropower production, and one-off factors – including the discontinuation of the excise duty refunds from India – had a negative impact on non-hydro revenues. While capital expenditure decreased significantly in the run-up to parliamentary elections in 2018, the control on current expenditure remained tight. 14. Public debt levels remain high, but risks are moderate as most of the external debt is linked to hydropower project loans from India. Public debt as a share of GDP remains high, estimated at 105.4 percent of GDP at the end of 2018/19. Hydropower debt from SOEs accounted for 74.4 percent of the total debt stock. According to the 2018 Debt Sustainability Analysis (DSA), the risk of debt distress however remains moderate. Around 95 percent of total debt is external with a long-term maturity, of which the majority is linked to hydropower project loans from the government of India (74.3 percent of GDP). This debt is denominated in INR, electricity export receipts are also in INR and the Bhutanese currency is pegged to the INR, thereby reducing exchange rate risks. Debt service only starts after the commissioning of a new hydropower plant. The loans from India are under an intergovernmental agreement in which the government of India covers both financial and construction risks of the hydropower projects and commits to buy all surplus electricity at a price reflecting cost plus a 15 percent net return. As a result, conditional on the continuation of the terms of the intergovernmental agreement, the risk to macroeconomic stability from Bhutan’s debt burden remains moderate. External debt outside hydropower projects is primarily concessional from multilateral financial institutions and bilateral donors (Austria, Denmark and Japan). Domestic debt remains a small share of GDP (2.9 percent). 15. To manage public debt, the government adopted the 2016 Debt Policy which imposes ceilings on various debt indicators. The approval of the Debt Policy in August 2016 was a major step to ensure debt sustainability. The debt policy imposed a ceiling for non-hydro debt at 35 percent of GDP on average in a 5-year period. The debt policy also mandates the formulation of a Medium-Term Debt Management Strategy and regular debt sustainability analyses. To support the implementation of the debt policy, the Debt Management Unit was formally transferred to the Department of Macroeconomic Affairs (DMEA), which coordinates all policies related to macroeconomics. The DMEA is responsible for ensuring that public debt is sustainable and is contracted at low costs and with a reasonable degree of risk. It also recommends debt thresholds and is responsible for preparing the medium-term debt management strategy. In addition, it advises the government on on-lending, loan guarantees, public private partnerships, dividends and divestment proposals. A quarterly debt report is produced and shared with key stakeholders, though the report is not publicly available.
14 It is important to note that the slowdown in capital expenditure does not reflect delays in the completion of hydropower projects, as these are undertaken outside the Budget.
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The World Bank Bhutan DPF with Cat DDO (P173008)
Table 1. Key Economic Indicators Table 1. Key Economic Indicators 15/16 16/17 17/18 18/19 19/20 20/21 21/22 22/23 (act.) (act.) (act.) (est.) (proj) (proj) (proj) (proj) Real Economy: annual percent change, unless indicated otherwise Real GDP 7.4 6.3 3.8 3.9 2.9 2.5 3.5 4.6 Agriculture 4.4 3.6 3.7 4.2 3.0 3.3 3.5 4.0 Industry 7.6 4.7 (1.2) (0.5) 3.3 2.7 3.6 4.9 Services 9.2 8.2 7.9 8.1 2.4 2.0 3.4 4.9 GDP per capita (USD, nominal) 2,817 3,094 3,348 3,412 3,399 3,584 3,776 4,029 GDP Deflator 4.0 4.7 3.4 2.6 2.5 2.9 2.4 2.4 CPI (year-average) 3.3 4.3 3.7 2.8 2.7 3.1 2.7 2.7 Fiscal Account: percent of GDP unless otherwise indicated Revenues and Grants 30.7 28.0 31.9 26.1 26.3 25.5 27.5 28.4 Hydropower 3.5 4.4 5.1 4.4 6.7 6.2 5.4 5.3 Non-Hydropower 16.4 15.1 17.7 15.6 12.8 11.9 13.5 13.9 Grants 10.9 8.5 9.1 6.2 6.8 7.4 8.6 9.1 Other (0.6) (0.0) 0.2 - - - - - Expenditure 32.7 32.8 35.2 25.3 29.7 29.0 30.2 30.6 Fiscal Balance (1.9) (4.8) (3.3) 0.8 (3.4) (3.5) (2.7) (2.3) Primary Balance (0.4) (3.5) (2.0) 1.8 (2.0) (2.0) (1.2) (0.7) Balance of Payments: percent of GDP unless indicated otherwise Current Account Balance (31.7) (23.6) (19.6) (23.9) (19.7) (22.3) (21.8) (19.8) Merchandise Exports 24.0 24.2 23.8 22.1 17.3 16.4 21.4 22.8 Hydropower 7.7 8.5 6.8 6.2 6.0 6.2 6.8 7.3 Non-Hydropower 16.2 15.7 17.0 15.8 11.2 10.2 14.5 15.5 Merchandise Imports 51.4 44.7 40.6 38.9 29.6 32.1 37.8 40.3 Foreign Direct Investment 0.6 (1.1) 0.2 0.5 0.2 0.2 0.5 0.6 Gross International Reserves (USD millions) 1,119 1,104 1,111 1,065 951 854 864 889 Gross International Reserves (months of next year's imports, 10.9 GNFS) 10.5 10.5 13.1 10.4 7.7 7.0 7.0 Total Public Debt 112.4 111.5 110.1 105.4 103.9 102.7 100.3 96.7 External Public Debt 108.9 104.9 105.1 102.5 101.2 100.4 98.3 94.9 Hydro Debt 83.0 81.1 80.2 78.4 77.4 76.8 75.2 72.6 Non-Hydro Debt 25.9 23.8 24.8 24.1 23.8 23.6 23.1 22.3 Domestic Public Debt 3.4 6.6 5.0 2.9 2.6 2.3 2.1 1.8 Other memo items: GDP nominal in LCU (millions) 136,804 152,322 163,449 174,133 183,603 193,504 205,146 219,767 GDP nominal in USD (millions) 2,063 2,293 2,511 2,589 2,609 2,780 2,960 3,191 Exchange Rate (Nu/USD), FY Average 66.3 66.4 65.1 67.3 70.4 69.6 69.3 68.9 Source: Government of Bhutan and WB staff estimates.
2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 16. The global COVID-19 outbreak has resulted in unprecedented macroeconomic uncertainty. The global pandemic has caused a slowdown in global growth. Bhutan has, to date, been able to prevent a spread of the virus within the country, but has been impacted by reduced foreign demand for tourism, lower demand for goods exports and higher import prices and import shortages. 17. Significant slowdowns in tourism, hydro and non-hydro exports are expected to decelerate growth in 2019/20. The point estimate for growth in 2019/20 stands at 2.9 percent, albeit with a large confidence interval in light of uncertainties surrounding the global pandemic. Prior to COVID-19, growth in Bhutan was projected to accelerate in 2019/20, following the operationalization of the Mangdechhu hydropower project in August 2019 and a positive outlook for tourism. However, as a result of the pandemic, growth in the services sector is projected to slow from 8.1 percent in 2018/19 to 2.4 percent in 2019/20 due to a rapid decline in tourism demand in the second half of 2019/20. Industry and agricultural growth, especially
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construction and exporting sectors, are also expected to be adversely affected by the COVID-19 pandemic due to staff shortages, disruptions in input supply chains and lower external demand, especially from India. On the demand side, consumption, investment and exports are all expected to decelerate, following supply chain disruptions and a global economic slowdown surrounding the COVID-19 pandemic. 18. Inflation is expected to remain moderate going forward. Two opposing forces are expected to drive inflation dynamics in the near term. On the one hand, a reduction in oil prices following the COVID-19 pandemic is expected to reduce inflation. On the other hand, a reduction in supplies of imported products, especially from India, is expected to push up imported inflation, leading to a moderate increase in the near term. Inflation is expected to remain moderate over the medium term as RMA steps up efforts to strengthen monetary management, including through the introduction of a new policy framework and a broadening of monetary policy instruments. Specific activities include improving liquidity management and forecasting capabilities, establishing an interest rate corridor and supporting the development of the interbank market. However, while the peg to the INR is maintained, the exchange rate will continue to be the nominal anchor and the impact of monetary policy as an effective policy tool will be limited. 19. The global COVID-19 outbreak has resulted in heightened uncertainty and may significantly impact the financial sector. Reduced profitability, weaker asset quality, and lower credit growth can have second- round repercussions for and an amplifying effect on the real economy. Disruptions from staff unavailability in financial institutions and regulatory agencies may impact the provision of financial services. Heightened uncertainty and investor risk aversion may result in a higher cost for external or local capital markets funding, but the impact is expected to be low as the financial sector exposure to foreign capital flows is minimal and local capital markets are underdeveloped. Overall, the RMA may need to provide liquidity support measures to support market functioning and use flexibly existing regulations to address the high probability of defaults. Additional support measures may become necessary, such as credit lines and risk sharing facilities targeted on the most affected sectors and firms. 20. COVID-19 is expected to adversely impact both export demand and import supply in the near term. While strong hydropower exports in the first half of 2019/20 (following the on-streaming of the Mangdechhu project in August 2019) act as a mediating factor, lower production in Bhutan and demand from India (for non-hydro exports) following the global pandemic is expected to slow down exports. Imports are expected to decelerate in 2019/20 following supply chain disruptions which are in turn likely to impact hydropower projects and capital investments. In subsequent years, and once the situation has stabilized, exports and imports are projected to accelerate gradually due to the ongoing construction of Punatsangchhu II and I, a pick-up in hydro, non-hydro and tourism exports, and a gradual recovery in public capital spending. Current account deficits are likely to persist over the medium term due to imports associated with the hydropower sector and they will continue to be financed by capital inflows from India. International reserves are projected to remain adequate at 7 months of imports in 2022/23. 21. The fiscal deficit is expected to widen as a result of the pandemic. Expenditure is expected to increase compared to 2019/20, given increased spending demand for health and economic assistance programs following the global pandemic. At the same time, non-hydro revenues are expected to be impacted adversely in 2019/20, following a significant reduction in tourism. Hydropower revenue is projected to increase, boosted by the one-off profit transfer from the commissioning of the Mangdechhu
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power plant in 2019/20, which had been realized prior to the pandemic outbreak.15 Grants, as a share of GDP, are expected to decrease gradually over the 12th FYP cycle. The planned introduction of the GST from July 2021, as well as a gradual improvement in tax administration are expected to support revenues from 2021/22 onwards. The overall deficit is expected to remain moderate in the medium-term. Table 2. Key Fiscal Indicators (in percent of GDP)
Table 2. Key Fiscal Indicators (in percent of GDP) 15/16 16/17 17/18 18/19 19/20 20/21 21/22 22/23 (act.) (act.) (act.) (est.) (proj) (proj) (proj) (proj) Resources 30.7 28.0 31.9 26.1 26.3 25.4 27.4 28.3 Taxes 14.5 14.2 16.6 15.6 13.1 13.0 14.8 15.1 Direct Taxes 7.6 6.9 7.3 7.0 6.1 6.1 7.1 7.2 Hydropower 1.9 1.6 1.4 1.2 1.4 1.4 1.6 1.6 Non-Hydropower 5.6 5.2 5.9 5.8 4.7 4.7 5.5 5.6 Indirect Taxes 6.9 7.4 9.3 8.6 7.0 6.9 7.7 7.9 Hydropower 0.1 0.1 1.2 1.3 1.4 1.4 1.7 1.6 Non-Hydropower 6.9 7.3 8.1 7.4 5.6 5.5 6.0 6.3 of which: Sales Tax/GST 2.6 2.5 2.6 2.7 2.2 2.2 2.7 2.9 Non-Tax Revenues 5.3 5.2 6.2 4.3 6.4 5.0 4.0 4.0 Hydropower 1.4 2.7 2.5 1.9 3.9 3.4 2.0 2.0 Non-Hydropower 3.9 2.6 3.8 2.4 2.5 1.6 2.0 2.0 Grants 10.9 8.5 9.1 6.2 6.8 7.4 8.6 9.2 Expenditure 32.7 32.8 35.2 25.3 29.7 29.0 30.2 30.6 Current Expenditure 16.7 15.8 16.8 15.9 20.5 19.6 19.3 19.2 Interest Payments 1.5 1.3 1.3 0.9 1.4 1.5 1.6 1.6 Salary and Allowances 6.9 6.2 6.0 6.7 8.9 8.6 8.5 8.5 Goods and Services 4.5 4.3 4.2 4.2 5.9 5.3 5.0 4.9 Subsidies and Transfers 2.3 2.7 4.0 2.7 2.7 2.7 2.7 2.7 Other 1.5 1.4 1.4 1.5 1.5 1.5 1.5 1.5 Capital Spending 15.9 17.0 18.3 9.3 9.2 9.4 10.9 11.4 Fiscal Balance -1.9 -4.8 -3.3 0.8 -3.4 -3.5 -2.8 -2.3 Primary Balance -0.4 -3.5 -2.0 1.8 -2.0 -2.1 -1.2 -0.7 Non-Hydro Fiscal Balance -5.4 -9.2 -8.4 -3.5 -10.1 -9.7 -8.1 -7.5 Financing (net) 25.0 4.1 9.0 2.8 4.0 4.2 3.5 3.1 External borrowing (net) 25.1 4.2 9.0 0.5 4.1 4.4 3.6 3.2 Domestic borrowing (net) -0.2 0.0 0.0 2.3 -0.1 -0.1 -0.2 -0.1 Source: Government of Bhutan and WB staff estimates. 22. Public debt is projected to gradually decline over the medium-term. According to the 2018 DSA, jointly conducted by the World Bank and the IMF, the risk of debt distress remains moderate despite breaches in all five indicators under the baseline scenario. This is because of the intergovernmental arrangement on hydropower projects between India and Bhutan which ensures that financial and construction risks of the projects are covered by India, which buys surplus electricity at a price reflecting cost plus a 15 percent net return. Furthermore, exchange rate risks are limited as debt from hydropower is denominated in INR, revenue flows from hydropower accrue in INR, and the Bhutanese Ngultrum is pegged to the INR. Debt service also only starts after commissioning of a new hydropower plant. Total
15 The peak in hydropower revenue in 2019/20 and 2020/21 is due to one-off profit transfer revenues associated with the commissioning of new hydropower plants. Profit transfers are expected to resume in 2023/24 with the commissioning of Punatsangchhu II and I in 2022/23 and 2023/24, respectively.
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public debt is expected to decline gradually over the medium term as debt servicing starts with the on- streaming of hydropower projects. Table 3. External Financing Requirements and Sources (in USD millions)
Table 3. External Financing Requirements and 15/16 16/17 17/18 18/19 19/20 20/21 21/22 22/23 Sources (in USD millions) (act.) (act.) (act.) (est.) (proj) (proj) (proj) (proj) Financing Requirements 707 688 627 854 753 864 892 895 Current Account 654 541 493 619 514 620 645 632 External debt amortization 53 147 135 236 239 243 247 263 Financing Sources 707 688 627 854 753 864 892 895 Capital Account (net) 228 187 232 272 313 348 403 463 Foreign Direct Investment (net) 12 -25 4 14 5 5 14 18 External borrowing 572 243 361 249 321 414 485 439 Change in reserve assets (+ = decrease) -160 15 -8 47 114 97 -10 -25 Net errors and omissions 56 269 38 273 0 0 0 0 Source: Government of Bhutan and WB staff estimates.
Figure 1: Public Debt Sustainability Analysis Figure 2: External Public Debt Sustainability Analysis
Source: IMF WB DSA 2018. 23. Risks to the outlook arise from a continued global slowdown due to COVID-19. A continued global slowdown of growth and a protracted domestic and global recovery due to the COVID-19 pandemic pose central risks to the macroeconomic outlook. Similarly, the potential for widespread community transmission within Bhutan, and associated lockdown measures, pose substantial downside risks. Should these materialize, the macroeconomic situation is expected to deteriorate significantly in the near term. Secondary risks include the possibility of further delays in hydro project completion, which would negatively impact growth, reduce exports and government revenues. Delays in the implementation of non-hydro revenue measures like the implementation of the GST constitute a medium-term risk to the government’s fiscal stance. 24. Bhutan’s macroeconomic policy framework is adequate for development policy financing. COVID- 19 poses substantial economic risks for Bhutan, which are expected to affect growth, exports, prices and government finances. While a global pandemic presents unprecedented challenges, the Royal Government of Bhutan has taken steps to reduce the economic risk from COVID-19 and has started mobilizing finances for a comprehensive economic support package. Outside COVID-19, Bhutan’s macroeconomic fundamentals have remained sound. Although external debt is high, the
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intergovernmental contract with India guarantees returns and mitigates risks. The government remains committed to macro-fiscal prudence as evidenced by its efforts to adopt fiscal stabilization measures, implement the GST, improve spending efficiencies through strengthened public financial management (all supported by this operation), adopt a debt strategy, and maintain the peg with the Indian rupee. Reforms that support the non-hydro sector–backed by the 12th FYP–will be instrumental in facilitating more private-sector-led growth and competitiveness over the medium term, and will support recovery from COVID-19. This will in turn help increase employment opportunities and domestic revenues and lessen the country’s dependence on the hydropower sector and foreign grant financing.
2.3. IMF RELATIONS 25. The last IMF Article IV review for Bhutan was approved in October 2018. The Article IV noted the progress made in reducing poverty and the robust growth during the 11th FYP period. It also highlighted the risks to the outlook, primarily from delays in the completion of hydropower projects and the implementation of the GST. It noted the policy challenges related to prudent management of anticipated hydropower revenues and the timely implementation of the GST. The IMF also provides technical assistance which is focused on macro-fiscal management, cash management, GST and e-payments.
3. GOVERNMENT PROGRAM 26. The Disaster Management (DM) Act of 2013 is the overarching legal foundation for implementing disaster risk management (DRM)-related policies, plans and programs in Bhutan. The main provisions of the Act include the establishment and strengthening of institutional capacity for disaster management, mainstreaming of disaster risk reduction in plans and programs, and setting an integrated and coordinated disaster management in the country with a focus on community participation. The Act established the National Disaster Management Authority (NDMA), which is the country’s highest decision-making body on disaster management chaired by the Prime Minister. The Department of Disaster Management (DDM) is the designated Secretariat and executive arm of NDMA. The Act also established DM Committees in Dzongkhags and DM Subcommittees in Thromdes as well as an Inter-Ministerial Task Force for DRM. Although the Act mandates relevant line ministries and departments to integrate DRM into their plans and programs, significant capacity building and cross-sectoral coordination are required to identify the climate and disaster risks, prioritize and implement DRM and climate change adaptation. In addition, the preparation of the National DM and Contingency Plan as well as DM and Contingency Plans by a majority of Dzongkhags and ministries are still under development. 27. The DM Rules and Regulation of 2014 guide the implementation of the DM Act. They established an administrative and regulatory framework for DM, including responsibility and governance arrangements of the above-mentioned DM institutions, critical DM facilities, emergency operation centers, early warning systems, search and rescue team, classification of disasters, declaration of disaster, trigger mechanism and procedures for emergency response, financial arrangements, grievance redress mechanism, and the roles of Civil Society Organizations in DRM. 28. The DDM prepared the National DRM Strategy in 2017 and a Roadmap for DRM in March 2019 for implementing the DM Rules and Regulations. The Strategy was prepared as a strategic derivative of the DM Act, and guided by the country’s FYP process. It articulates principles, priorities, and expected results
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in accordance with the Sendai Framework for Disaster Risk Reduction, 16 to maximize the efficient allocation of financial and technical resources. The strategy establishes coherent linkages between DRM, climate change adaptation and sustainable development. The Roadmap for DRM provides a comprehensive national disaster risk reduction and preparedness framework with a focus on disaster awareness, data preparedness, governance, coordination, resourcing, and sector preparedness. 29. In line with the mandates enshrined in the DM Act, a Health Emergency and Disaster Contingency Plan (HEDCP) was developed in 2016, with the aim of enhancing preparedness and response capacities for emergencies and disasters in the health sector. Specifically, the HEDCP, which covers all hazards including those induced by climate change, delineates both health emergency preparedness and response actions at different levels of health institutions, and responsibilities in terms of who, what resources and when. The DM Act mandates the Ministry of Health (MoH) with responsibility for delivering medical services at all times, especially “during and after the occurrence of natural and man-made disasters and emergencies”. 30. The MoH has established the Emergency Medical Service Programme. This was later upgraded to Division level under the Department of Medical Services to act as the nodal body to direct, coordinate and manage medical responses during disasters and health emergencies. In addition, the country carried out a Joint External Evaluation (JEE) to assess its technical core capacities (to detect, assess, notify and respond) under the IHR 2005 in 2017. The JEE IHR assessment concluded that RGOB’s commitment to building and maintaining core capacities to address major public health events is genuine and strong and enjoys high-level political commitment and support.
4. PROPOSED OPERATION 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION 31. The overall Program Development Objective (PDO) of this operation is to support the government in enhancing its technical and institutional capacity to manage the risk of climate change and natural disasters including disease outbreaks. The PDO will be achieved by supporting reforms under two pillars: (i) integrating climate and disaster resilience into the built environment; and (ii) strengthening Bhutan’s institutional and technical capacity for emergency preparedness and response. 32. The proposed operation is closely aligned with the RGOB’s 12th FYP, which recognizes the urgency to enhance the country’s climate and disaster resilience. The objective of the 12th FYP is to create “just, harmonious and sustainable society through enhanced decentralization.” The reforms supported under the proposed operation will contribute to achieving the National Key Result Areas (NKRAs) towards a harmonious society, including NKRA #6 on Carbon Neutrality, Climate and Disaster Resilience; #9 on Infrastructure, Communication and Public Services; #14 on Healthy and Caring Society; and #15 on Sustainable Human Settlements including access to adequate affordable housing. 33. Lessons learned from the Bank’s past and ongoing engagement in the country have been reflected in the design of this operation. The Bank has been supporting the RGOB in strengthening DRM and climate
16 Sendai Framework is a 15-year, voluntary, non-binding agreement endorsed by the UN General Assembly following the 2015 Third UN World Conference on Disaster Risk Reduction. Countries, including Bhutan, committed to the Sendai Framework.
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resilience through investments, technical assistance (TA), and analytical work focusing on seismic resilience, hydrometeorological and climate services, resilient infrastructure development, and climate change adaptation and mitigation. While polices, rules and regulations covering various aspects of resilience are in place, their implementation and monitoring are still a major challenge. The Implementation Completion and Results Report on the previous DPFs17 in Bhutan suggests that a reform champion and strengthening the technical capacity of the government will help implement and sustain reforms. Furthermore, the design of this operation is built on conclusions from several pieces of the World Bank’s analytical work on the role of financial protection in strengthening resilience.18 34. The existing National Influenza Pandemic Preparedness Plan (NIPPP) has elaborated strategies and standard operating procedures (SOPs) for monitoring and intervening in future outbreaks of Influenza H5N1 avian influenza. Since there is no way to predict the future behavior of H5N1, the previous H1N1 pandemic strain, or, if and when a new virus will appear, like the current COVID-19, the World Health Organization (WHO) continues to recommend surveillance to identify unusual clusters and emerging pathogens. Revisiting the existing NIPPP, therefore, is essential in ensuring that the country is prepared for the emergence of novel viruses including COVID-19, pandemic influenza and others. Having developed this plan, the RGOB would be prepared in terms of, inter alia, understanding the procedures and coordination mechanisms needed to adequately respond to public health emergencies. 35. The proposed Cat DDO is a risk financing product consistent with the Bank’s increasing emphasis on disaster preparedness (including detection and prevention), in addition to disaster response. The country’s establishment of an adequate macroeconomic policy framework and the existence of a satisfactory DRM program make Bhutan eligible for the Cat DDO. As an IDA country, Bhutan is also eligible to access PEF grant funds, if the emergency experienced by the country meets the pre-defined criteria and funds are available. In this case, PEF funds will be provided to the country as parallel financing. 36. The proposed operation will strengthen the RGOB’s financial protection against natural disasters including disease outbreaks. Bhutan has established a national contingency budget as per the DM Act and the 2007 Public Finance Act. The DM Act lists three types of financing arrangements, namely financing for: (i) response and relief activities; (ii) immediate restoration of essential public infrastructure and service center; and (iii) recovery and reconstruction activities. The first two financing arrangements are made through the General Reserve for Disaster Relief, which is managed by the Department of National Budget (DNB). The cumulative expenditure on disaster relief between FY14-18 was BTN380.7 million (US$5 million) with an average annual expenditure of BTN76.1 million (US$1 million).19 The cumulative expenditure on restoration works between FY14-18 was BTN1.19 billion (US$15.5 million) with an average annual expenditure of BTN237.1 million (US$3.1 million). Based on demand, financing for recovery and reconstruction follows the normal planning and annual budgeting process. Furthermore, the DDM and Dzongkhags have their own budget for disaster preparedness activities with an average annual budget of
17 World Bank. 2019. Implementation Completion and Results Report on Programmatic DPC I and II on Fiscal Sustainability and Investment Climate. Report No: ICR00004563. Washington, DC: World Bank Group. 18 These include: (i) IEG. 2006. Hazards of Nature, Risks to Development: An IEG Evaluation of World Bank Assistance for Natural Disasters; (ii) World Bank and UN. 2010. Natural Hazards, UnNatural Disasters ‐ The Economics of Effective Prevention; (iii) World Bank. 2012. The Sendai Report: Managing Disaster Risks for a Resilient Future; (iv) World Bank. 2014 Financial Protection against Natural Disasters: An Operational Framework for Disaster Risk Financing and Insurance. 19 Data received from DNB on January 27, 2020.
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BTN52.1 million (US$0.7 million) and BTN8.7 million (US$0.1 million) respectively between FY14-18.20 Considering the scale of the country’s existing contingent budgets, the proposed operation can provide the country with access to critical immediate liquidity following a natural disaster.
37. Cat DDO • Drawdown triggers. No withdrawal shall be made of the Single Withdrawal Tranche unless the Association is satisfied based on evidence satisfactory to it, that in response to a Natural Disaster21: (a) (i) a declaration of disaster has been made pursuant to the provisions of the Disaster Management Act; or (ii) the Prime Minister, in his capacity as the ex-officio Chairperson of the NDMA has declared a disaster; or (b) the MoF has, on the recommendation of the NDMA acting under the relevant provisions of the Disaster Management Act, issued in accordance with Section 66 of the Public Finance Act, 2007, an order to authorize use of public funds to be drawn down for the purpose of mobilizing financial resources to respond to such a Natural Disaster; each in such manner as the Recipient deems appropriate. • Drawdown period and renewals. The drawdown period for the proposed operation will be three years and may be renewed once, for a total drawdown period of six years. The World Bank will periodically monitor the satisfactory implementation of the disaster risk management program during the project implementation period. If the Bank concludes that the DRM program is not being implemented in a satisfactory manner, the Bank would promptly advise the borrower of the need for a subsequent review to confirm that the program is implemented satisfactorily before it would be able to grant any request for drawdown. Renewals would require that the original DRM program remain largely in place. The adequacy of the macroeconomic framework is assessed only at effectiveness and reconfirmed at renewal. Renewal would take place no earlier than one year and no later than six months before the expiration date. The renewal would be aligned with World Bank procedures for extension of closing dates beyond two years. 38. PEF. As described in more detail in Annex 5, PEF is a financing mechanism designed to provide additional resources to help IDA countries respond to large-scale disease outbreaks with pandemic potential. Bhutan is eligible to have access to PEF funds when available, contingent on the following conditions: (i) having a disease outbreak affecting Bhutan which meet the pre-defined criteria of the PEF22; (ii) the PEF having resources available; and (iii) Bhutan being deemed eligible to receive funding.23 39. Upon the occurrence of a large-scale disease outbreak and declaration of a public health emergency (as described above under Drawdown triggers), funds may be accessed from two different sources. The
20 ibid 21 “Natural Disaster” means, for the purposes of this Cat DDO, an imminent or occurring crisis or emergency situation arising from a cyclone, flood, storm, tsunami, drought, earthquake, volcanic eruption, plague or epidemic, or any other natural hazard, including a public-health related event, that requires the Recipient to promptly mobilize its capacity and/or financial resources under its applicable legal or administrative frameworks. 22 The PEF Operations Manual sets out guidelines related to the operating arrangements and procedures, including the activation criteria of the facility and the processes for fund allocations. 23 In the case of COVID-19, for example, a decision on whether, and when, the PEF insurance window will be activated will be made by an independent calculation agency, based on whether specific pre-defined parametric triggers have been met. If activated, given the global scale of the COVID-19 pandemic, the PEF steering body will decide on how to best allocate the resources.
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RGOB may draw down funds from its IDA financing or, subject to the conditions defined above, the RGOB may submit a request for funds from PEF.
4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS Pillar A. Integrating Climate and Disaster Resilience into the Built Environment 40. Prior Actions under this pillar reflect the RGOB’s commitment to enhance its technical and institutional capacity for integrating resilience into the built environment. This pillar corresponds to the 12th FYP’s NKRAs #6 on Carbon Neutrality, Climate and Disaster Resilience, #9 on Infrastructure, Communication and Public Services, and #15 on Sustainable Human Settlements. The Prior Action 1 forms an overarching legal framework for the built environment while the Prior Action 2 specifically addresses access to resilient and energy efficient housing.
Prior Action 1. The Recipient, through its Cabinet, has approved the National Construction Industry Policy on February 4, 2020, which promotes the quality of construction towards a safe, resilient and energy efficient built environment; as evidenced by letter Ref C-3/49/2020/462 dated February 26, 2020. 41. While construction is one of the country’s key economic activities, the industry faces challenges to improving the quality of construction practices and professionalizing the construction industry. In 2017, the construction sector contributed approximately 16 percent to the GDP.24 The industry heavily relies on foreign workers and imported construction materials with an annual remittance of BTN12.76 billion (US$166.97 million).25 As it has a high potential to generate wealth, employment and sustainable growth within the framework of GNH, the Economic Development Policy 2016 identifies construction industry as a priority sector.26 The 2016 Performance Audit of DM identified inadequate application of resilient engineering design standards and lack of proper planning, design, and workmanship in construction works. 27 Considering that the volume of construction is expected to increase due to urbanization, hydropower development and overall development of the country, promoting quality construction is critical to ensure a safe and resilient built environment. To address this challenge, the 12th FYP aims to professionalize the country’s construction sector.
42. The National Construction Industry Policy lays the foundation for a regulatory and institutional framework for improving quality of construction by professionalizing the construction industry. As mandated by the policy, the Ministry of Works and Human Settlements (MoWHS) will establish the Engineering Council of Bhutan for registering, regulating, and professionalizing the country’s 4,000 construction professionals28. In addition, the policy mandates the Construction Development Board to be reestablished as the Construction Development Authority (CDA) to (i) strengthen the system for registration, certification, and licensing of more than 2,500 contractors; (ii) institute a mechanism to regulate and enforce strict compliance of the regulation, quality and standards in construction industry; and (iii) carry out capacity building of contractors. Without registration and certification, construction professionals and contractors will not be allowed to provide services. The policy outlines interventions for
24 National Statistics Bureau. 2019. Statistical Year Book of Bhutan. 25 MoWHS. 2020. National Construction Industry Policy. 26 RGOB. 2016. Economic Development Policy 2016. 27 Royal Audit Authority. 2016. Performance Audit of Disaster Management. 28 Including engineers, planners and architects
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promoting resilient and green growth, including the development of Codes of Conduct and Ethics for contractors and professionals, guidelines for quality assurance and worksite safety, strategies for resilient and sustainable operation and maintenance of utility services, and material testing laboratories.
43. The implementation of this policy is expected to ensure safe, resilient and energy efficient infrastructure and buildings. Construction of buildings in Bhutan is guided by the Building Code 2018 and Building Regulation 2018, which are mainly applicable to concrete framed buildings. The RGOB is considering developing building codes for vernacular structures such as stone masonry and rammed earth 29 as well as the Code of Practice for Green Buildings28F based on the Bhutan Green Building Guidelines 2013. Registration and certification of construction professionals are the prerequisite and foundation for enforcing strict compliance of the regulation, quality and standards across all types of infrastructure and construction works in the country through professionalization of practitioners underpinned by mandatory requirements on certified professionals in future public works. The Department of Engineering Services (DES) has already established the interim Engineering Council within the department to start registering and certifying engineers. Both CDA and Council will be established as an autonomous organization of the RGOB under the planned Construction Industry Act. In the interim, the CDB will monitor large, medium and small contracts for all types of infrastructure and buildings and institute a mechanism to regulate and enforce strict compliance of the regulation, quality and standards in construction industry.
Prior Action 2. The Recipient, through its Cabinet, has approved the revised National Housing Policy, on February 4, 2020, which promotes the safe and resilient housing development for the urban poor; as evidenced by the letter Ref C-3/49/2020/462 dated February 26, 2020. 44. Building safe and green buildings based on climate smart local area plans is critical to address the increasing pressure on housing services and provide decent housing at affordable prices. The 2009 earthquake with magnitude 6.1 affected over 4,000 households and left over 7,000 people without adequate shelter.30 Another earthquake with magnitude 6.9 hit all the Dzongkhags in 2011, affecting the housing sector.31 The 12th FYP recognizes this challenge and highlights the need for retrofitting the existing houses to reduce their structural vulnerability. As of 2017, 21.7 percent of the country’s population had migrated from rural to urban areas. As urban population is projected to increase from 37.8 percent in 2017 to 56.8 percent by 204732, the demand for housing in urban centers will continue to increase. Although less than two percent of Thimphu’s population lived in squatter settlements in 2017,33 this may increase in the absence of an adequate supply of affordable housing based on migration, urban population growth trends, and a growing burden on rent costs, which consumes more than 40 percent of the monthly household income in cities.34 Without interventions, urban low-income groups would lack access to affordable and safe housing and quality essential services that will further increase
29 The Code of Practice for Green Buildings is expected to promote energy efficiency activities in new design and construction of commercial, public and residential buildings, including through the promotion of high efficiency architectural designs, building techniques and efficient equipment for lighting, heating and air conditioning that reduce energy consumption of buildings, exceeding current standards. 30 RGOB, World Bank, and UN. 2009. 31 RGOB, World Bank, and UN. 2011. 32 National Statistics Bureau of Bhutan. 2019. Population Projections Report 2017-2047. 33 World Bank. 2019. Bhutan Urban Policy Notes: Affordable Housing Policy. 34 Department of Human Settlements. 2020. National Housing Policy.
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their vulnerability to shocks. Such deficiencies in the housing sector could lead to increased informal settlements that often develop in hazard-prone areas.
45. The proposed reform aims to enable and enhance the safety, resilience and affordability of housing for the urban poor. The formulation of the housing policy is one of the Key Performance Indicators of the 12th FYP. The policy has amended the 2002 National Housing Policy based on the new guiding principles of affordability, adequacy, accessibility, safety and resilience, energy and environmental conservation, and community vitality. It outlines interventions for ensuring the resilience of all housing structures through enforcement of safety standards and regulations to prevent risk to lives and property, avoid environmental losses, and minimize the need for investments in reconstruction in accordance with Building Code 2018 and Building Regulation 2018. In addition, the policy targets promotion of energy efficient housing development to reduce energy consumption, considering that buildings are the highest national energy consuming sector (over 40 percent).35 Furthermore, the policy contributes toward the improvement of urban planning and management capacity building at the MoWHS to enable Local Area Plans and Structure Plans to better manage risk-informed urban growth, housing need and infrastructure supply, which can improve affordability and better access to jobs and services. Apart from the involvement of the MoWHS and the National Housing Development Corporation, there is currently no central coordinating entity that oversees the housing development in the country. As per the policy, the MoWHS will establish a dedicated housing unit within the Department of Human Settlements for the overall coordination and implementation of this policy. Based on the policy, the MoWHS plans to formulate the National Housing Act and amalgamate it with the Tenancy Act.
46. The implementation of this policy is expected to ensure the identification of state land for resilient, affordable and energy efficient housing development. The Department of Human Settlement (DHS) in coordination with the National Land Commission (NLC) will identify state land for new public housing development in Thimphu and Phuentsholing, which are the largest cities in the country and prone to flooding and landslides during monsoon seasons. While there has been public housing development in the two cities, the DHS will mandate new public housing to be resilient and energy efficient as per the National Housing Policy, Building Code 2018, Building Regulation 2018, and Green Building Guidelines 2018. In Bhutan, hazard information is generally incorporated into the Local Area Plans and Structure Plans; however, proper disaster and climate risk assessments still require technical capacity building and inter-departmental coordination. The DHS in coordination with relevant agencies will ensure that the housing designs are developed based on site-specific disaster and climate risk assessments.
Pillar B. Strengthening Bhutan’s institutional and technical capacity for emergency preparedness and response 47. Prior Actions under this pillar will support the RGOB’s efforts to enhance its emergency preparedness and response capacity. This pillar corresponds to the 12th FYP’s NKRAs #6 on Carbon Neutrality, Climate and Disaster Resilience and #14 on Healthy and Caring Society. Prior Action 3 strengthens the RGOB’s emergency preparedness and response to hydrometeorological hazards while Prior Action 4 addresses health emergencies.
Prior Action 3. The Recipient, through its NDMA chaired by the Prime Minister, has designated the NCHM
35 Department of Renewable Energy. 2016. Bhutan Energy Data Directory 2015.
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as the ‘National Hydromet Hazard Early Warning Service Provider’, pursuant to Section 108 of the Disaster Management Act’ to ensure clear and systematic early warning and notification to vulnerable populations and government agencies of threatening hydrometeorological hazards, disaster situations or events in the country; as evidenced by the Executive Order (C-2/2019/369) issued by the NDMA dated December 5, 2019. 48. The absence of official and scientifically validated early warning services had adversely affected timely and appropriate emergency response and evacuation in the past, putting at risk the lives of vulnerable people. In the absence of clear authority provided to the NCHM, notifications were previously done through informal arrangements and did not mandate the government agencies to act upon the information shared by the NCHM. In addition, without its formal designation, the NCHM did not have the authority to announce that the unqualified information on social media was imprecise. The lack of an authoritative voice on hydromet information meant that vulnerable people relied on wide ranging sources of information, leading to inconsistent responses and unnecessary panic among the public. During recent GLOF incidents, the absence of an official early warning adversely affected timely and appropriate evacuation by local communities and emergency actions by government agencies as the decisions were made on the basis of individual risk perception and inaccurate information.
49. This reform represents a high-level decision that empowers NCHM to save lives, transforming the national culture towards relying only on the scientifically informed-official warning system. It operationalizes Section 108 of the DM Act 2013, which mandates the NDMA to direct a relevant agency to put in place early warning systems. Early warnings are directly provided to the local communities through sirens and loudspeakers for their timely evacuation in times of hydromet disaster. This reform also enables the activation of the Disaster Management and Contingency Plans by Dzongkhags, Thromdes, and line ministries upon receipt of reliable warnings provided by the NCHM. This prior action will ensure authoritative and timely early warning and allow for better decision support in advance of hydromet hazards’ impact on the ground. The team will strengthen the narrative of this PA to clarify that it is much more than an administrative designation in the context of Bhutan.
50. As the designated national early warning services provider, the NCHM will formulate the National Meteorology and Hydrology Policy. This policy will provide a legal framework for the country allowing NCHM to: (i) enhance its provision of hydromet, climate and early warning services; (ii) ensure it retains a primary role in acquisition of such data and information; (iii) provide guidance for data use and sharing by others; (iv) promote quality controlled methods for hydromet data measurement across agencies; and (v) systematize processes for early warning to ensure their integrity and accuracy. The policy will also support Bhutan in structuring regional collaboration for strengthening its capacity to deliver such services. The NCHM also plans to establish a dedicated 24/7 National Weather and Flood Warning Center.
Prior Action 4. The Recipient, through its MoH, has approved the Bhutan Pandemic Preparedness and Response Plan (BPPRP) and Standard Operating Procedures (SOPs) on March, 2020 which enhances the Recipient’s preparedness and response capacities; as evidenced by letter Ref. MoH/DoPH/ZDCP(12)/2019-2020/11502 dated March 11, 2020. 51. A robust health preparedness and response mechanism is essential for the RGoB to address the emerging disease outbreaks of epidemic and pandemic potential. Over 60 percent of human infectious diseases worldwide are caused by pathogens of a zoonotic nature, mostly originating from wildlife. The most important zoonotic diseases occurring in Bhutan are Rabies (17 outbreaks in 2016) and Highly
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Pathogenic Avian Influenza (HPAI H5N1) (ten outbreaks since 2010), followed by anthrax, leptospirosis, scrub typhus, cystic echinococcosis and bovine brucellosis. In addition, Bhutan suffers from high rates of a series of climate-sensitive health burdens. Projected temperature rise (higher in mountainous areas than elsewhere in the world) is likely to increase the probability of GLOF; increase the geographic range and incidence of vector-borne diseases, particularly malaria and dengue; and increase the incidence of waterborne diseases. On particular, increasing temperatures are complicating the control of vector-borne diseases in Bhutan. Dengue, for example, which was for the first time documented in Bhutan in 2004, is now endemic during the monsoon period. In addition, diarrheal diseases represent a significant cause of morbidity in Bhutan for the last decade and contribute to about 10-15 percent of morbidity cases. Climate change has also influenced the drying up of water sources or contamination of water due to flooding, increasing the risk of diarrheal disease.
52. The IHR/JEE (2017) and the Global Health Security Index 2019 identified weaknesses in Bhutan’s capabilities to detect, assess, notify and respond to public health emergencies. As evidenced in the confirmed COVID-19 case in Bhutan, for example, the movement of people and goods poses risk to rapid spread of disease. This is compounded by the country’s vulnerability to climate-induced health risks. Given that Bhutan is a touristic country and livestock is an important component of Bhutan’s mixed farming systems, it is essential that the country strengthens its health and other related systems, including cross- border collaboration for the control of diseases of public health significance.
53. As a result, and in an effort to respond to public health weaknesses, the BPPRP was developed— through extensive consultation with a wide range of stakeholder. The BPPRP defines the roles and responsibilities of the different entities of government, and their coordinating functions and mechanisms during health emergencies. The BPPRP is accompanied by a range of SOPs, in areas such as containment, risk management and clinical management. They provide the foundation for effective and efficient implementation and use of the BPPRP by establishing operational procedures and coordination mechanisms for multiple types of emergencies, including the COVID-19 response. As a result, the BPPRP and associated SOPs are expected to guide the RGOB to plan and respond to pandemics and health emergencies, including disease outbreaks with epidemic and pandemic potential to minimize its health and economic consequences. The BPPRP complements and builds on the experience of the 2016 HEDCP.
54. Progress towards adherence to the BPPRP and SOPs will be measured based on the implementation of simulations and mock drill exercises on an annual basis. This is a key indicator being monitored under the Zoonotic Program in coordination with Emergency Medical Services Division. Simulations and mock- drill exercises—which are recommended by WHO and the Global Health Security Agenda—constitute vital components of epidemic and pandemic preparedness, and are expected to assess the effectiveness of operational procedures and coordination mechanisms at all levels of the health system. The findings of these assessments—which are expected to inform, inter alia, capacity building plans and technical revision to SOPs—directly support strengthening of public health emergency capabilities (including institutional and technical aspects). As such, they have been identified as a key component in the validation of core capacities under the IHR monitoring and evaluation framework.
Table 4: DPF Prior Actions and Analytical Underpinnings Prior Actions Analytical Underpinnings Pillar A: Integrating Climate and Disaster Resilience into the Built Environment
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The following works underpin the importance of having a safe built environment including quality infrastructure and buildings in enhancing resilience: • Prior action 1. World Bank. 2019. Lifelines for Better Development. National Construction • World Bank. 2015. Building Regulation for Resilience: Managing Risks for Safer Cities. Industry Policy • World Bank. 2012. Cities and Flooding: A Guide to Integrated Urban Flood Risk Management. • World Bank. 2019. Bhutan Urban Policy Notes: Urban Resilience. • NEC. 2015. Intended Nationally Determined Contribution (INDC) of RGOB. The following works underpin the role of risk-informed urban planning in building resilience in cities: • Ministry of Works and Human Settlement. 2016. National Report: The Third UN Conference on Housing Prior action 2. and Sustainable Urban Development. National Housing • World Bank. 2019. Bhutan Urban Policy Notes: Affordable Housing Policy. Policy • Miyamoto International. 2019. Overview of Resilient Housing Best Practices and Lessons Learned: United States + Japanese Experience.
Pillar B: Strengthening Bhutan’s institutional and technical capacity for emergency preparedness and response The following analysis underpins the role of early warning services in reducing the impact of natural disasters on the poor: • World Bank. 2016. Unbreakable: Building the Resilience of the Poor in the Face of Natural Disasters Prior action 3. Early Warning System The following roadmap highlights the importance of strengthening NCHM as the hydromet forecasts and early warning service provider in Bhutan: • World Bank. 2015. Modernizing Weather, Water, and Climate Services: Roadmap for Bhutan The following works underpin the role of the BPPRP: Prior action 4. BPPRP • WHO. 2018. Joint external evaluation of IHR core capacities of the Kingdom of Bhutan. • MoH. 2017. Strategy Plan for Emergency Medical Services 2018 – 2023.
4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY 55. The proposed operation is fully aligned with the World Bank Group’s Country Partnership Strategy (CPS) for Bhutan FY15-19 discussed by the Board on September 23, 2014 (Report No. 88597-BT). Under the Results Area 3 of Supporting Green Development, strengthened resilience to climate and disaster risks was included as one of the expected outcomes. The CPS noted that the challenges to achieving green and inclusive growth include rapid urbanization and changes to hydrology in the Himalayas due to climate change. The CPS highlighted the improvement of disaster preparedness and delivery of weather and climate services to address this challenge. This operation is expected to be aligned with the FY20-24 Country Partnership Framework, which is currently under development, as resilience is included as one of the focus areas. 56. The proposed operation contributes to the WBG’s twin goals of ending extreme poverty and promoting shared prosperity. The country’s estimated average annual economic loss from natural disasters is US$62.63 million.36 Efforts to reduce poverty and disaster risks are complementary. Estimates for 89 countries suggest that the number of people in extreme poverty–those living on less than US$1.90 a day–would fall by 26 million if all natural disasters could be prevented next year.37 The proposed
36 UNDRR. 2019. Global Assessment Report on Disaster Risk Reduction. Geneva, Switzerland: UNDRR. 37 Hallegatte, Stephane; Vogt-Schilb, Adrien; Bangalore, Mook; Rozenberg, Julie 2016.
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operation will contribute to enhancing the RGOB’s institutional and technical capacity for managing the risks of climate change and natural disasters, reducing the impact on the poor. 57. The proposed operation builds on the Bank’s past and existing engagement in Bhutan. This operation is complemented by the Bhutan Strengthening Fiscal Management and Private Sector Employment Opportunities (P171780) and the Bhutan COVID-19 Emergency Response and Health Systems Preparedness Project (P173787) in enhancing the government’s emergency response. The Regional Hydromet Services and Disaster Resilience Project (P154477) supports the enhancement of weather forecasting, aviation meteorology, establishment of a National Emergency Operation Center and strengthening of the DM Information System. The Strategic Program for Climate Resilience (P159600) supports the analytical studies on climate change impacts and capacity building. A TA on Capacity Building for Climate Resilient Infrastructure (P158723) supports an assessment and management of climate risks focusing on landslide and flood along the East-West Highway. A TA is provided to strengthen the RGOB’s capacity and information management for improved disaster risk assessment. In addition, a TA (P170337) is provided to strengthening health emergency and response systems. The reforms on construction and housing industry builds on the Bhutan Second Urban Development Project (P090157).
4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS 58. All prior actions under this operation have gone through extensive consultations with a wide range of citizens. When drafting the Construction Industry Policy and Housing Policy, the MoWHS conducted regional, focus group, and bilateral consultations. The draft policies have been uploaded on GNHC website for public comments. The GNHC cleared the policies and submitted to the Cabinet based on confirmation that all stakeholder inputs have been incorporated into the policies. The NCHM together with DDM and Dzongkhag governments have been conducting simulation drills to raise awareness among local communities including women about early warning systems and actions to be undertaken in times of disaster. The MoH conducted an extensive stakeholder consultation to develop the BPPRP with a variety of entities including government agencies, WHO, Centers for Disease Control and Prevention, Food and Agriculture Organization, health care providers at different ports of entry and officers at the airport. 59. Throughout the drawdown period, the RGOB and the Bank will continue a close policy dialogue on DRM and collaboration with development partners. The United Nations Development Programme and Japan International Cooperation Agency (JICA) supported the installation of automated weather and hydro stations across the country and early warning systems in priority river basins. Building on these efforts, the Bank is supporting enhancement of weather and flood forecasting. JICA is currently providing a TA to better understand the frequency of seismic activities and behavior of traditional constructions of rammed earth and stone masonry, which builds on the achievements of the Bank’s Improving Resilience to Seismic Risk Project. The World Food Programme is providing a TA to improve reporting in the first 72 hours of a disaster, building on the DM Information System supported by an ongoing Bank engagement.
5. OTHER DESIGN AND APPRAISAL ISSUES 5.1. POVERTY AND SOCIAL IMPACT 60. The implementation of the reforms is expected to have a beneficial impact on the poor and vulnerable groups, including women, female headed households, youth, elderly and individuals with a disability who are often more exposed to natural hazards yet less prepared to cope with and recover from
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shocks. The activation of the Cat DDO will help to ensure the continuity of development plans, making resources quickly available to respond to the needs of the affected populations. 61. The country system for managing potential social risks of the reforms is considered adequate although improvement is required. Although social impact assessments as per the Bank standards are not generally carried out, adequate stakeholder consultations are conducted by local governments to ensure all grievances are addressed in a timely manner. The implementation of the Construction Industry Policy will enforce procuring agencies and contractors to ensure community health and safety and proper labor and working conditions. The Land Act 2007 and the Land Pooling Rules 2009 are inconsistent with the Bank’s standards on several aspects, including ensuring replacement cost for affected assets at market value and recognition of non-titled holders. The legislation also does not include any mechanisms for voluntary land donation, although in practice it does take place. However, the risk of land acquisition and resettlement is considered low as the Housing Policy specifically mandates the NLC to identify state land. Improved urban planning systems and tools will help local governments and the NLC identify the best public lands available for new housing that would proximate to jobs and services. The country has an adequate system for protection of cultural heritage. 62. Prior actions under Pillar A contribute to technical capacity development of the country’s construction and housing sectors and enhanced resilience of the poor and vulnerable groups in urban areas. It will ultimately create job opportunities, enhance skill development, and enable knowledge exchange among professionals. Although traditional skilled labors may not be accustomed to modern technology-oriented jobs, this is mitigated as the policy mandates the use of traditional designs and capacity building of workers. The potential risk of the Construction Industry Policy on housing affordability is considered low because the policy does not aim for upgrading the infrastructure standards, but to enforce the existing standards. In addition, the Housing Policy aims to improve affordability through identification of state land, fiscal and monetary measures for promoting housing finance, use of locally sourced materials, and increasing housing stock to ensure public housing rents remain affordable. Therefore, the implementation of the two policies will ensure safe and affordable housing development. 63. The Construction Industry Policy is expected to have positive effects on gender equality. Bhutan ranked 134 in the Gender Development Index and Gender Inequality Index in 201838, and 131 in the 2020 Global Gender Gap Index.39 In 2018, the female labor force participation rate was 45.5 percent and the unemployment rate was 4.2 percent, which is higher than the male (2.7 percent).40 Among the employed female, 30.5 percent are engaged in agriculture and forestry and 0.3 percent in construction in 2015.41 The policy specifically mandates the MoWHS and procuring agencies to include employment generation at the core of construction programs to address the employment needs, particularly women and youth. Through registration of professionals, the DES will develop a gender-disaggregated data as an initial step to set a quantitative target on women construction professionals in a long run. 64. Prior actions under Pillar B will bring positive effects on the poor and vulnerable groups. Overall impact of Prior Action 3 will be positive through the dissemination of accurate disaster information and enhanced public awareness, increasing the safety of vulnerable groups. The BPPRP will have positive
38 http://hdr.undp.org/en/data 39 http://www3.weforum.org/docs/WEF_GGGR_2020.pdf 40 National Statistics Bureau. 2019. Statistical Yearbook of Bhutan 2019 41 National Statistics Bureau. 2016. Statistical Yearbook of Bhutan 2016
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impacts on reducing human infection by strengthening surveillance and early warning system, containing spread of virus at source, and minimizing morbidity, mortality and social disruption. The BPPRP mentions services to the vulnerable people by identifying their pandemic burden and risk as well as community transmission of diseases through the development of surveillance strategies and data collection.
5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS 65. The proposed operation is likely to have an overall positive effect on the environment. Enhancing the RGOB’s capacity to manage climate and disaster risks will lead to preservation of natural resources and the environment. The criteria for certification of professionals are expected to include environmental risk management in accordance with the guiding principle of the National Construction Industry Policy on minimizing negative environmental impacts. The policy also mandates procuring agencies to ensure the execution of Environmental Management Plans for all public works. As per the guiding principle of the National Housing Policy on low energy and minimal environmental impacts, the implementation of the policy is expected to promote strict adherence to environmental regulations in the housing sector. 66. Bhutan has a robust environmental legal framework to manage potential risks from the operation. The National Environment Protection Act 2007 is the overarching umbrella legislation that governs the use of land, water, forests, minerals and other natural resources. It provides an effective system to conserve and protect the environment through the National Environmental Commission (NEC) and other specified authorities and committees. Other relevant regulations include the Environmental Assessment (EA) Act 2000 and Regulation for Environmental Clearance of Projects 2016. EA Act is being enhanced through ongoing revision. Also, reforms and capacity building have been supported by the Bhutan Urban Development Project as well as various ongoing DRM TAs as discussed in Section 4.3. These existing systems would be able to address potential environmental effects of the proposed operation. 67. While the environmental legal framework is sound and comprehensive, implementation and enforcement could be strengthened. While the BPPRP will help the country respond to pandemic emergencies, medical waste management needs to be strengthened. Out of 27 hospitals, only a few are equipped with autoclave. The Bhutan COVID-19 Emergency Response and Health Systems Preparedness Project (P173787) includes capacity building to ensure compliance with medical waste management. The NEC is also stepping up to strengthen the country’s system for environmental due diligence in response to emerging issues associated with urbanization and economic diversification. For example, it launched the National Waste Management Strategy in November 2019.
5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS 68. The overall fiduciary risk of the proposed operation is rated moderate based on the current status of public financial management (PFM) systems and Forex control environment in the country. The government’s PFM structures and processes have improved. While challenges remain, the core elements of an adequate public financial management system are in place, including publication of the budget. The positive trajectory of improvements in financial management stems from the government’s commitment to: (i) strengthen the legal framework; (ii) enhance institutional capacity and the internal control framework; (iii) improve the financial management information system, and (iv) strengthen the oversight of public finances. Together, these actions are aimed at improving accountability and the timeliness, quality, transparency and reliability of the government’s accounting and reporting functions. These positive steps, as well as the government’s demonstrated focus on results and strong commitment for continued PFM reforms, provide a satisfactory basis for proceeding with the operation. The Public
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Expenditure and Financial Accountability update of 2016 confirms that Bhutan has good fiscal discipline through comprehensive coverage of the budget, orderly execution, good control over expenditure commitments and fiscal risks, timely and reliable financial reporting, and improved audit and legislative scrutiny. The World Bank also provides technical assistance on PFM issues through the PFM-MDF. 69. Bhutan’s public procurement system is open to competition, has checks and balances and is audited. The reforms to the public procurement system over the last decade are visible with commitment to further develop the procurement system by implementing Phase 1 of the eGP and Phase 2 is under way. The procurement performance improvement parameters include: roll out of the public procurement process including registration, tendering, debarment, annual procurement plan, and reporting being run on electronic platform resulting in more transparency; reduced procurement cycle time; enhanced competition with wider bidder participation; reduced transaction cost for all stakeholders; and the use of eGP generated data for data analytics, and procurement system management to inform public procurement reform. In 2016, the Bank conducted and approved the first ever Alternative Procurement Arrangements (APA) assessment of Thimphu Thromde. The APA assessment found several key good international practices such as a strong framework for control and audit, use of quality/cost rated criteria using a point-based system in works contracts and use of Conflict of Interest Declaration. The amendments to procurement rules will further improve the procurement framework in the country. 70. The MoF discloses the National Budget which is publicly available on the MoF website. The budget document is comprehensive, as it includes an analysis of the previous year’s financial statements, the budget for the coming year by economic classification, tax measures, a macro-fiscal economic outlook, a report on state-owned enterprises and government share-holdings, a report on the RMA, and a report on the pension fund. Quarterly and monthly execution reports are produced, but not published. Financial statements of the previous year are published after being audited. 71. On external audit, Bhutan has a reasonably well-functioning system. The Royal Audit Authority (RAA) conducts financial audits at the national level, the consolidated annual financial statements of the RGOB and at the individual agency level. The Auditor General submits the annual audit report during the fourth quarter of the fiscal year on the audits carried out during the previous fiscal year. The FY18 Audit report was submitted to the Parliament in June 2019 while the FY19 audit report will be submitted to the Parliament in the forthcoming (May/June 2020) session of the Parliament. The report contains the result of the audit of the annual financial statements of the government, the overall financial condition and recommendations to improve the economy and efficiency and effectiveness of the government. Besides, the RAA also conducts the financial audits of the donor assisted projects and performance audits. 72. The foreign exchange control environment of the central bank is satisfactory. The annual audit reports are published on the RMA website and are annually audited by external auditors. The accounts and audits are compiled and conducted in accordance with generally accepted accounting and auditing standards. Based on the audit reports and the satisfactory track record in the operation of special (designated) accounts in several IDA-financed operations held in the RMA in the past, it was concluded that the World Bank has reasonable assurance that the control environment for foreign exchange at the RMA is satisfactory. The IMF has not carried out a Safeguards Assessment of the RMA. 73. Disbursements. The proposed credit and PEF grant will follow World Bank’s disbursement procedures for development policy operations. The credit proceeds will be made available to the Government upon approval of credit effectiveness and occurrence of a natural disaster including health-related shocks. The credit needs to be approved and the World Bank needs to notify the credit effectiveness to the
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government. Once the Cat DDO is triggered (see Section 4.1), the RGOB may submit a withdrawal application in the requested format to the World Bank after submission of Authorized Signatories Letter of IDA. At the request of the MoF, the disbursement in USD will be made into the treasury account of the government maintained at the RMA that forms part of the country’s foreign exchange reserves which will later be transferred into Ngultrum equivalent of the government’s consolidated fund. The government will confirm to the World Bank, within 30 days, of receipt of the proceeds and its credit in the Treasury account, including the date of receipt, and the exchange rate applied to convert the credit proceeds into Bhutanese Ngultrum. These disbursement arrangements would also apply to the PEF Grant. 74. Disbursement of the credit proceeds will not be linked to specific purchases. The government will not use the credit proceeds to pay for expenditures included in the Bank’s standard negative list, which includes expenditures on military hardware and environmentally hazardous goods. If any portion of the credit is used to finance ineligible expenditures as so defined in the Financing Agreement, IDA shall require the government to refund the amount. Money refunded to IDA in respect of payments made for ineligible expenditures would be cancelled. 75. Reporting and auditing. No audit will be required for the proposed operation as funds will be transferred to the government’s treasury and not to a dedicated account.
5.4. MONITORING, EVALUATION AND ACCOUNTABILITY 76. The MoF leads the effort in coordinating the overall implementation of this operation. The MoF has experience and is conversant with World Bank policies and procedures through lending and TA operations. The MoF will have an overall coordination and decision‐making role, while the MoWHS, NCHM, and MoH will monitor the results to ensure the progress of the operation during the entire drawdown period. The Bank team will continue to provide support to government in monitoring the reform progress and results. 77. The Bank will monitor the status of the program implementation through regular implementation support missions and by tracking the results indicators provided in Annex 1, based on the data provided by the RGOB and disclosed in the official sources. The Bank will maintain the dialogue with the authorities and assess the compliance of the authorities with legal provisions under the financing agreement. 78. Grievance Redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as prior actions or tranche release conditions under a World Bank Development Policy Operation may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate GRS, please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.
6. SUMMARY OF RISKS AND MITIGATION
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79. The overall risk rating for this operation is moderate, considering the existing political and governance environment, moderate macroeconomic risk, the RGOB’s high level of commitment to the reforms, and mitigation measures for the institutional capacity for implementation. 80. Macroeconomic risk is moderate. The global COVID-19 pandemic presents substantial macroeconomic risks which are expected to affect Bhutan’s economy and fiscal stance through reduced demand for (non-hydro) exports and tourism, disruptions and increased prices for imports and potential domestic demand and supply disruptions in case of a domestic outbreak. While this is expected to affect the country’s fiscal resources and expenditure, and thus poses a substantial risk to the Bhutan Strengthening Fiscal Management and Private Sector Employment Opportunities (P171780), it is less likely to materially impact the PDO of this operation. As the present crisis has highlighted the importance of disaster preparedness, enhancing capacity to manage risks is considered a policy priority in Bhutan, and is thus less likely to be affected by a crisis-induced diversion of fiscal resources and policy priorities. 81. Risks related to institutional capacity for implementation and sustainability are substantial. The implementing agencies have limited experience with DPFs although they have accumulated experience in the Bank-executed TAs on DRM and health. In particular, the implementation involves three agencies (Engineering Council, CDA and Housing Unit) that will be newly established, posing some uncertainty in their capacity to sustain the outcomes of the operation. The crosscutting nature of this operation will demand a high level of cooperation among ministries and agencies. This risk will be mitigated through (i) the Bank’s technical support to enhance the in-house technical capacity of the government agencies in delivering the agreed results, (ii) the establishment of clear lines of accountability including monitoring and evaluation, and (iii) regular follow-ups and coordination with the implementing agencies led by MoF.
Table 5: Summary Risk Ratings
Risk Categories Rating 1. Political and Governance ⚫ Moderate
2. Macroeconomic ⚫ Moderate
3. Sector Strategies and Policies ⚫ Moderate
4. Technical Design of Project or Program ⚫ Moderate
5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial
6. Fiduciary ⚫ Moderate
7. Environment and Social ⚫ Moderate
8. Stakeholders ⚫ Moderate
9. Other
Overall ⚫ Moderate
.
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ANNEX 1: POLICY AND RESULTS MATRIX
Results Prior Actions Indicator Name Baseline (2020) Target (2023) Pillar A. Integrating Climate and Disaster Resilience into the Built Environment Prior Action 1. The Recipient, through its Cabinet, has approved The interim Engineering Council 0% 50% of the country’s the National Construction Industry Policy on February 4, 2020, of Bhutan is established under construction professionals which promotes the quality of construction towards a safe, the DES for registering and registered and certified by
resilient and energy efficient built environment. certifying construction the interim Engineering professionals based on Council of Bhutan, providing technical qualification criteria. gender-disaggregated data Legal evidence: Cabinet approval vide letter #C-3/49/2020/462 dated February 26, 2020 A construction quality 0% 60% of the works above compliance mechanism for BTN10 million (US$130,000) Lead entity: Department of Engineering Services, Ministry of enforcing safe, resilient and and 10% below BTN10 Works and Human Settlements green construction is million monitored and a established and implemented construction quality by the Construction compliance mechanism Development Board (CDB) established and implemented by CDB for enforcement. Prior Action 2. The Recipient, through its Cabinet, has approved State land for resilient, 0 3 state land sites in Thimphu the revised National Housing Policy, on February 4, 2020, which affordable and energy efficient and 1 state land site in promotes the safe and resilient housing development for the housing development is Phentsholing identified for urban poor. identified. resilient, affordable and energy efficient housing Legal evidence: Cabinet approval vide letter #C-3/49/2020/462 dated February 26, 2020
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Results Prior Actions Indicator Name Baseline (2020) Target (2023)
Lead entity: Department of Human Settlements, MOWHS Pillar B. Strengthening Bhutan’s institutional and technical capacity for emergency preparedness and response Prior Action 3. The Recipient, through its NDMA chaired by the Draft National Meteorology 0 1 Prime Minister, has designated the NCHM as the ‘National and Hydrology Policy is Hydromet Hazard Early Warning Service Provider’, pursuant to prepared for submission to the Section 108 of the Disaster Management Act’ to ensure clear GNHC and systematic early warning and notification to vulnerable populations and government agencies of threatening hydrometeorological hazards, disaster situations or events in the country.
Legal evidence: Executive Order (C-2/2019/369) issued by the NDMA dated December 5, 2019.
Lead entity: National Center for Hydrology and Meteorology Prior Action 4. The Recipient, through its MoH, has approved the MoH carries out simulations 0 3 Bhutan Pandemic Preparedness and Response Plan (BPPRP) and and mock drill exercises in Standard Operating Procedures (SOPs) on March, 2020 which accordance with the BPPRP enhances the Recipient’s preparedness and response capacities. and SOPs
Legal evidence: Letter Ref. MoH/DoPH/ZDCP(12)/2019- 2020/11502 dated March 11, 2020
Lead entity: Ministry of Health
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ANNEX 2: FUND RELATIONS ANNEX
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ANNEX 3: LETTER OF DEVELOPMENT POLICY
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ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE
Significant poverty, social or Significant positive or negative Prior Actions distributional effects positive or environment effects negative
Pillar A: Integrating Climate and Disaster Resilience into the Built Environment
Prior action 1. National Construction Positive. Positive Industry Policy Prior action 2. National Housing Positive. Positive. Policy
Pillar B: Strengthening Bhutan’s institutional and technical capacity for emergency preparedness and response Prior action 3. NCHM as National Hydromet Hazard Early Warning No impact Positive Service Provider Prior action 4. BPPRP Positive. Positive
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ANNEX 5: HOW THE PANDEMIC EMERGENCY FINANCING FACILITY (PEF) WORKS
The Pandemic Emergency Financing Facility (PEF) – a financing mechanism housed at the World Bank – is designed to provide additional resources to help the world’s poorest countries respond to large-scale disease outbreaks. As one part of the global solution to strengthening pandemic risk management, the PEF may help fill the financing gap that occurs after the initial outbreak and before large-scale humanitarian relief assistance can be mobilized. The PEF currently provides financing through two windows, insurance and cash.
Beneficiaries: All IDA countries are eligible to access PEF funds when available. In addition, international organizations and NGOs that have been accredited as PEF responding agencies and are supporting the efforts of the affected countries may access PEF funds. PEF premiums are covered by donors, and beneficiary countries are not required to bear any costs.
Design and activation: The PEF provides funding for countries and accredited responding agencies to address infectious disease outbreaks. It does so through two complementary windows with distinct activation criteria – (i) the Cash Window for early or emergency stage of large-scale disease outbreaks and (ii) the Insurance Window, for established larger-scale, specific high severity disease outbreaks.
Insurance Window activation criteria: The determination of an outbreak meeting the Insurance Window activation criteria is made by an independent calculation agent, based on publicly available data published by the WHO, which activates the flow of funds.
Cash Window activation criteria: The determination of an outbreak reaching the Cash Window activation criteria is made by the PEF Coordinator through a sequential three-step process based on: (i) pathogen type; (ii) epidemiological thresholds; and (iii) technical assessment. The final decision on a payout from the Cash Window is taken by the PEF Steering Body. The PEF Coordinator presents the application together with the advice obtained through the technical assessment to the Steering Body, which takes a decision on the payout from the Cash Window.
Additional information on the PEF, including the Operations Manual and the PEF Framework, is publicly available at www.worldbank.org/pef.
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