Bhutan: Micro, Small, and Medium-Sized Enterprise Sector Development Program

Progress Report on Tranche Release

Project Number: 39221 Grant Number: 0088/0089 November 2012

This consultant’s report does not necessarily reflect the views of ADB or the government concerned. [For PPTAs: Also, all of the views expressed herein may not be incorporated into the proposed project’s design.]

CURRENCY EQUIVALENTS (as of 31 October 2012) Currency Unit – ngultrum (Nu) Nu1.00 = $0.01851 $1.00 = Nu54.015

ABBREVIATIONS ADB – Asian Development Bank BDBL – Bhutan Development Bank Limited BDFC – Bhutan Development Finance Corporation BDS – business development service BSB – Bhutan Standards Bureau COS – Committee of Secretaries CSF – cost-sharing facility DCSI – Department of Cottage and Small Industry G2B – government-to-business G2C – government-to-citizen GDP – gross domestic product GNHC – Gross National Happiness Commission ISC – International Securities Consultancy Limited MOEA – Ministry of Economic Affairs MSME – micro, small, and medium-size enterprise MTI – Ministry of Trade and Industry OSS – one-stop shop RIA – regulatory impact assessment RMA – Royal Monetary Authority RTIO – regional trade and industrial office SQCA – Standard and Quality Control Authority

NOTES (i) The fiscal year (FY) of the Government of Bhutan and its agencies ends on 30 June. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2008 ends on 30 June 2008.

(ii) In this report, "$" refers to US dollars.

Vice-President X. Zhao, Operations 1 Director General J. Miranda, South Asia Department (SARD) Director B. Carrasco, Public Management, Financial Sector and Trade Division, SARD

Team leader A. Huang, Finance Specialist, SARD Team member Jogendra Ghimire, Counsel, Office of General Counsel M. Panis, Senior Operations Assistant, SARD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page I. INTRODUCTION 1 II. RECENT MACROECONOMIC AND POLITICAL DEVELOPMENTS 2 A. Country Background 2 B. Political Developments 3 III. STATUS OF TRANCHE RELEASE POLICY ACTIONS 3 IV. PROGRAM IMPLEMENTATION 8 V. PROGRAM ASSURANCES 11 VI. CONCLUSION 12 VII. PRESIDENT’S DECISION 12

APPENDIXES 1. Design and Monitoring Framework 13 2. Status of Third Tranche Release Policy Actions 18 3. Status of Third Non-Tranche Release Policy Actions 22 4. Project Cost Estimates and Financing Plan 24 5. Chronology of the Missions for the Micro, Small, and Medium-Sized Enterprise 25 Sector Development Program 6. Bhutan Country Economic Indicators 26 7. Government’s Calculation of World Bank’s Eight Procedures for Business 27 Formalization

I. INTRODUCTION

1. The Board of Directors of the Asian Development Bank (ADB) approved the Asian Development Fund grants to the Kingdom of Bhutan for the Micro, Small, and Medium-Sized Enterprise (MSME) Sector Development Program on 21 November 2007. 1 The program consists of (i) a program grant (Grant 0088) of $6 million to promote policy reforms, (ii) a project grant (Grant 0089) of $9 million to facilitate program implementation and extend credit to MSMEs,2 and (iii) an associated technical assistance of $400,000 to strengthen the business enabling environment for private sector development through the introduction of regulatory impact assessment (RIA).3

2. The impact of the program is a vibrant MSME sector to encourage private sector development for broad-based sustainable economic growth. The outcome of the program is an improved enabling environment for doing business and greater access to key resources. The outputs of the program are (i) an integrated policy, strategy, and institutional framework for MSME development; (ii) enhanced business laws and regulations; (iii) increased access to market-based finance; and (iv) strengthened business support infrastructure.

3. The program grant (Grant 0088) supports policy reforms in the four areas described in para. 2. The program grant comprises three equal tranches of $2 million, for a total of $6 million. The releases of each tranche are contingent upon the compliance with the respective policy actions outlined in the policy matrix.4 The first tranche of $2 million was released on 16 May 2008 upon grant effectiveness and satisfactory compliance with the first tranche release policy actions. The second tranche of $2 million was released on 26 November 2011.5 This progress report addresses the third and final tranche release. The program grant had an implementation period of 3 years, from 21 February 2008 to 31 December 2010. Due to the delay in meeting the first two tranche release policy actions, Grant 0088’s closing date was extended from 31 December 2010 to 31 December 2011, then to 30 June 2012, and finally to 30 November 2012. Details of the program implementation delay are discussed in section IV.

4. The project grant (Grant 0089) complements the implementation of the program grant (Grant 0088) through increased access to market-based finance by MSMEs, enhanced business development services, and capacity building. The project grant comprises three components: (i) a credit line of $5 million to the Bhutan Development Finance Corporation (BDFC), since renamed the Bhutan Development Bank Limited (BDBL), to extend credit assistance to MSMEs; (ii) a cost-sharing facility (CSF) of $1 million to provide the necessary technical support and knowledge transfer to growth-oriented businesses; and (iii) a component of $3 million to support program implementation and institutional capacity building.6

1 ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Kingdom of Bhutan: Micro, Small, and Medium-Sized Enterprise Sector Development Program. Manila. 2 Micro enterprises (or cottage industry as defined by the government) are businesses with investment of less than Nu1 million. Small enterprises have investment of between Nu1 million and Nu10 million. Medium enterprises have investment of between Nu10 million and Nu100 million. 3 ADB. 2007. Capacity Building for Introducing Regulatory Impact Assessment (Bhutan) (Financed by the Australia- ADB South Asia Development Partnership Facility [RETA 6337: Development Partnership Program for South Asia Subproject 5]). Manila. The TA was physically closed on 31 September 2011 and the TA completion report has been circulated to the ADB Board of Directors in October 2012. 4 Footnote 1, pp. 55–58. 5 The second tranche release was based on 6 full compliances, 1 substantial compliance, and 1 deferred compliance of a total of 8 tranche release policy actions. 6 Footnote 1, pp. 25 – 26.

5. ADB conducted 10 program review missions from 2008 to 2012 for a total of 2.2 person months. Releasing the third and final tranche is justified by Bhutan’s achievement of all tranche release policy actions. The status of third tranche and non-tranche release conditions is in Appendixes 2 and 3. The history of monitoring and review missions is in Appendix 5.

II. RECENT MACROECONOMIC AND POLITICAL DEVELOPMENTS

A. Country Background

6. Bhutan’s economy is dominated by hydropower export to India. Electricity generation is the single largest industry in the country, accounting for 22% of gross domestic product (GDP) and half of the country’s exports. It is followed by agriculture at 17% of GDP, construction at 12%, and manufacturing at 9%.7 The GDP growth rate was estimated at 7.9% for FY2012 (ending 30 June) and 8.4% for FY2013.8 Constructions of the four hydropower projects (Tala, Chhukha, Kurichhu, and Basochhu) and manufacturing (mainly cement) are the main drivers.

7. To support sustainable, long-term economic growth, the Government of Bhutan needs to broaden the economic base to boost job creation and income generation, and the expansion of Bhutan’s private sector is essential. However, this process has been challenging. Agriculture has not recorded significant growth from FY2005 to FY2012 because of the difficulties in raising productivity. Tourism still requires significant investment to meaningfully contribute to the national economy. The unemployment rate has averaged 3.5% from 2009 to 2012, likely to surpass the government target of 2.5% set for 2013.

8. Bhutan’s fiscal deficit for FY2012 was estimated at 4.3% of GDP,9 following a fiscal deficit of 4.7% of GDP in FY2011.10 The deteriorated fiscal stance reflected rising expenditures on a civil services pay increase in January 2011 and on the hydropower sector. The overall fiscal deficit is projected to deteriorate further to 6% of GDP in FY2013 (footnote 10).

9. The current account deficit widened from 9.9% of GDP in FY2010 to about 23.9% in FY2011 as the trade deficit increased from 20.9% of GDP to 30.2% during the same period. The current account deficit is projected at 20.0% for FY2012 (footnote 8). In particular, Bhutan’s external position with India suffered from slow export growth as power sales reached generation capacity as well as accelerated imports from hydropower construction and strong consumer demand. Bhutan’s external debt rose from 80.9% of GDP in FY2011 to 91.2% of GDP in FY2012. The bulk of debts were loans for hydropower construction. The external debt service ratio jumped from 29.8% of exports in 2010 to 52.2% in FY2011 to 123.2% in 2012.

10. Broad money rose by 21.2% in FY2011, mainly due to the expansion in net foreign assets. Private sector credit grew by 31.9% in FY2011, concentrated on housing and other personal consumption. Inflation is high, forecasted at 10.1% in FY2012 and 10.5% in FY2013 (footnote 8), a likely result of (i) trade controls on housing construction materials and personal transportation, (ii) the lagged transmission of price increases in India as the ngultrum is pegged to the rupee, and (iii) rising local demand for goods as growth in personal income remains buoyant.

7 ADB. 2010. Asian Development Outlook. Manila. 8 ADB. 2012. Asian Development Outlook Update. Manila. In its latest annual report 2010–2011, the Royal Monetary Authority of Bhutan estimated that the GDP growth rate for 2012 was 8.5%. 9 Royal Monetary Authority of Bhutan (RMA). 2012. Monetary Policy Statement June 2012. Thimphu. 10 ADB. 2012. Asian Development Outlook. Manila.

11. In summary, Bhutan’s economic fundamentals, while historically strong, are under increasing strain. Rapid credit growth along with an expansion of public spending and net lending from 41% of GDP in FY2009 to 47% in FY2011 have led to a widening fiscal deficit, double digit inflation, and a current account deficit in excess of 20% of GDP.11 External debt is expanding. At the end of FY2011, Bhutan’s rupee reserves amounted to only one week of import cover (although convertible currency reserves were high at nearly $890 million, equivalent to about 9 months of total imports). Extraordinary measures have been introduced to address a rupee liquidity crunch reflecting these imbalances in the economy.12

B. Political Developments

12. Bhutan places a strong premium on preserving its culture, environment, and identity. While economic growth is considered important, the government promotes a unique development concept of “gross national happiness,” which is supported by sustainable socioeconomic development, environmental conservation, cultural heritage promotion, and good governance.

13. Bhutan’s historic transformation from an absolute monarchy to a constitutional monarchy was successfully completed in July 2008. Elections for the upper house took place in December 2007, and elections for the 47-member lower house were held in March 2008. On 18 July 2008, the new Parliament formally adopted the Constitution. The Election Commission of Bhutan conducted local government elections in 3 of 20 districts in 2011. Bhutan’s 205 village groups (gewogs) were demarcated to form 1,042 village constituencies (chiwogs) in preparation for their 2011 election. The Parliament is likely to be dissolved towards the end of the first quarter of 2013 resulting in new general elections expected in July 2013.

14. The public views employment and income generation as fundamental to improving social welfare. However, the private sector is hampered by Bhutan’s small domestic market, the lack of supportive infrastructure, and comparatively high costs of doing business. In response, the program to support the development of MSME remains relevant to support the government’s efforts toward employment and income generation and to promote sustainable and broad-based economic growth.

III. STATUS OF TRANCHE RELEASE POLICY ACTIONS

15. There are 10 policy actions for the third tranche release of the program grant (Grant 0088). Table 1 summarizes the status of compliance with regards to the third tranche release policy actions.

Table 1: Summary of Status of Compliance with Third Tranche Release Policy Actions

Focus of Reform Policy Actions to Be Taken Prior Status of Compliance to Third Tranche Release A. Establish a policy, strategy, and institutional framework for MSME development 1. Improve organizational Government to adopt the MSME Fully complied structure and develop an policy, strategy and institutional

11 ADB. 2012. Asian Development Outlook Update. Manila. 12 ADB is preparing a program loan to Bhutan in early 2013 to help improve overall economic management to address impediments to sustainable growth.

appropriate policy, strategy, framework, and development and institutional framework for program with 3-year action plan for MSME development MSME development. B. Enhance business laws and regulations and facility business processes 1. Enhance legal and regulatory Government to review and revise, Fully complied structure and conduct RIA as needed, the draft legislations based on RIA recommendations for submission to the National Assembly Government to adopt the approved Fully complied RIA policy and designate the MSME division to implement the RIA policy 2. Simplify business formalization Reduce overall time involved in Fully complied process business formalization process to less than 30 days, aiming to approximate international best practice 3. Introduce OSSs to facilitate MSME division to set up a website Fully complied business formalization process with complete information on the business formalization process and prepare a brochure, detailing the process of business formalization with time and costs involved, for public dissemination. MTI to establish OSS units in the Fully complied RTIOs at the regional level 4. Increasing accountability and MSME division to disseminate Fully complied efficiency of RTIOs performance benchmarks to the public and RTIOs to implement performance benchmarks set by MTI; establish complaints desk to obtain feedback from public users C. Increase access to market-based finance 1. Establish a central registry to RMA to make the central registry Fully complied encourage secured fully operational as per approved transactions plan. D. Strengthen business support infrastructure 1. Broaden BDS support with Cost-sharing facility to be fully Fully complied private sector participation operational. 2. Improve quality control and SQCA or its successor Bhutan Fully complied product standards Standards Bureau (established under the Standards Act) to approve the plan for establishment of product standard, testing facilities, and product certification. BDS = business development service, MSME = micro, small and medium-sized enterprise, MTI = Ministry of Trade and Industry, OSS = one-stop-shop, RIA = regulatory impact assessment, RMA = Royal Monetary Authority, RTIO = regional trade and industry office, SQCA = Standard Quality Control Authority. Sources: ADB project review missions 2010–2012; ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Kingdom of Bhutan: Micro, Small, and Medium-Sized Enterprise Sector Development Program. Manila.

16. Government to adopt the MSME policy, strategy and institutional framework, and development program with 3-year action plan for MSME development (policy action A.1). The development of (i) an MSME policy, (ii) a strategy and institutional framework, and (iii) a development program is one of the four program outputs (para. 2). The three documents provide Bhutan’s long-term MSME development roadmap and implementation plan. The draft MSME policy, titled Cottage, Small and Medium Industry Policy, was endorsed by the Ministry of Economic Affairs (MOEA) for submission to the Gross National Happiness Commission (GNHC) on 10 May 2012. Following the GNHC endorsement, the MSME policy was submitted to the cabinet for approval on 24 July 2012. The cabinet approved the policy on 3 August 2012. The MSME strategy and institutional framework and development program with 3-year action plan were finalized on 31 August 2012. The other two documents are titled Cottage, Small and Medium Industries Development Strategy (2012–2020) and Action Plan (2012–2014). The strategy provides MSMEs with a development vision within the framework of the approved policy. The action plan supports the first 3 years of implementation of the strategy with detailed steps to be undertaken by all relevant government ministries, agencies, and private sector stakeholders. These two documents were approved by the MOEA on 5 September 2012. This tranche release policy action is fully complied with.

17. Government to review and revise, as needed, the draft legislations based on regulatory impact assessment (RIA) recommendations for submission to the National Assembly (policy action B.1). RIA is a review process that assesses and improves regulatory effectiveness. The RIA piloting work under the project grant (Grant 0089) focused on the regulatory impact assessments on business legislations and policies related to MSME and general business development, which is one of the four program outputs (para. 2). The government conducted pilot RIAs on (i) Business Start-up in Bhutan and (ii) Improving Entrepreneurial Skills Development and Access to Finance for Cottage and Small Industries in Bhutan. The Committee of Secretaries (COS)13 endorsed both documents on 6 September 2010. The MOEA conducted further RIA reviews on (i) Enterprise Registration Bill in Bhutan (2012), which was finalized by the MOEA on 27 August 2012, and (ii) Foreign Direct Investment Rules and Regulations (2012), which was finalized by the MOEA on 19 July 2012. The Enterprise Registration Bill will be presented to the COS for endorsement to be submitted to the Parliament. This tranche release policy action is fully complied with.

18. Government to adopt the approved RIA policy and designate the MSME division to implement the RIA policy (policy action B.1).14 The COS during its 26th session approved the Rules and Regulations for Mainstreaming RIA System in Bhutan (2011) and RIA Guideline (2011) on 1 December 2011. The cabinet approved both documents as RIA policy on 4 April 2012. Jacob & Associates, a consultancy recruited under this component, conducted a total of 2,410 person-hours of training with government officials from 8 October 2008 to 11 February 2011, covering RIA policy introduction, methodologies, procedures, and consultation. The Department of Cottage and Small Industry (DCSI) of the MOEA has been implementing the RIA component since the commencement of the program. Through its efforts, an RIA unit was established under the Cabinet Secretariat on 1 December 2011 to expand the implementation of RIA to sectors other than MSME and business development. A regulatory registry of legal measures is being established to cover (i) registration of regulatory forward plans, (ii)

13 The Committee of Secretaries consists of secretaries of all line ministries and is headed by the Cabinet Secretary. Its functions include examination and review of administrative rules and regulations, procedures, manuals, and guidelines as submitted by any ministry. 14 The MSME division has been replaced by the Department of Cottage and Small Industry (DCSI) of the MOEA.

6 registration of draft legal measures and RIA reports, and (iii) registration of existing regulations. This tranche release policy action is fully complied with.

19. Reduce overall time involved in business formalization process to less than 30 days, aiming to approximate international best practice (policy action B.2). Reduction of the business formalization process is a key program output listed in para. 2.15 Following the practice of the first tranche release, ADB obtained an official letter from the government stating that, by adopting the same eight procedures used by the World Bank, the average number of days for business formalization in Bhutan is 29. 16 More specifically, the government has implemented one multipurpose security clearance certificate from April 2009 to significantly shorten such processing time from the Royal Bhutan Police to 3 days (Appendix 7). Regional trade and industry offices (RTIOs) throughout Bhutan have been delegated power to approve the licensing of small and cottage businesses with a fixed investment under Nu10 million. RTIOs are also authorized to issue environmental clearances to businesses in 17 sectors. These efforts greatly expedited MSMEs’ business approval process, which was previously available only at the Project Development Services Division of the Department of Industries and at the Environmental Unit of the MOEA in the capital of Thimphu. Furthermore, the government conducted a detailed review of the environmental clearance process and waived such a clearance for 59 business sectors, most of which are MSMEs with limited environmental impact. As already approved in the progress report on the second tranche release dated August 2011, the business formalization in Bhutan was 29 days and remains valid as of October 2012. This tranche release policy action is fully complied with.

20. MSME division to set up a website with complete information on the business formalization process and prepare a brochure for public dissemination that details the process of business formalization with time and costs involved (policy action B.3). The DCSI of the MOEA developed a website with information on the business formalization process.17 A brochure titled “Improved Services” has been circulated by the DCSI to the general public in 2012 and it provides detailed information, including time and cost, on the business formalization process. Because both the government-to-citizen (G2C) initiative and government- to-business (G2B) initiative also cover business registration and other business formalization processes, similar information is also provided on the G2C and G2B websites.18 This tranche release policy action is fully complied with.

21. The Ministry of Trade and Industry (MTI) to establish one-stop shop (OSS) units in the RTIOs at the regional level (policy action B.3).19 The rationale for introducing OSSs is to provide convenient single-access points throughout Bhutan to offer business registration and related services otherwise available only in Thimphu. This component is designed to ease market entry for business start-ups. The six RTIOs already provide business registration and related services designed for OSS, including MSME licensing. In addition, the G2C initiative

15 Business formalization refers to the process of setting up a business, measured by the number of days. 16 The adoption of the 29 days is based on the official letter from the government and an accompanying calculation spreadsheet and backup files to substantiate its claim. The government’s final tally of 29 days, using the same World Bank methodology and eight categories, is much shorter than the 46 days cited in the 2011 World Bank Doing Business Survey. The government submitted an official letter to the Executive Director for Bhutan at the World Bank on 6 July 2011 to rectify the total number of days in business formulation process to 29 days. 17 The website address is http://www.bhutanmsme.org, hosted by the DCSI of the MOEA. 18 The website addresses are http://www.citizenservices.gov.bt and http://www.g2c.gov.bt (hosted by the G2C initiative) and http://www.g2b.gov.bt (hosted by the MOEA). Because the same information is provided on multiple websites, the government would need to consolidate these information in the future. 19 The MTI has been replaced by the Ministry of Economic Affairs.

7 covers the same services through 205 local community centers, reaching far broader areas than the six RTIOs were designed to cover. This tranche release policy action is fully complied with.

22. MSME division to disseminate performance benchmarks to the public and RTIOs to implement performance benchmarks as set by MTI; establish complaints desk to obtain feedback from public users. (policy action B.4). The MOEA signed a performance compact with the G2C initiative on 4 January 2011 on the simplification and automation of cottage and small industry licensing. The performance benchmarks include (i) citizens’ overall time spent on obtaining the licensing service, (ii) citizens’ time spent on each step of application, verification, approval, and issuance of the business license, (iii) citizens’ time spent on the physical travel time to the licensing centers, and (iv) public resources utilization in providing the licensing service. Performance benchmarks of services availability, turnaround time, eligibility, and fees are disseminated on the G2C initiative website (footnote 18). In terms of the complaint desk, the contact information is on the websites of the G2C initiative and the DCSI as well as in the DCSI “Improved Services” brochure. The G2C system platform also provides comprehensive feedbacks on the non-compliances of the performance benchmarks. Further, the G2C initiative’s “voice of customers” service channels individual complaints to the Prime Minister’s office and/or the concerned line ministry ministers for action. This tranche release policy action is fully complied with.

23. The Royal Monetary Authority (RMA) to make the central registry fully operational as per the approved plan (policy action C.1). The central registry records movable properties that could be used as collaterals to promote secured transactions and facilitate access to finance by MSMEs. This component is a key program output to increase access to market- based finance. The RMA, the central bank, was selected to establish the central registry. International Securities Consultancy Limited (ISC), a consultancy, was recruited on 9 May 2011 to provide the support. ISC submitted detailed implementation plan of the central registry to RMA on 21 August 2012 and the RMA subsequently accepted the report. The hardware and software were procured through a local vendor, Peljorkhang Private Limited (Bhutan). The contract with the vendor was signed on 27 January 2012. The system was delivered and installed in June 2012. The RMA accepted the system on 13 September 2012 following a period of testing. Pursuant to section 92 of the Movable and Immovable Property Act of the Kingdom of Bhutan (1999), the government provided the RMA with the legal status on 22 August 2012 to establish the central registry and perform the services. The system went live on 31 October 2012. This tranche release policy action is fully complied with.

24. Cost-sharing facility to be fully operational (policy action D.1). This component was designed to enhance MSMEs’ capacity to strengthen business support infrastructure, which is the last of the four program outputs (para. 2). Despite an initial delay due to poor consultant performance, the replacement consultant team (i) realigned the CSF design; (ii) trained officials in the DCSI, RTIO, and the Bhutan Chamber of Commerce and Industry on the CSF grant scheme; (iii) established CSF guidelines; and (iv) conducted awareness workshops in all 20 administrative districts of Bhutan over the course of 2011 and 2012. The CSF office was established within the DCSI on 17 February 2011 with three full-time staff. However, the CSF was unable to disburse funds because of the restrictive disbursement conditions. Based on the difficult ground realities, a minor change in implementation arrangement was approved on 21 May 2012 to facilitate the disbursement of funds. Currently, (i) overseas private business development service (BDS) providers are able to access the CSF,20 (ii) cost sharing ratio is

20 BDS providers are technical training centers that offer services to support business development. The services include information technology, bookkeeping, incense-making, bakery, plumbing, carpentry, and crafts. ADB will

5%, 21 (iii) direct contracting is allowed to select BDS providers 22 if there is only one BDS provider in the region,23 (iv) capital expenditures are allowed, and (v) at least 50 enterprises should benefit from the CSF and there is no individual contract ceiling.24 To entice demand for CSF funds, the CSF was transferred to the Bhutan Development Bank Limited (BDBL) to be grouped with its existing MSME loan applications. By combining the business development services with BDBL’s MSME loans, the original development impact has been significantly strengthened. There are 110 applications for the CSF fund as of 26 October 2012, and BDBL is working towards disbursing the balance of the $875,000 allocated for this component by 30 November 2012. This tranche release policy action is fully complied with.

25. The Standard Quality Control Authority (SQCA) or its successor the Bhutan Standards Bureau (established under the Standards Act) to approve the plan for the establishment of product standards, testing facilities, and product certification (policy action D.2). This component intends to strengthen business support infrastructure by establishing high product standards and strict quality control on goods produced by MSMEs to improve their competitiveness in domestic and international markets. This component also benefits the health, safety, and welfare of the public; assists and protects consumers; and promotes industrial efficiency and development. The SQCA was the national standards body for standardization and quality control. The Bhutan Standards Bureau (BSB) was established upon the enactment of the Bhutan Standards Act 2010 by the Parliament on 7 July 2010 to succeed the SQCA. The BSB is now an autonomous organization and an umbrella institution that coordinates and oversees all standardizations and related services in Bhutan. IDRG Consultancy Services (India), a consultancy recruited for this component, prepared a 3-year corporate plan, which was approved sequentially by the BSB board on 14 September 2011 and 25 July 2012. In a letter to ADB dated 24 April 2012, the BSB indicated that it has begun implementing the corporate plan. Currently, the BSB is fully operational, with seven established technical committees, a certification scheme, a national metrology laboratory, a testing service, and a technical information center. This tranche release policy action is fully complied with.

IV. PROGRAM IMPLEMENTATION

26. The implementation of the program grant suffered from a delay of 23 months (para. 3). The delays of the first and second tranche releases were partly caused by external factors, particularly the political transition from absolute monarchy to constitutional monarchy in 2007– 2008, when the process suspended various government offices including the ADB counterparts in the Ministry of Finance.

retain the conflict of interest provision to ensure that the CSF funds will not benefit any particular government entity. 21 The cost-sharing ratio of 50% is shared between (i) the MSMEs that apply for BDS and (ii) the CSF grant. 22 The procurement plan of the project grant prohibited direct contracting as stated in the Section C “Procurement Thresholds for Consultant Services” on page 72 of the RRP (ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Kingdom of Bhutan: Micro, Small, and Medium-Sized Enterprise Sector Development Program. Manila). 23 Since intra-country travel is difficult owing to dispersed population settlement and a poorly developed road network, the selection of the BDS providers should be based on a localized region with easy access by the residents. 24 ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Kingdom of Bhutan: Micro, Small, and Medium-Sized Enterprise Sector Development Program. Manila (para. 93, p. 23).

27. Prior to the first tranche release, with the dissolution of the cabinet, the private sector development committee did not function in 2008.25 Significant time was required for the MOEA to restructure the committee to comply with the first tranche release requirement of having at least 40% of its members from the private sector. In addition, because of extended reviews of the program’s consultant recruitment from October 2008 to June 2009, some key experts were reassigned to other projects and were no longer available.

28. Prior to the second tranche release, poor consultant performance contributed to repeated replacements of consultants per the requests of the government and ADB. In addition, the RMA’s central registry project could not proceed in early 2010 because no suitable consultants were identified during the first tendering.26 Thereafter, few RMA staff resources were available to expedite a new round of consultant recruitment. This delay should be viewed against the backdrop of the RMA’s usually satisfactory project implementation performance.

29. Overall, these delays did not reflect any lack of commitment on the part of the government to implement the program. Rather, following the removal of some obstacles, the government has demonstrated substantial dedication to carry the project forward within a relatively short period of time.

30. Table 2 summarizes the achievement of the program targets:

Table 2: Achievement of the Program Targets

Targets Performance Indicators Status/Updates Impact A vibrant and expanding MSME Increased broad-based Although the impact indicator is sector leading to accelerated private and/or MSME sector too early to be measured, initially private sector development for participation in economic available information indicates broad-based, sustainable activities, measured by: that the number of MSMEs in economic growth (i) private sector contribution to Bhutan has increased from GDP increased, 16,557 in 2006 to 27,982 in (ii) total employment by private December 2011. and/or MSME-oriented sectors, including manufacturing, trade, hotels, and services as percentage of total labor force, exceeds 6% by 2010,a and (iii) economic growth rate is at least 7% per annum.

Outcome Improved enabling environment Days and procedures in setting The DCSI and the G2C initiative for doing business and greater up a new business reduce to 30 have coordinated to streamline access to key resources days or less by 2010 the business formalization process, which has been reduced to 29 days in 2011.

25 In 2000, the government established the committee to initiate and coordinate policies and programs supporting private sector development. This advisory body also supports MSME development with institutional capacity building to define and implement policy, strategy, and programs. 26 The second bidding followed in early 2011, and ADB is assisting the government’s fast-tracking of procurement. The consultant team leader commenced work in May 2011.

Targets Performance Indicators Status/Updates Share of total loan portfolio in the The share of total loan portfolio in MSME-oriented sector by the the MSME-oriented sector in target financial institution, BDFC, BDFC (succeeded by BDBL) was exceeds 25% by 2010 66.7% as of 2009 and 58.7% as of September 2012.

At least 250 private sector Actual ground conditions have businesses assisted by the cost- made such a target difficult to sharing facility by 2010 attain. A minor change in scope was approved in May 2012 to change such a target to 50. The implementation is to be completed by 30 November 2012.

Outputs 1. Establishment of a Establishment of an MSME The DCSI of the MOEA has been coordinated policy, strategy, division to facilitate coordination playing such a role, including and institutional framework between different ministries and being the ADB grants’ project for MSME development other stakeholders, including the management unit. private sector

Prepared and adopted long-term An MSME policy, strategy, and policy and strategy (i.e., white action plan have been adopted paper) for MSME development by the government.

2. Enhanced business laws and Developed RIA methodology, The government has developed regulations. policy, and guidelines the RIA rules and regulations and RIA guideline, which covers RIA methodology, policy, and guidelines.

Piloted RIA on two selected draft RIA has been piloted on the business laws (e.g., Bhutan Bhutan enterprise registration Enterprises Registration Act bill. and/or Industries and Investment Act, or any other legislation relevant to MSME development )

Reduced time involved in The time required for business business formalization process formalization has been reduced from 62 days to 30 or even closer to 29 days as of 2011. to international best practice

Established OSS units at the All business formalization RTIOs with approved and services have been delegated to adopted action plans and the 205 community centers and 6 performance benchmarks RTIOs throughout Bhutan. The work has been undertaken by combined efforts with the G2C initiative.

3. Increased access to market- Approved and adopted The 5-year business plan was based finance. BDFC 5-year business plan adopted by the BDBL board for aiming at providing suitable implementation in 2008. The

Targets Performance Indicators Status/Updates financial services to MSMEs BDBL’s disbursement to MSMEs has been expanding and has benefited partly from the ADB credit facility to the BDBL.

Improved MSME lending practice MSME loans from the BDBL at BDFC by increasing the share (succeeding BDFC) are about of total loan portfolio allocated in 58.7% of the total loan portfolio the MSME-oriented sector, and as of October 2012. BDBL’s NPL reducing its NPL ratio (e.g., from ratio has been improving from 15% in 2006; increasing from 21.3% in 2007 to 8.3% in 2011. 15% of total loan portfolio distributed in the manufacturing sector in 2006)

Establish a central registry The central registry at RMA has for secured transactions at been fully established. The RMA system went live on 30 October 2012.

4. Strengthened business Established cost sharing facility The CSF has been established support infrastructure to promote quality business and it is expected that the development services allocated $875,000 be disbursed by 30 November 2012.

Draft standards act submitted to Bhutan Standards Act 2010 was the National Assembly approved by the Parliament on 7 July 2010.

Prepared draft plan for testing, The BSB has been established to establishing standards, and replace the SQCA and is fully product certification operational.

ADB = Asian Development Bank, BDBL = Bhutan Development Bank Limited, BDFC = Bhutan Development Finance Corporation Limited, BSB = Bhutan Standards Bureau, CSF = cost-sharing facility, DCSI = department of cottage and small industry, G2C = government-to-citizen, GDP = gross domestic product, GNHC = Gross National Happiness Commission, MSME = micro, small, and medium-sized enterprise, NPL = nonperforming loan, OSS = one-stop shop, RIA = regulatory impact assessment, RMA = Royal Monetary Authority, RTIO = regional trade and industry office, SQCA = Standard Quality Control Authority. Sources: ADB project review missions 2010–2012; ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Kingdom of Bhutan: Micro, Small, and Medium-Sized Enterprise Sector Development Program. Manila.

V. PROGRAM ASSURANCES

31. In accordance with the provisions of the grant agreement between ADB and Bhutan on the release of the third tranche, ADB understands that the government still satisfactorily complies with all the tranche release policy actions under the first and second tranches.

VI. CONCLUSION

32. The 10 tranche release policy actions are key output milestones of the MSME Sector Development Program. Policy action A.1 ensures that the overarching MSME sector policy is in place. Policy actions B.1, B.2, B.3, and B.4 improve the legislative framework and environment for doing business. Policy action C.1 helps establish a movable property central registry in Bhutan to facilitate access to market-based finance. Policy actions D.1 and D.2 provide direct financial support to business development services and improve product standards to strengthen business support infrastructure. These milestones help address major constraints on Bhutan’s MSME development.

33. The program has significantly improved MSME development in Bhutan. The government now has a roadmap to pursue a long-term MSME sector development strategy. Comprehensive institutional infrastructure has been established at the MOEA and through the G2C initiative to improve business formalization, while relevant regulations are being better screened and reviewed. Market-based finance is being improved. Credit has been channeled through the BDBL to MSMEs. Improved business support infrastructure is in place.

34. The achieved policy actions for third tranche release accomplished most program outputs with respect to (i) developing an MSME policy, (ii) enhancing business laws and regulations through piloting RIA and reducing the time required for business formalization, (iii) supporting the BDFC (now BDBL) to increase market-based finance, and (iv) establishing a CSF and product standardization to strengthen business support infrastructure.

35. Overall, the development of the MSME sector has been rapid following the commencement of the ADB program. In 2006, it was estimated that there were 16,557 MSMEs in Bhutan. 27 As of December 2011, there were 27,982 licensed cottage and small-scale enterprises in the country (defined as enterprises with investment less than Nu10 million).28 Although the program’s impact on the expansion of the MSME sector will be assessed at a future date, the initially available information indicates that the program has already contributed meaningfully to this development.

VII. PRESIDENT’S DECISION

36. In view of the progress made in the implementation of the Micro, Small and Medium Sized Enterprise Sector Development Program, as evidenced by the full compliance with all ten tranche release conditions, the President is satisfied with the overall implementation of the Program, and that the necessary conditions for the release of the third tranche of the Program have now been fulfilled. In accordance with the established procedure, the President will authorize the release of the third tranche in the amount of $2,000,000. The authorization shall be effective not less than 10 working days after the circulation of this progress report to ADB’s Board of Directors.

27 Footnote 1, p. 2. 28 Ministry of Economic Affairs. 2011. Cottage & Small Industry of Bhutan Overview 2011. Thimphu.

Appendix 1 13

DESIGN AND MONITORING FRAMEWORK

Design Performance Data Sources/Reporting Assumptions Summary Targets/Indicators Mechanisms and Risks Impact Assumptions A vibrant and Increased broad-based RMA annual reports and Political stability and expanding MSME private and/or MSME sector other government government commitment sector leading to participation in economic statistics to carry out the reform accelerated private activities, measured by: agenda sector development for ADB documents, such as broad-based, (i) private sector Bhutan country program Favorable response from sustainable economic contribution to GDP strategy papers, country the private sector growth increased, assistance program (ii) total employment by evaluation reports, and private and/or MSME- program completion oriented sectors, reports including manufacturing, trade, ADB missions hotels, and services as percentage of total labor force, exceeds 6% by 2010,a and (iii) economic growth rate is at least 7% per annum.

Outcome Assumption Improved enabling Days and proceduresb in Official copies of Continuing strong political environment for doing setting up a new business government’s will to undertake the business and greater reduce to 30 days or less confirmation of the reform agenda access to key by 2010 actions undertaken resources Risks Share of total loan portfolio Official copies and Policy reforms reversed in the MSME-oriented publication of government or not implemented sector by the target strategies financial institution, BDFC, Insufficient counterpart exceeds 25% by 2010 Program progress reports support to undertake and continue the reforms At least 250 private sector ADB review missions businesses assisted by the cost-sharing facility by 2010

Outputs Assumptions 1. Establishment of a Establishment of an MSME Official copies of Adequate resources and coordinated policy, division to facilitate government’s budget support available strategy, and coordination between confirmation on the to carry out all the institutional different ministries and actions undertaken activities framework for other stakeholders, MSME development including the private sector Official copies and Strong government publication of government commitment to pursue Prepared and adopted strategies the reform agenda long-term policy and strategy (i.e., white paper) Program progress reports Good coordination of, and for MSME development implementation support ADB review missions from, government

14 Appendix 1

Design Performance Data Sources/Reporting Assumptions Summary Targets/Indicators Mechanisms and Risks 2. Enhanced business Developed RIA Official copies of agencies and laws and regulations methodology, policy, and government’s stakeholders guidelines confirmation of actions undertaken Qualified consulting Piloted RIA on two selected services provided to draft business laws (e.g., Official publication of assist project Bhutan Enterprises government strategies implementation Registration Act and/or Industries and Investment Official copies of laws Adequate technical Act, or any other legislation and regulations assistance provided to relevant to MSME strengthen capacity in development ) Program progress reports BDFC

Reduced time involved in ADB review missions Risks business formalization Loss and/or lack of process from 62 days to 30 qualified staff, including or even closer to counterpart staff international best practice Expected results not fully Established OSS units at met for lack of the RTIOs with approved understanding, and adopted action plans consensus, or political will and performance benchmarks Inadequate staffing, skills, or training to implement 3. Increased access to Approved and adopted Official copies of BDFC’s the BDFC business plan, market-based BDFC 5-year business plan board decision or an unsatisfactory finance aiming at providing suitable financial performance by financial services to BDFC. MSMEs

Improved MSME lending practice at BDFC by increasing the share of total loan portfolio allocated in the MSME-oriented sector, and reducing its NPL ratio (e.g., from 15% in 2006; increasing from 15% of total loan portfolio distributed in the manufacturing sector in 2006)

Establish a central registry for secured transactions at RMA

4. Strengthened Established cost sharing Official copies of business support facility to promote quality government’s infrastructure business development confirmation of actions services taken

Draft standards act Official copies of acts, submitted to the National laws, and regulations

Appendix 1 15

Design Performance Data Sources/Reporting Assumptions Summary Targets/Indicators Mechanisms and Risks Assembly Program progress reports Prepared draft plan for testing, establishing ADB review missions standards, and product certification

Activities with Milestones Inputs 1. Establish a policy, strategy, and institutional framework for MSME ADB ($15 million) development 1.1. MTI to establish a specialized MSME division to facilitate coordination Program grants of $6 between different ministries and other involved government agencies and million to support the representatives from the private sector by November 2007 (completed) government’s reform 1.2. MTI to prepare a draft long-term policy and strategy framework and agenda program for MSME development (a white paper on MSME development), with a rolling 3-year action plan, based on competitiveness study, supply- Project grants of $9 chain and value-added analyses, and consultation with the private sector million to support and relevant stakeholders by May 2009 (i) credit assistance 1.3. Government to disseminate the white paper on MSME development and ($5 million) discuss with all stakeholders in a proper forum to be set up for the purpose (ii) CSF ($1 million) by May 2009 (iii) technical support 1.4. Government to adopt the MSME policy and strategy framework and for program development program with the 3-year action plan for MSME development implementation by May 2009 and institutional 1.5. MSME division to implement first year of the 3-year action plan for MSME capacity building development by November 2010 ($3 million from 1.6. Provide institutional capacity building to MSME division to undertake the ADB’s Special abovementioned actions, including conducting and as necessary Funds resourcesd) synthesizing available competitiveness studies and cluster and supply-chain analyses by November 2010 Government ($1.6 million) 2. Enhance business laws and regulations 2.1 MTI to establish an RIA working group under the MSME division to undergo For local counterpart training and subsequently undertake pilot implementation of RIA by support, office December 2007 accommodation, 2.2. RIA working group to conduct pilot RIA exercises on the draft Bhutan communication, and Enterprises Registration Act and/or Industries and Investment Act or any contingencies other legislation relevant to MSME development by May 2009 2.3. RIA working group to submit recommendations for the MSME division to undertake RIA and adoption of an RIA policy by May 2009 2.4. MSME division to review and revise, as needed, the draft legislation based on RIA recommendations by May 2009 2.5. MTI to adopt the approved RIA policy and designate the MSME division to implement the RIA policy by November 2010 2.6. Government to submit revised legislation to the National Assembly by November 2010 2.7. Government to reduce overall time involved in business formalization process from 62 to 43 days, by December 2007; from 43 to 30 days by May 2009; from 30 days to close to international best practice by November 2010 2.8. Government to establish an OSS working group, consisting of government officers from all relevant administrative levels by December 2007 2.9. OSS working group to submit the action plan for introducing OSS units at the regional level, including introduction of OSS performance benchmarks

16 Appendix 1

Design Performance Data Sources/Reporting Assumptions Summary Targets/Indicators Mechanisms and Risks Activities with Milestones by May 2009 2.10. MTI to establish OSS units in the RTIOs at the regional level and approve the action plan proposed by the OSS working group to establish OSS units in the RTIOs by May 2009 2.11. MSME division to set up a website with complete information on the business formalization process and to disseminate brochures with detailed information about the license process and time and costs involved by November 2010 2.12. MTI to assign the MSME division to commence review and consideration of establishment of performance benchmark and monitoring system for RTIOs by December 2007 2.13. MTI to introduce performance benchmarks and monitoring system for enhancing RTIO performance by May 2009 2.14. MTI to disseminate performance benchmarks to the public and RTIOs to implement performance benchmarks as set by MTI; establish complaints desk to obtain feedback from public users by November 2010 2.15. MTI to monitor the performance of RTIOs through surveys and against performance benchmarks by November 2010 2.16. Provide training and technical assistance to MSME division and the RIA working group to implement the agreed reform agenda and pilot RIA on selected business laws by November 2010

3. Increase access to market-based finance 3.1. BDFC board to approve and adopt the 5-year strategy and business plan, which includes an appropriate corporate governance structure, human- resource strategy, and performance targets by December 2007 and/or before first tranche release 3.2. BDFC to implement the strategy and business plan by May 2009 3.3. BDFC to submit a review of program implementation and plan for taking corrective actions, as necessary, by November 2010 3.4. MTI to assign the MSME division to review existing credit and/or guarantee schemes and other incentives provided to MSMEs with respect to effectiveness by December 2007 3.5. MSME division to submit plan to rationalize incentives for MSMEs by May 2009 3.6. In close consultation with ADB, Government to rationalize incentives for MSMEs with increased government reliance on market-based finance for MSME assistance by November 2010 3.7. RMA to form a working group to commence a feasibility study for establishment of a central registry at RMA by December 2007 3.8. Government, based on recommendations of the working group, to prepare plan to establish the central registry at RMA by May 2009 3.9. RMA to establish the central registry, including drafting and issuing necessary legal amendments, including regulations and institutional structure by November 2010 (phase I completed by August 2008; phase II by May 2009; and the central registry fully operational by November 2010) 3.10. Provide technical support and advisory services to establish the central registry at RMA by November 2010

4. Strengthen business support infrastructure 4.1. MSME division to assess BDS requirements by MSMEs and based on the recommendations of TA 4412c to establish a CSF to meet identified needs by December 2007

Appendix 1 17

Design Performance Data Sources/Reporting Assumptions Summary Targets/Indicators Mechanisms and Risks Activities with Milestones 4.2. MSME division to establish a CSF by May 2009 4.3. MSME division to start implementation of the CSF by November 2010 4.4. Establish a standards working group to determine quality control and product certification standards for key industries in the MSME sector by December 2007 4.5. SQCA to submit the Standards Act to the National Assembly by May 2009 4.6. Based on the recommendations of the standards working group, SQCA to prepare plan for establishment of standards, testing, and product certification by May 2009 4.7. SQCA, or its successor Bhutan Standards Bureau (established under the Standards Act) to approve the plan for establishing product standard, testing facilities, and product certification by November 2010 4.8. Provide institutional capacity-building and technical support to MSME division and SQCA to undertake the committed reform actions, including implementation of the CSF and establishment of product standards by November 2010

ADB = Asian Development Bank, BDFC = Bhutan Development Finance Corporation, BDS = business development service, CSF = cost-sharing facility, GDP = gross domestic product, MSMEs = micro, small, and medium-sized enterprises, MTI = Ministry of Trade and Industry, OSS = one-stop shop, RIA = regulatory impact assessment, RMA = Royal Monetary Authority, RTIO = regional trade and industry office, SQCA = Standards and Quality Control Authority. a Current employment in manufacturing, tourism, and services is 6% of total labor force. The data is calculated based on RMA. 2007. Annual Report of Royal Monetary Authority 2005/6. Thimphu. b Definitions and calculation refer to World Bank. 2006. Doing Business. Washington, DC. c ADB. 2004. Technical Assistance to the Kingdom of Bhutan for Small and Medium Enterprise Development. Manila (TA 4412-BHU approved on 8 October). d An additional $400,000 is financed by the Australian Agency for International Development through ADB. 2006. Proposed Technical Assistance for the Development Partnership Program for South Asia. Manila (TA 6337-REG approved on 18 August). Note: The Ministry of Trade and Industry (MTI) was restructured following the program inception and its relevant functions were taken over by the Ministry of Economic Affairs (MOEA). Sources: ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Kingdom of Bhutan: Micro, Small, and Medium-Sized Enterprise Sector Development Program. Manila.

18 Appendix 2

STATUS OF THIRD TRANCHE RELEASE POLICY ACTIONS

Focus of Reform Actions to be Taken Prior to Current Update Third Tranche Release A. Establish a policy, strategy, and institutional framework for MSME development 1. Improve organizational Government to adopt the MSME Third tranche release policy structure and develop an policy, strategy, institutional action fully complied with appropriate policy, framework, and development strategy, and institutional program with 3-year action plan The MSME policy, titled Cottage, framework for MSME for MSME development Small and Medium Industry Policy, development was submitted to the GNHC on 10 May 2012. The GNHC endorsed the policy on 24 July 2012. The cabinet approved the policy on 3 August 2012. The MSME strategy, institutional framework, and development program with 3-year action plan were approved by the MOEA on 5 September 2012.

B. Enhance business laws and regulations 1. Enhance legal and Government to review and Third tranche release policy regulatory structure and revise, as needed, draft action fully complied with conduct RIA legislation based on RIA recommendations for The government conducted pilot submission to the National RIAs on (i) Business Start-up in Assembly Bhutan, (ii) Improving Entrepreneurial Skills Government to adopt the Development and Access to approved RIA policy and Finance for Cottage and Small designate the MSME division to Industries in Bhutan, (iii) Enterprise implement RIA policy Registration Bill in Bhutan (2012), and (iv) Foreign Direct Investment Rules and Regulations (2012). All relevant documents have been revised and/or submitted for endorsements.

The cabinet approved the Rules and Regulations for Mainstreaming RIA System in Bhutan (2011) and RIA Guideline (2011) documents as RIA policy on 4 April 2012. MSME-related RIA policy has been implemented by the DCSI of the MOEA. In addition, an RIA unit was established under the Cabinet Secretariat on 1 December 2011 to expand the implementation of RIA to sectors other than MSME and business development.

2. Simplify the business Time required for business Third tranche release policy formalization process. formalization reduced to less action fully complied with than 30 days, aiming to

Appendix 2 19

Focus of Reform Actions to be Taken Prior to Current Update Third Tranche Release approximate international best In line with the first tranche release practice policy action, the government provided an updated calculation of the business formalization process, which shows that the number of days for business formalization was 29 in 2011 and remains valid as of 2012.

3. Introduce OSSs to MSME division to set up a Third tranche release policy facilitate the business website with complete action fully complied with formalization process. information on business formalization and prepare a The DCSI website has been brochure for public developed. A brochure titled dissemination detailing business “Improved Services” has been formalization and its time and circulated by the DCSI to the monetary costs general public in 2012. The G2C and G2B initiatives also cover MOEA to establish OSS units in business registration and other regional RTIOs formalization processes, and similar information on business formalization with time and costs involved is also provided on the G2C and G2B websites.

The work of the G2C initiative replaced the work of OSSs. The scope of the G2C work covers 205 local community centers, far broader than the areas the six RTIOs were designed to cover.

4. Increase the accountability MSME division to disseminate Third tranche release policy and efficiency of RTIOs performance benchmarks to the action fully complied with public, and RTIOs to implement performance benchmarks as set The MOEA signed a performance by MOEA; RTIO to establish compact with the G2C initiative on complaints desk to obtain 4 January 2011 on the feedback from public users simplification and automation of cottage and small industry licensing. Performance benchmarks of services availability, turnaround time, eligibility, and fees are provided on the G2C website. In terms of the complaint desk, the contact information is on the G2C and DCSI websites as well as in the DCSI brochure. The G2C system platform also provides comprehensive information on the non-compliances of the performance benchmarks. The G2C initiative’s “voice of

20 Appendix 2

Focus of Reform Actions to be Taken Prior to Current Update Third Tranche Release customers” service directs individual complaints to the Prime Minister’s office or the concerned line ministry ministers for action.

C. Increase access to market-based finance 1. Restructure the BDFC as N/A a sustainable and efficient financial institution dedicated to MSMEs and rural lending

2. Establish a central registry RMA to make the central registry Third tranche release policy to encourage secure fully operational as per approved action fully complied with transactions plan The central registry has been fully established and its legal status has been provided on 22 August. The system went live on 31 October.

D. Strengthen business support infrastructure 1. Broaden BDS support with CSF to be fully operational Third tranche release policy private sector participation action fully complied with

The CSF has been established and transferred to the BDBL for implementation. The cost-sharing ratio and eligibility criteria have been updated to reflect ground conditions and help facilitate the CSF disbursement. The process was ongoing as of October 2012 and expected to be fully disbursed by 30 November 2012.

2. Improve quality control SQCA or its successor the BSB Third tranche release policy and product standards (established under the action fully complied with Standards Act) to approve the plan for establishing product The 3-year corporate plan was standards, testing facilities, and approved by the BSB board, for product certification implementation on 14 September 2011 and 25 July 2012. The BSB has begun implementing the corporate plan, including the establishment of the standardization division, certification division, metrology and laboratory services division, and international relations division.

ADB = Asian Development Bank, BDFC = Bhutan Development Finance Corporation, BDBL = Bhutan Development Bank Limited, BSB = Bhutan Standards Bureau, CSF = cost-sharing facility, DCSI = Department of Cottage and Small Industry, G2B = government-to-business, G2C = government-to-citizen, GNHC = Gross National Happiness Commission, MOEA = Ministry of Economic Affairs, MSMEs = micro, small, and medium-sized enterprises, OSS =

Appendix 2 21

one-stop shop, RIA = regulatory impact assessment, RMA = Royal Monetary Authority, RRP = Report and Recommendation to the President; RTIO = regional trade and industry office, SQCA = Standards and Quality Control Authority. Sources: ADB project review mission February–March 2011; ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Kingdom of Bhutan: Micro, Small, and Medium-Sized Enterprise Sector Development Program. Manila.

22 Appendix 3

STATUS OF THIRD NON-TRANCHE RELEASE POLICY ACTIONS

Focus of Reform Actions to be Taken Current Status A. Establish a policy, strategy, and institutional framework for MSME development 1. Improve organizational The MSME division to implement The MOEA has endorsed the MSME structure and develop an first year of the 3-year action strategy and action plan on 5 appropriate policy, plan for MSME development September 2012 and has begun the strategy, and institutional implementation of the first year framework for MSME action plan. development B. Enhance business laws and regulations 1. Enhance legal and The government to submit The Enterprise Registration Bill will regulatory structure and revised legislation to the be presented to the COS for conduct RIA National Assembly endorsement to be submitted to the Parliament.

2. Increase accountability The MTI to monitor the The MOEA (which has replaced the and efficiency of RTIOs performance of RTIOs through MTI) has not begun monitoring the surveys and against performance of RTIOs through performance benchmarks surveys and against performance benchmarks. However, the G2C system has a detailed performance monitoring framework to follow.

C. Increase access to market-based finance 1. Restructure the BDFC The BDFC to submit a review of The BDBL (which has replaced the as a sustainable and program implementation and plan BDFC) has submitted both the efficient financial corrective actions, as necessary RAA’s ADB program audit report and institution dedicated to its own performance report on the MSMEs and rural credit facility’s implementation as of lending September 2012.

2. Rationalize government In close consultation with ADB, Five incentives are (i) the credit and guarantee rationalize incentives for MSMEs engagement of the private sector, (ii) schemes and incentives with increased government the provision of a voucher system, provided for MSMEs reliance on market-based finance (iii) cash-flow analysis, (iv) a soft for MSME assistance loan scheme for existing firms, and (v) the introduction of financial leasing. Option (i) has been implemented by the Ministry of Labor and Human Resources, which has prepared a paper on a credit guarantee scheme. Options (iii) and (v) are included in the MSME policy.

D. Strengthen business support infrastructure 1. Improve quality control The SQCA or its successor the The 3-year corporate plan was and product standards BSB to initiate implementation approved by the BSB board for according to the approved plan implementation on 14 September 2011 and 25 July 2012. The BSB has begun implementing the 3-year corporate plan.

ADB = Asian Development Bank, BDFC = Bhutan Development Finance Corporation, BDBL = Bhutan Development Bank Limited, BDS = business development service, BSB = Bhutan Standards Bureau, COS = Committee of Secretaries, G2C = government-to-citizen, MSME = micro, small, and medium-sized enterprise, MOEA = Ministry of

Appendix 3 23

Economic Affairs, MTI = Ministry of Trade and Investment, OSS = one-stop shop, RAA = Royal Audit Authority, RIA = regulatory impact assessment, RMA = Royal Monetary Authority, RTIO = regional trade and industry office, SQCA = Standards and Quality Control Authority. Sources: ADB project review mission February–March 2011; ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Kingdom of Bhutan: Micro, Small, and Medium-Sized Enterprise Sector Development Program. Manila.

24 Appendix 4

PROJECT COST ESTIMATES AND FINANCING PLAN ($)

Financier Total ADB Government and BDFC Item A. Subproject 1: Credit Line to BDFC 1. Credit assistance 5,000,000 5,000,000 0 2. Offices and equipment 35,000 0 35,000 3. Administration costs 200,000 0 200,000 Base Cost (A) 5,235,000 5,000,000 235,000

Physical and Price Contingencies 680,550 0 680,550

Subtotal (A) 5,915,550 5,000,000 915,550

B. Subproject 2: Cost-Sharing Facility 1. Credit assistance 875,000 a. Small grants 562,500 0 b. Large grants 312,500 0 2. Facility management 165,755 a. Long-term staff and administration costs 64,800 14,836 b. Vehicle purchase and maintenance 40,680 27,189 c. Offices and equipment 0 5,500 d. Taxes and duties 0 12,750 Base Cost (B) 1,040,755 980,480 60,275

Physical and Price Contingencies 135,298 21,856 113,442

Subtotal (B) 1,176,054 1,002,336 173,718

C. Subproject 3: Program Implementation and Institutional Capacity Building 1. Consultants a. Remuneration and per diem i. International consultants 1,504,500 1,504,500 0 ii. National consultants 235,000 235,000 0 b. International and local travel 256,000 256,000 0 c. Reports and communications 15,200 15,200 0 2. Office and equipment 393,000 205,000 188,000 3. Taxes and duties 61,500 0 61,500 4. Training and workshops, including manuals 409,000 337,000 72,000 5. Administration costs 180,600 54,600 126,000 Base Cost (C) 3,054,800 2,607,300 447,500

Physical and Price Contingencies 458,220 391,095 67,125

Subtotal (C) 3,513,020 2,998,395 514,625

Total (A+B+C) 10,604,624 9,000,731 1,603,893 ADB = Asian Development Bank, BDFC = Bhutan Development Finance Corporation. Source: ADB estimates.

Appendix 5 25

CHRONOLOGY OF MISSIONS FOR THE MICRO, SMALL, AND MEDIUM-SIZED ENTERPRISE SECTOR DEVELOPMENT PROGRAM

Type of Mission Dates Mission Number of Total Person- Duration Travelers Field Months (days) Days Fact finding 16–27 April 2007 10 3 30 1.0 Appraisal 20–23 August 2007 4 3 12 0.4 Inception 11–12 December 2008 2 2 4 0.1 Tripartite 1–3 September 2009 2 2 4 0.1 Tripartite 21–24 November 2009 4 1 4 0.1 Program review 24–26 January 2010 3 2 6 0.2 Special project administration 10–11 May 2010 2 4 8 0.3 Special project administration 9–11 September 2010 3 3 9 0.3 Program review & handover 24–28 February 2011 4 2 8 0.3 Program review 15–22 July 2011 6 1 6 0.2 Program review 9–13 April 2012 5 2 10 0.3 Final Program review 9-12 October 2012 4 2 8 0.3 Sources: ADB Project Performance Report for Grant 0088/0089-BHU: Micro, Small, and Medium-Sized Enterprise Sector Development Program.

26 Appendix 6

BHUTAN COUNTRY ECONOMIC INDICATORS

Item Fiscal Year 2008 2009 2010 2011 20121 A. Income and growth 1. GDP per capita ($, current) 1,923 1,775 2,059 2,428 2,576 2. GDP growth (%, constant) 10.8 5.7 9.3 8.3 7.9 a. Agriculture 0.8 1.7 1.5 0.6 2.02 b. Industry 20.5 4.8 8.2 8.4 7.92 c. Services 5.4 9.1 12.7 9.4 9.42 B. Saving and investment (% of GDP) 1. Gross fixed capital formation 27.8 32.2 35.4 … … 2. Gross domestic savings 16.1 27.2 33.7 … … C. Money and inflation (annual % change) 1. Consumer price index 6.4 7.01 4.8 8.6 10.1 2. Total liquidity (M2) 2.3 24.6 30.1 21.2 5.43 D. Government finance (% of GDP) 1. Revenue and grants 35.2 40.4 46.4 39.1 31.22 2. Expenditure 34.4 38.6 44.7 43.8 32.82 3. Overall fiscal surplus (deficit) 0.8 1.9 1.6 (4.7) (4.3) 2 E. Balance of payments (annual % change) 1. Merchandise trade balance ($ million) (72) (90) (299) (519) (553) 2. Current account balance (% of GDP) (2.2) (1.1) (9.9) (23.9) (20.0) 3. Merchandise export ($) growth 4.4 (13.8) 5.5 22.2 (6.7) 4. Merchandise import ($) growth 27.4 (9.6) 39.0 40.5 (0.9) F. External payments indicators 1. Gross reserves (months of imports) 12.4 13.9 11.2 9.1 8.63 2. External debt service (% of exports) 17.3 30.5 29.8 52.2 123.23 3. Total external debt (% of GDP) 67.0 69.5 66.6 80.9 91.23 G. Memorandum Items 1. GDP (current prices, Nu billion) 49.5 54.7 61.2 72.5 … 2. Exchange rate (Nu/$, average) 40.4 47.8 46.7 45.3 51.22 3. Population (thousand) 671.1 683.4 696.0 708.3 … ( ) = negative, GDP = gross domestic product. Sources: ADB. 2012. Asian Development Outlook 2012. Manila.; ADB. 2012. Key Indicators 2012. Manila. Royal Monetary Authority of Bhutan. 2010 and 2012. Annual Reports 2008/2009 and 2010/2011. Thimphu. 1 Data for 2012 are projections from Asian Development Outlook 2012 and Asian Development Outlook 2012 Update unless otherwise stated. 2 Data obtained from Royal Monetary Authority of Bhutan Monetary Policy Statement June 2012. 3 Data obtained from Royal Monetary Authority of Bhutan Monetary Policy Statement June 2012, up to March 2012.

Appendix 7 27

GOVERNMENT’S CALCULATION OF WORLD BANK’S EIGHT PROCEDURES FOR BUSINESS FORMALIZATION

World Bank Activity in Line with the World Bank Doing Business Survey Time Taken for All Procedure Criteria in Bhutan Businesses in Bhutan 1 Obtain a clearance from the Royal Thimphu Police (Security 3 days Clearance Certificate) 2 Submission of proposal with the Department of Industry 15 days and 2 hours 3 Registration with Registrar of Companies 3 days and 9 hours 4 Application for a trade or industrial license at the regional trade & 2 days industry office of the MOEA 5 Application for tax payer identification number and registration 1–3 days 6 Making a company seal Not applicable 7 Opening a bank account 1 day 8 Filing evidence of opening a bank account with the registrar of 1 day companies TOTAL 29 days MOEA = Ministry of Economic Affairs, MSME = micro, small, and medium-sized enterprise. Source: Ministry of Economic Affairs, Royal Government of Bhutan, 2011.