This action is funded by the European Union

Transcription

1 EN This action is funded by the European Union ANNEX 2 of the Commission Implementing Decision on the Annual Action Programme 2016 part 1 in favour of Bhutan to be financed from the general budget of the European Union Action Document for Rural Development and Climate Change Response Programme 1. Title/basic act/ CRIS number 2. Zone benefiting from the action/location 3. Programming document 4. Sector of concentration/ thematic area 5. Amounts concerned 6. Aid modality(ies) and implementation modality(ies) Rural Development and Climate Change Response Programme, one single action funded from decisions: 1. CRIS number: ACA/2016/ CRIS number: ENV/2016/ Bhutan (Asia) The action shall be carried out countrywide 1. Multi-annual Indicative Programme (MIP) Bhutan 2. Global Goods and Challenges Programme (GPGC), Global Climate Change Alliance (GCCA+) Rural development Climate Change and Environment Policy Total estimated cost: EUR , of which: 1. EUR for a Sector Reform Contract in support to the renewable natural resources sector 2. EUR for complementary support, including technical assistance, studies, etc. The total cost include EUR by decision ACA/2016/ , and EUR by decision ENV/2016/ (subject to further approval of Commission Implementing Decision on the Annual Action Programme 2016 for the Global Climate Change Alliance Plus (GCCA+) under the Global Public Goods and Challenges Thematic Programme, to be financed from the general budget of the European Union). 1. Direct management Budget support: Sector Reform Contract 2. Direct management procurement of services 1

2 7. a) DAC code(s) Rural development Environmental policy and administrative management b) Main delivery Channel Recipient Government 8. Markers (from CRIS DAC form) General policy objective Not targeted Significant objective Main objective Participation development/good governance Aid to environment Gender equality (including Women In Development) Trade Development Reproductive, Maternal, New born and child health RIO Convention markers Not targeted Significant objective Biological diversity Main objective Combat desertification Climate change mitigation Climate change adaptation 9. Global Public Goods and Challenges (GPGC) thematic flagships Global Climate Change Alliance Plus (GCCA+) 2

3 SUMMARY The Royal Government of Bhutan is successfully implementing the 11 th Five Year Plan (FYP) for which defines specific policies for the so called Renewable Natural Resources (RNR) sector. The sector comprises agriculture, i.e. crop production, livestock and forestry management. The sector is characterised by low competitiveness of the production which results in a high volume of imports. Due to its geography and economic base, Bhutan is vulnerable to climate change which in particular affects the RNR sector. More irregular and higher rainfalls and drier winters are predicted as results of climate change. In addition, threats are often posed by floods including the Glacier Lake Outburst Floods (GLOF). The overall objectives of the Bhutan 11 th five year plan in the RNR sector are: (i) enhanced food and nutrition security; ii) accelerated growth of the RNR sector; iii) enhanced sustainable rural livelihoods, and iv) improved sustainable management of natural resources. The specific challenges of climate change are defined in the Sector Adaptation Plan of Action and the National Adaptation Plan of Action both of which are coherent with the sector FYP. The reforms presented in the 11 th FYP require a long-term strategy and fiscal space to be extended and ensured for the subsequent FYP. Sector reforms include improving public service delivery at the local level and achieve results such as more effective and efficient extension services, mechanisation centres, marketing support, improved planting material, improved breeding stock, investments in irrigation facilities, renewable energy technologies such as small biogas facilities and other climate change resilient technologies as well as better risk reduction management mainstreaming into the 11 th FYP and 12 th FYP. The Ministry of Agriculture and Forestry is implementing the sector policy in cooperation with the local governments. Development partners such as World Bank, Japan International Cooperation Agency and International Fund for Agriculture Development provide technical and financial support. The EU has supported the renewable natural resources sector in Bhutan extensively in the past. An EU sector budget support program supporting the RNR sector has recently been completed in mid The EU considers the sector a priority under the multi-annual indicative programme Given the challenges faced by Bhutan mentioned above, the present action proposes to allocate EUR in support of the renewable natural resources sector taking into account innovative practices for climate change adaptation and mitigation as Sector Reform Contract (sector budget support) as well as complementary EUR for technical assistance and studies (service contracts). The present action proposes to combine EUR from the geographical development cooperation instrument (DCI) with a EUR allocation from the thematic Global Climate Change Alliance (GCCA) programme. 1. CONTEXT 1.1 SECTOR/COUNTRY/REGIONAL CONTEXT/THEMATIC AREA Bhutan is a land locked, Least Developed Country (LDC) in the Himalayas nestled between India and China. Bhutan has a total land area of km 2 of which 72.5 percent of the total area is under forest cover. The terrain ranges from tropical foothills in the south to extremely rugged mountains in the north. The population is about persons. The population below the poverty line is 12 % (as defined by Bhutan: USD 1.25 daily purchasing power). The country developed from an absolute to a constitutional monarchy after a peaceful modernisation and democratisation process only since The overall development approach is 3

4 based on the concept of Gross National Happiness which focuses on equality, sustainability and cultural values alongside economic growth. The development activities are planned in form of five year plans, the current one being the 11 th plan for the period The renewable natural resources (RNR) sector takes a prominent role in the 11 th five year plan of Bhutan as it contributes to the all the four objectives of Gross National Happiness, in particular equitable and sustainable socio-economic development, and preservation of the environment PUBLIC POLICY ASSESSMENT AND EU POLICY FRAMEWORK The current 11 th FYP part for the RNR sector ( ) which has recently gone through a midterm review has four overall objectives: i) enhanced food and nutrition security; ii) accelerated growth of the RNR sector; iii) enhanced sustainable rural livelihoods, and iv) sustainable management and utilization of natural resources. Good governance throughout the RNR sector underpins these goals and overall objectives. This plan provides a strong strategic framework, including a reliable set of goals, objectives and strategies designed to achieve these targets and includes the following: i) enhanced farm productivity; ii) farm mechanisation; iii) agricultural marketing; iv) land development; v) irrigation; vi) the development of value chains; vii) sustainable management of natural resources and biodiversity; viii) contract farming and private sector participation; ix) climate and disaster risk reduction. The Five Year Plan includes 16 'programmes', being implemented by different departments of the MoAF, which relate directly and indirectly to climate change. Despite the progress made in recent years, Bhutan is still facing challenges of low competitiveness and climate change vulnerability (see section below). Regarding specific climate change issues, the 1 st National Adaptation Action Plan (NAPA) was prepared in 2006, updated in 2012 by the National Environment Commission (NEC) and is considered as the 2 nd NAPA. The strategy developed in each NAPA is to rank a series of programmes and projects that have been prepared by various agencies in order of priority, and to search out funding from various donors. The 3 rd NAPA is currently under preparation with the UNDP and NEC. In addition and more recently, in 2015 Bhutan committed to remain carbonneutral at the United Nations Climate Change Conference (COP 21) in Paris and submitted its Intended Nationally Determined Contribution in September 2015 where a series of priority activities for climate change adaptation and mitigation have been included, notably resilient agriculture to contribute towards achieving food and nutrition security. The 1 st Sector Adaptation Plan of Action (SAPA) for the RNR sector was prepared in 2013 under the GCCA programme. Overall, both NAPA and SAPA are coherent with the FYP. The FYP is therefore considered the relevant sector policy for the present action and a proliferation of parallel planning exercises driven by external donor requirements is avoided. The EU has supported the RNR sector in Bhutan extensively since 1982 and included it as a priority under the MIP and More recently, the EU has supported the sector through a EUR sector budget support programme to the MoAF ( ). Additionally, the EU is supporting mainstream climate change into national agricultural policies through a EUR Global Climate Change Alliance (GCCA) programme ( ). Finally, the RNR sector receives human resource capacity building support from the EU through a EUR technical cooperation project ( ). According to mid-term reviews held in 2014, previous budget support operations have proven to be, very successful and Bhutan has demonstrated effective capacity to absorb and adapt to the budget support modality. Bhutan, therefore, expressed interest in continuation of the earlier sector budget support program (RNRSP). As a response, the EU has set aside EUR from the MIP to propose a follow-up budget support operation and an additional EUR

5 would be allocated from the thematic GCCA to complement the efforts in view of the related climate change mitigation and adaptation challenges. Unlike previously, where the EU funded 2 parallel sector budget support programs in the same sector (RNRSP I and GCCA), the present action will combine resources from different EU programs into one single action. The proposed action will be fully aligned with the Bhutan's sector plan, i.e. the 11 th FYP. The financial sustainability of the sector policy is ensured through sharing of costs by the users, i.e. farmers, for the services being provided. Only capital development expenditures are included in donor funding, recurrent expenditure is fully covered by Bhutan's own resources. It is confirmed that there is a credible and relevant national and sector policy that supports the objectives of poverty reduction, sustainable and inclusive growth, sustainable natural resources management, and climate change resilient development and therefore fulfils the pre-conditions for the EU providing budget support STAKEHOLDER ANALYSIS The proposed action has nationwide coverage, but with specific focus on rural areas (which are highly dependent on natural resources and affected by climate change). The programme will benefit farmers, their families and communities, where effective agricultural services will translate into better economic and social outcomes, ensuring resilience of smallholder rural households, cooperative farmers (through tillage, harvesting, thrashing, transport etc.) and commercially organized and informal community organizations. The central institutions involved in the RNR sector are in particular the Ministry of Agriculture and Forestry (MoAF) and its departments involved in the implementation of the 11 th FYP are the key stakeholders of the programme. The MoAF is in charge of policies regarding crop production, livestock, and forestry and is the relevant Ministry for climate change mitigation and adaptation policies. The recent adjustment to more commercial farming approaches under the 11 th FYP entails the incorporation of two new stakeholders: i) the private sector (which will participate through commercial farming and public-private partnerships); and ii) the Food Corporation of Bhutan Limited. The local governments, i.e. the dzongkags (districts) and gewogs (counties) are playing a role in identifying local priority needs, planning activities, and administratively supporting extension agents and other staff at local levels. Community based organisations and cooperatives will help local governments to identify those needs. Specific institutions deal with climate change issues: The Council for Renewable Natural Resource Research of Bhutan belongs to MoAF and is the apex body for relevant research. The MoAF is a key stakeholder in the National Environmental Commission (NEC) which anchors the institutional coordination and reporting arrangements. NEC has set up Climate Change Division and the Multisectoral Technical Committee on Climate Change (MSTCCC), as a permanent mechanism to coordinate and oversees environmental policy development and implementation. In addition the Gross National Happiness Commission is a key stakeholder as it is in charge of the overall planning in all sectors of concern to Bhutan. The Ministry of Finance is also an important stakeholder in particular with regard to the modality of budget support. All the central institutions and departments of MoAF are in general represented during project steering committee meetings and the RNR donor coordination meeting chaired by MoAF Minister. They are also consulted during annual review missions. 5

6 1.1.3 PRIORITY AREAS FOR SUPPORT/PROBLEM ANALYSIS Bhutan is characterised as an agriculture-based society with nearly 60% of the population directly depending on natural resources to sustain their livelihood. Smallholder subsistence farmers occupy the majority of arable land and produce most crop and livestock products. Farmers, however, usually produce for both subsistence and commercial purposes. Some crops and livestock products will be consumed and the surplus will be sold (e.g. horticulture crops or milk). In the last decade several initiatives under the FYPs have produced admirable results and impact, especially as regards poverty reduction in rural areas. Despite the progress made, Bhutan still faces a number of challenges including the following: Climate change and natural disasters: The most likely adverse impacts of climate change in Bhutan include: warming across all climatic zones; overall increase in rainfall during the monsoon with higher risks of Glacier Lake Outburst Floods (GLOF), floods, flash floods and consequent landslides. On the other hand, drying up of springs in the dry season is anticipated to become a greater problem with climate change. The RNR and hydropower are the most vulnerable sectors. In the RNR sector, the areas that need interventions and support are: irrigated paddy rice areas; terraced dryland agriculture; sloping agricultural land without terracing; pastureland; forests under various management systems. All of these have a direct impact on the majority of vulnerable families who rely on agriculture and natural resource management to sustain their livelihoods. Limited availability of agricultural land: Bhutan is extraordinarily rugged and mountainous and about 2.9% (94,903 hectares) of the country s total land is usable for the development of agriculture. Over 70% of the terrain is covered by forests. Such terrain makes investments in infrastructure such as irrigation schemes or farm roads costly. Farm labour shortages: inadequate farm labour due to rural out-migration is widely viewed as a constraint to agricultural production. The structure of the rural workforce has changed dramatically in recent years, with the rural out-migration of men having increased the number of women active in rural agriculture from 21% to 65%. This increased feminisation of agriculture necessitates MoAF to mainstream gender into their plans and programmes. Lack of irrigation: given the characteristics of the terrain, food production in Bhutan is directly linked to the limitations of irrigation, including non-functional irrigation channels, competition for water use, the drying up of water sources, soil erosion and environmentally hazardous conditions. This problem is compounding the climate change impacts mentioned above. Human-wildlife conflict: in addition to limited arable land, Bhutan has large populations of fauna living in close proximity to rural communities, leading to conflict between humans and wildlife. The loss of crops, livestock and/or human life to wildlife entails social and economic costs that jeopardise livelihoods and exacerbate poverty. Lack of credit opportunities: Access to finance is a major constraint for private investors in agriculture since the formal financial sector allocates only limited resources to agriculture at relatively high interest rates and according to stringent conditions. In this context agriculture has been benefiting only from a very small share (2%) of the credit provided by financial institutions. Overall, there is a low efficiency of public service delivery; low agricultural competitiveness inter alia due to low productivity, low economies of scale, limited agricultural marketing opportunities, lack of infrastructure and post-harvest storage facilities, on-farm shortages of labour and lack of credit and insurance opportunities for farmers. Such challenges hamper the performance of the sector and affect the livelihoods of households who rely exclusively on agriculture, the environment and natural resources. 6

7 1.2 OTHER AREAS OF ASSESSMENT FUNDAMENTAL VALUES Bhutan has transitioned from an absolute monarchy to a multi-party democracy. The development of Bhutanese democracy has been marked by the stable and active democratic encouragement and participation of reigning Bhutanese monarchs since the 1950s, culminating in the enactment of Bhutan's Constitution. The first democratic elections in Bhutan began in 2007, and all levels of government had been democratically elected by There have been human rights violations at the end of the 1990s when persons of Nepali origin were expelled following the adoption of a 'one nation one people' policy. A solution still has to be found today for some last remaining persons still living in refugee camps in Nepal. Despite this past development, Bhutan now adheres to the fundamental values of democracy, human rights and the rule of law. As the last UN Human Rights Universal Periodic Review (2009) points out, 'the Royal Government believes that without the enjoyment of all human rights, Gross National Happiness, to which it is also deeply committed, cannot be achieved.' The assessment of fundamental values confirms that Bhutan should continue to be eligible for receiving budget support MACROECONOMIC POLICY Since 2013, Bhutan's economy has experienced a significant revitalization of growth (5%) and an increase in the per capita Gross Domestic Product (GDP) of USD 2,520 as a result of macroeconomic stability during Inflation has moderated to a level of 7.6% against 11.3% percent in 2013 but it has to be noted that the national currency Ngultrum is pegged to the Indian Rupee. The relatively high level of public debt (116% in 2015) is largely due to investments in the hydropower sector, which are expected to generate revenues once operational, hence the risk of unsustainable public debt is limited in this case. On the fiscal front, significant progress has been observed through the strengthening of public financial management, which helped improve the efficiency of public resource mobilization and utilization. The Government has strengthened the legislative base, increased the transparency of budget information, improved control over expenditures and strengthened budget supervision. Recent reports 1 confirm macroeconomic stability scenario. Overall, it can be concluded that Bhutan's macro-economic risks are manageable and that Bhutan fulfils the eligibility criteria for EU budget support PUBLIC FINANCIAL MANAGEMENT (PFM) Improvements in the PFM performance of Bhutan are implemented based on an action plan derived from the last Public Expenditure and Financial Assessment (PEFA) study in A 'PFM Governance Group' has been constituted with members from across the Ministry of Finance and approved by the Cabinet. The members of the group meet regularly on a monthly basis, but do not include members from other ministries/agencies. The PFM Reform Strategy of the Royal Government of Bhutan, was approved in A new PEFA study is currently being conducted and will be completed in early A PFM reform strategy is consequently expected 1 The WB, Bhutan Development Update, May

8 to be agreed and supported by development partners, including the EU through a separate EUR action. PFM topic areas such 'Debt Management and Procurement' and other matters were directly addressed in the Royal Audit Authority (RAA) s work programmes and annual audit reports. The RAA recently published its annual audit report for The RAA had completed 616 audits during the period. Overall the progress made in relation to systems development has been very positive, including a diagnostic study of Government Integrated Financial Management Information System and the launch of Revenue Administration Management Information System for tax collection. Effectiveness of measures for tax payer registration and tax assessment and collection of payments has made substantial progress. For recording and management of cash balances, debt and guarantees, a Treasury Single Account (sweeping) is in place with the majority of accounts being consolidated. The Department of Revenue and Customs has begun developing an integrated web-based system for both tax and non-tax revenue. Bhutan is ramping up its legislative and policy development activities, which will result in the strengthening of the institutional reform arrangements for PFM. Bhutan continues to maintain a strong zero tolerance policy regarding fraud and corruption, underpinned by two constitutional bodies established in 2005 to develop public education, promote preventive system to control corruption and investigate cases of corruption. Bhutan also has an asset declaration system for civil servants and politicians. Overall, the assessment of PFM confirms eligibility for providing EU budget support TRANSPARENCY AND OVERSIGHT OF THE BUDGET The budget, financial statements and audit reports are publicly available, and the Parliament is involved in budget dialogue as well as in budget execution and follow-up on audit recommendations. The key budgetary documents including the Executive Budget Proposal, Enacted Budget, Annual Financial Statements, and Audit Report are produced and available to the public through Ministry of Finance and Royal Audit Authority websites. The National Budget is very comprehensive with line agency and dzongkhag, and gewog level budget information. The budget information, in general, is of good quality consistent with economic and functional classification recommended by the IMF. One area of weakness in the National Budget Report is the lack of information on expected output/outcome and performance indicators. The Annual Financial Statements are produced on time and include most of the essential information and data. The audit report is scrutinised, debated, and results in hearings by parliamentary committees with follow up action usually implemented throughout the government. A major weakness in the transparency and oversight of budget eligibility is the lack transparency in in-year reporting and mid-year documentation. The parliamentary scrutiny of the budget has improved significantly with the establishment of a finance committee in the lower house of the parliament in early The three major PFM systems Multi-Year Rolling Budget, Public Expenditure Management System and Planning and Monitoring System have been largely integrated allowing for combined financial and performance monitoring. Application for and notification of budget releases is now done online. An Electronic Fund Transfer and Clearing System has been piloted for salaries and periodic non-salary operational expenses such as utilities in the Ministry of Finance and Ministry of Agriculture. Overall, Bhutan fulfils the condition on transparency and oversight of the budget for EU budget support and continues to make progress. 8

9 2. Risks and Assumptions The risks and assumptions taken concerning the proposed present action include the following: Table 1: Risks and assumptions Risk Risk Level Mitigating Strategy Serious constraints in adopting new technology and appropriate natural resources managements i.e. commercial farming, new resilient seeds, sustainable land and water practices, management, and other production options, etc. Mountainous terrain and scattered settlements make delivery of services difficult. Climate change and associated natural disasters pose serious challenges and its development. This is the case of cyclones, glacier lake outburst floods (GLOF) etc. which constitute a threat to Bhutan's economy and environment. Weak monitoring systems and lack of culture of measuring policy impacts and results based management. Medium High High Medium Knowledge sharing strategy for technological transferring; Institutional strengthening and financial and technical support to a set of selective successful replicable and scalable experiences; Economies of scales and priority setting on capital investment, building a strategic approach to regional disparities based on socio-economic and infrastructural obstacles. Main-streaming climate change mitigation and adaptation across government policies in line with the "Framework for the Mainstreaming of Environment, Climate Change and Poverty". Enhancing capacities of the national institutes for ensuring sustainable livelihoods; Efforts being made in respect of disaster risk management. For example under its Intended Nationally Determined Contribution (INDC) Bhutan will initiate crop insurance programs against climate induced extremes. Planning and Monitoring System has been put in place and is becoming more integrated. Unsustainable dependency on donor funding Medium Financial contributions of beneficiaries of public services (to be monitored and discussed through policy dialogue). 9

10 All mitigation strategies will be followed up upon through the policy dialogue which is part of the present action. 3. LESSONS LEARNT, COMPLEMENTARITY AND CROSS-CUTTING ISSUES 3.1 LESSONS LEARNT The proposed action incorporates the lessons learnt from previous and ongoing projects in Bhutan 2, particularly the earlier EU support through sector budget support (RNRSP I and GCCA), and projects funded by other development partners such as the World Bank, IFAD, JICA, and other. The following key lessons are of particular relevant for the present action: a) The effectiveness and efficiency in public service delivery, especially extension services in the rural areas, needs to be improved; b) Marketing systems have shown strong deficiencies: farmers incomes can be enhanced significantly by combining strategies to raise productivity and production at the household level with proactive marketing support to ensure competitive prices; c) Farmer organisation has been historically weak: there is a need to move from informal loose farmer groups to formal collectives to facilitate joint decision making, shared investments to scale up group production, processing and marketing and shared responsibility for the functioning of the organisation. Gender issues are important and are to be addressed through farmer organisations; d) Climate Smart Agriculture: MoAF has developed guidelines/manuals for proven sustainable land management practices which can be up-scaled nation-wide. These practices and research results on climate resilient crops and adapted cropping patterns are also available from research institutes and other donor-funded projects for upscaling; e) Weak learning and institutionalization of proven practice: one area of improvement are monitoring and reporting on impact/outcome level of project interventions, as well as on documenting and mainstreaming good approaches and practices. A more coordinated approach at the government level together with other donors need to be enhanced in particular with regard to climate change monitoring and evaluation. 3.2 COMPLEMENTARITY, SYNERGY AND DONOR COORDINATION Several development partners have been and continue to be supportive to the development of the RNR sector in Bhutan through both technical and financial support. The financial resource gaps, however, continue to be one of the major dilemmas for Bhutan. So far, MoAF depends on development partners for successful implementation of its RNR sector policies. During the 11 th FYP, almost 80% of capital investment has come from development partners. Bhutan will however be able to meet all of its recurrent expenditures from domestic sources, as prescribed in the Constitution of the country. The current contribution of the major development partners to overall support is as follows: EU (22%), World Bank (18%), UN agencies (12%), IFAD (11%), JICA (10%), Government of India (8%), Helvetas/Swiss Development Cooperation (5%), Bhutan Trust Fund for Environmental Conservation (4%), World Wildlife Fund (4%) and others (6%). 2 A Profile of Donor Supported Projects in the Renewable Natural Resource (RNR) Sector Policy & Planning Division, Ministry of Agriculture & Forests Royal Government of Bhutan (May 2015) 10

11 The present action will be complementary to other donors support, such as Rural Infrastructure Development and Rural Machinery by JICA, Rural Community Development and Supply Chain Management of Horticulture Production by Netherlands (SNV), Integrated Rural Development in Eastern Districts - Comprehensive Market Focused Agriculture and Rural Livelihood Enhancement Project (CARLEP) by IFAD and Market Access and Growth Intensification Project (MAGIP) by the World Bank. In addition the action will complement new climate change mitigation and adaptation support forthcoming from the World Bank managed Pilot Program for Climate Resilience and the investments resulting from this programme. Concerning other areas of climate change in the Himalayan region metrological information is being supported by JICA as well as by ICIMOD, which receives EUR support from the EU. Similarly, disaster risk management is being supported by the World Bank which receives EUR support from the EU. The Global Environment Facility through its Least Developed Country Fund provides support to climate change adaptation, in particular early warning and GLOF risk management. The present action is coherent with the forthcoming EU support to local government and public finance management (EUR 20 million) which is currently under preparation, due to the institutional linkages to the local government institutions (see section above) as well as the relevance of general public finance management improvements for all sectors. Similarly, the present action is fully coherent with the forthcoming EU support for civil society development which will benefit also informal farmer and forestry management groups, cooperatives, and others. In terms of overall coordination, a formal RNR Coordination Meeting is regularly (once a year) organized by the Ministry of Agriculture and Forests, and chaired by the Minister. The meeting gives the possibility for all development partners to jointly take stock of the developments in the sector. The present action will promote further coordination efforts and dialogue resulting in concrete, joint, analysis and activities, including climate change. The EU is committed to play a lead role in donor coordination CROSS-CUTTING ISSUES The RNR sector has employed increasing numbers of women 3 in recent years, with 65% of women now active in agriculture. Social expectations, inheritance patterns and lack of urban sector-related skills contribute to the engagement of women in the agricultural sector. Investments in the improvement of smallholder agriculture will therefore help women more than most other areas of investment. The Ministry is mainstreaming gender issues into all plans and programmes. In doing this, the ministry is implementing activities and promoting technologies that are particularly women friendly such as: promoting women friendly farm machinery; promote use of drudgery reduction technologies such as drip and sprinklers for irrigation rather than other more labor intensive options; encourage stall feeding so that women are not required to herd the cattle; promote use of electric fencing so that women do not have to spend their nights guarding the crops from wildlife; promote use of biogas so that women are not required to go and fetch fire woods; encourage women participation in farmer groups and cooperatives, other. Agricultural activities have a major impact on land use, soil, water, biodiversity and the landscape. There are a number of environmental issues with significant implications for the performance of the agricultural sector. These include: land degradation, agro-chemical pollution of ground and surface water, loss of forests and wetlands leading to loss of biodiversity, increasing numbers of livestock, causing increased pressure on rangeland ecosystems and water systems, and loss of biodiversity in agricultural landscapes through the introduction of non-native varieties. All these are taken into account in the RNR sector 11 th FYP. 3 National Labour Force Survey (2011), 11

12 Climate change in Bhutan is primarily a threat to the largely agrarian population that depends on subsistence agriculture to sustain its daily livelihood. Details are presented above in section 1. The proposed action will address these cross-cutting issues as they are fully integrated in Bhutan's sector policy. 4. DESCRIPTION OF THE ACTION 4.1 OBJECTIVES/RESULTS The overall objective of the present action is to assist Bhutan in reducing poverty and inequality by developing sustainable rural livelihoods resilient to climate change impacts and by facilitating the key objectives of Bhutan's 11 th and 12 th five year plans in the RNR sector. The specific objectives are to: 1) To provide fiscal space and improve the financial capability of the RGoB to enable the MoAF to address and improve RNR sector policy reforms in the priority areas defined in the 11 th FYP and future 12 th FYP: a. Enhanced food and nutrition security ; b. Improved sustainable rural livelihoods and generate employment opportunities; c. Accelerated and sustainable growth of the RNR sector; d. Sustainable management and utilization of natural resources; 2) To support innovative actions undertaken by RGoB to enhance resilience to climate change. The expected results of the intervention are: 1) Improved implementation of the RNR 11 th FYP ( ) and the design and the implementation of the subsequent 12 th FYP; 2) Improved RNR related public service delivery at the local level, notably with respect to the implementation of crop production, livestock, forestry, sustainable rural livelihoods, rural employment opportunities, and in particular climate change mitigation and adaptation as well as gender sensitive services; 3) Improved achievement of results in terms of sustainable and inclusive socio-economic development, conservation and sustainable management of natural resources and the environment including climate change resilience. 4.2 MAIN ACTIVITIES The main activities of the present action are: Sector Reform Contract 1) Provide EUR in budgetary support to strengthen the RNR sector, i.e. in support of the 11 th FYP until 2018 and the subsequent 12 th FYP (2019 to 2020) including of climate change mitigation and adaptation initiatives; 2) Conduct policy dialogue with the authorities on RNR sector policy implementation taking into account all climate change issues; of particular relevance is a strengthened focus on 'results' in terms of RNR service delivery, gender issues, financial sustainability (e.g. user charges) and climate change resilience; This policy dialogue will be held in the context of the formal Donor Coordination meetings organised by Bhutan which was launched during the earlier sector budget support program. 12

13 3) Regular monitoring of budget support eligibility criteria (annual performance reviews, macroeconomic situation, PFM and budget oversight reports,). Complementary support 4) Provide up to EUR in complementary support for technical assistance and studies (service contracts). More particularly the technical assistance budget will serve to enhance the climate change component of the proposed action by: mainstreaming climate change adaptation and RNR in the preparation of the 12 th FYP; improving Bhutan's climate finance readiness; improving RNR and climate change statistics system (already started under the current GCCA programme); conducting an RNR public expenditure review; integrating climate change and best practices across the region with a component related to research; increasing better evaluation and monitoring. 4.3 INTERVENTION LOGIC The proposed action supports the implementation of sector reforms in the RNR sector to achieve the sector objectives in line with the 11 th FYP to address the current challenges of agriculture, and livestock production as well as forestry management. The challenges (see section above) result in low productivity and climate change vulnerability. In order to address these challenges, the Royal Government of Bhutan's objectives are to improve the competitiveness of the sector, enhance food and nutrition security; enhance sustainable rural livelihoods; accelerate sector growth; and promote sustainable management and utilization of natural resources. One general feature of Bhutan's current FYP is for development to be carbon neutral and climate change resilient. The specific sector policy of the MoAF contributes to the competitiveness of production, conservation of biodiversity, protection of water and ecosystems, and intends to further mainstream climate change mitigation and adaptation issues into the next FYP. The present action proposes to support the implementation of Bhutan's policies and the direct outputs envisaged include the sustainable land and crop management as well as climate change resilient resource management. The action is expected to improve effectiveness and efficiency of service delivery in the various departments of the MoAF, through activities including: increase in the use of improved seeds and livestock breeds, construction of rural roads and irrigation facilities, improved land and water sustainable management practices, enhance participation of farmer cooperatives in the supply chain, increased distribution of climate change resilient inputs, extended use of innovative food processing technologies, afforestation, and other. Other climate change relevant activities such as disaster risk management, improved energy efficiency and other are supported through separate action by the EU and others. The support to the Government of Bhutan's efforts will be through a proposed sector reform contract which includes fixed and variable tranches, as further outlined below, in section 5.3. to provide incentives for delivering results. The achievement of targets for the tranche releases will be subject to joint annual reviews. These reviews will include the policy dialogue with the Government of Bhutan and participating development partners to develop a joint understanding of achievements of results and outcomes. 5. IMPLEMENTATION 5.1 FINANCING AGREEMENT In order to implement this action, it is foreseen to conclude a financing agreement with the Royal Government of Bhutan, referred to in Article 184(2)(b) of Regulation (EU, Euratom) No 966/2012. The financing agreement will cover the single action funded from a combination of 13

14 both the geographic DCI and GCCA+ financing decisions. The financing agreement will only be signed after the adoption of both decisions. 5.2 INDICATIVE IMPLEMENTATION PERIOD The indicative operational implementation period of this action, during which the activities described in section 4.2 will be carried out and the corresponding contracts and agreements will be implemented, is 54 months from the date of entry into force of the financing agreement. Extensions of the implementation period may be agreed by the Commission s authorising officer responsible by amending this decision and the relevant contracts and agreements; such amendments to this decision constitute technical amendments in the sense of point (i) of Article 2(3)(c) of Regulation (EU) No 236/ IMPLEMENTATION OF THE BUDGET SUPPORT COMPONENT RATIONALE FOR THE AMOUNTS ALLOCATED TO BUDGET SUPPORT The amount allocated for the sector budget support component is EUR , and for complementary support is EUR This amount is in line with the needs expressed by the Ministry of Agriculture and Forests and based on: a) the need to find resources to fund the ongoing strategic reforms and ensure fiscal sustainability, b) Bhutan's commitment to increase the allocation of national budget resources (including EU budget support) in line with the financing needs of the RNR trends in the future years; c) a high value for money and impact of the proposed activities that will ensure achieving the 11 th FYP RNR policy objectives through provision of budget support; d) a successful track record of MoAF with EU budget support operations in the past RNRSP as well as the current GCCA; e) a rigorous mid-term financing plan based on strategic costing by setting target on a set of selected core indicators that will be the main driver for improved sector performance, and finally, f) the MoAF adoption of an improved statistics monitoring and evaluation system (PlaMS) to improve data quality of sector information systems and other activities CRITERIA FOR DISBURSEMENT OF BUDGET SUPPORT a) The general conditions for disbursement of all tranches are as follows: Satisfactory progress in the implementation of the RNR sector policy in the current 11 th RNR sector FYP (up to 2018) and the subsequent 12 th FYP including climate change mitigation and adaptation plans and continued credibility and relevance thereof; Implementation of a credible stability-oriented macroeconomic policy; Satisfactory progress in the implementation of the PFM reform strategy; Satisfactory progress with regard to the public availability of timely, comprehensive and sound budgetary information as well as oversight of the budget. b) The specific conditions for disbursement that will be used for variable tranches are the following and have been chosen from each of the different sector key areas of the RNR sector with the cross-cutting target of climate change: Better food and nutrition security through the increase in number of improved dairy cattle breeds in the country with the aim to increase milk productivity and production; Growth of the sector and generation of the employment thanks to increased number of registered farmer groups and cooperatives; 14

15 An improved sustainability in the management of biodiversity resources by the rehabilitation of degraded areas with forest plantation. This will also help in combating climate change effects; Maintain the carbon neutral environment in Bhutan by favouring the use of biogas production established with stall feeding across the country; Enhanced food and nutrition security through the construction and renovation of the major irrigation channels provided by the MoAF; Finally, improve climate change resilience through an increase in the supply to farmers of improved seed varieties of cereals and vegetables; The performance targets and indicators to be used for disbursements will apply for the duration of the programme. However, in duly justified circumstances, the Royal Government of Bhutan may submit a request to the Commission for the targets and indicators to be changed. The changes agreed to the targets and indicators may be authorised by exchange of letters between the two parties. In case of a significant deterioration of fundamental values, budget support disbursements may be suspended, temporarily suspended, reduced or cancelled, in accordance with the relevant provisions of the financing agreement BUDGET SUPPORT DETAILS Budget support is provided as direct, un-targeted, budget support, delivered through a mix of 60% fixed and 40% variable tranches to the National Treasury. The choice of providing 40% variable tranche is justified because it provides the right balance and the incentive for dialogue on results. The crediting of the Euro transfers disbursed into Bhutan Ngultrum will be undertaken at the appropriate exchange rates in line with the relevant provisions of the financing agreement. As the fiscal year of Bhutan is from July to June, progress in the implementation can obviously be assessed after the closure of a financial year, i.e. from July onwards in the 1 st quarter of the fiscal year (n). Information on variable tranche releases should be available in the 3 rd quarter of the financial year (January/February) when the budget for financial year (n+1) is being prepared, for an actual disbursement beginning of the following fiscal year (n+1). For the first year, only a fixed tranche disbursement is foreseen. The current GCCA programme in the RNR sector is ongoing until November 2017 and a last tranche disbursement should be done end of the 2016/2017 fiscal year The present action will therefore consider the new GCCA allocation after this period. The indicative schedule of disbursement is summarised in the table below (all figures in Euro million): 15

16 Table 2: Indicative disbursement schedule (EUR million) Plan: 11 th Five Year Plan 12 th Five Year Plan Calendar year: Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Fiscal year: Total Fixed tranche 60 % Variable tranche (40 %) Total IMPLEMENTATION MODALITIES FOR COMPLEMENTARY SUPPORT OF BUDGET SUPPORT PROCUREMENT (DIRECT MANAGEMENT) Subject in generic terms, if possible Type (works, supplies, services) Indicative number of contracts Indicative trimester of launch of the procedure Supporting services (TA, studies) Services 3 T4/ SCOPE OF GEOGRAPHICAL ELIGIBILITY FOR PROCUREMENT AND GRANTS The geographical eligibility in terms of place of establishment for participating in procurement and grant award procedures and in terms of origin of supplies purchased as established in the basic act and set out in the relevant contractual documents shall apply. The Commission s authorising officer responsible may extend the geographical eligibility in accordance with Article 9(2)(b) of Regulation (EU) No 236/2014 on the basis of urgency or of unavailability of products and services in the markets of the countries concerned, or in other duly substantiated cases where the eligibility rules would make the realisation of this action impossible or exceedingly difficult. 16

17 5.6. INDICATIVE BUDGET The indicative budget for the present action is planned as follows: Table 3: Indicative budget EU contribution (amount in EUR) Indicative third party contribution, in currency identified Budget support, Sector Reform Contract -DCI-ASIA geographic -GCCA+ total Complementary support, composed of Procurement of services for technical assistance, studies, other (direct management) Evaluation Communication and visibility Sub-total DCI-ASIA geographic Sub-total GCCA + Total The total budget for this programme is EUR from the general budget of the European Union for 2016, is subject to the approval of the action for Bhutan under Annual Action Programme 2016 for the GCCA+ (EUR ). 5.7 ORGANISATIONAL SET-UP AND RESPONSIBILITIES The proposed sector reform contract in support of the RNR sector reforms will be concluded with the Gross National Happiness Commission on behalf of the Government of Bhutan after consultations with the Ministry of Agriculture and Forestry, and the Ministry of Finance. Joint annual reviews will take place in order to establish the achievement of agreed results which will inform the decision making on the actual amount of fixed and variable payment releases. The timing of the reviews will be such that the information on actual payment releases will be available in time to inform the budget preparation process. Since the budget calendar does not follow a calendar year cycle but rather the period July June, the information on EU payments needs to be available by February each year at the latest. For that reason, the annual reviews will take place 17

18 around July/August each year in order to allow time for processing the payment decision before informing the Government of Bhutan about the amounts to be disbursed. Actual disbursement will take place as soon as possible in the same financial year. Regarding the complementary support, a service contract will be concluded by the EU Delegation (direct management). The above mentioned annual review will include dialogue and monitoring and oversight of needs, contracting, and implementation. An overall programme steering committee will meet at least annually around July to take stock of performance and inform the above mentioned disbursement decision making process. 5.8 PERFORMANCE MONITORING AND REPORTING The day-to-day technical and financial monitoring of the implementation of this action will be a continuous process and part of the implementing partner s responsibilities. To this aim, the implementing partner shall establish a permanent internal, technical and financial monitoring system for the action and elaborate regular progress reports (not less than annual) and final reports. Every report shall provide an accurate account of implementation of the action, difficulties encountered, changes introduced, as well as the degree of achievement of its results (outputs and direct outcomes) as measured by corresponding indicators, using as reference the log frame matrix (for project modality) or the list of result indicators (for budget support). The report shall be laid out in such a way as to allow monitoring of the means envisaged and employed and of the budget details for the action. The final report, narrative and financial, will cover the entire period of the action implementation. The Commission may undertake additional project monitoring visits both through its own staff and through independent consultants recruited directly by the Commission for independent monitoring reviews (or recruited by the responsible agent contracted by the Commission for implementing such reviews). 5.9 EVALUATION Having regard to the nature of the action, a final evaluation will not be carried out for this action or its components. However a mid-term evaluation will be carried out for this action or its components via independent consultants contracted by the Commission. It will be carried out for learning purposes, in particular with respect to the relevance of the action further to the adoption of the 12 th five year plan by Bhutan. The Commission shall inform the implementing partner at least one month in advance of the dates foreseen for the evaluation missions. The implementing partner shall collaborate efficiently and effectively with the evaluation experts, and inter alia provide them with all necessary information and documentation, as well as access to the project premises and activities. The evaluation reports shall be shared with the partner country and other stakeholders. The implementing partner and the Commission shall analyse the conclusions and recommendations of the evaluations and, where appropriate, in agreement with the partner country, jointly decide on the follow-up actions to be taken and any adjustments necessary, including, if indicated, the reorientation of the project. Indicatively, one contract for evaluation services shall be concluded under a framework contract in quarter 3 of AUDIT Without prejudice to the obligations applicable to contracts concluded for the implementation of this action, the Commission may, on the basis of a risk assessment, contract independent audits or expenditure verification assignments for one or several contracts or agreements. 18