Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA IDA-H4660) ON A

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No: ICR IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA IDA-H4660) ON A GRANT IN THE AMOUNT OF SDR MILLION (US$9.10 MILLION EQUIVALENT) AND CREDIT IN THE AMOUNT OF SDR MILLION (US$11.12 MILLION EQUIVALENT) Poverty Reduction and Economic Management Finance and Private Sector Development Unit Bhutan Country Management Unit South Asia Region TO THE THE KINGDOM OF BHUTAN FOR THE DEVELOPMENT POLICY FINANCING FOR INSTITUTIONAL STRENGTHENING August 20, 2010

2 CURRENCY EQUIVALENTS (Exchange Rate Effective as of July 29, 2010) Currency Unit: Ngultrum US$1.00 Nu FISCAL YEAR July 1 June 30 ABBREVIATIONS AND ACRONYMS ACC Anti-Corruption Commission INTOSAI International Organization of Supreme Audit ADB Asian Development Bank Institutions BCCI Bhutan Chamber of Commerce and Industry LMIS Labor Market Information System BICMA Bhutan Information, Communications and Media MDGs Millennium Development Goals Authority M&E Monitoring and Evaluation BPC Bhutan Power Corporation MFCC Macroeconomic Framework Coordination Committee BPFFS Budget Policy and Fiscal Framework Statement MoA Ministry of Agriculture CAS Country Assistance Strategy MoF Ministry of Finance CIB Credit Information Bureau MoIC Ministry of Information & Communication CFAA Country Financial Accountability Assessment MoLHR Ministry of Labor and Human Resources DIT Department of Information Technology MoU Memorandum of Understanding DNB Department of National Budget MoWHS Ministry of Works and Human Settlements DoR Department of Roads MTFF Medium Term Fiscal Framework DPA Department of Public Account MYRB Multi-Year Rolling Budgets DPC Development Policy Credit NGOs Non-governmental Organization DPFIS Development Policy Financing for Institutional OPCS Operations Policy and Country Services Strengthening OPGW Optical Fiber Ground Wire DPG Development Policy Grant PDO Program Development Objectives EAA Environmental Assessment Act PEMS Public Expenditure Management System EDP Education Development Project PFM Public Financial Management FDI Foreign Direct Investment PlaMS Planning and Monitoring System GARR General Auditing Rules and Regulations PPPD Public Procurement Policy Division GDP Gross Domestic Product PRSP Poverty Reduction Strategy Paper GGA Good Governance Affairs PSD Private Sector Development GoI Government of India RAA Royal Audit Authority GNHC Gross National Happiness Commission RGoB Royal Government of Bhutan HRD Human Resources Development RMA Royal Monetary Authority IAASB International Auditing & Assurance Standards ROSC Report on the Observance of Standards & Codes Board SBDs Standard Bidding Documents ICT Information & Communication Technology SMEs Small and Medium Enterprises ICR Implementation Completion & Results Report SRFPs Standard Request For Proposals I&DD Investigation & Development Division VET Vocational Education and Training IDF Institutional Development Fund 9FYP Ninth Five-Year Plan IFAC International Federation of Accountants 10FYP Tenth Five-Year Plan Vice President: Isabel M. Guerrero Country Director: Nicholas J. Krafft Sector Director: Ernesto May Sector Manager: Miria A. Pigato Task Team Leader: Ananya Basu ICR Team Leader: Suhail Kassim ICR Primary Authors: Suhail Kassim Ananya Basu

3 KINGDOM OF BHUTAN Development Policy Financing for Institutional Strengthening CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring 1. Program Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1 Bank Lending and Implementation Support/Supervision Processes Annex 2. Beneficiary Survey Results Annex 3. Stakeholder Workshop Report and Results Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders Annex 6. List of Supporting Documents MAP 33373R

4 A. Basic Information Country: Bhutan Program Name: Bhutan Development Policy Grant/Credit for Institutional Strengthening Program ID: P L/C/TF Number(s): IDA-45620,IDA-H4660 ICR Date: 08/20/2010 ICR Type: Core ICR Lending Instrument: DPL Borrower: Original Total Commitment: Revised Amount: XDR 13.7M ROYAL GOVERNMENT OF BHUTAN XDR 13.7M Disbursed Amount: XDR 13.7M Implementing Agencies: Department of Public Accounts, Ministry of Finance Cofinanciers and Other External Partners: B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 10/16/2008 Effectiveness: 06/25/ /25/2009 Appraisal: 02/12/2009 Restructuring(s): Approval: 05/26/2009 Mid-term Review: Closing: 03/31/ /31/2010 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Satisfactory Low or Negligible Satisfactory Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory Overall Bank Performance: Satisfactory Overall Borrower Performance: Satisfactory i

5 C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Program at any time (Yes/No): Problem Program at any time (Yes/No): DO rating before Closing/Inactive status: No No Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating: D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration General finance sector General transportation sector Other social services Vocational training Theme Code (as % of total Bank financing) Education for the knowledge economy Infrastructure services for private sector development Other accountability/anti-corruption Public expenditure, financial management and procurement Regulation and competition policy E. Bank Staff Positions At ICR At Approval Vice President: Isabel M. Guerrero Isabel M. Guerrero Country Director: Nicholas J. Krafft Nicholas J. Krafft Sector Manager: Miria A. Pigato Miria A. Pigato Program Team Leader: Ananya Basu Ananya Basu ICR Team Leader: ICR Primary Author: Suhail Kassim Suhail Kassim Ananya Basu ii

6 F. Results Framework Analysis Program Development Objectives (from Project Appraisal Document) The overarching objectives of the DPFIS were to strengthen institutions to: (a) promote good governance through sound fiscal and public financial management and procurement, and strong accountability institutions; (b) foster dynamic labor markets, ensure skills match, and generate employment; and (c) expand access to infrastructure (roads,power, ICT) in an environmentally sustainable manner. Revised Program Development Objectives (if any, as approved by original approving authority) N/A (a) PDO Indicator(s) Indicator Original Target Values (from Baseline Value approval documents) Fiscal deficit as share of GDP. Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 1 : Value For 2007/08, the actual Actual fiscal For 2008/09, the (quantitative or fiscal surplus was deficit below 5% actual fiscal surplus Qualitative) 0.49% of GDP. of GDP. is 1.87% of GDP. Date achieved 06/30/ /30/ /30/2010 Comments (incl. % Fully achieved as per data availability. Actuals for 2009/10 not available yet. achievement) Indicator 2 : Foreign Direct Investment project approvals. Increase over Value baseline value, no (quantitative or 13 clear target Qualitative) specified. 20 Date achieved 06/30/ /30/ /30/2010 Comments (incl. % achievement) Target achieved. (b) Intermediate Outcome Indicator(s) Indicator Indicator 1 : Value (quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Number of labor officers and regional offices of MoLHR. 15 labor officers 11 labor officers and 1 and 3 regional regional office. offices. Actual Value Achieved at Completion or Target Years 21 labor officers and 4 regional offices. iii

7 Date achieved 06/30/ /30/ /30/2010 Comments (incl. % More than targets achieved. achievement) Indicator 2 : Rules for Asset Declaration implemented and online. Online asset Online asset Rules for Asset declaration by declaration by 80% Value Declaration by civil officials who of officials who (quantitative or servants under declare assets to declare assets to Qualitative) preparation. Anti Corruption Anti Corruption Commission. Commission. Date achieved 06/30/ /30/ /30/2010 Comments (incl. % achievement) 80% of offcials are declaring online. The original targets did not specify an exact percentage, and 80% online declaration is considered satisfactory. G. Ratings of Program Performance in ISRs Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 08/31/2010 Satisfactory Satisfactory H. Restructuring (if any) Not Applicable iv

8 Percentage change over preceding year 2003/ / / / /08 1. Program Context, Development Objectives and Design 1.1 Context at Appraisal The Development Policy Financing for Institutional Strengthening (DPFIS) was appraised in February 2009, against a backdrop of strong economic performance by Bhutan. This was indicated by easing inflationary pressures, manageable fiscal deficits of around 2-3 percent of GDP, high external reserves, and growth averaging more than 9 percent per annum during the Ninth Five-Year Plan (9FYP) (2002/ /08, extended by one year). Bhutan did not feel significant effects of the recent global economic crisis, unlike some other countries largely on account of sound macroeconomic management and the underdeveloped nature of its financial markets that were less exposed to international markets. On the expenditures side, the public sector was the key driver of growth, and spending on the provision of social services and public investment (like in hydropower projects) played a central role in ensuring a buoyant economy. On the revenues side, large inflows from external donor assistance and hydropower sales to India flowed through the government. Overall, macroeconomic policy was anchored in maintaining current expenditures below domestic revenues, and projections showed a favorable mediumterm outlook, as well as an ability to withstand short-term shocks. In addition, Bhutan demonstrated solid progress in human development, despite the difficult terrain and wide dispersion of the population. At the same time, Bhutan faced several challenges, which are still relevant. Economic volatility continues to be a major concern for the small landlocked country. More than 70 percent of the country s revenues come from electricity and budgetary grants, and the revenue stream is heavily dependent on the timing of hydropower projects coming onstream, and on external assistance materializing on schedule. Even though debt was about 60 percent of GDP, this was largely on account of hydropower development loans, and expected to contribute to growth and government revenues. Private sector development is constrained by factors including limited access to finance, shortage of skilled / educated labor, and transport. In 2007, the overall unemployment rate reached 3.7 percent, and it was particularly high among the year olds, at 9.9 percent up from 2.2 percent in Despite expansion of basic education, the nation s skill base is narrow, and Bhutanese youth have had insufficient exposure to practical and applied studies that equip them with skills required for employment in expanding sectors. Underdeveloped infrastructure constrains the delivery of public services, and access remains a problem in the remote areas. Despite the rapid expansion of the road network, more than 50 percent of the population lives half a day s walk from the nearest motor road. Ambitious hydropower development plans, while critical for growth and revenue, are limited by capacity and funding constraints. Furthermore, given the country s dependence on environmental resources, it is critical that development plans continue to be implemented in an environmentally sustainable manner. Figure 1: Fiscal Performance and Economic Volatility at DPFIS Appraisal Share of GDP 2002/ / / / / /08 Actual Actual Actual Actual Revised Estimated Total Revenue & Grants Of which Domestic Revenue Of which Electricity Sector Of which Grants Expenditure + Net Lending Of which Current Expenditure Of which Capital Expenditure Fiscal Balance (including grants) Total Government Debt Of which Foreign Debt Of which Hydropower Debt Of which Domestic Debt Notes: Data from RGoB, Macroeconomic Framework Coordination Committee. 56% 42% 28% 14% 0% -14% Total Revenue & Grants Expenditure + Net Lending 1

9 A process of political change was underway in Bhutan when the operation was appraised. Bhutan's political system evolved from an absolute monarchy into a constitutional monarchy, following a decade of planning and consultations. The new democratic system comprises a National Council and a National Assembly, the latter based on political party affiliations. Elections for the National Council were held on December 31, 2007, while elections for the National Assembly were held on March 24, The Royal Government of Bhutan (RGoB) was pursuing a medium-term policy and institutional reform program anchored in its Tenth Five-Year Plan (10FYP). The 10FYP (2008/ /13) reflected the priorities of the newly elected government, and laid out key elements of the reform program aimed at reducing the poverty headcount rate from 23.2 percent in 2007 to 15 percent by the end of the Plan period. The strategic priorities for 10FYP are: (i) vitalizing industry; (ii) strengthening national spatial planning; (iii) synergizing rural-urban development; (iv) expanding strategic infrastructure; (v) investing in human capital; and (vi) fostering an enabling environment through good governance. Prior to appraisal of the DPFIS, the World Bank had supported the RGoB s development efforts through two budgetary operations which had achieved good results in promoting institutional reforms. The First and Second Development Policy Grants (DPGs) were designed as a programmatic series in support of RGoB s medium term reforms anchored in the 9FYP. 1 They provided US$15 million in FY06 and US$12 million in FY07 respectively, to help the RGoB meet selected development goals, and contributed to deepening the policy dialogue. The DPG program has contributed to several positive results, 2 including the preparation and inclusion of the first medium-term fiscal framework in the budget, the passage of the Public Finance Act, and the issuance of a new procurement manual consistent with the latest internationally accepted procurement practices. In the social sectors, the program has helped enhance the quality and access to education, and improve health care utilization. The RGoB requested continued Bank engagement through policy-based budget support to strengthen institutions in priority areas, in line with 10FYP goals, and to meet resource needs. With the Kingdom s move to democracy, the RGoB emphasized that strong donor support was especially important through this period of transition, to help ensure that the new democratic government has the resources to deliver public services, and to sustain development progress. Development policy lending was regarded as an appropriate instrument in such circumstances. Part of the impetus for the DPFIS stemmed from anticipated financing needs. At the time of appraisal, the funds provided to the RGoB through the grant component of DPFIS were expected to reduce the fiscal deficit in the Budget Policy and Fiscal Framework Statement for 2008/09 by more than 25 percent, and the credit share would finance about a third of the overall net resource gap. Bhutan s development progress and commitment to moving forward justified policy-based support to help maintain the momentum of reform. The DPFIS was planned as a single-tranche budgetary operation under the FY06-09 Country Assistance Strategy (CAS), to support selected key components of the government's own medium term program. It provided US$20.22 million in budget support in FY09 to help the RGoB meet its development goals, and helped to deepen the policy dialogue with the RGoB. 1 The DPG series highlighted measures to: (a) enhance the delivery of public services by strengthening fiscal management, (b) increase the effectiveness of public spending by improving financial management and procurement processes, (c) create better income earning opportunities by improving the investment climate, facilitating greater labor market flexibility, and increasing foreign direct investment, (d) raise educational attainment, particularly in previously under-served areas, by expanding access to high quality education services, and (e) reduce maternal mortality by increasing the number of births delivered in health facilities. 2 See Implementation Completion and Results Report, ICR

10 1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) The overarching objectives of the DPFIS were to strengthen institutions to: (a) promote good governance through sound fiscal and public financial management and procurement, and strong accountability institutions; (b) foster dynamic labor markets, ensure skills match, and generate employment; and (c) expand access to infrastructure (roads, power, ICT) in an environmentally sustainable manner. These were viewed by the RGoB as critical to sustain robust development performance over the medium-term, and are closely aligned with the strategic priorities of the 10FYP. The expected outputs and outcomes of the DPFIS, along with several specific progress indicators related to their achievement, were presented in the Program Policy Matrix in Annex 1 of the Program Document. Success in achieving the development objectives is evaluated in this ICR largely in terms of accomplishments against output progress indicators in the Policy Matrix. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification The Program Development Objectives were not revised. 1.4 Original Policy Areas Supported by the Program (as approved) The Bhutan CAS emphasizes selectivity to maximize the development impact of the Bank's limited financial and staff resources. Accordingly, selectivity was also a key feature of the DPFIS reforms. While there were numerous meaningful development initiatives being undertaken by the RGoB, the DPFIS focused on strategic areas identified in close consultation with the authorities, which were considered important to the overall success of the program. Under the three overarching themes outlined above, the following sub-components of the RGoB's developmental reform strategies were highlighted by the DPFIS: Strengthening macroeconomic monitoring, bolstering fiduciary systems for public financial management, improving efficiency of public procurement, enhancing audit effectiveness, reducing regulatory burden and enhancing transparency, and establishing e-government; Strengthening institutional frameworks for the labor market, improving skills match and employability, enhancing labor market information and job intermediation systems, creating an enabling environment for the private sector by setting up the necessary policies, and enhancing access to credit; Institutional strengthening for roads and power sectors, enabling access to fairly priced backbone capacity in the ICT sector, and promoting environmental sustainability. 1.5 Revised Policy Areas (if applicable) Policy areas were not revised. 1.6 Other significant changes There were no significant changes in design, scope and scale, implementation arrangements and schedule or funding allocations. 3

11 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance The DPFIS was a single tranche operation, and disbursed as follows. Operation Amount in USD Expected Release Date Actual Release Date Release DPFIS 20,220, /30/2009 6/25/2009 Regular The DPFIS was designed such that specific government actions had to be completed before the DPFIS was presented to the Bank s Executive Board, as described in Box 1. The RGoB successfully met all the prior actions before the DPFIS was approved. Box 1: Development Policy Financing for Institutional Strengthening Prior Actions (from Program Document) Status Theme 1: Promoting Good Governance through Sound Fiscal and Public Financial Management and Procurement, and Strong Accountability Institutions Prior Action 1. Update the budget situation reports on quarterly basis for monitoring of budget execution, within one month of close of quarter. Prior Action 2. Officially issue Standard Bidding Documents (SBDs). Prior Action 3. Finalize and issue Rules for Asset Declaration and Gifts Restriction. Theme 2. Fostering Dynamic Labor Markets, Ensuring Skills Match, and Generating Employment Met Met Met Prior Action 4. Submit the rules and regulations on Employment Conditions, associated with the Labor and Employment Act, to the Cabinet. Prior Action 5. Introduce revised curricula to improve the quality of the Vocational Education and Training (VET) program. Prior Action 6. Provide in-principle approval for new banking/insurance licenses, to foster competition in the financial sector Met Met Met Theme 3. Expanding Access to Infrastructure (Roads, Electricity, and ICT) in an Environmentally Sustainable Manner Prior Action 7. Prepare a road classification system, including definition and specification of all road categories; procedures and; criteria for upgrading a road to next category, and submit for approval to Cabinet. Met 2.2 Major Factors Affecting Implementation A number of factors contributed to the successful implementation of the program, as indicated by the timely fulfillment of prior actions for the DPFIS. First, the operation was designed through a consultative and participatory process. The actions supported by the operation were anchored in the 10FYP that was put together through wide consultations over the course of two years. This included a participatory process that pulled together 201 gewog (block) plans, 20 dzongkhag (district) plans, and numerous sectoral plans. The operation was prepared in consultation with various levels of government, the private sector, development partners, and other stakeholders. The focus areas of the operation reflected the priorities of the new government, and had full RGoB ownership. Second, the program was based on sound background analysis, and drew lessons from other related Bank and donor operations. The Bank s support built on the ongoing engagement both in terms of projects, as 4

12 well as analytical and advisory services. There was a deepening engagement on macroeconomic, fiscal, and financial management issues, through IDF grants supporting capacity in these areas. In order to foster the nascent formal private sector, technical assistance was provided in key areas such as the development of legislation for foreign direct investment (FDI), promotion of small and medium enterprises (SMEs), and capacity building in the Bhutan Chamber of Commerce and Industry (BCCI). Analytical support has been provided through the Investment Climate Assessment Survey (2002), and the various Doing Business Reports (till 2009). Several background notes/papers were prepared by the Bank's team in developing the DPFIS, on: (a) poverty and MDGs; (b) private sector development and employment generation; (c) medium-term macro / fiscal issues; and (d) financial management. The Bank has also drawn from various reports prepared as analytic support to public financial management reforms the Country Financial Accountability Assessment (2002), and the Public Sector Accounting & Auditing: A Comparison with International Standards (2006) have been completed, and a Report on Standards & Codes: Accounting & Auditing has been prepared. An Investment Climate Assessment was undertaken in 2009, to provide nuanced information of private sector development constraints, and a report is now available. In addition, the operation was based on analytical work and reports produced by the RGoB. These include the Plan and Vision 2020 documents, an MDG assessment, and various statistical updates and analyses undertaken by the National Statistics Bureau. Third, the program design was based on realistic expectations of capacity and complexity. Effort was well spent on supporting institutions and capacity building, in order to consolidate progress made on various reform efforts. For example, the RGoB has received considerable support from the Bank in the form of technical assistance over the past several years for strengthening country fiduciary systems. The convening power of the Ministry of Finance (MoF) as the focal ministry for programmatic support helped to ensure that line ministries remain on-track for achieving agreed targets in specific sectors. Fourth, adequate efforts were made to ensure that the identified risks did not derail the program. In particular, the Bank was aware of the political risks that could affect program implementation. In order to mitigate this risk, the Bank sought to ensure full country ownership. Moreover, the design of the program attempted to ensure continuity of reforms as supported under the earlier DPGs, with changes to reflect the priorities of the new government. The Bank also recognized the threat of external shocks that could affect the program, particularly in a small landlocked country like Bhutan but the scope for the DPFIS to mitigate the risk of major external shocks was limited. The program s emphasis on medium-term fiscal programming was aimed to help ensure that the multi-year consequences of investments and other decisions were forecast and taken into account. The program s focus on improving the general environment for private sector development are also expected to help the country realize more of its potential for economic diversification, thereby reducing the magnitude of risks from external shocks. The environmental risks from infrastructure expansion were mitigated by supporting sound environmental policies and requirements, and efforts to mainstream environmental issues at sectoral levels. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization The assessment finds that the M&E design of the operation was constrained by data availability at the entry stage. Although there were several outcome indicators for the various policy actions identified at appraisal, there were data limitations that made it difficult to assess whether particular outcomes and outputs were achieved in some cases. A few selected indicators in the Policy Program Matrix were rather broad and it was difficult to attribute changes in some indicators to specific policy actions supported under the DPFIS. In some cases, where feasible outcome / output indicators could not be identified, there was a reliance on process indicators. Some of the progress indicators on outcomes were presented in the medium-term framework of the 10FYP, and were beyond the short lifespan of the DPFIS. 5

13 The M&E implementation of the program was done well, given the design limitations. The Department of Public Account (DPA), Ministry of Finance, was responsible for the overall implementation of the DPFIS. The RGoB established a multi-ministerial group of officials, headed by the Secretary, Ministry of Finance, to provide overall coordination for the operation. Most of these officials had worked with the Bank during the earlier DPG series, and were familiar with budget support operations. The Bank s implementation support missions monitored actions and reviewed implementation progress of the operation. The Policy Program Matrix of the operation provided a results framework that described expected outputs during the DPFIS, as well as indicators to measure success during implementation. During the implementation phase of the operation, these benchmarks were regularly evaluated to the extent possible, and interim steps taken by the RGoB were monitored. The available and new data collected were utilized for M&E purposes. M&E of the program involved a mix of qualitative and quantitative data. It was challenging, as Bhutan remains characterized by significant data gaps which are still being addressed. Where possible, program monitoring relied on quantitative indicators. However, in areas where progress was linked to particular process steps towards institutional strengthening, monitoring was necessarily qualitative, and relied on process steps. 2.4 Expected Next Phase/Follow-up Operation (if any) The DPFIS was appraised after a new government came to power following the historic elections at the end of March 2008, and expressed the need for continued financial support for its ongoing reform program. In view of good progress and to support the new administration, the Bank is ready to extend its policy-based lending. A new operation is under preparation as the first of a programmatic series, and is expected to be presented to the Bank s Board in FY11. The new series supports continuation of the DPFIS reform program, with some adjustment in reform areas to reflect ground realities. The First Development Policy Credits (DPC1) will support strengthening institutions to: Promote government efficiency and effectiveness through sound fiscal and public financial management and procurement, and strong public administration; Foster private sector development by improving the policy environment and facilitating productive employment opportunities; Expand access to infrastructure in a sustainable manner. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The objectives of the DPFIS program remain relevant to Bhutan s current development priorities. The original objectives constituted a well structured program of reform that would enable Bhutan to advance its long term development goals, indentified by the RGoB in the 10FYP as described in Section 1.1. In fact, the program design was based on the RGoB s own broad reform agenda, as outlined in the Letter of Development Policy dated March 13, Program objectives also reflected the strategic priorities indentified by the Bank in its CAS for FY The CAS that guided Bank engagement during appraisal was still in effect when the DPFIS closed, and, hence, was relevant. The Bank s CAS aligned with Bhutan s vision of Gross National Happiness, and the priorities and goals of the PRSP. It emphasized selectivity, and supported development based on three pillars: (i) expanding access to better infrastructure and quality social services, as well as connecting communities to markets; (ii) promoting private sector development and employment; (iii) strengthening the management of public resources, as well as the monitoring and evaluation of development outcomes. 6

14 The proposed DPFIS program supported all three CAS pillars. The first component on macroeconomic/fiscal management and fiduciary systems are part of the third CAS pillar, aiming to help the RGoB ensure effective public resource management. The second component on labor and employment and private sector development is a part of the second CAS pillar on fostering private sector growth and employment opportunities, highlighting several measures specifically targeting private sector development and the labor market. The last component on infrastructure lies within the first CAS pillar, aiming to assist the RGoB s efforts to provide expanding access to better infrastructure. Implementation was well organized and structured. No major risks were faced during implementation, even during the political transition. The Bank team showed considerable commitment to supervision. The program design was commensurate with the existing technical capacity and circumstances in the country. Bank staff and RGoB officials had a clear understanding of the constraints, and continuous dialogue ensured that the program remained highly relevant to RGoB s development priorities. In fact, the new DPC is largely continuing with the same themes as the DPFIS, indicating the strategic importance of those themes. 3.2 Achievement of Program Development Objectives The ICR concludes that the DPFIS satisfactorily achieved the Program Development Objectives (PDO), as measured by the progress indicators that were identified at appraisal described below. The operation was designed such that the key reform actions were met upfront, and the reforms remain on course. While questions can be raised concerning specific causal attributions between indicators and policy actions, and on lack of earmarked funds for line ministries participating in the DPFIS, the assessment concludes that RGoB has made good progress in its reforms over the past few years, even though the DPFIS program coincided with a transition in governance arrangements. In a few cases, the ICR found insufficient data to evaluate outcomes in the Program Policy Matrix. In a few other cases, establishing a direct causal linkage was difficult. For purposes of this section, the ICR focuses on the policy areas and actions supported by the DPFIS, with data on progress indicators both qualitative and quantitative where available. It also looks at the RGoB s progress on overall reforms, as presented in the Policy Program Matrix. This ICR evaluates against progress indicators and effective design where data on final medium-term outcomes are not available. The ICR finds that the positive results of the policy and institutional reforms supported specifically by the DPFIS are evident in many areas, including improved budget preparation, strengthened procurement practices, stricter anti-corruption measures, expansion of financial institutions, and approval of labor regulations. The RGoB s overall reform program highlighted under the DPFIS under the three overarching themes is broadly on track, as measured against the progress indicators. However, there are some areas in the RGoB s broader program where progress has been slower than envisaged, and the reform momentum can be stepped up. The remainder of this section closely tracks the Policy Program Matrix presented in Annex I of the DPFIS Program Document, and present the achievements under the various reform areas specified therein. A. Promoting Good Governance through sound Fiscal and Public Financial Management and Procurement, and strong Accountability Institutions A1. Strengthening macroeconomic monitoring The RGoB has successfully introduced several reforms to improve macroeconomic monitoring, in order to better respond to the impact of external shocks and volatility on the small Bhutanese economy. The 7

15 Macroeconomic Framework Coordination Committee (MFCC), established in 2005, has been the focal group preparing macroeconomic and fiscal projections, with capacity and expertise being developed through successive iterations. The Public Finance Act, which was passed in June 2007, provides for the development of a three-year Budget Policy and Fiscal Framework Statement (BPFFS), based on the Medium Term Fiscal Framework (MTFF). As a specific prior action for the DPFIS, in order to further improve the accuracy of macroeconomic monitoring, the RGoB has enhanced the BPFFS to include monitoring of budget execution on a quarterly basis. Quarterly reports on revised budget and revenue figures are being regularly developed by the Department of National Budget (DNB) and submitted internally to the Finance Minister and Finance Secretary within a month of the closing of the quarter, to identify suitable policy responses to emerging situations. In addition, the RGoB has maintained a satisfactory macroeconomic framework aligned to its BPFFS goal of keeping the fiscal deficit below 5 percent on average. In 2008/09, the RGoB achieved an actual fiscal surplus on 1.9 percent of GDP (against a budget estimate of 3.9 percent deficit). In 2009/10, high capital expenditures on account of hosting the 2010 South Asia Association for Regional Cooperation (SAARC) summit has resulted in a revised estimate fiscal deficit of just above 6 percent of GDP, and actuals are not available yet. The average fiscal deficit presently estimated for the 10FYP period (2008/ /13) is about 4.8 percent, which remains within the upper cap of 5 percent. Growth slowed somewhat as the effects of the Tala Hydropower project (which had contributed to real growth of 11.7 percent in 2007/08) wore off but 2008/09 and 2009/10 still saw good real economic growth of about 7-9 percent. A2. Bolstering fiduciary systems for public financial management Bolstering the public financial management systems is an area of high priority for the RGoB, given that the government is the major controller of public resources. Overall, the RGoB has made good progress in taking forward its public financial management reforms agenda during the DPFIS. In order to improve the quality and timeliness of financial information for decision making, the RGoB has developed integrated web based application software, which will allow the newly introduced Multi-Year Rolling Budgets (MYRB) process to align with the accounting and reporting functions. This will substantively update and replace the existing budgeting and accounting systems, as well as interface with the Planning and Monitoring System (PlaMS) of the Gross National Happiness Commission (GNHC). The development process and piloting in select Ministries of the updated web based computerized Budget & Accounting System (BAS), renamed as Public Expenditure Management System (PEMS), has been substantively completed. The DPA has since been running training programs for all RGoB staff. The MYRB/PEMS system development has been completed, and piloted in four select pilot spending agencies Ministry of Health, Ministry of Education, Ministry of Works and Human Settlements, and Thimphu Dzongkhag. It has been rolled out across all spending agencies in July 2010, as per the matrix, to meet the medium-term goal of timely and reliable flow of funds. As a basis for competent financial reporting and transparency, the RGoB proposes to adopt international standards for accounting for the public and private sector. International consultants have been engaged to assist the RGoB in defining accounting and auditing standards. 3 Defining and adopting accounting and auditing standards in Bhutan has to been seen within a framework of a 5-7 year road map and linked with capacity building initiatives. However, the first step in the road map has been completed with the Cabinet approval of the formation of the Accounting & Auditing Standards Board of Bhutan (AASBB), with 9 members on the Board, and with the Auditor General as the chair as per the matrix. The RGoB has also approved a small Secretariat office within the MoF with a full-time General Secretary. The Board is 3 This is supported by the ADB-financed Financial Sector Development Program. 8

16 currently working on the nominations for the Technical Working Committee. The DPA has issued a circular in July 2009 on the simplified fund release procedures applicable for all budgetary and nonbudgetary releases. The circular provides clear instructions on the documentation required for each kind of release and sets a service standard for processing of releases (within 2-7 working days). The Bureau of Internal Audit has been established, and internal audit staff has been augmented from 18 to 25 as per 2009/10 targets presented in the RGoB s matrix. The internal audit manual is under development and is expected to be ready for dissemination by end-september The Institutional Development Fund (IDF) Grant for Improvement of Public Financial Management is financing the cost of an international consultancy firm to assist RGoB in the development of the manual and providing training to the staff. Internal audit is operational for the majority of central government entities (measured by value of revenue / expenditure), and substantially meets professional standards. At least 50 percent of staff time is focused on systemic issues. MoF is the parent agency for Government Internal Auditors. Internal Auditors operate in 9 of the 10 Ministries. On average, 70 percent of the budget is covered by internal audit over the last three years. The reports are issued to management as and when an audit is done, but there is no consolidated report issued annually. The report is issued to the head of the agency with a copy to the audited unit within the agency. Reports are not circulated to the Supreme Audit Institution (SAI) and MoF, but SAI can get access to Internal Audit Reports from the Agency. Internal Audit recommendations are addressed in all the Ministries and acted upon with accordance to their significance, and approximately 70 percent of the recommendations are acted upon immediately. Although there are few Internal Auditors in each Ministry, the outcome or effectiveness is felt in the Ministries. There is approval for the establishment of Internal Audit Services in all dzongkhags, and this would further strengthen the effectiveness of the Internal Audit Services. There is also a plan to recruit more Internal Auditors in the Ministries and in the dzongkhags. The Bank and RGoB have jointly undertaken the Public Expenditure and Financial Accountability assessment for Bhutan in 2009/10. It is the expectation that the results will help to set the baseline and report on progress in PFM performance as measured by indicators. A3. Improving transparency and efficiency of public procurement In order to strengthen the legal framework for public procurement, the RGoB revised and launched the new Procurement Manual in April 2007, which contained the rules and regulations guiding public procurement processes in Bhutan. This was further reviewed and necessary alignments with the Standard Bidding Documents (SBDs) were made and launched in April 2009, and renamed as Procurement Rules and Regulations As a specific prior action for the DPFIS, the RGoB issued Standard Bidding Documents (SBDs) for goods and works, and Standard Request for Proposals (SRFPs) to go along with the Procurement Rules and Regulations The SBDs and SRFPs are now in use in Bhutan, and sector-specific and small value contract SBDs are under preparation by local consultants under an IDF Grant. Under the broader program, the RGoB is taking measures to build procurement capacity over the next three years. 4 It will create institutional and individual capacity through the delivery of certified procurement training on a sustainable basis. As of now, the Compliance on Procurement Certificate (CPC) course has been offered to two batches of procurement personnel in the country. Further, it is planned to have another four batches by December Another 5 personnel (two from the Public 4 This is helped by the World Bank Institutional Capacity Building Project for Procurement, which became effective in September Training is provided by the Chartered Institute for Purchasing and Supply (CIPS). 9

17 Procurement Policy Division, two from Royal Institute of Management and one from Gaedue Business College) have completed Chartered Institute for Purchasing and Supply (CIPS) Level 4 training, and these personnel are attending CIPS level 5 courses in the country under IDA s Institutional Capacity Building for Procurement Project (ICBPP). 5 The Public Procurement Policy Division (PPPD) is also working to produce an operations manual and users guide for the SBDs, to provide support to public procurement in Bhutan. While the operational manual is expected to be complete by December 2010, the users guide for the SBDs are under preparation by the local consultant, and the first draft is ready. The staff strength of the PPPD has been augmented; while the PPPD still shares the Head with the MoF, there are now 3 full-time professional personnel, who are assisted by one administrative assistant and one IT assistant each. The CIPS has been contracted and the ICBPP project under IDA is approximately a year old. Under the ICBPP project, different courses have been created, and job descriptions, national qualifications and career paths have been created by the Royal Civil Services Commission for procurement positions in the civil service. However, progress on measures to set up an independent grievance redressal mechanism has been slow. It is expected that the steering committee responsible for drafting the roadmap will be created in While the Ministry of Information and Communication (MoIC) has taken significant steps on e- government as described below, electronic government procurement (e-gp) has not yet seen major developments, although it remains on the RGoB s agenda. MoF is planning to start moving towards e-gp by launching the PPPD website. The PPPD is preparing the terms of reference for the recruitment of an international consultant to work on the PPPD website. The full introduction of e-gp might take a while, considering the general unavailability of IT infrastructure across the country. A4. Enhancing audit effectiveness The RGoB s reforms to enhance audit effectiveness as highlighted in the RGoB s matrix have progressed well. The Royal Audit Authority (RAA) was brought within the legal framework of an Audit Act, which was passed by the National Assembly in 2006, and set up a separate division to actively track and monitor responses by public spending units of audit observations until settlement / adjustment. During 2009/10, the RAA has focused on enhancing performance audits: compared to seven undertaken in 2008/09, the RAA has done nine which is in line with the Strategic Plan ( ), and more than the 2009/10 target of eight. Also, the RAA has adopted international auditing standards in line with the International Organization of Supreme Audit Institutions (INTOSAI) Auditing Standards. By an Executive Order in August 2009, the RAA has also incorporated the International Federation of Accountants / International Auditing and Accounting Standards Board (IFAC/IAASB) International Standards on Auditing. This is an improvement over the earlier auditing approach based on the General Auditing Rules and Regulations (GARR), The new auditing standards are available on the RAA website. A5. Reducing the regulatory burden and enhancing transparency The RGoB has made good progress in reforms to reduce regulatory burdens and enhance transparency. In order to enhance transparency, the Anti-Corruption Commission (ACC) has issued Asset Declaration and Gifts Restriction Rules setting procedures for the declaration of assets and acceptance of gifts by public officials, which were specific prior actions for the DPFIS. Both are under implementation. Asset declaration forms are online, and compliance level is above 80 percent among Schedule I (higher level officials) who submit their asset declaration statement to the ACC. The online submission option is 5 This is supported by an IDF grant. 10

18 available, as indicated in the matrix. The RGoB has made efforts to enhance and improve the standard cost model, to assess the costs to citizens for the delivery of various services. Administrative costs both to the service recipient and provider were estimated in three pilot organizations: the Road Safety and Transport Authority, Business Licensing, and Thimphu City Corporation. This accountability measure was expanded, in April 2009, to a government-wide initiative called the Integrated Public Service Delivery Systems (IPSDS), to analyze and implement measures to enhance service delivery standards. Under this initiative, forty two ministries, agencies, and dzonghkhags have prepared service deliver standards, which lay out modalities, time requirements, and points of contact for citizens to access various services. These standards will be implemented across government in a phased manner, by 2011/12. Although the Transparency International Corruption Perception Index for Bhutan has declined marginally from 5.2 in 2008 to 5 in 2009, the ICR believes this indicator is too broad to measure the positive impacts of the measures undertaken. Bhutan still remains the least corrupt country in the South Asia Region. A6. Establishing e-government Reforms to establish e-government are broadly on track, with some delays. Towards institutional strengthening, the Ministry of Information and Communication (MoIC) has completed the preparation of an e-governance Implementation Roadmap, in consultation with stakeholders, with inputs from international expertise including Bank support as per the matrix. The final Roadmap has been delivered in June The RGoB has put in place a second institutional mechanism for e-governance (the first being the MoIC itself) in the form of the IPSDS office to establish one-stop delivery points for government services throughout the country. Some initial data standards, security management policy, and systems development guidelines have also been developed and new systems under the responsibility of Department of Information Technology (DIT) are being developed in accordance with them. 6 Towards integrated information systems and resources, two important systems have been developed by DIT as initial components of the future technology platform for e-governance. They are the Office Procedure Automation and the e-platform systems, both of which are designed for government-wide use and according to the Standards. However, new standards and architecture are still to be developed and deployed. Budget allocation is awaited to procure the necessary resources, which are not locally available. Bank support has been sought, but due to IDA allocation constraints, the RGoB is in the process of identifying alternative resources. In order to build capacity, an ICT human resource development plan has been prepared and fiscally sanctioned as part of the 10FYP. Staffing is an ongoing exercise. The challenge is to secure senior people with ICT experience to provide leadership. MoIC is implementing a bilateral cooperation training program with the National Indian Institute of Training sponsored by the Government of India. B. Fostering Dynamic Labor Markets, Ensuring Skills Match, and Generating Employment B1. Strengthening the institutional framework underpinning the labor market An important strategy to strengthen the institutional framework underpinning the labor market is to improve the working / employment conditions in the private sector through the enforcement of the These include the e-platform, the Security Clearance System, the Crime Case Management System and the Bio Security system. 11

19 Labor and Employment Act and its regulations. Before the introduction of the Act, there was no labor market legislation in Bhutan, with the exception of some fragmented regulations on minimum wages and on occupational health and safety. In order to implement the Act, the RGoB has approved 14 Rules and Regulations on Employment Conditions, which was a specific prior action for the DPFIS. 7 Eight additional Rules and Regulations, focusing on Occupational Health and Safety have been drafted, but there have been delays in the timeline that were discussed early on during preparation of the DPFIS. However, this is due to valid reasons. Since these Rules and Regulations are fairly technical in nature, they require specialized expertise, local adjustment and consultation which are well under way. As other actions under the RGoB s program, 21 labor officers (against a 2009/10 target of 15) are now working to enforce the Act, up from 11 in 2008/09. The number of Regional Offices of the Ministry of Labor and Human Resources (MoLHR) has gone up from 1 to 4 (against a 2009/10 target of 3) over the last two years. However, unemployment among the youth has gone up to about 13 percent from less than 10 percent in 2007 although the ICR considers this outcome indicator too broad to be causally linked to the positive measures highlighted in the matrix. B2. Improving the skills match and the employability of job-seekers With a view to improving skills and employability of job-seekers, in order to improve quality of and accessibility to technical and vocational training, revised curricula were developed and introduced for six trades, starting 2008/09, as a specific prior action under the DPFIS. Reforms in this area have continued, and the Department of Occupational Standards is working on new occupational skills standards, for priority occupations in eight trades during 2009/10, and also to pilot Competency Based Training in five selected occupations. Under the RGoB s wider program, a Human Resource Development Policy has been prepared and approved by the Cabinet for implementation, as presented in the matrix as a 2009/10 action. The objectives are: (i) creating human capital; (ii) strengthening existing and plan for new HRD institutions; (iii) promoting coordination among HRD agencies; and (iv) analyzing and projecting future labor market scenarios. The Apprenticeship Training program has shown good results in placement rates of its graduates, and more than 320 participants are enrolled in this program, against a 2009/10 target of 300. However, there has been little progress on improving M&E of training programs as envisaged, largely due to capacity issues although it remains on the RGoB s agenda. B3. Enhancing labor market information and job intermediation systems It is important for Bhutan to enhance labor market information and job intermediation to better match skills and opportunities. To provide better guidance for jobseekers and employers, the RGoB integrated the Labor Market Information System (LMIS) with Labor Net (a database that helps recruit foreign workers), and reports from the integrated system are available. Moreover, four external sources have been linked to the LMIS as envisaged, and it now includes information from the Ministry of Education, Royal University of Bhutan, Royal Civil Service Commission, and the National Statistics Bureau as indicated in the matrix. 7 These include rules on minimum wage, provident fund, foreign workers recruitment, acceptable forms of child labor, sexual harassment, leave, workers compensation, gratuity, worker s associations, internal service, labor inspection, grievance procedures, and penalties regulations. In fact, the DPFIS required the Cabinet submission of 12 Rules and Regulations, but 14 were approved. 12

20 At the same time, the Job Portal, which was launched in 2004 as a web-based job intermediation system, has been identified as in clear need of being revamped, to make it more useful and this action remains pending, due to capacity constraints. As consequence, it is not possible to measure whether the number of vacancies posted and job seekers registered in Job Portal have gone up. B4. Creating an enabling environment for the private sector by setting up the necessary policies As presented in the its matrix, the RGoB has prepared and approved an Economic Development Policy (EDP) in 2009/10, to help guide public sector development over the next 15 years. 8 The articulated goals are to: (i) achieve economic self-reliance; (ii) generate employment; (iii) harness and add value to natural resources in a sustainable manner; (iv) realize import substitution; (v) promote entrepreneurship; (vi) diversify the economic base; and (vii) increase and diversify exports. As highlighted in the matrix, the draft EDP was prepared and extensively consulted with stakeholders over several rounds, including government, private sector, and civil society. The Policy was approved by the Cabinet in November 2009, subject to the incorporation of comments to be collected through a last intra-ministerial round of consultations. The final version was released in April Steps towards implementation are under way. With an objective of encouraging more Foreign Direct Investment (FDI) to broaden the employment and revenue base, to benefit from technology transfer, and to increase foreign exchange earnings, the RGoB initiated the revision of the 2002 FDI Policy and Rules and Regulations with an intention that the revised policy would lead to the introduction of an FDI Act. 9 A revised draft FDI Policy was prepared, supported by extended consultations, and was recently approved by the Cabinet as per the matrix. The supporting Rules and Regulations are under preparation. The number of FDI projects approvals has gone up from five before 2005 to 20 in FDI inflows in 2009/10 are estimated to be about 16 percent higher than in 2008/09 and growth in FDI is projected to be 9 percent for the 10FYP, higher than the 5 percent target presented in the matrix. Secondary and tertiary sector output as a share of GDP has gone up from 80.1 percent in 2007/08 to 82.1 percent in 2009/ B5. Fostering private sector dynamism through enhancement of access to credit Important reforms to improve access to credit are progressing well. As a specific prior action for the DPFIS, the Royal Monetary Authority (RMA) Board provided an in-principle approval to three banks and one insurance company in December 2008, with specific qualification criteria to be met by these financial institutions to obtain licenses within one year of the approval. 11 All in-principle licenses have been issued, radically changing the financial sector in Bhutan. Bhutan Insurance Limited was granted a new insurance license in August 2009 by the RMA. Two new private commercial banks, T Bank and Druk Punjab National Bank, launched operations in the first quarter of 2010, at about the same time that Bhutan Development Finance Corporation acquired a specialized bank license. 8 UNDP is supporting this effort. 9 IFC/SEDF has been supporting the Ministry of Economic Affairs (MoEA) in reviewing the 2002 FDI policy as well as preparing required FDI legal framework and is planning to provide further Technical Assistance to support the drafting of FDI rules and regulations. 10 The numerical targets and baselines for GDP shares in the program document were revised, due to revised estimation of GDP figures. 11 The RMA Board comprises of: (i) the Minister, Ministry of Finance; (ii) the Secretary, Ministry of Finance; (iii) the Director, National Statistical Bureau; (iv) the Director General, Economic Affairs, Cabinet Secretariat, and (v) Managing Director, RMA. 13

21 Furthermore, an efficient payment system would stimulate commercial and financial transactions, and reduce costs of physically moving cash and paper-based instruments across regions especially in a country like Bhutan. As part of its 2009/10 plan, the RGoB has established the Credit Information Bureau (CIB), and that will help enhance the efficiency of the financial sector. The RMA has prepared a long-term strategic plan in January 2009 with a phased approach to introduce a modernized electronic payment system. 12 The CIB has been operational from November 2009, with products including Consumer Credit Information Reports and Self Inquiry Reports. The EFTCS is currently operational in Thimphu, and will be expanded to a national coverage over the next two years. The system s functionalities current includes credits (salaries, dividends) and debits (utility bill payments). Future functionalities under consideration include pension payments, Initial Public Offering (IPO) refunds and government taxes, among others. To allow for interoperability of Automatic Teller Machines (ATM), the RMA plans to implement a national card switch system by the end of Despite this progress Bhutan s rank has slipped to 177 of 183 countries on the Getting Credit Indicator in Doing Business 2010 although this indicator is too broad to be linked to exclusively to the RGoB s matrix actions, and it is expected that ongoing reforms will show good results in the medium term. C. Expanding Access to Infrastructure (Roads, Electricity, and ICT) in an Environmentally Sustainable Manner C1. Institutional strengthening to help meet road sector targets Towards institutional strengthening of the roads sector, the RGoB has prepared and published Guidelines on Road Classification System and Delineation of Construction and Maintenance Responsibilities, which clarify ownership and roles of various agencies as regards to planning and budgeting, implementation, and maintenance. This was a specific prior action for the DPFIS, aimed at reducing some of the overlaps in mandates and responsibilities among various agencies involved in the sector. The Department of Roads (DoR) now needs to complete the process of reclassifying roads along these guidelines and revise the 2004 Road Act (as well as 2004 Road Sector Master Plan), using any appropriate prioritizing tool. The Road Act is under revision, and is expected to be submitted to Parliament in 2010/11. While there is an increasing demand for new roads and improving existing road infrastructure across the country, the DoR, Ministry of Agriculture (MoA), and the engineering division of dzongkhags require significant capacity enhancement to implement development programs. Measures to implement training in line with the Human Resource Development Master Plan prepared by the Ministry of Works and Human Settlements (MoWHS) and MoA has not progressed as anticipated in the RGoB s matrix, largely due to funding constraints even though various ad hoc training measures have been undertaken with donor support. In order to meet these new challenges, the MoWHS is considering a proposal to restructure the DoR, and to give it more autonomy. In the DoR, the Investigation and Development Division (I&DD) has an environmental unit, which is presently involved in forwarding, with its recommendations, the applications for environmental clearances to competent authorities for issuing environmental clearances. There is now an Assistant Engineer responsible for the functioning of the unit. The expansion of the DoR's environmental unit s roles and responsibilities is part of the overall restructuring of DoR, and it is conceived that the unit will gradually develop, over time, into a resource centre in Bhutan Environment Friendly Road Construction. This action is therefore a long-term one linked with DoR's institutional reform. 12 Based on the Plan, the first phase of the development of an Electronic Fund Transfer System is being carried out under the Bank s Private Sector Development Project. 14

22 C2. Institutional strengthening to help meet power sector targets Progress on the power sector reforms reflected in the RGoB s matrix has been modest. This operation marked an entry point for the Bank into the dialogue on power sector reforms, and was not backed by Technical Assistance or investment lending. The key players in the sector are the Government of India (GoI) for hydropower development, and the Asian Development Bank (ADB) for rural electrification. A proposal to upgrade the Department of Energy to a Secretariat was approved by Cabinet in 2008/09. However, due to concerns from the Royal Civil Services Commission (RCSC) on staffing, the proposal is still awaiting implementation. In particular, the RCSC has raised questions on the precedence of having multiple Secretariats under the single Ministry of Economic Affairs. On the positive side, the draft policies on renewable Energy and Captive Power Generation have been prepared as envisaged, and are undergoing consultations. The Bhutan Electricity Authority (BEA) has been delinked from the Department of Energy, and is now an autonomous body with a separate budget line. The Standards of Performance by the utilities have been finalized, and are under implementation. The average contribution of electricity to GDP continues to be around 11 percent. In 2008/09 and 2009/10, over 40 percent of domestic revenue has come from the electricity sector. However, progress on rural electrification has been slower than anticipated. In 2008/09, 148 rural households gained access against a target of 609; in 2009/10, 1845 rural households gained access against a target of 14,000. The balance unconnected households are now part of 2010/11 targets. C3. Enabling access to fairly priced backbone capacity in the ICT sector Reforms for the Information and Communication Technology (ICT) sector have moved reasonably. The Bhutan Information, Communications and Media Authority (BICMA) has issued a tariff order in June 2009, placing a price cap on wholesale bandwidth tariffs. The new ceiling price for leased lines in Bhutan marks a reduction of 67 percent of previous bandwidth prices, and changes Bhutan s competitive position in the provision of connectivity. However, the tariff order has not yet been implemented consistently. Once uniformly implemented, Bhutan s international wholesale bandwidth prices would be lower than regional averages and ensure regionally competitive wholesale bandwidth prices. In order to strengthen capacity, the RGoB proposed to undertake and implement organizational strengthening of the telecom entity in the Bhutan Power Corporation (BPC), to equip it to undertake the ambitious agenda. Further capacity is still required for BPC to further expand its business to the telecom sector including Dark Fiber leasing as well as bandwidth leasing, and this will be an element of the RGoB s ongoing program. The RGoB has provided financial resources from the ICT Development Fund to the BPC to install Optical Fiber Ground Wire (OPGW) over the existing power transmission lines throughout the nation. The tendering of Phase 1 of replacing the groundware with OPGW by BPCL and laying down additional OPGW in all districts was initiated in September About 50 percent of Phase 1 has been completed, as per the RGoB s matrix. Full completion is expected in May 2011, and will ensure the deployment of ICT infrastructure in all dzongkhags. Phase 2 will be aimed at deploying the domestic backbone in the 205 gewogs. C4. Promoting environmental sustainability Reforms to promote environmental sustainability as highlighted in the RGoB s matrix show good advancement. In order to clarify mandates, roles, and responsibilities, the RGoB is in the process of revising Environmental Assessment Act 2000 (EAA 2000) and Regulations for the Environmental 15

23 Clearance of Projects 2002 (RECP 2002). Legal consultants have been hired to look at the areas needing clarification. A draft amendment bill has been prepared and consulted with the line ministries, NGOs, and private sector, and reforms are on track albeit with slight delays from what was envisaged. A national level consultation workshop was held in June 2010, and the draft bill will be submitted to the Cabinet, and then to Parliament. Of the eight sectoral Application for Environmental Clearance Guidelines, draft revisions for the four priority sectors roads and highways, mines, hydropower, and transmission lines have been prepared, and stakeholder workshops on the guidelines for road and highways have taken place. The RGoB intends to formally issue these revised guidelines after the amendment to the EAA The reason for this is to ensure consistency with the provisions of, the revised EAA Review of other guidelines and Environmental Codes of Practices (ECoPs) is ongoing. The interim ambient air quality standards have been reviewed and revised in light of the baseline data. The revised National Standard for Ambient Air Quality, Industrial Emission, Workplace Emissions and Noise Levels for Bhutan have been finalized and issued. These are available on the NEC website, and are under implementation indicating that the RGoB is on track as per actions presented in its matrix. The RGoB has decided to expand the scope of the draft Guidelines for Mainstreaming Environment in Policies and Programs to include Poverty as well; the new guidelines will tentatively be titled Guidelines for Mainstreaming Environment and Poverty in Policies and Programs. 3.3 Justification of Overall Outcome Rating Rating: Satisfactory The overall conclusion is that the major objectives of the DPFIS were broadly achieved as per the progress indicators outlined in the Program Document, and are on track. The program remains relevant even today, in line with the 10FYP. The operations were designed such that key policy actions were implemented prior to Board approval of the operation. The impact of the policy and institutional reforms supported by the DPFIS program is evident in many areas, as discussed above in Section 3.2. This includes improved budget preparation, strengthened procurement practices, improved public administration, better policy environment and access to finance for the private sector, institutional strengthening for infrastructure development, and improved framework for labor markets. In fact, in each of the three policy areas individually, the progress has been satisfactory. However, the RGoB will need to step up efforts in a few specific sub-components of its broader reform program, as outlined above, in order to sustain momentum. 3.4 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development Based on discussions with the RGoB, the assessment concludes that the DPFIS is likely to yield positive social impacts. However, no new data was available within the short timeframe of the DPFIS to formally evaluate this. The program helped to provide sound macroeconomic and fiscal underpinnings for continued steady economic growth to help improve the quality of life for all sections of the population. Improved service delivery and better accountability will help the Bhutanese population in accessing quality services. Measures to increase incomes through PSD-related reforms, as well as to enhance access to basic public services and information through improved efficiency of public spending with a special focus on remote, under-served areas will be particularly beneficial to the poor. Efforts to improve the investment climate for private sector growth and employment generation will create new 16

24 opportunities and reduce the dependence of the poor on agricultural employment. Measures to improve infrastructure availability will directly help poor and remote communities to access basic services and market infrastructure. It will also encourage private sector development, and help sustain the growth momentum. Accessibility to strategic infrastructure affects the living conditions and welfare of communities all across the country and determines their livelihood opportunities. (b) Institutional Change/Strengthening The DPFIS had major institutional strengthening across several sectors as its core development objective. The key policy actions that were supported by the program were all geared towards institutional strengthening and change, and building capacity within the government for the longer term. While there have been some shortfalls and delays as discussed in Section 3.2, the overall institutional development achieved under the DPFIS program has been substantial. (c) Other Unintended Outcomes and Impacts (positive or negative, if any) Not applicable. 3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Discussions have been held in September and October 2009, and February and April 2010, with representatives from the RGoB, development partners, and other stakeholders to discuss achievements, shortcomings, and lessons of the DPFIS. The assessments were generally favorable, and concluded that the DPFIS had made significant contributions to institutional reforms in Bhutan. Line ministries have expressed the need for focused technical assistance alongside budget support, to help them achieve reform goals and targets outlined in the operations. No beneficiary surveys were undertaken. 4. Assessment of Risk to Development Outcome Rating: Negligible to Low The overall risk that the development outcomes will not be maintained is rated as negligible to low. The DPFIS reforms are largely being consolidated and supported under a new series of budget support operations that are under preparation, thus helping sustainability of the reforms. External Shocks. As a small landlocked country, Bhutan faces several vulnerabilities, including, most notably, the heavy reliance on hydropower for its budget, balance of payments, and growth prospects. The undiversified nature of the economy poses risks for the development outcomes, and the dependence on India for hydropower development leaves Bhutan open to shocks transmitted from India. The program s emphasis on medium-term fiscal programming helps ensure that the multi-year consequences of investments and other decisions are forecast and taken into account. The focus on improving the general environment for private sector development help the country realize more of its potential for economic diversification, thereby reducing the magnitude of risks from external shocks to the development outcomes that have been achieved. Capacity Constraints. The DPFIS identified risks related to technical capacity constraints and put forward some mitigation measures, including the provision of appropriate technical assistance where essential. The DPFIS accounted for capacity constraints in design, through selectivity of focus, a limited number of prior actions, and simplicity. There were also efforts to identify and encompass technical assistance (financed from other sources) to support the reform program such as IDF grants for capacity 17

25 building in the areas of fiscal management, procurement, and environmental sustainability, technical assistance for the e-governance program, and dialogue on private sector development constraints. Capacity building measures will continue under follow-up operations, and is unlikely to pose a major risk to development outcomes already achieved. Political Risks. There have been political changes underway in Bhutan preceding the DPFIS, culminating in the formation of a new elected government in However, the political transition has been smooth and peaceful, and the new government has completed two years in office. The earlier program of DPGs has already achieved satisfactory development outcomes even through the period of more significant governance changes. Sustainability has been helped by the extensive and careful preparation of the ongoing changes in governance, and the strong ownership of the reform program by the government (and civil service). Indeed, the RGoB views the reform program as an important source of continuity through the transition. The authorities formally requested a follow-up to the DPFIS, to which the Bank has agreed. This shows commitment of the government to keeping the reform momentum going. Programmatic follow-up operations are under preparation, and will contribute to sustaining achievements. Environmental Risks. The RGoB has ambitious plans to realize the benefits of the Kingdom s large hydropower potential and to expand infrastructure, for the benefit of the people. This planned expansion is going to proceed, subject to funding and capacity irrespective of the Bank s involvement. The Bank s support for environmental mainstreaming measures, and environmentally friendly plans for infrastructure development actually help mitigate this risk. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Satisfactory The Bank collaborated effectively with the borrower in devising a relevant program of reforms to be supported under the DPFIS. Possible risks to program implementation were clearly flagged, and mitigatory measures were successfully adopted. Identification and design were consistent with the CAS and country priorities in the PRSP. In fact, the DPFIS built on the earlier DPG series, to keep the reform momentum strong. The Bank was responsive to client concerns, and maintained close contact with other donors during program identification and preparation. The Bank team recognized upfront that, as the Bhutan program evolved, country circumstances would change, particularly in light of the pending transition to a system of democratic governance. Accordingly, a flexible approach was adopted to designing the operation, and responding to the borrower. Given that the DPFIS coincided with a new government coming to power, and a new Plan being prepared, the themes to be supported were adopted in close consultation with the RGoB, in line with the expressed priorities. (b) Quality of Supervision Rating: Satisfactory The Bank team s supervision was satisfactory. The team maintained a proactive relationship with the government authorities during supervision, and was able to engage the government in a continued dialogue through the political transition. The DPFIS program was monitored through one full 18

26 implementation support mission in October 2009, which included specialists to cover the different areas of support under the program. 13 A multi-sector mission in June 2010 provided further information reflected in this ICR. Smaller missions were fielded in September 2009, February and April 2010, to provide implementation support. Sector specialists working on related projects in Bhutan notably the Private Sector Development Project, the Procurement Training Project, the Rural Access Project were part of the DPFIS team, and, apart from actively participating in DPFIS missions, also provided supplementary supervision through activities for sectoral projects. The missions followed up on progress on implementing agreed actions and monitoring indicators. Outside of the immediate team, the Country Director and Sector Manager also visited Bhutan to discuss implementation issues, among other things. In addition to regular and supplementary supervision, there were ancillary activities under Institutional Development Fund (IDF) grants and technical assistance that strengthened the supervision function. The Bank followed up on M&E arrangements during supervision as effectively as possible, given data limitations and the difficulties of attributing particular outcomes to specific actions. The Policy Program Matrix of the operations provided a results framework that described expected outcomes in the medium term, as well as indicators to measure success. During the supervision phase of the operation, these benchmarks were regularly evaluated, and the interim steps taken by the RGoB were monitored. Monitoring and evaluation remained challenging through the program, as significant data gaps and uncertainties are still being addressed. For quantitative indicators, the supervisions missions obtained data whenever updates were available. In many cases, the team relied on administrative data collected by the RGoB. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory The overall assessment of the Bank s performance is rated as satisfactory. Project identification and appraisal were satisfactory, with a drawback in the form of some outcomes which were difficult to link causally with the outcome indicators in some cases. Supervision was satisfactory at all stages of implementation. 5.2 Borrower Performance (a) Government Performance (b) Implementing Agency or Agencies Performance The government and the implementing agency were the same. (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory The assessment finds it commendable that the RGoB was able to maintain the DPFIS program largely on track even following changes in governance, as the Kingdom made the transition to a democracy. As 13 During supervision, the team found the Implementation Progress and Development Objective ratings to be satisfactory. Due to technical glitches from the move to a new ISR system, the ISR has not been archived at the time of submission for Country Director approval. 19

27 discussed above, all prior actions were successfully and timely met by the RGoB prior to Board approval of the individual operations. While some specific prior actions were process-related, these actions are now under satisfactory implementation. The RGoB was always keen to engage with the Bank, and the program was designed through close interactions. The RGoB participated actively in preparation and implementation through consultations, meetings, organizational support, research, and discussions. There were no major drawbacks or discontinuities in implementation from the RGoB side. The Department of Public Accounts, Ministry of Finance was responsible for overall implementation of the DPG program. The RGoB had established an inter-ministerial group of officials, headed by the Secretary, Ministry of Finance, to provide coordination for the earlier DPG series. This group has been working with the Bank team since the inception of the budget support program, and their experience and familiarity with the processes have helped in smooth implementation. Some minor delays and lack of progress on specific actions have been described in Section 3.2. This is partly attributable to lack of capacity within the government, in recognition of which various capacity-building measures have been supported under both operations. That the RGoB delivered the agreed program through these shortcomings and governance changes is considered to be noteworthy. 6. Lessons Learned Important lessons learnt under DPFIS have informed the design of the DPC series. Meaningful progress on key reforms is helped when leveraged with investment projects or technical assistance in related areas. This was evident in the case of Bank financing or technical assistance for private sector development, ICT, e-governance, rural access, environment, public financial management and procurement. In contrast, for the power sector, the Bank s leverage was limited since there were major players in the sector (GoI, ADB), and the Bank s role was limited in the absence of investment or technical assistance. Learning from this experience, the DPC series has included urban development as a policy area, to benefit from synergies with the recently-approved Second Urban Development Project. Efforts to support institutions and capacity building were seen to be worthwhile, in order to consolidate progress made on various reform efforts. Accordingly, the DPFIS continued support for capacity building initiatives, with parallel IDF grants and other measures. Providing assistance through cross sectoral programmatic support helped to sustain momentum in the RGoB s efforts to implement its reform program. The convening power of the MoF as the focal ministry for programmatic support helps to ensure that line ministries remain on-track for achieving agreed targets in specific sectors. Identifying good indicators upfront to gauge progress can be difficult, especially in a country with limited capacity and data. The DPFIS experience also shows the difficulty in finding suitable indicators of progress, when attribution is difficult. In particular, given the short timespan covered by the DPFIS operation, it was difficult to find outcome indicators that would show improvement by the close of the operation. The DPC series is making special efforts to rely on quantitative and qualitative progress indicators that can be measured within the life of the series. Despite the small size of Bhutan and the high costs of operations, it was important and worthwhile to sustain a close engagement, as there are strong impacts of Bank interventions in a small economy. Accordingly, the DPFIS sought to deepen the engagement for wider and longer-lasting impacts, and for ensuring sustainability of the reforms from the earlier DPG series. 20

28 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies The RGoB was in broad agreement with the Bank s assessment of DPFIS. Through various discussions with representatives from the RGoB, the World Bank, development partners and other stakeholders, it was recognized that the DPFIS program had played a useful role in helping the RGoB more fully develop, articulate and highlight specific institutional and policy reforms. Furthermore, in a context of governance changes and a plethora of competing priorities, the DPFIS had helped counterparts sustain momentum and follow-through on their stated intentions. However, some concerns have been raised by sectoral counterparts about the lack of earmarked funds for line ministries involved in the budget support program. (b) Cofinanciers Not applicable. (c) Other partners and stakeholders Not applicable. 21

29 Annex 1 Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Names Title Unit Lending Shahnaz Sultana Ahmed Program Assistant SASEP Ananya Basu Senior Economist SASEP Dimitri De Pues Consultant WBIGV Drona Raj Ghimire Environmental Specialist SASDI Christian Eigen-Zucchi Senior Economist SASEP Bharatha Manju Sri Kumar Haththotuwa Senior ICT Policy Specialist SASFP Rabin Indrajad Hattari Research Analyst SASEP Sapna John Program Assistant SASGP Pravin Karki E T Consultant SASDE Manvinder Mamak Sr Financial Management Specialist SARFM Rohit Mittal Financial Analyst SASDE Cecile Thioro Niang Economist SASFP Kyoo-Won Oh E T Consultant SASFP Vaikalathur J. Ravishankar Consultant SACIN Rajesh Rohatgi Senior Transport Specialist SASDT Geeta Sethi Lead Economist LCSPE Andrea Vermehren Senior Social Protection Specialist SASSP Milan Vodopivec Sector Leader AFTSP Supervision Shahnaz Sultana Ahmed Program Assistant SASEP Ananya Basu Senior Economist SASEP Suhail Kassim Private Sector Development Specialist SASFP Rohit Mittal Financial Analyst SASDE Rajesh Rohatgi Senior Transport Specialist SASDT Drona Raj Ghimire Environmental Specialist SASDI Bharatha Manju Sri Kumar Haththotuwa Senior ICT Policy Specialist SASFP Sapna John Program Assistant SASGP Rabin Indrajad Hattari Research Analyst SASEP Andrea Vermehren Senior Social Protection Specialist SASSP Responsibility/ Specialty (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage USD Thousands (including travel and No. of staff weeks consultant costs) Lending FY Total: ,535 Supervision/ICR FY FY Total: ,878 22

30 Annex 2. Beneficiary Survey Results Not applicable. 23

31 Annex 3. Stakeholder Workshop Report and Results Not applicable. 24

32 Annex 4. Summary of Borrower's ICR 25

33 ROYAL GOVERMENT OF BHUTAN BORROWER S ICR FOR THE DEVELOPMENT POLICY FINANCING FOR INSTITUTIONAL STRENGTHENING A. Objectives 1. Since the beginning of the planned development in Bhutan in the early 1960s, its development philosophy is guided by the series of Five-Year development plans. The start of the Tenth Five-Year Plan covering the period FY09 to FY13 of the Royal Government of Bhutan (RGoB) coincided with the implementation of the Development Policy Financing for Institutional Strengthening. The Tenth Five-Year Plan encompasses the medium-term policy and institutional reform program, which is also the RGoB s Poverty Reduction Strategy Paper. It has six overall strategic priorities: i. vitalizing industry; ii. strengthening national spatial planning; iii. synergizing rural-urban development; iv. expanding strategic infrastructure; v. investing in human capital; and vi. fostering an enabling environment through good governance. 2. The RGoB requested the World Bank to continue providing policy-based assistance to meet the goals of the Tenth Five-Year Plan. Since the landmark elections in March 2008, the Kingdom has moved to a democratic system of government, and the RGoB invited strong support from the World Bank during this crucial transition period. Further, Bhutan is rated as one of the top performers among IDA countries with the highest CPIA ratings in the region. In addition, the First and the Second Development Policy Grants have resulted in several important and sustainable institutional benefits and outcomes. The RGoB reaffirmed its commitment to move forward with its reform agenda. Based on these arguments, the World Bank agreed to continue its program of policy based support to Bhutan, to provide impetus to the reform programs enshrined in the Tenth Five-Year Plan. 3. The World Bank provided a single-tranche budget support operation, the Development Policy Financing for Institutional Strengthening (DPFIS), of US$20.22 million in FY09 to Bhutan. The DPFIS supported selected key components of the RGoB reform program to maintain the reform momentum and help meet Bhutan s development goals. The DPFIS was 26

34 based on lessons learnt in the First and the Second Development Policy Grants. It is planned to continue this series of World Bank development policy operations to continue the reform progress by building on lessons learnt, including the usefulness of the instrument in facilitating development in Bhutan. B. Design, Implementation, and Operation experience 4. The RGoB requested for a series of policy support from the World Bank for the following reasons: i. Flexibility it provides fungibility in terms of utilization of the proceeds based on the RGoB s priority. ii. Simple and lower costs of administering the program the DPFIS proceeds are transferred to the consolidated account of the RGoB in a single tranche. iii. Vote of confidence It provides added impetus to the RGoB s effort towards ongoing reform programs already initiated. iv. Ownership the reform programs under the DPFIS are closely aligned to the medium term institutional and policy reforms reflected in the Tenth Five-Year Plan, and are accepted by the RGoB as crucial to sustain development progress in the coming years. 5. The Department of Public Accounts, Ministry of Finance was responsible for overall implementation of the DPFIS operation. The institutional arrangements for DPFIS preparation and implementation on the part of the RGoB have been thorough and effective. Several rounds of interactions, meetings, brainstorming, consultation and research have gone into making the DPFIS a success. 6. The DPFIS supported the strengthening of institutions in Bhutan to: i. Promote good governance through sound fiscal and public financial management and procurement, and strong accountability institutions; ii. Foster dynamic labor markets, ensure skills match, and generate employment; and iii. Expand access to infrastructure (roads, power, ICT) in an environmentally sustainable manner. C. Reform progress achieved under the development policy financing for institutional strengthening 27

35 7. Under the three themes highlighted in the DPFIS, the RGoB s reform program has made significant progress, as outlined below. Promoting Good Governance through sound Fiscal and Public Financial Management and Procurement, and strong Accountability Institutions 8. Strengthening macroeconomic monitoring The DPFIS operation supported reforms to strengthen macroeconomic monitoring. The RGoB views this as especially important, given the spill over impacts of the global financial crisis into Bhutan. Specific progress was made along the following lines: i. The three-year Budget Policy and Fiscal Framework Statement (BPFFS) was enhanced to include quarterly monitoring of budget execution. ii. The Department of National Budget is preparing quarterly reports on revised budget and revenue figures which are being submitted to the Finance Minister and Finance Secretary. iii. The RGoB has maintained a satisfactory macroeconomic framework aligned to its BPFFS goal of keeping the actual fiscal deficit below 5 percent in 2008/ Bolstering fiduciary systems for public financial management The RGoB has made good progress in the priority area of public financial management reforms. Specific progress was made along the following lines: i. The updated web based computerized Public Expenditure Management System is fully operational with effect from 1 st July, ii. This integrated web based application software is aligned with the Multi-Year Rolling Budgets process with the accounting and reporting functions, and will interface with the Planning and Monitoring System. iii. The Cabinet has approved the formation of the Accounting & Auditing Standards Board of Bhutan (AASBB). iv. International consultants have been engaged to assist the RGoB in defining international accounting and auditing standards for the public and private sector. v. The Department of Public Accounts, Ministry of Finance has issued a circular on 01-Jul on the simplified fund release procedures applicable for all budgetary and nonbudgetary releases. vi. The Bureau of Internal Audit has been established, internal audit staff has been augmented, and the internal audit manual is under development. 28

36 vii. Internal audit is operational for the majority of central government entities and largely meets professional standards. viii. The RGoB and the World Bank are jointly undertakeing the PEFA assessment for Bhutan. 10. Improving transparency and efficiency of public procurement i. The RGoB has issued Standard Bidding Documents (SBDs) and Standard Request for Proposals (SRFPs), which are now in use, to accompany the Procurement Rules and Regulations The PPPD is working to issue an operations manual and users guide for SBDs by December ii. The RGoB is taking measures to build procurement capacity over the next three years, via assistance from the World Bank Institutional Capacity Building Project for Procurement. iii. The staff strength of the PPPD has been augmented. iv. MoF plans to start on electronic government procurement (e-gp) by launching the PPPD website. v. Progress on measures to set up an independent grievance redressal mechanism has been slow. 11. Enhancing audit effectiveness i. The Royal Audit Authority (RAA) has conducted nine performance audits in FY10, which is an improvement over FY09 and is in line with the Strategic Plan targets. ii. The RAA has adopted international auditing standards in line with the INTOSAI Auditing Standards. iii. The RAA has incorporated the IFAC/IAASB International Standards on Auditing by an Executive Order in August The new auditing standards are on the RAA website. 12. Reducing the regulatory burden and enhancing transparency i. Under the Integrated Public Service Delivery Systems initiative, 42 ministries, agencies, and dzonkhags have drafted service delivery standards, which will be adopted over the next two years. 29

37 ii. Rules for Asset Declaration and Gifts Restriction have been finalized and issues, and online asset declaration option is available. More than 80% of officials filing to the Anti Corruption Commission use this option. 13. Establishing e-government i. The RGoB has completed the preparation of an e-governance Implementation Roadmap. ii. The RGoB has implemented a second institutional mechanism for e-governance in the form of the Integrated Public Service Delivery Secretariat (the new name for the Good Governance Affairs office) which would eventually act as a one-stop delivery point for government services in Bhutan. iii. An ICT human resource development plan has been sanctioned in the Tenth Five-Year Plan. Fostering Dynamic Labor Markets, Ensuring Skills Match, and Generating Employment 14. Strengthening the institutional framework underpinning the labor market i. Fourteen Rules and Regulations on Employment Conditions have been approved and issued, and eight more on Occupational Health and Safety are already drafted and are under discussion. Together, they will form the basis for the full implementation of the Labor and Employment Act 2007, and improve working conditions. ii. Progress has been made on strengthening enforcement and decentralization, through the establishment of four Regional Offices of the Ministry of Labor and Human Resources, and having 21 labor officers in total. 15. Improving the skills match and the employability of job-seekers i. A Human Resource Development Policy has been prepared and approved by the Cabinet for implementation, with the objectives, to provide overall guidance to the sector. ii. The RGoB has successfully expanded the coverage of the apprenticeship program, and has introduced revised curricula in several trades. Occupational skills standards are under preparation for priority trades, in order to improve the skills composition of workers. 30

38 16. Enhancing labor market information and job intermediation systems i. The LMIS has been enhanced with additional information from four external sources, and reports can be now generated. This will enable our young people to have better access to jobs that are suited to their qualifications. 17. Creating an enabling environment for the private sector by setting up the necessary policies i. The last fiscal year has seen the approval of two policies to promote the private sector development in line with our 10FYP priorities. The Economic Development Policy provides a long term vision for industrial development, and will be implemented over the coming years. ii. The Foreign Direct Investment Policy has been approved, and Rules and Regulations are under preparation to give teeth to the policy. This will help our goal of increasing FDI inflows into Bhutan. 18. Fostering private sector dynamism through enhancement of access to credit i. Since access to credit is a key constraint for the private sector, the RGoB has granted licenses to four new financial institutions last year, which will increase competition in the sector. ii. Modernized electronic payments systems are under development. The Credit Information Bureau is successfully established, and will serve to decrease collateral requirements. Development of the EFTCS is also progressing as per a Strategic Plan that chalks out future milestones. Expanding Access to Infrastructure (Roads, Electricity, and ICT) in an Environmentally Sustainable Manner 19. Institutional strengthening to help meet road sector targets i. The RGoB has prepared and published Guidelines on Road Classification System and Delineation of Construction and Maintenance Responsibilities, which clarify ownership and roles of various agencies as regards to planning and budgeting, implementation, and maintenance. 31

39 ii. The RGoB is considering a proposal to restructure the Department of Roads, and give it more autonomy. iii. The Investigation and Development Division in the Department of Roads has an environmental unit, which is presently involved in forwarding, with its recommendations, the applications for environmental clearances to competent authorities for issuing environmental clearances. 20. Institutional strengthening to help meet power sector targets i. A proposal to upgrade the Department of Energy to a Secretariat was approved by Cabinet in 2008/09, but due to concerns on staffing, the proposal is pending implementation. ii. The draft policies on renewable Energy and Captive Power Generation have been prepared and are undergoing consultations. iii. The Bhutan Electricity Authority has been delinked from the Department of Energy, and is now an autonomous body with a separate budget line. iv. The Standards of Performance by the utilities have been finalized and are under implementation. v. The average contribution of electricity to GDP continues to be around 11 percent, with over 40 percent of domestic revenue coming from the electricity sector in FY09 and FY Enabling access to fairly priced backbone capacity in the ICT sector i. With a view to making the sector more competitive, the Bhutan Information, Communications and Media Authority (BICMA) has issued a tariff order in June 2009, placing a price cap on wholesale bandwidth tariffs. ii. To deploy ICT infrastructure in all dzongkhngs, Phase 1 of replacing the groundware with OPGW and laying down additional OPGW in all districts was initiated in September About 50 percent of Phase 1 has been completed. Full completion is expected in May The government will then focus on deploying the domestic backbone in the 205 gewogs. 32

40 22. Promoting environmental sustainability i. The RGoB is in the process of revising the Regulations for the Environmental Clearance of Projects 2002 (RECP 2002). The revision of the Environmental Assessment Act 2000 (EAA 2000) is in the final stages. ii. Draft revisions to the Application for Environmental Clearance Guidelines for four priority sectors roads and highways, mines, hydropower, and transmission lines are ready. iii. The revised National Standard for Ambient Air Quality, Industrial Emission, Workplace Emissions and Noise Levels for Bhutan have been finalized and issued. These are available on the RGoB website and are under implementation. iv. The RGoB has decided to expand the scope of the draft Guidelines for Mainstreaming Environment in Policies and Programs to include Poverty as well. D. Proposed arrangement for follow on operation The RGoB has requested further budget support from the Bank to: (i) strengthen its ongoing program of institutional reforms; and (ii) provide resources for its development agenda. First, as the one-year old democratically elected government deepens its reform program, Bank assistance will help highlight key development priorities to meet the challenges. Bank support through budgetary operations has achieved significant success in recent years, and the RGoB would like build on this momentum. Second, the projected resource gap in financing the 10FYP agenda is above US$400 million, and further support will help fill part of this gap. Given Bhutan s good performance in reform, the RGoB is happy that the Bank has agreed to provide further budget support. Assistance is envisaged as a programmatic series of two single-tranche Development Policy Credits (DPC) over the next 2-3 years. The operations are designed to align with the RGoB s reform program as anchored in the Tenth Five-Year Plan (10FYP) (2008/ /13). It is expected that DPC1 will go to the Board in Calendar Year 2010, followed by a follow-on DPC2 within two years, subject to good reform progress. The RGoB has indicated that it wishes to continue with the same three broad themes that were supported under the DPFIS, with some adjustments to reflect ground realities. The DPFIS reforms were designed to fit closely with the 10FYP priorities of the new government, and remain highly relevant. The DPCs support strengthening institutions to: 33

41 o Promote government efficiency and effectiveness through sound fiscal and public financial management and procurement, and strong public administration; o Foster private sector development by improving the policy environment and facilitating productive employment opportunities; o Expand access to infrastructure in a sustainable manner. E. Conclusion 23. Overall, the DPFIS operation was deemed successful based on the fact the all upfront actions under the operation were met in a timely manner, and the reform program is on track as measured against the outputs and progress indicators. The success of the DPFIS operation is mainly attributed high levels of commitment and full country ownership by the RGoB. 24. It is evident from the above (the reform progress achieved under DPFIS) that there is a visible impact of policy and institutional reforms supported by the policy operation. This includes improved and rational budget preparation, more robust financial management and procurement practices, stronger financial sector players, and better institutions to manage infrastructure. 25. Drawing on the lessons learnt, and the benefits derived from the DPFIS and the past two DPG operations, the RGoB is fully committed to carry forward the reform program undertaken under the past programmatic operations as well new areas of engagement. The RGoB is looking forward for implementation of the fourth policy operation in FY11. 34

42 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders Not applicable. 35

43 Annex 6. List of Supporting Documents 36

44 37