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

Transcription

1 Progress Report on Tranche Release Project Number: Grant Number: 0088/0089 November 2012 Bhutan: Micro, Small, and Medium-Sized Enterprise Sector Development Program This consultant s report does not necessarily reflect the views of ADB or the government concerned. [For PPTAs: Also, all of the views expressed herein may not be incorporated into the proposed project s design.]

2 CURRENCY EQUIVALENTS (as of 31 October 2012) Currency Unit ngultrum (Nu) Nu1.00 = $ $1.00 = Nu ABBREVIATIONS ADB Asian Development Bank BDBL BDFC BDS BSB Bhutan Standards Bureau Bhutan Development Bank Limited Bhutan Development Finance Corporation business development service COS CSF Committee of Secretaries cost-sharing facility DCSI Department of Cottage and Small Industry G2B G2C government-to-business government-to-citizen GDP gross domestic product GNHC ISC MOEA Gross National Happiness Commission International Securities Consultancy Limited Ministry of Economic Affairs MSME micro, small, and medium-size enterprise MTI Ministry of Trade and Industry OSS one-stop shop RIA regulatory impact assessment RMA Royal Monetary Authority RTIO regional trade and industrial office SQCA Standard and Quality Control Authority NOTES (i) The fiscal year (FY) of the Government of Bhutan and its agencies ends on 30 June. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2008 ends on 30 June (ii) In this report, "$" refers to US dollars. Vice-President X. Zhao, Operations 1 Director General J. Miranda, South Asia Department (SARD) Director B. Carrasco, Public Management, Financial Sector and Trade Division, SARD Team leader Team member A. Huang, Finance Specialist, SARD Jogendra Ghimire, Counsel, Office of General Counsel M. Panis, Senior Operations Assistant, SARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 CONTENTS Page I. INTRODUCTION 1 II. RECENT MACROECONOMIC AND POLITICAL DEVELOPMENTS 2 A. Country Background 2 B. Political Developments 3 III. STATUS OF TRANCHE RELEASE POLICY ACTIONS 3 IV. PROGRAM IMPLEMENTATION 8 V. PROGRAM ASSURANCES 11 VI. CONCLUSION 12 VII. PRESIDENT S DECISION 12 APPENDIXES 1. Design and Monitoring Framework 2. Status of Third Tranche Release Policy Actions 3. Status of Third Non-Tranche Release Policy Actions 4. Project Cost Estimates and Financing Plan 5. Chronology of the Missions for the Micro, Small, and Medium-Sized Enterprise Sector Development Program 6. Bhutan Country Economic Indicators 7. Government s Calculation of World Bank s Eight Procedures for Business Formalization

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5 I. INTRODUCTION 1. The Board of Directors of the Asian Development Bank (ADB) approved the Asian Development Fund grants to the Kingdom of Bhutan for the Micro, Small, and Medium-Sized Enterprise (MSME) Sector Development Program on 21 November The program consists of (i) a program grant (Grant 0088) of $6 million to promote policy reforms, (ii) a project grant (Grant 0089) of $9 million to facilitate program implementation and extend credit to MSMEs, 2 and (iii) an associated technical assistance of $400,000 to strengthen the business enabling environment for private sector development through the introduction of regulatory impact assessment (RIA) The impact of the program is a vibrant MSME sector to encourage private sector development for broad-based sustainable economic growth. The outcome of the program is an improved enabling environment for doing business and greater access to key resources. The outputs of the program are (i) an integrated policy, strategy, and institutional framework for MSME development; (ii) enhanced business laws and regulations; (iii) increased access to market-based finance; and (iv) strengthened business support infrastructure. 3. The program grant (Grant 0088) supports policy reforms in the four areas described in para. 2. The program grant comprises three equal tranches of $2 million, for a total of $6 million. The releases of each tranche are contingent upon the compliance with the respective policy actions outlined in the policy matrix. 4 The first tranche of $2 million was released on 16 May 2008 upon grant effectiveness and satisfactory compliance with the first tranche release policy actions. The second tranche of $2 million was released on 26 November This progress report addresses the third and final tranche release. The program grant had an implementation period of 3 years, from 21 February 2008 to 31 December Due to the delay in meeting the first two tranche release policy actions, Grant 0088 s closing date was extended from 31 December 2010 to 31 December 2011, then to 30 June 2012, and finally to 30 November Details of the program implementation delay are discussed in section IV. 4. The project grant (Grant 0089) complements the implementation of the program grant (Grant 0088) through increased access to market-based finance by MSMEs, enhanced business development services, and capacity building. The project grant comprises three components: (i) a credit line of $5 million to the Bhutan Development Finance Corporation (BDFC), since renamed the Bhutan Development Bank Limited (BDBL), to extend credit assistance to MSMEs; (ii) a cost-sharing facility (CSF) of $1 million to provide the necessary technical support and knowledge transfer to growth-oriented businesses; and (iii) a component of $3 million to support program implementation and institutional capacity building. 6 1 ADB Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Kingdom of Bhutan: Micro, Small, and Medium-Sized Enterprise Sector Development Program. Manila. 2 Micro enterprises (or cottage industry as defined by the government) are businesses with investment of less than Nu1 million. Small enterprises have investment of between Nu1 million and Nu10 million. Medium enterprises have investment of between Nu10 million and Nu100 million. 3 ADB Capacity Building for Introducing Regulatory Impact Assessment (Bhutan) (Financed by the Australia- ADB South Asia Development Partnership Facility [RETA 6337: Development Partnership Program for South Asia Subproject 5]). Manila. The TA was physically closed on 31 September 2011 and the TA completion report has been circulated to the ADB Board of Directors in October Footnote 1, pp The second tranche release was based on 6 full compliances, 1 substantial compliance, and 1 deferred compliance of a total of 8 tranche release policy actions. 6 Footnote 1, pp

6 2 5. ADB conducted 10 program review missions from 2008 to 2012 for a total of 2.2 person months. Releasing the third and final tranche is justified by Bhutan s achievement of all tranche release policy actions. The status of third tranche and non-tranche release conditions is in Appendixes 2 and 3. The history of monitoring and review missions is in Appendix 5. II. RECENT MACROECONOMIC AND POLITICAL DEVELOPMENTS A. Country Background 6. Bhutan s economy is dominated by hydropower export to India. Electricity generation is the single largest industry in the country, accounting for 22% of gross domestic product (GDP) and half of the country s exports. It is followed by agriculture at 17% of GDP, construction at 12%, and manufacturing at 9%. 7 The GDP growth rate was estimated at 7.9% for FY2012 (ending 30 June) and 8.4% for FY Constructions of the four hydropower projects (Tala, Chhukha, Kurichhu, and Basochhu) and manufacturing (mainly cement) are the main drivers. 7. To support sustainable, long-term economic growth, the Government of Bhutan needs to broaden the economic base to boost job creation and income generation, and the expansion of Bhutan s private sector is essential. However, this process has been challenging. Agriculture has not recorded significant growth from FY2005 to FY2012 because of the difficulties in raising productivity. Tourism still requires significant investment to meaningfully contribute to the national economy. The unemployment rate has averaged 3.5% from 2009 to 2012, likely to surpass the government target of 2.5% set for Bhutan s fiscal deficit for FY2012 was estimated at 4.3% of GDP, 9 following a fiscal deficit of 4.7% of GDP in FY The deteriorated fiscal stance reflected rising expenditures on a civil services pay increase in January 2011 and on the hydropower sector. The overall fiscal deficit is projected to deteriorate further to 6% of GDP in FY2013 (footnote 10). 9. The current account deficit widened from 9.9% of GDP in FY2010 to about 23.9% in FY2011 as the trade deficit increased from 20.9% of GDP to 30.2% during the same period. The current account deficit is projected at 20.0% for FY2012 (footnote 8). In particular, Bhutan s external position with India suffered from slow export growth as power sales reached generation capacity as well as accelerated imports from hydropower construction and strong consumer demand. Bhutan s external debt rose from 80.9% of GDP in FY2011 to 91.2% of GDP in FY2012. The bulk of debts were loans for hydropower construction. The external debt service ratio jumped from 29.8% of exports in 2010 to 52.2% in FY2011 to 123.2% in Broad money rose by 21.2% in FY2011, mainly due to the expansion in net foreign assets. Private sector credit grew by 31.9% in FY2011, concentrated on housing and other personal consumption. Inflation is high, forecasted at 10.1% in FY2012 and 10.5% in FY2013 (footnote 8), a likely result of (i) trade controls on housing construction materials and personal transportation, (ii) the lagged transmission of price increases in India as the ngultrum is pegged to the rupee, and (iii) rising local demand for goods as growth in personal income remains buoyant. 7 ADB Asian Development Outlook. Manila. 8 ADB Asian Development Outlook Update. Manila. In its latest annual report , the Royal Monetary Authority of Bhutan estimated that the GDP growth rate for 2012 was 8.5%. 9 Royal Monetary Authority of Bhutan (RMA) Monetary Policy Statement June Thimphu. 10 ADB Asian Development Outlook. Manila.

7 3 11. In summary, Bhutan s economic fundamentals, while historically strong, are under increasing strain. Rapid credit growth along with an expansion of public spending and net lending from 41% of GDP in FY2009 to 47% in FY2011 have led to a widening fiscal deficit, double digit inflation, and a current account deficit in excess of 20% of GDP. 11 External debt is expanding. At the end of FY2011, Bhutan s rupee reserves amounted to only one week of import cover (although convertible currency reserves were high at nearly $890 million, equivalent to about 9 months of total imports). Extraordinary measures have been introduced to address a rupee liquidity crunch reflecting these imbalances in the economy. 12 B. Political Developments 12. Bhutan places a strong premium on preserving its culture, environment, and identity. While economic growth is considered important, the government promotes a unique development concept of gross national happiness, which is supported by sustainable socioeconomic development, environmental conservation, cultural heritage promotion, and good governance. 13. Bhutan s historic transformation from an absolute monarchy to a constitutional monarchy was successfully completed in July Elections for the upper house took place in December 2007, and elections for the 47-member lower house were held in March On 18 July 2008, the new Parliament formally adopted the Constitution. The Election Commission of Bhutan conducted local government elections in 3 of 20 districts in Bhutan s 205 village groups (gewogs) were demarcated to form 1,042 village constituencies (chiwogs) in preparation for their 2011 election. The Parliament is likely to be dissolved towards the end of the first quarter of 2013 resulting in new general elections expected in July The public views employment and income generation as fundamental to improving social welfare. However, the private sector is hampered by Bhutan s small domestic market, the lack of supportive infrastructure, and comparatively high costs of doing business. In response, the program to support the development of MSME remains relevant to support the government s efforts toward employment and income generation and to promote sustainable and broad-based economic growth. III. STATUS OF TRANCHE RELEASE POLICY ACTIONS 15. There are 10 policy actions for the third tranche release of the program grant (Grant 0088). Table 1 summarizes the status of compliance with regards to the third tranche release policy actions. Table 1: Summary of Status of Compliance with Third Tranche Release Policy Actions Focus of Reform Policy Actions to Be Taken Prior to Third Tranche Release Status of Compliance A. Establish a policy, strategy, and institutional framework for MSME development 1. Improve organizational structure and develop an Government to adopt the MSME policy, strategy and institutional Fully complied 11 ADB Asian Development Outlook Update. Manila. 12 ADB is preparing a program loan to Bhutan in early 2013 to help improve overall economic management to address impediments to sustainable growth.

8 4 appropriate policy, strategy, framework, and development and institutional framework for program with 3-year action plan for MSME development MSME development. B. Enhance business laws and regulations and facility business processes 1. Enhance legal and regulatory structure and conduct RIA 2. Simplify business formalization process 3. Introduce OSSs to facilitate business formalization process 4. Increasing accountability and efficiency of RTIOs C. Increase access to market-based finance 1. Establish a central registry to encourage secured transactions plan. Government to review and revise, as needed, the draft legislations based on RIA recommendations for submission to the National Assembly Government to adopt the approved RIA policy and designate the MSME division to implement the RIA policy Reduce overall time involved in business formalization process to less than 30 days, aiming to approximate international best practice MSME division to set up a website with complete information on the business formalization process and prepare a brochure, detailing the process of business formalization with time and costs involved, for public dissemination. MTI to establish OSS units in the RTIOs at the regional level MSME division to disseminate performance benchmarks to the public and RTIOs to implement performance benchmarks set by MTI; establish complaints desk to obtain feedback from public users RMA to make the central registry fully operational as per approved D. Strengthen business support infrastructure 1. Broaden BDS support with Cost-sharing facility to be fully private sector participation operational. 2. Improve quality control and product standards SQCA or its successor Bhutan Standards Bureau (established under the Standards Act) to approve the plan for establishment of product standard, testing facilities, and product certification. Fully complied Fully complied Fully complied Fully complied Fully complied Fully complied Fully complied Fully complied Fully complied BDS = business development service, MSME = micro, small and medium-sized enterprise, MTI = Ministry of Trade and Industry, OSS = one-stop-shop, RIA = regulatory impact assessment, RMA = Royal Monetary Authority, RTIO = regional trade and industry office, SQCA = Standard Quality Control Authority. Sources: ADB project review missions ; ADB Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Kingdom of Bhutan: Micro, Small, and Medium-Sized Enterprise Sector Development Program. Manila.

9 5 16. Government to adopt the MSME policy, strategy and institutional framework, and development program with 3-year action plan for MSME development (policy action A.1). The development of (i) an MSME policy, (ii) a strategy and institutional framework, and (iii) a development program is one of the four program outputs (para. 2). The three documents provide Bhutan s long-term MSME development roadmap and implementation plan. The draft MSME policy, titled Cottage, Small and Medium Industry Policy, was endorsed by the Ministry of Economic Affairs (MOEA) for submission to the Gross National Happiness Commission (GNHC) on 10 May Following the GNHC endorsement, the MSME policy was submitted to the cabinet for approval on 24 July The cabinet approved the policy on 3 August The MSME strategy and institutional framework and development program with 3-year action plan were finalized on 31 August The other two documents are titled Cottage, Small and Medium Industries Development Strategy ( ) and Action Plan ( ). The strategy provides MSMEs with a development vision within the framework of the approved policy. The action plan supports the first 3 years of implementation of the strategy with detailed steps to be undertaken by all relevant government ministries, agencies, and private sector stakeholders. These two documents were approved by the MOEA on 5 September This tranche release policy action is fully complied with. 17. Government to review and revise, as needed, the draft legislations based on regulatory impact assessment (RIA) recommendations for submission to the National Assembly (policy action B.1). RIA is a review process that assesses and improves regulatory effectiveness. The RIA piloting work under the project grant (Grant 0089) focused on the regulatory impact assessments on business legislations and policies related to MSME and general business development, which is one of the four program outputs (para. 2). The government conducted pilot RIAs on (i) Business Start-up in Bhutan and (ii) Improving Entrepreneurial Skills Development and Access to Finance for Cottage and Small Industries in Bhutan. The Committee of Secretaries (COS) 13 endorsed both documents on 6 September The MOEA conducted further RIA reviews on (i) Enterprise Registration Bill in Bhutan (2012), which was finalized by the MOEA on 27 August 2012, and (ii) Foreign Direct Investment Rules and Regulations (2012), which was finalized by the MOEA on 19 July The Enterprise Registration Bill will be presented to the COS for endorsement to be submitted to the Parliament. This tranche release policy action is fully complied with. 18. Government to adopt the approved RIA policy and designate the MSME division to implement the RIA policy (policy action B.1). 14 The COS during its 26th session approved the Rules and Regulations for Mainstreaming RIA System in Bhutan (2011) and RIA Guideline (2011) on 1 December The cabinet approved both documents as RIA policy on 4 April Jacob & Associates, a consultancy recruited under this component, conducted a total of 2,410 person-hours of training with government officials from 8 October 2008 to 11 February 2011, covering RIA policy introduction, methodologies, procedures, and consultation. The Department of Cottage and Small Industry (DCSI) of the MOEA has been implementing the RIA component since the commencement of the program. Through its efforts, an RIA unit was established under the Cabinet Secretariat on 1 December 2011 to expand the implementation of RIA to sectors other than MSME and business development. A regulatory registry of legal measures is being established to cover (i) registration of regulatory forward plans, (ii) 13 The Committee of Secretaries consists of secretaries of all line ministries and is headed by the Cabinet Secretary. Its functions include examination and review of administrative rules and regulations, procedures, manuals, and guidelines as submitted by any ministry. 14 The MSME division has been replaced by the Department of Cottage and Small Industry (DCSI) of the MOEA.

10 6 registration of draft legal measures and RIA reports, and (iii) registration of existing regulations. This tranche release policy action is fully complied with. 19. Reduce overall time involved in business formalization process to less than 30 days, aiming to approximate international best practice (policy action B.2). Reduction of the business formalization process is a key program output listed in para Following the practice of the first tranche release, ADB obtained an official letter from the government stating that, by adopting the same eight procedures used by the World Bank, the average number of days for business formalization in Bhutan is More specifically, the government has implemented one multipurpose security clearance certificate from April 2009 to significantly shorten such processing time from the Royal Bhutan Police to 3 days (Appendix 7). Regional trade and industry offices (RTIOs) throughout Bhutan have been delegated power to approve the licensing of small and cottage businesses with a fixed investment under Nu10 million. RTIOs are also authorized to issue environmental clearances to businesses in 17 sectors. These efforts greatly expedited MSMEs business approval process, which was previously available only at the Project Development Services Division of the Department of Industries and at the Environmental Unit of the MOEA in the capital of Thimphu. Furthermore, the government conducted a detailed review of the environmental clearance process and waived such a clearance for 59 business sectors, most of which are MSMEs with limited environmental impact. As already approved in the progress report on the second tranche release dated August 2011, the business formalization in Bhutan was 29 days and remains valid as of October This tranche release policy action is fully complied with. 20. MSME division to set up a website with complete information on the business formalization process and prepare a brochure for public dissemination that details the process of business formalization with time and costs involved (policy action B.3). The DCSI of the MOEA developed a website with information on the business formalization process. 17 A brochure titled Improved Services has been circulated by the DCSI to the general public in 2012 and it provides detailed information, including time and cost, on the business formalization process. Because both the government-to-citizen (G2C) initiative and governmentto-business (G2B) initiative also cover business registration and other business formalization processes, similar information is also provided on the G2C and G2B websites. 18 This tranche release policy action is fully complied with. 21. The Ministry of Trade and Industry (MTI) to establish one-stop shop (OSS) units in the RTIOs at the regional level (policy action B.3). 19 The rationale for introducing OSSs is to provide convenient single-access points throughout Bhutan to offer business registration and related services otherwise available only in Thimphu. This component is designed to ease market entry for business start-ups. The six RTIOs already provide business registration and related services designed for OSS, including MSME licensing. In addition, the G2C initiative 15 Business formalization refers to the process of setting up a business, measured by the number of days. 16 The adoption of the 29 days is based on the official letter from the government and an accompanying calculation spreadsheet and backup files to substantiate its claim. The government s final tally of 29 days, using the same World Bank methodology and eight categories, is much shorter than the 46 days cited in the 2011 World Bank Doing Business Survey. The government submitted an official letter to the Executive Director for Bhutan at the World Bank on 6 July 2011 to rectify the total number of days in business formulation process to 29 days. 17 The website address is hosted by the DCSI of the MOEA. 18 The website addresses are and (hosted by the G2C initiative) and (hosted by the MOEA). Because the same information is provided on multiple websites, the government would need to consolidate these information in the future. 19 The MTI has been replaced by the Ministry of Economic Affairs.

11 7 covers the same services through 205 local community centers, reaching far broader areas than the six RTIOs were designed to cover. This tranche release policy action is fully complied with. 22. MSME division to disseminate performance benchmarks to the public and RTIOs to implement performance benchmarks as set by MTI; establish complaints desk to obtain feedback from public users. (policy action B.4). The MOEA signed a performance compact with the G2C initiative on 4 January 2011 on the simplification and automation of cottage and small industry licensing. The performance benchmarks include (i) citizens overall time spent on obtaining the licensing service, (ii) citizens time spent on each step of application, verification, approval, and issuance of the business license, (iii) citizens time spent on the physical travel time to the licensing centers, and (iv) public resources utilization in providing the licensing service. Performance benchmarks of services availability, turnaround time, eligibility, and fees are disseminated on the G2C initiative website (footnote 18). In terms of the complaint desk, the contact information is on the websites of the G2C initiative and the DCSI as well as in the DCSI Improved Services brochure. The G2C system platform also provides comprehensive feedbacks on the non-compliances of the performance benchmarks. Further, the G2C initiative s voice of customers service channels individual complaints to the Prime Minister s office and/or the concerned line ministry ministers for action. This tranche release policy action is fully complied with. 23. The Royal Monetary Authority (RMA) to make the central registry fully operational as per the approved plan (policy action C.1). The central registry records movable properties that could be used as collaterals to promote secured transactions and facilitate access to finance by MSMEs. This component is a key program output to increase access to marketbased finance. The RMA, the central bank, was selected to establish the central registry. International Securities Consultancy Limited (ISC), a consultancy, was recruited on 9 May 2011 to provide the support. ISC submitted detailed implementation plan of the central registry to RMA on 21 August 2012 and the RMA subsequently accepted the report. The hardware and software were procured through a local vendor, Peljorkhang Private Limited (Bhutan). The contract with the vendor was signed on 27 January The system was delivered and installed in June The RMA accepted the system on 13 September 2012 following a period of testing. Pursuant to section 92 of the Movable and Immovable Property Act of the Kingdom of Bhutan (1999), the government provided the RMA with the legal status on 22 August 2012 to establish the central registry and perform the services. The system went live on 31 October This tranche release policy action is fully complied with. 24. Cost-sharing facility to be fully operational (policy action D.1). This component was designed to enhance MSMEs capacity to strengthen business support infrastructure, which is the last of the four program outputs (para. 2). Despite an initial delay due to poor consultant performance, the replacement consultant team (i) realigned the CSF design; (ii) trained officials in the DCSI, RTIO, and the Bhutan Chamber of Commerce and Industry on the CSF grant scheme; (iii) established CSF guidelines; and (iv) conducted awareness workshops in all 20 administrative districts of Bhutan over the course of 2011 and The CSF office was established within the DCSI on 17 February 2011 with three full-time staff. However, the CSF was unable to disburse funds because of the restrictive disbursement conditions. Based on the difficult ground realities, a minor change in implementation arrangement was approved on 21 May 2012 to facilitate the disbursement of funds. Currently, (i) overseas private business development service (BDS) providers are able to access the CSF, 20 (ii) cost sharing ratio is 20 BDS providers are technical training centers that offer services to support business development. The services include information technology, bookkeeping, incense-making, bakery, plumbing, carpentry, and crafts. ADB will

12 8 5%, 21 (iii) direct contracting is allowed to select BDS providers 22 if there is only one BDS provider in the region, 23 (iv) capital expenditures are allowed, and (v) at least 50 enterprises should benefit from the CSF and there is no individual contract ceiling. 24 To entice demand for CSF funds, the CSF was transferred to the Bhutan Development Bank Limited (BDBL) to be grouped with its existing MSME loan applications. By combining the business development services with BDBL s MSME loans, the original development impact has been significantly strengthened. There are 110 applications for the CSF fund as of 26 October 2012, and BDBL is working towards disbursing the balance of the $875,000 allocated for this component by 30 November This tranche release policy action is fully complied with. 25. The Standard Quality Control Authority (SQCA) or its successor the Bhutan Standards Bureau (established under the Standards Act) to approve the plan for the establishment of product standards, testing facilities, and product certification (policy action D.2). This component intends to strengthen business support infrastructure by establishing high product standards and strict quality control on goods produced by MSMEs to improve their competitiveness in domestic and international markets. This component also benefits the health, safety, and welfare of the public; assists and protects consumers; and promotes industrial efficiency and development. The SQCA was the national standards body for standardization and quality control. The Bhutan Standards Bureau (BSB) was established upon the enactment of the Bhutan Standards Act 2010 by the Parliament on 7 July 2010 to succeed the SQCA. The BSB is now an autonomous organization and an umbrella institution that coordinates and oversees all standardizations and related services in Bhutan. IDRG Consultancy Services (India), a consultancy recruited for this component, prepared a 3-year corporate plan, which was approved sequentially by the BSB board on 14 September 2011 and 25 July In a letter to ADB dated 24 April 2012, the BSB indicated that it has begun implementing the corporate plan. Currently, the BSB is fully operational, with seven established technical committees, a certification scheme, a national metrology laboratory, a testing service, and a technical information center. This tranche release policy action is fully complied with. IV. PROGRAM IMPLEMENTATION 26. The implementation of the program grant suffered from a delay of 23 months (para. 3). The delays of the first and second tranche releases were partly caused by external factors, particularly the political transition from absolute monarchy to constitutional monarchy in , when the process suspended various government offices including the ADB counterparts in the Ministry of Finance. retain the conflict of interest provision to ensure that the CSF funds will not benefit any particular government entity. 21 The cost-sharing ratio of 50% is shared between (i) the MSMEs that apply for BDS and (ii) the CSF grant. 22 The procurement plan of the project grant prohibited direct contracting as stated in the Section C Procurement Thresholds for Consultant Services on page 72 of the RRP (ADB Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Kingdom of Bhutan: Micro, Small, and Medium-Sized Enterprise Sector Development Program. Manila). 23 Since intra-country travel is difficult owing to dispersed population settlement and a poorly developed road network, the selection of the BDS providers should be based on a localized region with easy access by the residents. 24 ADB Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Kingdom of Bhutan: Micro, Small, and Medium-Sized Enterprise Sector Development Program. Manila (para. 93, p. 23).

13 9 27. Prior to the first tranche release, with the dissolution of the cabinet, the private sector development committee did not function in Significant time was required for the MOEA to restructure the committee to comply with the first tranche release requirement of having at least 40% of its members from the private sector. In addition, because of extended reviews of the program s consultant recruitment from October 2008 to June 2009, some key experts were reassigned to other projects and were no longer available. 28. Prior to the second tranche release, poor consultant performance contributed to repeated replacements of consultants per the requests of the government and ADB. In addition, the RMA s central registry project could not proceed in early 2010 because no suitable consultants were identified during the first tendering. 26 Thereafter, few RMA staff resources were available to expedite a new round of consultant recruitment. This delay should be viewed against the backdrop of the RMA s usually satisfactory project implementation performance. 29. Overall, these delays did not reflect any lack of commitment on the part of the government to implement the program. Rather, following the removal of some obstacles, the government has demonstrated substantial dedication to carry the project forward within a relatively short period of time. 30. Table 2 summarizes the achievement of the program targets: Table 2: Achievement of the Program Targets Targets Performance Indicators Status/Updates Impact A vibrant and expanding MSME sector leading to accelerated private sector development for broad-based, sustainable Increased broad-based private and/or MSME sector participation in economic activities, measured by: economic growth (i) private sector contribution to (ii) GDP increased, total employment by private and/or MSME-oriented sectors, including manufacturing, trade, hotels, and services as percentage of total labor force, exceeds 6% by 2010, a and (iii) economic growth rate is at least 7% per annum. Although the impact indicator is too early to be measured, initially available information indicates that the number of MSMEs in Bhutan has increased from 16,557 in 2006 to 27,982 in December Outcome Improved enabling environment for doing business and greater access to key resources Days and procedures in setting up a new business reduce to 30 days or less by 2010 The DCSI and the G2C initiative have coordinated to streamline the business formalization process, which has been reduced to 29 days in In 2000, the government established the committee to initiate and coordinate policies and programs supporting private sector development. This advisory body also supports MSME development with institutional capacity building to define and implement policy, strategy, and programs. 26 The second bidding followed in early 2011, and ADB is assisting the government s fast-tracking of procurement. The consultant team leader commenced work in May 2011.

14 10 Targets Performance Indicators Status/Updates Share of total loan portfolio in the MSME-oriented sector by the target financial institution, BDFC, exceeds 25% by 2010 The share of total loan portfolio in the MSME-oriented sector in BDFC (succeeded by BDBL) was 66.7% as of 2009 and 58.7% as of September Outputs 1. Establishment of a coordinated policy, strategy, and institutional framework for MSME development 2. Enhanced business laws and regulations. 3. Increased access to marketbased finance. At least 250 private sector businesses assisted by the costsharing facility by 2010 Establishment of an MSME division to facilitate coordination between different ministries and other stakeholders, including the private sector Prepared and adopted long-term policy and strategy (i.e., white paper) for MSME development Developed RIA methodology, policy, and guidelines Piloted RIA on two selected draft business laws (e.g., Bhutan Enterprises Registration Act and/or Industries and Investment Act, or any other legislation relevant to MSME development ) Reduced time involved in business formalization process from 62 days to 30 or even closer to international best practice Established OSS units at the RTIOs with approved and adopted action plans and performance benchmarks Approved and adopted BDFC 5-year business plan aiming at providing suitable Actual ground conditions have made such a target difficult to attain. A minor change in scope was approved in May 2012 to change such a target to 50. The implementation is to be completed by 30 November The DCSI of the MOEA has been playing such a role, including being the ADB grants project management unit. An MSME policy, strategy, and action plan have been adopted by the government. The government has developed the RIA rules and regulations and RIA guideline, which covers RIA methodology, policy, and guidelines. RIA has been piloted on the Bhutan enterprise registration bill. The time required for business formalization has been reduced to 29 days as of All business formalization services have been delegated to the 205 community centers and 6 RTIOs throughout Bhutan. The work has been undertaken by combined efforts with the G2C initiative. The 5-year business plan was adopted by the BDBL board for implementation in The

15 11 Targets Performance Indicators Status/Updates financial services to MSMEs BDBL s disbursement to MSMEs has been expanding and has benefited partly from the ADB credit facility to the BDBL. 4. Strengthened business support infrastructure Improved MSME lending practice at BDFC by increasing the share of total loan portfolio allocated in the MSME-oriented sector, and reducing its NPL ratio (e.g., from 15% in 2006; increasing from 15% of total loan portfolio distributed in the manufacturing sector in 2006) Establish a central registry for secured transactions at RMA Established cost sharing facility to promote quality business development services Draft standards act submitted to the National Assembly Prepared draft plan for testing, establishing standards, and product certification MSME loans from the BDBL (succeeding BDFC) are about 58.7% of the total loan portfolio as of October BDBL s NPL ratio has been improving from 21.3% in 2007 to 8.3% in The central registry at RMA has been fully established. The system went live on 30 October The CSF has been established and it is expected that the allocated $875,000 be disbursed by 30 November Bhutan Standards Act 2010 was approved by the Parliament on 7 July The BSB has been established to replace the SQCA and is fully operational. ADB = Asian Development Bank, BDBL = Bhutan Development Bank Limited, BDFC = Bhutan Development Finance Corporation Limited, BSB = Bhutan Standards Bureau, CSF = cost-sharing facility, DCSI = department of cottage and small industry, G2C = government-to-citizen, GDP = gross domestic product, GNHC = Gross National Happiness Commission, MSME = micro, small, and medium-sized enterprise, NPL = nonperforming loan, OSS = one-stop shop, RIA = regulatory impact assessment, RMA = Royal Monetary Authority, RTIO = regional trade and industry office, SQCA = Standard Quality Control Authority. Sources: ADB project review missions ; ADB Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant Kingdom of Bhutan: Micro, Small, and Medium-Sized Enterprise Sector Development Program. Manila. V. PROGRAM ASSURANCES 31. In accordance with the provisions of the grant agreement between ADB and Bhutan on the release of the third tranche, ADB understands that the government still satisfactorily complies with all the tranche release policy actions under the first and second tranches.

16 12 VI. CONCLUSION 32. The 10 tranche release policy actions are key output milestones of the MSME Sector Development Program. Policy action A.1 ensures that the overarching MSME sector policy is in place. Policy actions B.1, B.2, B.3, and B.4 improve the legislative framework and environment for doing business. Policy action C.1 helps establish a movable property central registry in Bhutan to facilitate access to market-based finance. Policy actions D.1 and D.2 provide direct financial support to business development services and improve product standards to strengthen business support infrastructure. These milestones help address major constraints on Bhutan s MSME development. 33. The program has significantly improved MSME development in Bhutan. The government now has a roadmap to pursue a long-term MSME sector development strategy. Comprehensive institutional infrastructure has been established at the MOEA and through the G2C initiative to improve business formalization, while relevant regulations are being better screened and reviewed. Market-based finance is being improved. Credit has been channeled through the BDBL to MSMEs. Improved business support infrastructure is in place. 34. The achieved policy actions for third tranche release accomplished most program outputs with respect to (i) developing an MSME policy, (ii) enhancing business laws and regulations through piloting RIA and reducing the time required for business formalization, (iii) supporting the BDFC (now BDBL) to increase market-based finance, and (iv) establishing a CSF and product standardization to strengthen business support infrastructure. 35. Overall, the development of the MSME sector has been rapid following the commencement of the ADB program. In 2006, it was estimated that there were 16,557 MSMEs in Bhutan. 27 As of December 2011, there were 27,982 licensed cottage and small-scale enterprises in the country (defined as enterprises with investment less than Nu10 million). 28 Although the program s impact on the expansion of the MSME sector will be assessed at a future date, the initially available information indicates that the program has already contributed meaningfully to this development. VII. PRESIDENT S DECISION 36. In view of the progress made in the implementation of the Micro, Small and Medium Sized Enterprise Sector Development Program, as evidenced by the full compliance with all ten tranche release conditions, the President is satisfied with the overall implementation of the Program, and that the necessary conditions for the release of the third tranche of the Program have now been fulfilled. In accordance with the established procedure, the President will authorize the release of the third tranche in the amount of $2,000,000. The authorization shall be effective not less than 10 working days after the circulation of this progress report to ADB s Board of Directors. 27 Footnote 1, p Ministry of Economic Affairs Cottage & Small Industry of Bhutan Overview Thimphu.

17 Appendix 1 13 DESIGN AND MONITORING FRAMEWORK Design Summary Impact A vibrant and expanding MSME sector leading to accelerated private sector development for broad-based, sustainable economic growth Performance Targets/Indicators Increased broad-based private and/or MSME sector participation in economic activities, measured by: (i) (ii) private sector contribution to GDP increased, total employment by private and/or MSMEoriented sectors, including manufacturing, trade, hotels, and services as percentage of total labor force, exceeds 6% by 2010, a and (iii) economic growth rate is at least 7% per annum. Data Sources/Reporting Mechanisms RMA annual reports and other government statistics ADB documents, such as Bhutan country program strategy papers, country assistance program evaluation reports, and program completion reports ADB missions Assumptions and Risks Assumptions Political stability and government commitment to carry out the reform agenda Favorable response from the private sector Outcome Improved enabling environment for doing business and greater access to key resources Days and procedures b in setting up a new business reduce to 30 days or less by 2010 Share of total loan portfolio in the MSME-oriented sector by the target financial institution, BDFC, exceeds 25% by 2010 At least 250 private sector businesses assisted by the cost-sharing facility by 2010 Official copies of government s confirmation of the actions undertaken Official copies and publication of government strategies Program progress reports ADB review missions Assumption Continuing strong political will to undertake the reform agenda Risks Policy reforms reversed or not implemented Insufficient counterpart support to undertake and continue the reforms Outputs 1. Establishment of a coordinated policy, strategy, and institutional framework for MSME development Establishment of an MSME division to facilitate coordination between different ministries and other stakeholders, including the private sector Prepared and adopted long-term policy and strategy (i.e., white paper) for MSME development Official copies of government s confirmation on the actions undertaken Official copies and publication of government strategies Program progress reports ADB review missions Assumptions Adequate resources and budget support available to carry out all the activities Strong government commitment to pursue the reform agenda Good coordination of, and implementation support from, government

18 14 Appendix 1 Design Summary 2. Enhanced business laws and regulations Performance Targets/Indicators Developed RIA methodology, policy, and guidelines Piloted RIA on two selected draft business laws (e.g., Bhutan Enterprises Registration Act and/or Industries and Investment Act, or any other legislation relevant to MSME development ) Data Sources/Reporting Mechanisms Official copies of government s confirmation of actions undertaken Official publication of government strategies Official copies of laws and regulations Program progress reports Assumptions and Risks agencies and stakeholders Qualified consulting services provided to assist project implementation Adequate technical assistance provided to strengthen capacity in BDFC 3. Increased access to market-based finance Reduced time involved in business formalization process from 62 days to 30 or even closer to international best practice Established OSS units at the RTIOs with approved and adopted action plans and performance benchmarks Approved and adopted BDFC 5-year business plan aiming at providing suitable financial services to MSMEs ADB review missions Official copies of BDFC s board decision Risks Loss and/or lack of qualified staff, including counterpart staff Expected results not fully met for lack of understanding, consensus, or political will Inadequate staffing, skills, or training to implement the BDFC business plan, or an unsatisfactory financial performance by BDFC. Improved MSME lending practice at BDFC by increasing the share of total loan portfolio allocated in the MSME-oriented sector, and reducing its NPL ratio (e.g., from 15% in 2006; increasing from 15% of total loan portfolio distributed in the manufacturing sector in 2006) Establish a central registry for secured transactions at RMA 4. Strengthened business support infrastructure Established cost sharing facility to promote quality business development services Official copies of government s confirmation of actions taken Draft standards act submitted to the National Official copies of acts, laws, and regulations

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