Document o f The World Bank FOR OFFICIAL USE ONLY Report No: 38945 - BT PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF SDR 5.3 MILLION (US$S.O MILLION EQUIVALENT) TO THE KINGDOM OF BHUTAN FOR A PRIVATE SECTOR DEVELOPMENT PROJECT May 17,2007 Finance and Private Sector Development Unit South Asia Region This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document o f The World Bank
FOR OFFICIAL USE ONLY
Report No: 38945 - BT
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED GRANT
IN THE AMOUNT OF SDR 5.3 MILLION (US$S.O MILLION EQUIVALENT)
TO THE
KINGDOM OF BHUTAN
FOR A
PRIVATE SECTOR DEVELOPMENT PROJECT
May 17,2007
Finance and Private Sector Development Unit South Asia Region
This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without Wor ld Bank authorization.
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
ADB
ATM B A S B C C I
B D F C B I C M A
BIPS BNB
BOB
BPO BT
C A R CAS C M S C C H DADM
DIT
EFTCS
F IAS FDI GDP GNH GNI IDA
CURRENCY EQUIVALENTS
(Exchange Rate Effective March 3 1, 2007) Currency Unit = Ngultrums (Nu)
Nu43.01 = US$1 US$1.51326 = S D R l
GOVERNMENT FISCAL YEAR July 1 - June 30
ABBREVIATIONS AND ACRONYMS
Asian Development Bank
Automated Teller Machine Budget and Accounting System Bhutan Chamber o f Commerce and Industry Bhutan Development Finance Corp. Bhutan Information, Communication & Media A c t Bhutan ICT Policy and Strategy Bhutan National Bank
Bank o f Bhutan
Business Processing Outsourcing Bhutan Telecom Ltd.
Capital Adequacy Ratio Country Assistance Strategy Course Management System Check Clearing House Department o f Aid and Debt Management Department o f Information Technology
Electronic Fund Transfer Clearing System Foreign Investment Advisory Services Foreign Direct Investment Gross Domestic Product Gross National Happiness Gross National Income International Development Association
IFC/SEDF
IT ITES I C T
IRR M&E
MOF M O I C
MOLHR
NPV PIA
PPP PRSP PSD RFP RAA
R I C B
RMA
RGOB RUB TA T O R V S A T WAN
South Asia Enterprise Development Facil ity Information and Technology IT Enabled Services Information and Communication Technology Internal Rate o f Return Monitor ing and Evaluation
Ministry o f Finance Ministry o f Information and Communication Ministry o f Labor and Human Resources N e t Present Value IT/ITES Promotion & Program Implementation Agency Public Private Partnership Poverty Reduction Strategy Paper Private Sector Development Request For Proposal Royal Audit Authority
Royal Insurance Corporation o f Bhutan Royal Monetary Authority o f Bhutan
Royal Government o f Bhutan Royal University o f Bhutan Technical Assistance Terms o f Reference Very Small Aperture Terminal Wide Area Network
V i c e President: P ra fu l C. Pate l
Sector Director: Sadiq A h m e d Sector Manager: Simon C. B e l l
Task T e a m Leader: A s y a Akh laque
Coun t ry Director: Alastair J. M c K e c h n i e
BHUTAN FOR OFFICIAL USE ONLY
Private Sector Development Project
CONTENTS Page
I . STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 A . B . C .
I1 . A . B . C . D . E . F .
I11 . A . B . C . D . E . F .
I V . A . B . C . D . E . F . G .
Country and sector issues ................................................................................................ 1
Rationale for Bank involvement ..................................................................................... 4
Higher level objectives to which the project contributes ................................................ 5
PROJECT DESCRIPTION ......................................................................................... 5 Lending instrument ......................................................................................................... 5 [If Applicable] Program objective and Phases ................................................................ 5 Project development objective and key indicators., ........................................................ 6
Policy Exceptions and Readiness .................................................................................. 23
This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties . I t s contents may not be otherwise disclosed without Wor ld Bank authorization .
Annex 1: Country and Sector or Program Background ......................................................... 24
Annex 2: Major Related Projects Financed by the Bank andlor other Agencies ................. 30
Annex 3: Results Framework and Monitoring ........................................................................ 31
Date: M a y 17,2007 Country Director: Alastair J. McKechnie Sector Manager/Director: Simon C. B e l l
Team Leader: Asya Akhlaque Sectors: General industry and trade sector (70%); Information technology (1 5%); Other industry (10%); Payment systems, securities clearance and settlement (5 %) Themes: Infrastructure services for private sector development (P) Environmental screening category: Partial Assessment
Project ID: PO73458
Lending Instrument: Specific Investment Loan I
Project Financing Data [ ] Loan [ ] Credit [XI Grant [ ] Guarantee [ ] Other:
For Loans/Credits/Others: Total Bank financing (US$m.): 8.00
Total: 0.00 8.00 8.00
Borrower: Kingdom o f Bhutan Responsible Agency: Ministry o f Finance, and Ministry o f Information and Communication
I _
Estimated disbursements (Bank FY/US%m) TY 2008 2009 2010 2011 2012 k u a l 0.50 1.00 1 S O 2.50 2.50 hmu la t i ve 0.50 1 S O 3 .OO 5.50 8.00 Project implementation period: Start October 3 1, 2007 End: December 3 1, 201 1 Expected effectiveness date: September 30, 2007 Expected closing date: June 30, 2012 Does the project depart f rom the CAS in content or other significant respects? Re$ PAD A.3 Does the project require any exceptions f rom Bank policies? Re$ PAD D. 7
[ ]Yes [XINO
[ ]Yes [XINO [ ]Yes [ IN0 [ ]Yes [ IN0
Have these been approved by Bank management? I s approval for any pol icy exception sought f i om the Board?
[XIYes [ ] N o
[XIYes [ ] N o
Does the project include any critical r i sks rated “substantial” or “high”? Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D. 7
Project development objective Re$ PAD B.2, Technical Annex 3
The objective o f the project i s to increase productive employment in Bhutan through promotion o f enterprise development In the IT/ ITES sector, enhanced i T skills, and improved access to finance. Project description [one-sentence summary of each component] Re$ PAD B.3.a, Technical Annex 4
1. Development of IT/ITES Sector (USS5.0 mill ion) This component focuses o n the development the IT/ ITES sector in Bhutan, using an integrated approach that includes (i) establishment o f IT Park and related infrastructure and (ii) IT promotion services.
2. Development of IT/ITES Skills Program (USS2.0 mill ion) This component focuses o n development o f skil ls, through collaboration with international institutions at the fo l lowing three levels (i) Generic Skills for the IT/ ITES Sector; (ii) Distance learning facilities/CMS for IT Skills development; and (iii) IT Entrepreneurship Development Program.
3. Strengthening Financial Sector through I T Use (USD1 .O mill ion) This component aims at achieving greater efficiency in the financial sector through IT use, comprising the fol lowing three activities: (i) IT system up-gradation in the Bank o f Bhutan; and (ii) developing a ‘Financial sector IT development strategic plan’; and (iii) establishing the Inter-bank Electronic Fund Transfer Clearing System at the RMA. Which safeguard policies are triggered, if any? Re$ PAD 0.6, Technical Annex 10
Environmental Assessment (OP/BP/GP 4.01) This i s a category B project. The safeguard pol icy o n Environmental Assessment i s triggered. T h e project includes the development o f an IT Park, which will consist o f a few small buildings such as an incubation center, shared technology center, office building. There will be n o manufacturing facility in the IT Park. The construction o f the IT Park facility wil l be financed by a private developer who will be selected through a competitive process after Board approval o f the project. Hence, the environmental assessment (EA) and environmental management p lan (EMP) will not be prepared until after a private developer i s selected for the commencement o f the IT Park infrastructure activities. Significant, non-standard conditions, if any, for: None Re$ P A D C. 7 Board presentation:
Loadcredi t effectiveness:
Covenants applicable to project implementation:
I. STRATEGIC CONTEXT AND RATIONALE
A. Country and sector issues
1. Bhutan i s a small economy with a GDP o f Nu 32,814 mi l l ion (US$ 735.6 million).’ Landlocked between regional giants China and India, i t s population i s estimated at 672,425.* Over the past 25 years, the country has achieved rapid economic, social and human development, driven by the exploitation o f vast hydropower potential and donor supp01-t.~ Real GDP growth averaged more than 6 percent a year over this period, and sustained growth has increased Gross National Income (GNI) per capita in 2004 to about US$720. The economy i s modernizing rapidly, albeit agriculture continues to account for about 26 percent o f GDP, with industry and services representing 43 percent o f GDP and 31 percent o f GDP respectively. M u c h o f the impressive transformation that has taken place since the opening up o f the economy in the 1960s i s attributed to the initiatives spearheaded by the government. Public sector enterprises are a central feature o f the Bhutanese economy, with expenditures amounting to 16.6 percent o f GDP in 2004.4
Private Sector
2. Employment generation a challenge. Creating jobs, particularly for the increasing unemployed youth, i s the central challenge facing the country. Good progress in achieving educational and literacy goals has meant that a growing number o f educated Bhutanese as well as those leaving agricultural activities - as part o f an accelerating trend towards urbanization’ - are n o w seeking urban employment opportunities. Over the decade 2001 to 2010 it i s projected that approximately 90,000 school leavers and graduates will be produced by the school system - with exponential increases taking place each year. As the current formal sector work force i s estimated around 60,000,6 the creation o f an additional 90,000 jobs appears as a formidable challenge. W h i l e the majority o f the school leavers have been absorbed into the public sector in the past - the preferred employer for most Bhutanese - the government has now largely reached saturation point with only around 20 to 30 graduate officers being absorbed o n an annual basis.
3. Private sector designated as the “engine of growth ”. Strengthening the private sector t o create employment opportunities has been recognized by the Government as a high priority and forms a central tenet o f the Ninth Five-Year Development Plan (2002-2007).’ T o date, the development o f the private sector has been supported by policies aimed at strengthening market forces, increasing
‘These are estimated figures for 2004-05, as reported in the Statistical Year Book, 2004, National Statistical Bureau, Selected Economic Indicators, June 2005, Royal Monetary Authority, Royal Government o f Bhutan.
T h i s i s according to the Bhutan Census 2005. Previously, the RGoB reported a population estimate o f 734,000 in the Statistical Yearbook o f Bhutan 2003, and other figures are noted elsewhere (including the World Bank’s World Development Indicators). Greater consensus i s expected once more demographic data analysis has been undertaken on the census. 79 percent of the population lives in rural areas.
Power generation provides approximately 35 percent o f government revenue, excluding external resources which account for almost 50 percent of Government revenue (Source: Interview with DADM).
Non-commercial organizations/authorities such as the Royal Monetary Authority of Bhutan (RMA) and the National Pension and Provident Fund (NPPF) are not included.
Urbanization has accelerated, and Thimphu, the Kingdom’s capital, i s growing fast at around 10 percent per year. Of which 30,000 are thought to be non-nationals - and a further 22,000 are in the civil service or in public sector institutions
which are not growing. A caveat, the data on employment i s quite limited, and the labor force surveys did not distinguish between public and private sector employment. ’ Reflecting the distinct vision of Gross National Happiness (GNH), the Ninth Five-Year Plan has five overall goals: (i) improving quality of the l i f e and income, especially for the poor; (ii) ensuring good governance; (iii) promoting private sector growth and employment generation; (iv) preserving and promoting cultural heritage and environmental conservation; and, (v) achieving rapid economic growth and transformation. The Ninth 5-year Plan, which was to cover the period 2002-2007, has been extended by a year to 2008, with a view to having the start of the Tenth 5-year Plan coincide with the establishment of Constitutional democracy.
competition and refocusing the role o f the government. The private sector’s contribution, nonetheless, remains modest with the public sector continuing to play the lead role in the economy. With i t s small population spread over a difficult, mountainous terrain, access to global markets, technology and sewices i s essential to development efforts, particularly, growth o f private sector in the country.
4. Constraints to PSD. The Wor ld Bank Group’s Doing Business Report (2007) and Investment Climate Assessment (2002) have identified several constraints faced by private investors in realizing opportunities in Bhutan. A small domestic market, high transport costs and inadequate infrastructure (including roads and electricity), regulations, labor market issues and s l u l l shortages, financing, and business development services to handle externalities, are the most important factors behind the high costs o f doing business in the country.8 Bhutan ranks 138th out o f 175 countries on the ease o f starting a business, and licensing i s t ime-consuming and bureaucratic, p lac ing Bhutan at 145th position worldwide. N o t surprising then that the role o f the private sector in the economy remains somewhat restricted with entrepreneurship nascent. Cognizant o f this, the RGoB i s fo l lowing a two-prong strategy for private sector development:” (i) improving the investment climate (IC) to reduce the cost o f doing business; and (ii) facilitating the growth o f niche or priority sectors as potential source o f growth and employment generation.
5. Investment Climate Reforms. RGoB’s has undertaken an array o f pol icy and institutional reforms for improving the investment climate in the country. Reform initiatives in the area o f labor market issues, business registration and licensing, regulations for facilitating domestic and foreign investment, access to finance, and addressing skill shortages are particularly impressive. Expanding infrastructure - including roads, electricity and telecommunications - i s also an important part o f the strategy.
6. Support from the World Bank. The Bank Group has been supporting Bhutan in PSD reforms through a program o f pol icy dialogue, analytical work, development pol icy lending and TA. The programmatic Development Policy Grant (DPG), specifically has supported RGoB ’s efforts in development o f flexible labor and employment l aw and procedures; simplification o f the registration process for business start-up; and creating an enabling environment for foreign direct investment through development o f FDI pol icy and accompanying FDI rules and regulations (2005). The Foreign Investment Advisory Service (FIAS) has provided technical assistance in the development o f the regulatory framework for foreign direct investment (FDI). The South Asia Enterprise Development Facil ity (IFCBEDF) has played a catalytic role in the promotion o f small and medium enterprises (SMEs), and in the building o f capacity in the Bhutan Chamber o f Commerce and Industry (BCCI) as wel l as in financial sector institutions.
Information and Communication Sector
7. Niche market approach to PSD. In parallel with PSD pol icy reforms in cross-sectoral areas, the RGoB’s PSD Strategy aims to encourage the growth o f niche sectors as potential source o f growth and employment generation. Information and communications technology (ICT) - along with other export- oriented industries” - i s one such sector which has been recognized as an “unmatched developmental tool
These are based on the findings o f the Bhutan Private Sector Survey (World Bank June 2002). The objective behind this survey was to shed light on the constraints private sector faces in Bhutan. T h e survey was undertaken by the World Bank, in collaboration with the Ministry o f Trade and Industry (MTI) and the Bhutan Chamber o f Commerce and Industry (BCCI) in 2002 9 Entrepreneurs have to complete 11 separate procedures taking 62 days, well above the regional average o f 8 steps and 35 days, and OECD average o f 6 steps and 19 days (See Doing Business Report, The World Bank, 2006). lo See the Private Sector Policy and Strategy Paper, February, 2007, MTI, RGoB.
See Private Sector Development Policy and Strategy (MTI, RGoB June 2007).The dual track approach was also recommended in the Bhutan Private Sector Survey, June 2002, The World Bank. T h e report acknowledges that in central Bhutan, high labor costs as well as higher transport costs make the development o f industries uneconomic. Instead, these areas should focus on
2
as wel l as an area of new business and employment opportunities for a l l Bhutanese people.” I C T plays both to Bhutan’s strengths and avoids the country’s major constraints. For instance, ICT services would take advantage o f the disciplined, English speaking workforce and relatively developed telecommunications network. Yet it would not be constrained by the mountainous terrain, extreme weather and geographic isolation. In addition, the development o f this sector would help create jobs for the increasingly unemployed youth, and would be gender-sensitive in impact. According to the RGoB’s Information and Communications Technology (ICT) Master Plan, the development and application o f IT wil l be guided by three broad pol icy objectives: use IT as an integral tool t o enhance good governance; develop IT and IT-enabled industries in the private sector to generate income and employment; and apply IT to improve the l ivelihood o f a l l Bhutanese.12 The sector also holds promise for improving productivity and increasing competitiveness in existing public and private sectors and industries.
8. Bhutan as an IT/ITES location: Bhutan has the geographical advantage o f being located close to India which i s the biggest player in the offshoring o f ITATES, globally. Companies prefer to locate in more than one location as part o f r i sk mitigation strategies and business continuity planning. Bhutan offers a location close to India which i s polit ically stable and relatively secure. It would therefore make business sense for companies to explore setting up their back-up centers in Bhutan.
9. Bhutan i s an attractive tourist destination. Companies that wish to locate in scenic natural settings may also find Bhutan an attractive location. In fact the feasibility study did make a mention o f the possibility o f combining a future IT Park with an executive tourism resort.
10. As Bhutan grows and i t s education, tourism, energy, agro-processing and other small businesses need more IT enabled ski l ls, one can expect local businesses to begin catering to this requirement. Bhutanese entrepreneurs would also prefer t o operate f rom Bhutan given adequate infrastructure and a conducive business environment.
11. Developing a niche market approach for IT sector, nonetheless, presumes that the government wil l also be able to deal with issues related to skilled workers, government regulations; to promote greater technology transfer into Bhutan; to address constraints imposed by the financial sector; and to gradually seek alternative methods o f addressing the restrictions and higher costs imposed by the transport infrastructure. T o guide ICT development, the Bhutan ICT Policy and Strategy (BIPS) calls for balanced and sustainable development based on five pillars: policy, infrastructure, human capacity, contents and applications, and enterprises. In June 2006, the Bhutan Information, Communication & Media A c t (BICMA) was passed. The purpose o f the ICM Ac t includes encouraging local and foreign investment in the I C T and media industry by providing a modem regulatory framework that fosters a convergence o f information, computing, media, and communications technologies, as wel l as facilitating privatization and competition.
Financial Sector
12. Weak Jinancial sector. As highlighted in the Do ing Business Report (2007) and Investment Climate Assessment (2002), the financial sector in Bhutan i s considered a constraint to private sector growth: out o f 175 countries in 2007, Bhutan ranks 159th o n the ease o f getting credit. The nascent nature o f private sector, combined with the small size of economy, has contributed to the
providing services to the heavier industrial belt along the southem border (increasingly providing accounting services, IT services, management, and financial services); providing other services such as tourism, construction and transport; and developing niche markets in specialized fields (mushrooms, essential oils, Himalayan medicines, handicrafts, furniture). l2 The ICT Master Plan (June 2001) spells out national programs and initiatives to promote IT. I t identifies seven focus areas that include: infrastructure, institutional arrangements, human resources and training, information management and content development, regulations, guidelines and legislation, public access and awareness, and private sector development.
3
underdevelopment o f the financial sector in Bhutan in terms o f the variety o f the financial products and operational efficiency.
13. Limited intermediation function. Bhutan’s f inancial sector appears to be stable as indicated by the large liquidity reserve rat io and high C A R in Table 1. However, given the l imi ted capacity o f financial intermediation and the lack o f domestic investment opportunities in Bhutan o n one‘ hand, the rapid accumulation o f liquidity, o n the other hand, presents a main challenge. As evidenced by the l o w domestic credit to the private sector, the liquidity build up has not been matched by domestic private investment. The loan market remains thin, and most o f the liquidity i s re-deposited in either non-interest bearing account with the Royal Monetary Authority (RMA) or, in high interest bearing deposits with commercial banking institutions in India. This weak intermediation function has led to high interest rate spread which i s about 9.5%, higher than a regional average o f 7% as o f 2005.
Table 1: Bhutan Financial System Comparative Data (2005)
Bhutan Indonesia India Nepal Pakistan Philippines Malaysia
Banking Industry Bank l iquid reserve to bank assets (“A) 76.8 15.5 21.8 9.0 9.2 3.4 Capital Adequacy Ratio (%) 18.6 19.6 12.8 -5.76 10.9 18.1 13.1
17.5 24.8 41.1 28.4 30.7 127.3 Domestic credit to private sector (% of GDP) Interest rate spread (%) 9.5 6.0 5.9 4.6 3 .O M 2 to GDP (%) 46.9 41.0 62.8 38.2 45.2 51.6 100.6 Number o f A T M s per 100,000 people 0.3 4.8 6.3 0.1 4.7 5.3 16.4
Sources: Financial Sector Development Indicators, Royal Monetary Authority o f Bhutan, Getting Finance in South Asia
14. The payment system in Bhutan i s characterized by the heavy use o f cash and paper-based instruments for a l l types o f payment transactions both in rural and in urban areas. This causes significant costs not only in the banking sector, but also in the private and government sector, to physically move these instruments f rom region to region. The distribution o f cash in a country like Bhutan with extensive mountains and insufficiently developed transportation infrastructure i s extremely cumbersome. In this context, the development o f electronic payment instruments would be wel l suited to Bhutan to stimulate commercial and financial transactions. However, underdeveloped IT infrastructure, coupled with unbalanced IT development in the financial institutions has led the financial sector in Bhutan to remain at a rudimentary stage in terms o f the e-payment services as evidenced by the number o f ATMs per 100,000 people being 0.3.
B. Rationale for Bank involvement
15. The Royal Government o f Bhutan (RGoB) has sought Bank’s assistance to support i t s strategy o f private sector-led economic growth that i s capable o f combating rising unemployment, particularly o f youth, and help to further diversify the economic base o f the country. The Bank’s Country Assistance Strategy (CAS) for Bhutan i s wel l aligned to the RGoB’s priorities o f “promoting private sector development and employment ’I as one o f three ~ i 1 l a r s . l ~
16. The proposed PSD project aims to increase productive employment opportunities in Bhutan through promotion o f enterprise development in the IT/ ITES sector, enhanced IT skil ls, and improved access to finance. A priority sector for the RGoB, ICT has been shown globally to have a multiplier effect o n employment generation. At the same time, the growth o f private sector predicates on a strong financial
l3 The other two include: expanding access to better infrastructure and social services, and connecting communities to markets; and strengthening management o f public resources.
4
sector. Use o f IT can p lay an important role in increasing the operational efficiency and transactional soundness o f a country’s financial sector.
17. The interventions proposed are informed by the W o r l d Bank Group’s analytical and advisory program o n private sector development issues - including a feasibility study for the IT Park -, national priorities articulated in the Ninth Five-Year Development Plan (2002-2008) - wh ich i s also i t s Poverty Reduction Strategy Paper (PRSP) and Sectoral policies and ~trategies. ’~ Tak ing into account what other donors are doing, the project seeks synergies to complement their support.
18. Bearing global experience in ICT sector - including development o f I T Parks - and financial sector, the Bank Group i s well-positioned to offer significant value addition in terms o f sharing best practices f rom cross-country projects. In addition, the Bank’s involvement can help catalyze interest o f international players in developing the IT Park which i s based o n a Public Private Partnership (PPP) business model.
19. Lastly, the proposed PSD intervention strikes a balance in Bank Group’s program o f lending investment and pol icy reform dialogue. The latter i s being supported under the Development Policy Grant dialogue in the area o f investment climate and PSD growth.
C. Higher level objectives to which the project contributes
20. The proposed project i s part o f a broader, medium-term strategy aimed at creating employment opportunities through private sector development in Bhutan - the twin goals highlighted as priorities in the RGoB’s Ninth Five-Year Development Plan (2002-2008), and the Bhutan CAS. By supporting the efforts o f the RGoB to create gainful employment, the project shall contribute towards accelerating the pace o f poverty reduction, and diversifying the economy beyond the current main-stay o f hydropower exports and decrease reliance on a single-markethingle-commodity export, l5 thereby mitigating vulnerability. Lastly, the project i s highly compatible with the country’s goal of preserving the natural environment as I C T services would not impose a burden o n the country’s natural resources.
, ,I
11. PROJECT DESCRIPTION
A. Lending instrument
2 1. The proposed PSD Project involves a total investment o f US$8 mill ion, consisting entirely o f an IDA grant which shall be implemented over 5 years. The funds shall finance IT Park related infiastructure; lease-in space for an incubation facility; shared technology center and a data center from the IT Park; an IT skills development program; and IT related hardware and software investment in the financial sector, complimented by a small amount o f TA advisory services.
B. [If Applicable] Program objective and Phases
22. NIA
l4 The PRSP and the Joint Staff Advisory Note (Bhutan: Joint Staff Advisory Note o f the Poverty Reduction Strategy Paper, [Report No. 3071 6-BT1) prepared by the staffs of the International Development Association and the International Monetary Fund, was discussed by the Board on February 8, 2005. l5 Investments in hydropower sector development have been mainly with support from India - i ts largest single donor and trading partner. India grant aid supports about a quarter of Government’s expenditure. Bhutan has a free trade agreement with India, which accounts for 80 percent of the country’s imports and 90 percent o f exports (mainly electricity exports).
5
C. Project development objective and key indicators
23. The objective o f the project i s to increase productive employment in Bhutan through promotion o f enterprise development in the IT/ ITES sector, enhanced IT ski l ls , and improved access to finance. The project shall pursue these objectives by supporting interventions in three complementary areas:
(i) (ii) (iii)
Provision o f infrastructure for establishing an IT Park; Development o f a three-tiered sk i l ls program for promoting the IT/ITES industry; and Strengthening the financial sector through deployment o f technology.
24. Suggested key performance indicators include:
0
0
0
0
0
Increased j o b creation in the IT/ITES sector supported by the project; Number o f companies successfully incubated in the IT Park; Percent o f students trained are successfully employed by the private sector; Number and value o f financial transactions by using ATMs; and Volume o f fund transfer transactions among banks channeled through the EFT system.
D. Project components
25. The project has three components: (i) development o f IT/ ITES sector by establishing an IT Park and related infrastructure and IT promotion services; (ii) development o f IT sk i l l s program; and (iii) strengthening the financial sector through IT investments.
Component I : Development of IT/ITES Sector (US$5.0 million)
26. This component focuses on the development the IT/ ITES sector in Bhutan, using an integrated approach that includes (i) provision o f infrastructure, and (ii) IT promotion. The two complementary and mutually reinforcing sub-components shall be structured and financed as follows:
(0 Infrastructure - Establishment of the IT Park (US$4.0 million)
27. This sub-component shall help set up an IT Park close to Thimphu that has been recommended by the IT Park Feasibility study as an ideal location in view o f being the administrative capital o f the country, the largest c i ty and with existing demand for IT services. The Park shall have four elements: (a) plug and play office infrastructure for IT/ITES companies; (b) shared technology center; (c) incubation center; and (d) space for data center.
28. Business model for the IT Park The business model being adopted involves helping RGoB attract private sector investments into the IT/ITES sector in Bhutan. The role o f private sector i s envisaged at two levels -a private sector developer to establish the IT Park and also the private sector tenant f i r m s to locate and operate in the IT Park. Involvement o f the private investors i s considered a better option for attracting IT/ ITES f i r m s to Bhutan as the private sector i s expected to bring in greater speed and efficiency in designing, constructing and managing the Park to suit requirements o f IT/ITES companies,16 and i s more l ike ly to be active in marketing the Park to prospective tenants.
l6 In case a private sector developer does not come forth for setting up the IT Park, other options shall be explored, i.e. establishment o f IT centers along the Phuentsholing-Thimphu-Par0 fiber optic corridor, as designed in the IFUSEDF feasibility study - and keeping within the project costs.
6
29. Given the nascent stage o f Bhutan’s IT industry and the challenges and constraints in attracting IT f i r m s to locate in Bhutan, the RGoB will share some o f the investment r i sks by (i) making land available for the Park as an equity contribution f rom the government, with the equity amount being determined through a competitive bidding process; (ii) investing in ancillary infrastructure for the Park e.g. roads, power, waterhewage etc.; and (iii) ensuring a f ixed annual revenue stream for the private sector for a period o f 5 years with government agreeing to lease in about 10,000 SFT o f space in the Park. The aggregate lease amount over five years shall not exceed US$2 mill ion. The proposed business model for the IT Park would be incorporated into an RFP for launching the bidding process.
30. The leased shell space f rom the Park would be used or leased out by RGoB for the purposes o f establishing an incubation facility, a shared technology center and a data center. The RGoB will invest in developing a shared technology center, data center and incubation centre with investment o f about US$700,000, US$300,000 and US$330,000 respectively. The investment in the shared technology center may be in the shape o f software testing tools andor a render farm. The exact nature o f the investment in technology infrastructure will be determined in consultation with the Park developer and other stakeholders.
3 1. The construction cost for IT Parks in India i s estimated at about $30 to $35 per SFT. Assuming the most pessimistic scenario, the construction cost in Bhutan should not exceed $80 per SFT. With the provision o f $2 mi l l ion under the project for the IT Park, i t should be possible for a private sector developer to build 25,000 SFT without undertaking any significant risk. RGoB will be leasing-in 10,000 SFT f rom the IT Park for 5 years. The remaining 15,000 SFT will necessarily have to be leasedsold to IT/ ITES companies by the developer. This in itself should constitute a strong motivation for getting companies to locate in the Park. In the more optimistic scenario, the private sector would invest in the vic in i ty o f $5 mil l ion and would be able to attract global players to set up operations within the Park.
32. Ancillaiy infrastructure: In addition, the RGoB shall invest in providing ancillary infrastructure l ike water, sewerage, power f rom alternative feeders and high speed connectivity. The connectivity proposed for the Park would have to include both fiber optic and V S A T so as to provide redundancy. Moreover, the proposed data center in the IT Park would need to be connected with the Government Wide Area Network (WAN), while the shared technology center would be connected to the Royal University o f Bhutan (RUB) WAN to allow wider use o f the facility.
33. Policy issues: For the successful implementation o f the IT Park, the RGoB has undertaken key pol icy and institutional reforms (see Annex 16). The commitment to move forward o n a fast-track basis i s also reinforced by the meeting o f project readiness criteria.
34. Leased line prices: Whi le currently the cost o f leased lines in Bhutan i s higher than that o f the region, the RGoB i s committed to bringing down prices and i s currently working out various options. Discussions have progressed o n two fronts in this regard. The incumbent operator - Bhutan Telecom i s at the f inal stages o f negotiating with an Indian party- Reliance Group - for larger international bandwidth at a lower cost. The RGoB, through the MoIC, i s also holding parallel negotiations with Indian Videsh Sanchar Nigam Ltd. (VSNL) and internally with Bhutan Power Corporation. M o I C i s confident that they wil l successfully conclude negotiations by the end o f the year and offer competitive pricing, equivalent to India.
35. Other relevant developments in the area o f connectivity include: Samden Tech, a private ICT player i s planning to ro l l out WiMAX in urban centres across Bhutan in the coming year. Samden Tech i s partnering with a large private equity fund which focuses on the Telcom sector. Tashi group - one o f the largest private sector enterprises in Bhutan - hopes to use their newly acquired cellular license to ro l l out GSM, GPRS and edge technologies. All in all, domestic and international competition i s expected to
7
bring down connectivity costs in the near future. If at the time o f the operationalization o f the PSD project there i s any remaining differential f rom regional rates, RGoB i s committed to bearing this cost in the short-run.
36. FDI Policy 2002 and Labor & Emuloyment Ac t 2006: Up till the time the Bhutanese workers are trained, the RGoB has agreed to al low foreign skilled workers. The Foreign Direct Investment Policy o f 2002 permits the employment o f skilled foreigners in Bhutan where such sk i l l s are not locally available. According to the policy, “Notwithstanding the objective o f employment o f nationals, foreign companies will be allowed to bring in expatriate personnel in areas where there are shortages o f Bhutanese with requisite skil ls.” In recognition o f the need for highly trained staff at senior levels, RGoB i s committed to relaxing restrictions on the employment o f non-nationals, and shall make more flexible labor and investment regulations related to foreign workers for the ICT sector, under the Labor & Employment Act. Ministry o f Information and Communications (MoIC) has already secured a commitment f rom the Ministry o f Labor and Human Resources (MoLHR) via a letter dated 16 Feb. 2007.
“
37. The privacy o f the digital data: Some Provisions for protection o f digital data and information privacy exist under Bhutan Information, Communication & Media A c t 2006 (BICMA), including the consequences o f infringement. Documentation i s being drafted by RGoB that highlights these relevant provisions o n privacy under the Act, along with the provisions in the draft contract l aw to provide a degree o f confidence that data protection concerns are adequately addressed under the existing/proposed legislation in Bhutan.
38. Acquisition of land for IT Park Land has been allocated for the IT Park at Wangchutaba, near Thimphu. The Government has given clearance to transfer f ive acres land to the MoIC. An Allotment Order was issued o n 8 March, 2007 to transfer land to MoIC. At the same time, a suitable alternative site has been identified at Par0 so as to provide a possible alternative, in case the private sector considers i t necessary to locate the Park close to the international airport.
39. Fast-tracking of clearances for the Establishment of the IT Park: Investments into the IT Park will be given priority, fast clearance by an Empowered Task Force (ETF),” already constituted by the Council o f Ministers, under the direction o f an Executive Order issued by the Prime Minister o f RGoB on March 1,2007. The ETF will be coordinated by the MoIC, and will have as i t s membership the head o f each o f the key ministries/departments relevant for new business registration & ICT investment in Bhutan. MoIC wi l l act as the single point of contact for the investor and wi l l ensure clearances are processed in a rapid and time bound manner. Specifically, the focal persons, shall be collectively responsible for: (a) expediting land allotment, registration, environmental, ut i l i t ies and other related clearances for the establishment o f the IT Park; (b) expediting FDI and other related clearances for participation o f foreign f i r m s in the development o f the IT Park; and (c) simplifying any other existing procedures and norms that will fast-track the implementation o f the project.
40. Advance preparedness measures for targeting potential investors for the IT Park: A consultant has been hired by M o I C to help with preparatory work for the IT/ ITES and sk i l ls development components. The task o f targeting potential investors for the IT Park (i.e. the first component) requires substantial advance preparation and lead time. In this regard, the consultant has prepared a draft bidding document to procure the IT Park developer within a PPP framework. The RGOB intends to ho ld
” The ETF comprises: the Director General (DG), Department o f Debt and Aid Management (DADM); DG, Dept. o f Industry; Director, Dept. o f Labor; Director, Dept. o f Revenue and Customs; Director, Dept. o f Trade; Managing Director (MD), Royal Monetary Authority (RMA); MD, Bank o f Bhutan (BOB); Mayor Thimphu City Corporation; MD, Bhutan Power Corporation; MD, Bhutan Telecom Ltd.; and Secretary General, Bhutan Chamber o f Commerce and Industry (BCCI).
8
meetings with potential investors by end April. This will be well-advanced by the time o f project effectiveness.
(ii) IT Promotion (US$I.O million)
41. For the successful design and implementation o f the project, coordination with different government agencies and with the private sector i s a key imperative. Under the Bhutan Information, Communications and Media Act 2006, the M o I C as the lead ministry i s empowered to direct, coordinate, encourage, advise and support ICT development in the country. Towards this end, this sub-component will support M o I C to establish an ITDTES Promotion & Program Implementation Agency (PIA). The PIA shall promote and facilitate the development o f IT/ITES industry in Bhutan.
42. The Agency functions shall include but not l imi ted to the following: to act as a ‘One Stop’ shop to cater to al l needs o f an ITES companies for setting up or facilitating their IT/ITES business venture in Bhutan; to act as a bridge between the private ITES companies and the various government bodies; to identify the IT demands and requirements in the financial institutions and link them with IT/ITES companies and IT training institutions; to study the laws, regulations and strategies o f various competitor countries and carry out market intelligence and exploring new markets for Bhutanese IT/ ITES industry; arranging participation o f Bhutanese IT/ ITES industry in domestic and international IT/ITES events; providing protocol, hosting and match-making facilities for foreign delegates and investors; and to develop a marketing plan to help local IT and ITES companies reach out to potential clients abroad, attract and facilitate foreign I C T and related f i r m s to establish their development and other facilities in Bhutan.
43. This agency would be a lean organization that would rely o n consultants, academic institutions, private sector personnel and government resources to aggressively reach out to I T investors and present Bhutan’s value proposition. The PIA would be headed by a Director, and other staff may include: a Deputy Director; a Program Manager who will be able to multi-task across al l program components - with a business and finance background; and Project management sk i l ls f rom private sector; and support staff. For managing the immediate task o f coordination and IT promotion for setting up the IT Park, the functions shall be assumed by the senior functionary o f Mo IC .
ComPonent 2: Development of ITDTES Skills Program (US$2.0 million)
44. Availabil ity o f a stream o f trained IT manpower i s a pre-requisite for the success and sustainability o f the IT Park in Bhutan. This component shall focus o n development o f skil ls, through collaboration with international institutions, at the fo l lowing three levels (a) Generic Slulls for the IT/ ITES Sector; (b) Distance learning facilities/Course Management Systems (CMS) for IT/ ITES Skills development; and (c) IT/ITES Entrepreneurship Development Program. As the main manpower supplier for the country, the Royal University o f Bhutan (RUB), shall coordinate and implement this component, along with the support and direction o f the IT Skills Development Task Force.
45. Generic Skills for I T enabled services: As part o f the university’s academic development initiatives, the RUB has established basic competencies in languages (English and Dzongkha) and IT for a l l graduates. However, these competencies are not closely allied to industry requirements. The PSD project will support the creation o f a standard assessment and certification system that i s widely recognized by industry.
46. This level o f program would particularly focus o n improving s h l l s required for IT enabled services including English language - i.e. listening and speaking - analytical ability, mathematical ability,
9
computer s lu l l s and inter-personal ski l ls. The project would support the fo l lowing activities: introduction and implementation o f an ‘assessment o f competency’ test that would entail assessing candidates on key IT/ ITES sk i l l s through a standard assessment, thus making it easier for f i r m s to screen candidates and also provide training needs analysis to candidates; training o f teachers in institutions under the RUB; introduction o f remedial training for students in government/private institutions; and conducting Just-in- T ime (JIT) training for potential candidates for employment with identified investors.
47. Development of skilled IT Professionals through Distance learning facilities/CMS: T o help develop skilled IT professionals in Bhutan, this sub-component would support (a) setting up o f distance learning infrastructure in selected institutions imparting higher-level IT/ ITES ski l ls training; and (b) the adoption o f C M S to facilitate a better Virtual Learning Environment (VLE) for students.
48. Distance learning infrastructure: IT programs are currently being conducted in RIM and in Sherubtse College, Kanglung. Introduction o f engineering courses in IT at the College o f Science and Technology in Phuentsholing are also underway. In addition to these courses, the Samtse College o f Education, Samste offers a Distance Teacher Education Program which would be used to develop competencies in generic sk i l l s for the IT/ ITES sector. The College will also be offering Post Graduate Diploma in School Guidance and Counseling through distance mode towards the latter part o f 2007. T h i s sub-component would finance videoconferencing (VC) facilities for facilitating distance learning initiatives in IT sk i l ls being imparted at the above four institutions, and the Office o f the Vice Chancellor, RUB in Thimphu.
49. Course Management Software: Recent trends in higher education are veering towards a hybrid approach o f complementing face-to-face teaching with on-line learning. This has meant that the use o f C M S i s becoming critical for posting course content, assessment and course discussion. At present the RUB has n o single VLE, and i s at the early stage o f determining general pol icy directions in relation to programmes, learning and teaching. The University i s keen to establish a single VLE for the entire University and put in place the training and support programmes needed to make this effective.
50. Course management systems are s t i l l maturing as a market. A careful review o f the market products, as wel l as their match with RUB’S o w n strategies, will therefore be necessary. A number o f open source and commercial C M S software are currently available. Open source solutions l ike Moodle and Sakai are becoming increasingly popular, while many institutions are adopting homegrown solutions around tools such as Microsoft SharePoint and Xythos. The RUB i s keen to use Moodle as the university- wide VLE. This will provide for an integrated VLE to enhance teaching and learning across the university. In view o f the fact that use o f C M S would provide a richer learning environment for students and would allow linking up with resources l ike MIT’s Open courseware this component shall be included under the current Project.
51. An IT entrepreneurship development program would be conducted under the project in collaboration with a leading business school. The program will a im at helping potential entrepreneurs to work o n their own business ideas and ventures, and concretize their plans to become real wor ld entrepreneurs. The program would have a short academic component combined followed by a corporate attachment module. The academic module would focus, among other things, o n areas such as identification and evaluation o f opportunities for new ventures; concept analysis and business plan development; establishing and managing an IT business; and l ive case studies with successful IT entrepreneurs. The Corporate attachment would involve embedding each student with one o f the leading IT companies most relevant to their future business, so that they gain an understanding o f h o w business i s managed in real life, and also develop networks for helping them once they get started o n their own. An attachment could also be arranged with a reputed venture capital firm to get a better understanding o f h o w to access capital. The total program duration would be for about a year and could rotate between the
10
business school and the attachment modules, so that candidates can be properly equipped to venture o n their own.
Component 3: Strengthening the Financial Sector through I T use (US$l.O million)
52. A strong financial sector i s critical for the growth o f the private sector in Bhutan. This third component o f the PSD Project supports strengthening o f financial sector through the use o f IT. The three components o f the project i.e. the development o f the IT/ ITES sector, development o f IT/ITES sk i l ls program, and the IT development in the financial sector have complimentary linkages in both IT/ITES and financial industries. The development and application ,o f IT for private sector development and financial sector strengthening i s the common link between the components. Whi le the f i r s t two components a im to support government’s efforts to develop IT/ ITES industries to generate income and employment in the private sector, the third component reinforces these efforts through improved access to finance for PSD growth. The three components also offer strong synergies: shared IT infrastructure such as data centers in IT Park, coupled with the improvement o f IT human sk i l l s and connectivity, can further enhance financial IT development, and vice versa.
53. The a im o f this component i s to achieve greater efficiency in the financial sector, through gradual growth o f IT use, thereby leading to better financial services for the private sector, bank customers and the government. As Box 1 depicts, this component comprises the fol lowing three main activities:
(i) (ii) (iii)
IT system up-gradation in the Bank o f Bhutan; developing a ‘Financial sector IT development strategic plan’; and establishing the Inter-Bank Electronic Fund Transfer Clearing System (EFTCS) at the M A .
BOX 1: The architecture o f the project
. - - - - - - - - (ii) ‘Financial Sector IT development Strategic Plan’ I - - - - - - - I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I
E-Davment: ATMlCD
t
Customers
(iii) Inter-Bank EFT Clearing System
CD
I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I
11
(i) Modernization of Bank of Bhutan through IT system upgrade (US$2OOK)
54. Notably unbalanced IT development exists between the Bhutan National Bank (BNB) and the Bank o f Bhutan (BOB), which has been hampering the development o f nationwide financial IT infrastructure including inter-bank electronic fund transfer system. Almost the entire financial operations and transactions in BOB are currently being carried out manually, which i s both time-consuming and contributes additional costs to BOB. This underdeveloped IT system in BOB leads to operational inefficiency in the overall banking sector which, in turn, impedes the growth o f private sector in Bhutan.
55. As the nationwide financial IT infrastructure cannot be efficiently built up without enhancing the level o f IT system in BOB, the project places i t s priority t o support IT system upgrade in BOB to enable the institution to accommodate the newly designed inter-bank Electronic Fund Transfer Clearing System. At a parallel level, i t shall support streamlining o f i t s operational procedures and data f l ow within and among the branches. Details o f IT system upgrade and capacity building will be guided by a bilateral complimentary TA provided by the IFC/SEDF o n a cost-sharing basis.
(ii) TA: Developing ‘Financial sector IT development strategic plan ’ (USUOK)
56. Given the rapid changes and growth in the financial and IT industry, IT development in the financial sector in Bhutan needs to be carried out in a more holistic way and an innovative manner f rom the inception stage. Among other things, it involves development o f a concrete strategy, regulatory, and legal framework and institutional arrangements, coupled with a detailed technical implementation plan for financial IT infrastructure.
57. This sub-component shall support the formulation o f a ‘Financial sector IT development strategic plan’ (the ‘PLAN’) with the main focus o n the development o f an electronic retail payment system in Bhutan. The PLAN shall comprise o f two main elements: (i) pol icy framework for the electronic financial transactions; and (ii) technical framework for development o f e-payment system.
58. In terms o f the pol icy framework, the P L A N will set out a comprehensive and detailed IT development strategy with a clear vision, and spell out a l l the legal, regulatory and institutional arrangements needed for the electronic financial transactions. Technical framework will cover the assessment o f the current payment system and financial IT system at both national and institutional level, accompanied by the detailed EFTCS development plan and recommendation o n the expansion o f e- payment instruments for commercial banks with a year-wise implementation action plan. This sub- component shall be carried out in collaboration with IFC/SEDF, which shall provide resources for technical assistance.
(iii) Establishing an Inter-bank Electronic Fund Transfer Clearing System (US$750K)
59. Payment system in Bhutan i s s t i l l heavily dependant o n cash and the paper-based instruments, o f which transactions must be followed by the physical movement f rom region to region. In order to support private sector growth by expanding the e-payment services in Bhutan, this sub-component shall support the establishment o f the inter-bank Electronic Fund Transfer Clearing System (EFTCS) within the RMA. Given the current rudimentary stage o f e-payment system in Bhutan, EFTCS wil l be developed in different phases guided by the PLAN. I t will first start f rom the basic EFTCS with key features within the IDA budget allocation coupled with counter funding f rom participants, then moving o n to a highly developed e-payment system with more advanced IT applications in the future. The details o f development EFTCS wil l be spelled out in the PLAN.
12
60. EFTCS will process high-volume and low-value financial transactions occurring in participating commercial banks at a l o w cost. In this scheme, participating banks wil l electronically submit i t s payment instructions to EFTCS installed in the RMA and inter-bank clearing and settlement will be carried out on the basis o f electronic data and files. Settlements will be made at the end o f each clearing and settlement cycle through the posting o f net balances into a single settlement account o f each participating bank held in the RMA.
61. Cost estimates and funding sources. While IDA supports this component with both physical investment and TA advisory services amounting up to US$1 mill ion, rest o f the project cost will be borne by IFC/SEDF, RMA and BOB as shown below (in U S D 000s).
Sub-components
Bilateral TA and c building program for
a/ Cost estimates are subject to change, accordingly funding sources from IFCBEDF and other counter funds.
E. Lessons learned and reflected in the project design
62. The design o f this project takes into account key lessons learnt in implementing other projects in Bhutan. As underlined by OED's Country Assistance Evaluation and the CAS completion Report, to maximize development impact, Bank assistance needs to emphasize selectivity, which should be balanced with flexibil i ty in order to best respond to new client needs and changing country and global conditions. Strong donor coordination i s required in order to enhance development effectiveness. In addition, the Bank should be more sensitive to Bhutan's capacity constraints.
63. Selectivity. To enhance private sector investments and productive jobs, in i t ia l ly a broad range o f investments were considered including establishment o f an industrial estate, developing an IT Park, and TA support for business development and capacity building activities in key economic ministries. Based on the findings o f feasibility studies," and consultation with other development partners, the project deliberately decided to focus on the (i) IT Park that would lead to the development o f IT/ITES sector; (ii) IT sk i l l s development program that i s a pre-requisite for the success and sustainability o f the IT Park; and (iii) strengthening and modernization o f the financial sector through deployment o f technology. All three components have clear synergies and would help provide complementarities. With regard to TA support, the Bank Group i s leveraging on internal resources by partnering with I F U S E D F o n the financial sector component.
l8 IFCISEDF commissioned the following two feasibility studies: (i) Industrial Estate; (ii) IT Park and Distance learning Centres. T h e drafts were finalized in the first ha l f o f 2006 after consultation process with the RGoB and other stakeholders including private sector, were undertaken in Bhutan.
13
64. Responding to new client needs and changing country conditions: Bhutan i s in the midst o f a period o f extraordinary change - regarding governance, social development, and the economy. Public consultations on the draft Constitution have been completed that will usher in a democratic, Constitutional monarchy in Bhutan. The Constitution i s expected to be ratif ied in 2008 and the f irst direct elections under the new Constitution are anticipated in 2008. The Constitution seeks to promote good governance, emphasizing transparency, accountability, efficiency and professionalism. The RGoB has emphasized that strong donor support i s especially important through this period o f transition and deepening democratization, both in terms o f supporting the credibility o f the new democratic government and in ensuring that i t has the resources it will require to deliver public services and sustain development progress. The development and use o f the IT/ITES sector can be an effective tool to enhance good governance; and generate employment through the growth o f private sector and IT/ ITES industries.
65. Private sector participation. Given the capacity constraints, the business model being adopted relies on involvement o f private sector in the development o f the IT Park component - f rom design, construction to management stage. This model i s also considered best practice for establishment o f sustainable IT Parks.lg
66. Ownership and Sustainability. During the course o f project implementation, client ownership and commitment are paramount to sustainability o f the project. The financial sector development component has been designed to maximize the client ownership through cost-sharing where IDA disbursement will be counter-funded by the project participants, the RMA and BOB. This scheme, coupled with active involvement o f the Task Force and Working Group, i s envisaged to ensure project sustainability through strong ownership, as wel l as to further catalyze the financial IT development in Bhutan.
F. Alternatives considered and reasons for rejection
67. The feasibility study for the IT Park/Distance Learning Center whi le principally endorsing the IT Park development in Bhutan recommended that it be preceded by establishing IT centers along the Phuentsholing-Thimphu-Par0 fiber-optic corridor. In keeping with the lessons listed above, the team considered, and rejected financing o f the IT Park as a public-sector l ed initiative. One o f the clear lessons f rom a recently completed global study o n “International Best Practice for Establishment o f Sustainable IT Parks”, shows that successful IT Parks are those that adopt a PPP model. Partnering with private sector would also help address the capacity constraints within Bhutan.
68. Based on follow-on consultation with stakeholders and potential investors, the project team felt that any strategy for developing a sustainable IT sector in Bhutan would necessarily have to include a focus on external markets given the small size o f the domestic market.20 The RGoB’s ultimate goal in ‘ICT Master Plan in Bhutan’ also supports the development o f I C T industry that could export IT services abroad, similar to the Indian model. Availabil ity o f a stream o f trained IT manpower i s a pre-requisite for the success and sustainability o f the I T Park in Bhutan. The second component shall focus on development o f skil ls, through collaboration with international institutions. At the same time, it i s envisaged that the development o f IT Park would lead to expansion o f IT applications in other local industries, particularly the financial sector. Use o f ICT development in the financial sector i s s t i l l at a rudimentary stage leading to operational inefficiencies that further hamper PSD in the country. The third
Refer to “International Best Practice for Establishment o f Sustainable I T Parks: Review o f experiences in select countries, including three country studies”, PriceWaterHouseCoopers and InfoDev. Aug. 2006.
That IT/ITES companies from outside can be attracted to do business in Bhutan i s evident from the case o f C-Bay. C-Bay i s a US company based in Annapolis Maryland and i s a leader in the medical transcription business. A Bhutanese entrepreneur has tied up with C-Bay for medical transcription services. About 65 trainees are currently undergoing a 6 months training program at Thimphu conducted by C-Bay staff. A majority of the trainees are graduates, while some have completed 12th grade.
14
component o f the project addresses this gap. By concentrating o n carefully targeted complementary interventions, the project maximizes synergies.
111. IMPLEMENTATION
A. Partnership arrangements
South Asia Enterprise Development Facility (IFC/SEDF)
69. The IFC/SEDF has collaborated on this project f rom the inception stage. IFC/SEDF undertook the feasibility study o n the IT Park component. I t has also been actively involved in the Access to Finance (ATF) program in Bhutan since 2003. Leveraging on this experience, the IFC/SEDF has contributed to the design o f the financial sector IT component. It shall continue to collaborate in the project in the form o f technical assistance for both: (i) preparing a ‘Financial sector IT development strategic plan’; and (ii) providing a bilateral complimentary TA for the IT system upgrade in BOB on a cost sharing basis.
Asian Development Bank (ADB)
70. ADB has a couple o f on-going TAs as wel l as a sector program for the support o f the financial sector development in Bhutan. The team i s maintaining a close collaboration with the ADB on the financial IT component, particularly in three areas: (i) legal and regulatory framework for the electronic payment system; (ii) development o f overall payment and settlement system in Bhutan; and (iii) strengthening the supervisory function o f RMA for the payment systems. Looking forward, given that financial IT development should be undertaken in a holistic manner, the ADB and the Wor ld Bank would need to closely work together by sharing information and ideas, informing each other o f the project progress and exchanging constructive inputs.
B. Institutional and implementation arrangements
Overall project and components’ management
7 1. A key element for the proposed program to succeed i s to have strong institutional arrangements in place f rom the very inception o f the Program. Towards this end, the M O I C - the designated agency for the overall project management and coordination - shall establish an ITDTES Promotion & Program Implementation Agency (PIA) by May 2007. The PIA will be responsible for coordinating & facilitating a l l the program components with the various external parties involved, including RGoB’s bodies. In particular, the P I A will promote and facilitate the development o f IT/ITES industry, and will be responsible for implementing component 1. The Agency will develop i t s work plan aimed at addressing a l l the obstacles facing the growth o f the ITES sector. The PIA i s expected to be operational by August 2007.
72. PIA will be supervised and monitored by Department of Information Technology (DIT)/MOIC and directed and supported by the two Program Task Forces (PTFs) - the Program Task Force for IT Skills Development, and the Program Task Force for Financial Sector IT Development. The PTFs play a dual role. They are an integral part o f the Governing Board (GB) o f PIA, as wel l as each serving as an implementation partner of PIA for their respective program areas. Both PTFs have already been constituted.
15
73. The Governing Board (GB) of the PIA will be a combination o f the 2 PTFs, chaired by the Secretary, MoIC, where the Director, DIT will be the Convener o f the GB. This arrangement shall ensure that there will be a separation between the executive functions o f the PIA, which will be under the purview o f the GB, from i t s day to day administrative functions, which will under the leadership o f the Director o f the PIA. The PIA i s expected to be operational by September 2007, fo l lowing the recruitment o f the Director, who will, in turn, finalize the staffing o f P I A along with DIT/MoIC.
74. P I A wil l be guided by an Advisory Council (AC). The A C wil l comprise leading professionals f rom the local and foreign I C T industry and academia as wel l as donors and c iv i l society organizations. They are expected to provide pol icy and strategic direction to the PIA. The primary role o f the AC i s to provide advice o n the appropriateness o f the current work program the PIA will be pursuing in response to the global trends & local ICT industry needs. The AC will also be able to give invaluable feedback and insights from the Industry o n the effectiveness o f the strategies, the reception to the initiatives by the market place etc. The AC will meet typically bi-annually & will be constituted by end June 2007.
75. The Program Steering Committee (PSC) will be chaired by the Secretary Finance, and co- chaired by Secretary, MoIC, and the heads o f the Royal Monetary Authority (RMA), the Royal University o f Bhutan (RUB) and the Bank o f Bhutan. The PSC wi l l meet with the PIA at least quarterly to review progress and performance. However, the Secretary, MOIC, as the Chairman o f the Governing Board & Director, DIT, along with the PTFs, will have a Board meeting at least monthly to guide the PIA’S leadership and make practical recommendations where nec.essary. The Director, DIT, wil l also assist PIA with any government road blocks it may encounter during implementation. The Director wi l l grant the necessary approvals to the PIA and in particular retain the responsibility for approving all procurement & disbursements recommended by the PIA leadership in a timely & expeditious manner, using DIT’S resources. (Annex 6 provides further details).
Component I - Development of ITDTES Sector
76. This component shall be managed by the PIA. Investments into the IT Park will be given priority, fast clearance by an Empowered Task Force (ETF), already constituted by the Council of Ministers, under the direction o f an executive order by the Prime Minister. The ETF will be co-ordinated by the MoIC, and will have as i t s membership the head o f each o f the key ministries/departments relevant for new business registration and ICT investment in Bhutan. MoIC wil l act as the single point ofcontactfor the investor and wil l ensure clearances are processed in a rapid and time bound manner. The ETF comprises: the Director General (DG), Department o f Debt & Aid Management; DG, Department o f industries; Director, Department o f labour, Director, Department o f Revenue & Customs; Director, Department o f Trade; Managing Director (MD), RMA; Mayor, Thimphu ci ty corporation; MD, Bhutan Power Corporation; MD, BOB; MD, BT; and Secretary General, BCCI.
Component 2 - Development of I T Skills Program
77. The IT Skills Development PTF shall oversee and coordinate the IT sk i l l s development program. It shall be chaired by Vice Chancellor o f RUB with Director Academics, RUB as the Secretary o f Task Force. Other members include: Director, Ministry o f Education (MoE); Deputy Director DIT; Director Bhutan Vocational Qualification Authority (BVQA), MOHLR; Head HRD, Royal Civil Service Commission (RCSC); and one representative f rom BCCI.
16
ComDonent 3 - Strengthening Financial Sector through I T Use
78. Financial Sector IT Task Force supported by the I T Working Group. Given the importance o f involvement o f a l l the relevant stakeholders in the development o f a national payment system, ‘Financial Sector IT Task Force’ (the ‘Task Force’) supported by ‘IT Technical working group’ (the ‘Working Group’)’’ has been set up to implement the project, as wel l as to identify and coordinate financial IT development needs f rom financial institutions and private companies. The Task Force and the Working Group will have regular meetings during the course o f the project and shall remain actively involved in design and implementation o f the project, with support f rom a consultancy firm.
79. Royal Monetary Authority of Bhutan. As RMA has the main responsibility for ensuring sound financial transactions through the national payment system, the institution has a central role in the development o f an effective national payment system, including supervision o f relevant IT development initiatives o f the financial institutions in Bhutan. Towards this end, the Financial Institutions Supervision Div is ion (FISD) o f the RMA, in collaboration with the Information Technology Div is ion (ITD), will take the responsibility for the overall project implementation and coordination o f the project activities regarding: (i) developing ‘Financial sector IT development strategic plan’; and (ii) establishing an Inter- bank Electronic Fund Transfer Clearing System.
80. Bank of Bhutan. Cognizant o f the urgent need for the financial IT development and general public perception o f i t s technological backwardness, BOB has expressed i t s full ownership and commitment to the project. ‘IT system up-gradation Task Force’, chaired by the deputy managing director, has been set up to oversee and coordinate the implementation o f the financial IT system up-gradation in BOB. The Task Force shall work closely with the consultancy firm and the IFC/SEDF during the course o f the project implementation.
C. Monitoring and evaluation of outcomes/results
81. The project has established monitoring and evaluation indicators to assess, on a regular basis, the progress towards expected outcomes and results. These indicators will generate information on project implementation progress and achievement o f project development objectives. Information, on a regular basis, shall be collected from key implementing agencies - MoIC, RUB and RMA. Details are presented in Annex 3.
D. Sustainability
82. The project supports the RGoB’s commitment in the area o f private sector development and financial sector development, growth and poverty reduction. I t s commitment to develop I C T in Bhutan i s manifest by the three broad pol icy objectives la id out in the Information and Communications Technology (ICT) Master Plan i.e. develop IT and IT-enabled industries in the private sector to generate income and employment; use o f IT as an integral tool to enhance good governance; and application o f IT to improve the l ivelihood o f a l l Bhutanese. To guide ICT development, the Bhutan I C T Policy and Strategy (BIPS) calls for balanced and sustainable development based on five pillars: policy, infrastructure, human capacity, contents and applications, and enterprises. The Bhutan Information, Communication & Media A c t June 2006, provides a modem regulatory framework that encourages local and foreign investment in the I C T and media industry as wel l as facilitates competition. The design o f the IT Park component i s fully aligned to RGoB’s Master Plan, BIPS and the ICT Act. It relies o n an
*’ ‘Financial Sector IT Task Force’ comprises director level staff from M A , BOB, BNB, RICB, BDFC, DIT, BT and BCCI, and ‘IT Technical working group’ manager level I T staff from same institutions.
17
integrated approach that includes provision o f infrastructure, and I T promotion, along with a sk i l ls development component. The three complementary and mutually reinforcing components would al l contribute to the sustainability o f the project.
83. The project’s components are strongly demand driven, and are perceived by the private sector as being critical. Nonetheless, to ensure appropriate project design and flexibil i ty during implementation - both o f which are critical to the sustainability o f the project’s results - the participation o f the private sector as partner stakeholders i s integral to the project. T h i s approach shall also help achieve enhanced transparency and accountability. Client ownership and commitment i s also manifest by the fact that the financial sector component i s being designed on a cost-sharing basis by the project participants.
E. Critical risks and possible controversial aspects
84. measures are flagged below:
Major potential r i sks that will influence the sustainability o f the project, and their mitigation
Failure to attract reputable IT infrastructure developers to Bhutan
The cross-sectoral nature o f proj ect involves working with different stakeholders which may delay decision making and implementation
Leading national and international developers would be identified in advance, and contacts made with them so as to factor in their perspectives while fine-tuning the design o f the project. A draft RFP for the bidding process for the IT Park would be tested through init ial contacts with potential investors. To manage the entire process o f identifying a suitable developer for the IT Park project, as wel l as to market Bhutan as a destination for IT companies, M o I C shall assume the main responsibility, with the lead coming f rom a high powered M o I C official. Local Bhutanese partners would be encouraged to team up with reputed IT infrastructure developers, to facilitate understanding o f local conditions and encourage ownership. Identification and allotment o f appropriate land site for the IT Park Establishing a high-powered mechanism for dealing with cross- sectoral clearances for the IT Park - either through the Finance Ministry or Prime Minister’s office; (ii) ‘Financial Sector IT Task force’, at inception stage to encourage collaboration, expedite decision-making, and undertake one-stop clearances. Where possible, capacity building TAs shall be explored with IFC/SEDF and other donors to support the preparatory work o f the taskforces.
H
M
18
Telecom connectivity infrastructure not strengthened up to international standards
Slulls gap - quantity and quality - not in step with the demand f rom IT companies Unsatisfactory IT system upgrade and usage to lead to operational efficiency in selected financial institutions (FIs) Overall Risk rating Risk rating: L=Low, M=M
0 First, the Bhutan Telecom i s in negotiation wi th Reliance in India for establishing a more competitive rate; (ii) the MoIC-RGoB i s in negotiation with Videsh Sanchar N igam Ltd. (VSNL) in India for establishing a more competitive rate; and (iii) Tashi Group - one o f the largest private sector enterprises in Bhutan and that has been licensed to establish a mobile phone company -- i s currently negotiating directly with an Indian gateway provider for international connectivity, and have received indications that they will be charged regionally competitive rates for accessing connectivity. Domestic and international competition shall bring down connectivity costs in the near future. Given that the capital cost o f fiber optic connectivity upto the Indian border i s a sunk cost and the marginal cost o f using the network i s minimal, bringing in such international competition i s most l ikely to result in lower leased l ine prices in the foreseeable future. If at the time o f the expected operationalization o f the PSD project the leased line rates for companies in the IT Park are higher than prevailing regional rates, RGoB i s committed to bearing the differential cost in the short term.
0 Establishing an IT Skills Task Force to undertake preparatory work including contacting academic institutions and forging collaborations at a l l three levels o f ITATES sk i l l s development.
Strengthening IT training in FIs in collaboration with I F C B E D F to enhance understanding on the importance o f financial IT, and to improve IT sk i l l s to efficiently operate embedded IT systems; and IT supervisory function o f RMA i s to be ensured for the quality assurance o f IT development at institutional level.
l iuq S=Substantial and H=High
S
M
M
S
F. Loadcredit conditions and covenants
85. A Project Implementation Plan [PIP], satisfactory to the Association, shall be prepared within three months o f project effectiveness date, and the RGoB shall not revise, amend, or otherwise abrogate the PIP without the prior approval o f the Association."
IV. APPRAISAL SUMMARY
A. Economic and financial analyses
86. The IT Park i s designed to be developed and managed by a private developer with i t s own investment, while the government makes the land available for the IT Park as an equity contribution and ensures a fixed annual revenue stream for the private developer by leasing in about 10,000 SFT o f space
19
in the IT Park. In this context, the financial analysis has been carried out f rom the perspective o f the government: i t identifies the project’s money in f l ow and outflows to and f rom the government stemming from development and management o f the IT Park. Economic analysis looks at the project f rom the perspective o f the entire society and measures the effects o f the project on the economy as a whole.
87. The financial analysis, which i s based on a discount rate o f lo%, indicates that the IT Park project generate a financial IRR o f 6.76%. The economic analysis indicates that the IT Park project yields an economic NPV o f US$30.6 mi l l ion with an economic IRR being 125.2% for a period spanning 20 years, which means that this project i s economically viable enough to generate employment and increase net exports (details in Annex 9).
B. Technical
88. The project design draws on the results o f relevant economic and sector work, and incorporates the lessons from other Bank Group IT Park and financial sector related projects, and Bhutan country context issues.
C. Fiduciary
89. Procurement. Procurement under Component 1 covering IT Park, under a PPP model, i s complex and involves selection o f an IT Park developer through an international competitive selection process. The IDA share o f the IT park infrastructure component will be US$ 4 million, along with US$ 1 mi l l ion for the other sub-component covering IT promotion. Procurement under Component 2 covering s h l l developments will account for JDA’s share o f US$2. Procurement under Component 3 for strengthening the Financial Sector through IT use will be the remaining US$ 1 mi l l ion. IFC/SEDF wil l fund US$ 100,000 to hire a consultant to develop the financial sector development strategy plan. Bank o f Bhutan (BOB) and Royal Monetary Authority ( M A ) will provide counter part funds for the balance cost o f component 3.
90. Procurement for the proposed project would be carried out in accordance with the Wor ld Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated October 2006 and “Guidelines: Selection and Employment o f Consultants by Wor ld Bank Borrowers” dated October 2006, and the provisions stipulated in the Legal Agreement. The general description o f various items under different expenditure category i s described in Annex 8. The Borrower, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on April 12, 2007 and i s available at respective implementing units. I t will also be available in the Project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.
91. An assessment o f the capacity o f the Implementing Agency to implement procurement actions for the project has been completed o n receipt o f f i l led up questionnaire. The organizational structure for implementing the project covers dedicated project staff responsible for procurement and i s adequately supported with the requisite delegation. Most o f the issues/ r isks concerning the procurement component for implementation o f the project have been assessed at the time o f appraisal. The procurement staff who will handle procurement are not familiar with Bank procedures and also standard bidding documents although they are very conversant with RGOB procedures. The knowledge gap i s small and can be bridged by training. The staff would be provided training in Bank procedures immediately after effectiveness o f the project. The procurement o f IT park developer will be complex. DIT will be using bank’s standard documents and the selection process will be pr ior reviewed. Further DIT has handled
20
complex procurement earlier o n i t s o w n .These are expected to reduce the risks to a great extent. However, the procurement process would need close monitoring and advise at a l l stages in procurement.
92. Financial Management and Fund Flow Mechanism, The guiding principles for designing the financial management arrangements for the project are to use the current RGoB financial management systems, to the extent feasible, as these are considered satisfactory and meeting the essential fiduciary requirements. However, IDA’S knowledge o f the weaknesses in the country’s public financial management systems and lessons emerging f rom the implementation o f other Bank financed operations in Bhutan have been taken into account and improvements have been made. These are: (i) use o f the RGOB’s Budgeting and Accounting Systems for accounting o f project expenditures; and (ii) agreement to maintain the designated account in Nugltrum, to eliminate the need for currency exchange. The arrangements are considered to be adequate to account for and report o n the project expenditures as wel l as satisfying the fiduciary requirements o f IDA.
Financial Management and Fund Flow Mechanism.
93. Project funds will be deposited in advance into a local currency designated account maintained by DADM, Ministry o f Finance (MOF) o n terms and conditions satisfactory to IDA. The DADM handles the designated accounts for a l l Bank financed projects and i s familiar with Wor ld Bank disbursement procedures since they have been satisfactorily managing several on-going projects in the country. The designated account will be segregated and used only to deposit advances for the project and to make payments for eligible project expenditures. Funds will be withdrawn from the designated account on a quarterly basis and transferred as an advance to the Government Budget Fund Account by DADM. These transfers will be based on requests f rom the implementing agencies to meet the requirements for project activities. Based on the approved requests, the DPA in the MOF will release Letters o f Credit to the respective L C accounts o f M o I C and RUB and bank accounts at RMA and BOB.
94. Each o f the implementing agencies will issue checks against the LC/bank accounts to meet the project expenditures and account for the same in the B A S (own accounting systems for RMA and BOB). On a monthly basis, the implementing agencies will submit a copy o f the financial report generated from the accounting systems to the PIA. PIA will consolidate the information and prepare interim unaudited financial reports, in form and contents agreed with IDA that report on activities o f the project and provide information on expenditures made in the previous quarter and forecast for two subsequent quarters. Quarterly disbursements would be made based o n these interim unaudited financial reports to provide funds for two subsequent quarters after adjustment for past disbursements. Replenishments f rom the designated account will be report-based and will be processed by DADM on a quarterly basis.
95. Auditing Arrangements. Consolidated annual project financial statements will be audited each year by the Royal Audit Authority (RAA), which i s the Supreme Audit Institution in Bhutan and i s acceptable to IDA as an external auditor. The format o f the annual financial statements will consist o f consolidated Interim financial reports o f the project along with a statement reconciling credit disbursements, as per claims submitted to IDA and balances available in the designated account. The P I A will be responsible for submitting the consolidated annual project financial statements to RAA by September 30 o f each financial year. The Terms o f Reference for the external audit have been prepared in agreement with the Bank and agreed with the RAA. For the internal audit function, i t has been agreed that the internal auditor designated to each implementing agency will review the project in a manner so that each o f the spending units will be covered at least once every financial year. Each o f the implementing agencies has also agreed that any exceptional internal audit reports o n project activities will be made available to RAA and IDA during project review/supervision. Therefore, n o separate TORS were considered necessary for the internal auditing arrangements.
21
D. Social
96. T o more precisely assess the nature and magnitude o f potential social impacts RGoB has carried out a social screening o f the site selected for the location o f the IT Park. The 5 acre site located in Wangchutbata o n the outskirts o f Thimphu i s public land o f which 4 acres i s owned by the Ministry of Agriculture (MOA) and 1 acre by the Thimphu City Corporation (TCC). This land has been transferred to the Ministry o f Information and Communication. The results o f the social screening indicate that n o acquisition o f privately owned land or displacement o f people i s expected under the project, including any land for access roads or ancillary infrastructure. The site selected will be serviced by existing roads. In addition, the social screening also indicates that the land designated as commercial by TCC i s free o f any structures, l ivelihood support activities or religious or cultural structures. OP 4.12 o n Involuntary Resettlement and OP 4.10 on Indigenous Peoples are not triggered by the project.
E. Environment
97. The IT Park i s expected to have a few buildings for office, training facilities and conference rooms, technology center and other ancillary buildings. There will be n o manufacturing facility at the site. Hence potential environmental impacts o f the IT Park are not expected to be significant. Environmental impacts, if any would largely be construction related considering the type o f facilities to be built in the park. Most o f these impacts are expected to be easily managed with proper design o f the facilities and management o f IT Park operations. An environmental screening o f the proposed IT site conducted by the M o I C and Bank staff visit to the site during project preparation suggests that the land identified for this purpose in Thimphu i s not in an environmentally sensitive area and has a gentle slope (10-15 degrees) and shows n o signs o f scars or erosion. The construction o f the IT Park will also will not entail additional road and power access infrastructure as the proposed IT site has direct road and power access available. An environmental assessment (EA) o f the IT park will be conducted in Year 2 o f project implementation after a suitable IT private investor has been identified and design and layout o f the IT Park infrastructure has been defined. The design o f the IT facility will incorporate adequate measures to mitigate construction related impacts and provision o f adequate facilities for solid and liquid waste disposal facilities, soil and water conservation measures, and drainage and erosion control. This will form the basis o f the environmental management plan (EMP). Since the IT Park developed will only be selected in Year 2 o f the project, the Project Financing Agreement will include specific requirement for preparation o f an EMP satisfactory to the Bank after the private developed has been selected. The EMP will ensure that the design o f the IT facility incorporates specific measures for the management o f construction related impacts and delivery o f service facilities mentioned above.
F. Safeguard policies
98. The safeguard policy o n Environmental Assessment (OP/BP/GP 4.0 1) i s triggered. The environmental assessment (EA) and environmental management plan (EMP) will not be prepared until after a private developer i s selected for the commencement o f the IT Park infrastructure activities. T h i s exceptional situation called for a modification o f the application o f OP/BP/GP 4.0 1. The reasons for seeking this modification are set forth below.
This i s a category B project.
99. The project includes the development o f an Information Technology (IT) Park in Year 2 o f the project. The IT Park wi l lconsist o f a few small buildings such as a incubation center, shared technology center, office building, etc. There wil l be n o manufacturing facil i ty in the IT Park. The construction o f the IT Park facility will be financed by a private developer who will be selected through a competitive process after Board approval of the project. Hence, unlike the typical process followed in OP 4.01, the
22
EA and EMP for the IT Park wil l not be prepared until after the private developer i s selected and the design and layout o f the IT park infrastructure determined by the private developer.
100. The results o f the social screening indicate that n o acquisition o f privately owned land or displacement o f people i s anticipated under the project, including any land for access roads or ancillary infi-astructure. The site selected will be serviced by existing roads. In addition, the social screening also indicates that the land designated as commercial by Thimpu City Corporation i s free o f any structures, l ivelihood support activities or religious or cultural structures. OP 4.12 on Involuntary Resettlement and OP 4.10 o n Indigenous Peoples are not triggered by the project. The total extent o f land required for the IT Park (5 acres) i s stable with a gentle slope (10-15 degrees) and shows no signs o f scars or erosion.
Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP 4.01) [XI [ I
Natural Habitats (OPBP 4.04) r i [XI L J
Pest Management (OP 4.09) [ I [XI Physical Cultural Resources (OPBP 4.11) [ I [XI Involuntary Resettlement (OPBP 4.12) [ I [XI Indigenous Peoples (OPBP 4.10) [ I [XI Forests (OPBP 4.36) [I [XI Safety o f Dams (OPBP 4.37) [I [XI Projects in Disputed Areas (OPBP 7.60) [ I [XI Projects on International Waterways (OPBP 7.50) [I [XI
G. Policy Exceptions and Readiness
101. NIA
23
Annex 1 : Country and Sector or Program Background
BHUTAN: Private Sector Development Project
Country and sector issues
1. Bhutan i s a small economy with a GDP o f Nu 32,814 m i l l i on (US$ 735.6 million).22 Landlocked between regional giants China and India,23 i t s population i s estimated at 672,425.24 Over the past 25 years, the country has achieved rapid economic, social and human development, driven by the exploitation o f vast hydropower potential and donor support.25 Real GDP growth averaged more than 6 percent a year over this period, and sustained growth has increased Gross National Income (GNI) per capita in 2004 to about US$720. The economy i s modernizing rapidly, albeit agriculture continues to account for about 26 percent o f GDP, with industry and services representing 43 percent o f GDP and 3 1 percent o f GDP respectively. M u c h o f the impressive transformation that has taken place since the opening up o f the economy in the 1960s i s attributed to the initiatives spearheaded by the government. Public sector enterprises are a central feature o f the Bhutanese economy, with expenditures amounting to 16.6 percent o f GDP in 2004.26
Private Sector
2. Employment generation a challenge. Creating jobs, particularly for the increasing unemployed youth, i s the central challenge facing the country. Good progress in achieving educational and literacy goals has meant that a growing number o f educated Bhutanese as wel l as those leaving agricultural activities - as part o f an accelerating trend towards urbanization2’ - are n o w seeking urban employment opportunities. Over the decade 2001 to 2010 it i s projected that approximately 90,000 school leavers and graduates will be produced by the school system - with exponential increases taking place each year. As the current formal sector work force i s estimated around 60,000,28 the creation o f an additional 90,000 jobs appears as a formidable challenge. Whi le the majority o f the school leavers have been absorbed into the public sector in the past -the preferred employer for most Bhutanese - the government has now largely reached saturation point with only around 20 to 30 graduate officers being absorbed on an annual basis.
3. Private sector designated as the “engine of growth”. Strengthening the private sector to create employment opportunities has been recognized by the Government as a high priority and forms a central tenet o f the Ninth Five-Year Development Plan (2002-2007).29 To date, the development o f the private
22 These are estimated figures for 2004-05, as reported in the Statistical Year Book, 2004, National Statistical Bureau, Selected Economic Indicators, June 2005, Royal Monetary Authority, Royal Government o f Bhutan. 23 The Himalayan kingdom has a land area o f about 47,000 square kilometers. 24 T h i s i s according to the Bhutan Census 2005. Previously, the RGoB reported a population estimate o f 734,000 in the Statistical Yearbook o f Bhutan 2003, and other figures are noted elsewhere (including the World Bank’s World Development Indicators). Greater consensus i s expected once more demographic data analysis has been undertaken on the census. 79 percent of the pppulation lives in rural areas.
Power generation provides approximately 35 percent o f government revenue, excluding external resources which account for almost 50 percent o f Government revenue (Source: Interview with DADM). 26 Non-commercial organizations/authorities such as the Royal Monetary Authority o f Bhutan ( M A ) and the National Pension and Provident Fund (NPPF) are not included. 27 Urbanization has accelerated, and Thimphu, the Kingdom’s capital, i s growing fast at around 10 percent per year. 28 Of which 30,000 are thought to be non-nationals - and a further 22,000 are in the civil service or in public sector institutions which are not growing. A caveat, the data on employment i s quite limited, and the labor force surveys did not distinguish between public and private sector employment. 29 Reflecting the distinct vision o f Gross National Happiness (GNH), the Ninth Five-Year Plan has five overall goals: (i) improving quality o f the l i fe and income, especially for the poor, (ii) ensuring good governance, (iii) promoting private sector growth and employment generation, (iv) preserving and promoting cultural heritage and environmental conservation, and (v)
24
sector has been supported by policies aimed at strengthening market forces, increasing competition and refocusing the role o f the government. The private sector’s contribution, nonetheless, remains modest with the public sector continuing to play the lead role in the economy. With i t s small population spread over a difficult, mountainous terrain, access to global markets, technology and services i s essential to development efforts, particularly, growth o f private sector in the country.
4. Constraints to PSD. The Wor ld Bank Group’s Doing Business Report (2006) and Investment Climate Assessment (2002) have identified several constraints faced by private investors in realizing opportunities in Bhutan. A small domestic market, high transport costs and inadequate infrastructure (including roads and electricity), regulations, labor market issues and skill shortages, financing, and business development services to handle externalities, are the most important factors behind the high costs o f doing business in the Bhutan ranks 66th o n the ease o f starting a bus ine~s,~ land licensing i s t ime-consuming and bureaucratic, p lacing Bhutan at 99th posi t ion worldwide. W h i l e Bhutan’s financial sector i s stable, i t lacks depth. Bhutan ranks 139th out o f 155 o n the ease o f getting credit. N o t surprising then that the role o f the private sector in the economy remains somewhat restricted with entrepreneurship nascent. Cognizant o f this, the RGoB i s following a two-prong strategy for private sector d e ~ e l o p m e n t : ~ ~ (i) improving the investment climate (IC) to reduce the cost o f doing business; and (ii) facilitating the growth o f niche orpr ior i ty sectors as potential source o f growth and employment generation.
5. Investment Climate reforms. RGoB’s has undertaken an array o f pol icy and institutional reforms for improving the investment climate in the country. Reform initiatives in the area o f labor market issues, business registration and licensing, regulations for facilitating domestic and foreign investment, access to finance, and addressing s k i l l shortages are particularly impressive. Expanding infrastructure - including roads, electricity and telecommunications - i s also an important part o f the strategy.
6. The Bank Group has been supporting Bhutan in PSD reforms through a program o f pol icy dialogue, analytical work, development pol icy lending and TA. The programmatic Development Policy Grant (DPG I & II), specifically has supported RGoB’s efforts in development o f flexible labor and employment law, rules and regulations and procedures; simplification o f the registration process for business start-up; and creating an enabling environment for foreign direct investment through development o f FDI pol icy and accompanying FDI rules and regulations (2005). The Foreign Investment Advisory Service (FIAS) has provided technical assistance in the development o f the regulatory framework for foreign direct investment (FDI). The South Asia Enterprise Development Facil ity (IFCISEDF) has played a catalytic role in the promotion o f small and medium enterprises (SMEs), and in the building o f capacity in the Bhutan Chamber o f Commerce and Industry (BCCI) as we l l as in financial sector institutions.
Information and Communication Sector
7. Niche market approach to PSD. Along with PSD policy reforms in cross-sectoral areas, the RGoB’s PSD Strategy aims to encourage the growth o f niche sectors as potential source o f growth and
achieving rapid economic growth and transformation. T h e Ninth 5-year Plan, which was to cover the period 2002-2007, has been extended by a year to 2008, with a view to having the start o f the Tenth 5-year Plan coincide with the establishment o f Constitutional democracy. 30 These are based on the findings o f the Bhutan Private Sector Survey (World Bank June 2002). The objective behind this survey was to shed light on the constraints private sector faces in Bhutan. The survey was undertaken by the World Bank, in collaboration with the Ministry o f Trade and Industry (MTI) and the Bhutan Chamber of Commerce and Industry (BCCI) in 2002 3’ Entrepreneurs have to complete 11 separate procedures taking 62 days, well above the regional average o f 8 steps and 35 days, and OECD average o f 6 steps and 19 days (See Doing Business Report, The World Bank, 2006). 32 See the Private Sector Policy and Strategy Paper, February, 2007, MTI, RGoB.
25
employment generation. Information and communications technology (ICT) - along with other export- oriented industries33 - i s one such sector which has been recognized as an “unmatched developmental tool as well as an area o f new business and employment opportunities for a l l Bhutanese people.” ICT plays both to Bhutan’s strengths and avoids the country’s major constraints. For instance, ICT services would take advantage o f the disciplined, English speaking workforce and relatively developed telecommunications network. Yet i t would not be constrained by the mountainous terrain, extreme weather and geographic isolation. In addition, the development o f this sector would help create jobs for the increasingly unemployed youth, and would be gender-sensitive in impact. According to the RGoB’s Information and Communications Technology (ICT) Master Plan, the development and application o f IT will be guided by three broad pol icy objectives: use IT as an integral tool to enhance good governance; develop IT and IT-enabled industries in the private sector to generate income and employment; and apply IT to improve the l ivelihood o f a l l Bhutanese.34 The sector also holds promise for improving productivity and increasing competitiveness in existing public and private sectors and industries.
8. Developing a niche market approach to private-sector development, nonetheless, presumes that the government will also be able to deal with issues related to skilled workers, government regulations; to promote greater technology transfer into Bhutan; to address constraints imposed by the financial sector; and to gradually seek alternative methods o f addressing the restrictions and higher costs imposed by the transport infrastructure. T o guide I C T development, the Bhutan ICT Policy and Strategy (BIPS) calls for balanced and sustainable development based on five pillars: policy, infrastructure, human capacity, contents and applications, and enterprises. In June 2006, the Bhutan Information, Communication & Media A c t was approved. The purpose o f the ICM A c t includes encouraging local and foreign investment in the I C T and media industry by providing a modem regulatory framework that fosters a convergence o f information, computing, media, and communications technologies, as wel l as facilitating privatization and competition.
Financial Sector
9. Financial system in Bhutan i s composed o f a central bank, four financial institutions, a pension fund, and a securities exchange. The financial institutions include: (i) two commercial banks, the Bank o f Bhutan (BOB), and the Bhutan National Bank (BNB); (ii) an insurance company, the Royal Insurance Corporation o f Bhutan (RICB); and (iii) a development bank, the Bhutan Development Financial Corporation (BDFC). The supervision and regulation o f a l l these institutions i s the responsibility o f the Royal Monetary Authority o f Bhutan (RMA). The two commercial banks dominate the financial sector, holding 88.8 percent o f the financial sector’s total assets as o f December 2006.
10. The lack o f adequate development in the private sector and the small size o f economy have attributed the financial sector in Bhutan to remain underdeveloped in terms o f the variety o f the financial products and operational efficiency. Bhutan’s financial sector appears to be stable indicated by the large liquidity reserve rat io and high C A R . However, given the l imited capacity o f financial intermediation and the lack o f domestic investment opportunities in Bhutan o n one hand, the rapid accumulation o f liquidity, o n the other hand, presents a main challenge. As evidenced by the l o w
33 See Private Sector Development Policy and Strategy (MTI, RGoB June 2007).The dual track approach was also recommended in the Bhutan Private Sector Survey, June 2002, T h e World Bank. T h e report acknowledges that in central Bhutan, high labor costs as well as higher transport costs make the development o f industries uneconomic. Instead, these areas should focus on providing services to the heavier industrial belt along the southern border (increasingly providing accounting services, IT services, management, and financial services); providing other services such as tourism, construction and transport; and developing niche markets in specialized fields (mushrooms, essential oils, Himalayan medicines, handicrafts, furniture). 34 T h e I C T Master Plan (June 2001) spells out national programs and initiatives to promote IT. I t identifies seven focus areas that include: infrastructure, institutional arrangements, human resources and training, information management and content development, regulations, guidelines and legislation, public access and awareness, and private sector development.
26
domestic credit to private sector, the liquidity build up has not been matched by domestic private investment. The loan market i s very thin, and most o f the liquidity i s re-deposited in either non-interest bearing account with the RMA or, in high interest bearing deposits with commercial banking institutions in India. This weak intermediation function has led to high interest rate spread wh ich i s about 9.5%, higher than a regional average o f 7% as o f 2005.
Table 1: Bhutan Financial System Comparative Data (2005) Bhutan Indonesia India Nepal Pakistan Philippines Malaysia
~
Banking Industry Bank liquid reserve to bank assets (%) 76.8 15.5 21.8 9.0 9.2 3.4 Capital Adequacy Ratio (%) 18.6 19.6 12.8 -5.76 10.9 18.1 13.1
24.8 41.1 28.4 30.7 127.3 Domestic credit to private sector (% of GDP) Interest rate spread (%) 9.5 6.0 5.9 4.6 3.0 M 2 to GDP (%) 46.9 41.0 62.8 38.2 45.2 51.6 100.6 Number o f A T M s per 100,000 people 0.3 4.8 6.3 0.1 4.7 5.3 16.4
1 7 . ~
Sources: Financial Sector Development Indicators, Royal Monetary Authority o f Bhutan, Getting Finance in South Asia
11. Since IT plays a key role in enhancing the operational efficiency and transactional soundness in financial sector, the worldwide IT development i s quickly adapted in the financial sector as seen in the speedy development o f mobile and internet banking and electronic money. However, IT development o f the financial sector in Bhutan i s s t i l l at a rudimentary stage as indicated in the number o f ATMs per 100,000 being 0.3.
12. There have been major constraints which impede the financial IT development: (i) a lack o f understanding o n the importance o f financial IT at both managerial and operational working level; (ii) a lack o f IT human resources to support financial sector; (iii) poor and costly IT infrastructure; and (iv) n o economies o f scale for financial IT investment given the small size o f economy. These constraints, coupled with notably unbalanced IT development among financial institutions (FIs), further hampers the development o f nationwide financial IT infrastructure, creating difficulties in operating interchangeable electronic financial transactions among FIs.
Payment system in Bhutan
13. I t i s through the national payment system that money i s transferred between buyers and sellers in commercial and financial transactions. The payment system in Bhutan i s characterized by the heavy use o f cash and paper-based instruments for a l l types o f payment transactions both in rural and in urban areas. This causes significant costs not only in the banking sector, but also in the private and government sector, to physically move these instruments f rom region to region. The distribution o f cash in a country l ike Bhutan with extensive mountains and insufficiently developed transportation infrastructure i s extremely cumbersome. In this context, the development o f electronic payment instruments would be wel l suited to Bhutan to stimulate commercial and financial transactions. However, underdeveloped IT infrastructure, coupled with unbalanced IT development in the financial institutions has led the financial sector in Bhutan to remain at a rudimentary stage in terms o f the e-payment services. An example in B o x 1 wel l illustrates inefficiency with current cash and paper-based payment system in Bhutan.
27
14. card.
Ma in ~ a y ~ ~ e n t ins~nir i ien~s in ~ ~ ~ u t a ~ are cash arid check with mrnima’l usage o f ATM and credit
15. Cirsh. The most i ~ ~ p o r ~ a n ~ and ~ ~ q u ~ i i ~ l y - u ~ e ~ retail payment ~ n s ~ r ~ m e n t rn huta an i s cash. Cash coniprises 26.7 per cent and 13.2 per cent of t l ie narroct money supply (MI) and the broad irioney supply ( M Z ) respectively as o f l ~ e e e ~ b e r 2006. Stnce Bliutan’s check clearing house (CCXI) was f irst e s ~ a ~ l I s ~ e d in T ~ i m p ~ ~ an3 F ~ i u e I i t s l i ~ ~ l ~ n g HI 1907 and 2000, the c ~ ~ ~ p o s i ~ i o n o f cash in Mf has been no tab^^ Jucreased from 32.8% (1997) to 23.1% (2002) as shotin in Table 2. This dccrease ~ ~ d ~ c a t e s that due to the e s ~ ~ ~ ~ ~ s ~ ~ ~ ~ i ~ t o f CCf f the volurnt. of check c ~ r c ~ ~ l a ~ ~ ~ ~ n expanded so rapidly that checks r e ~ ~ a c e ~ i the ttsagc of cash in the ~inancial ~ r a ~ ~ a c ~ t ~ n Eioweser, the portxltn o f cabh II? MI has starzed ‘to ~ r a d L ~ a ~ ~ ~ xricscase from 2002, mhich also suggests that there are strong needs for d e ~ ~ c ~ o p ~ i ~ n ~ of the ~ n i i ~ ~ r a ~ i ~ ’ c payment ~ns~~n ten ts beyond the p a ~ ~ r - b a s u ~ payment ~ ~ s ~ ~ u ~ ~ ~ e n ~ ~
17. 011 J a ~ ~ ~ a ~ 15, 2007, KMA ~aunched a new a ~ ~ t o ~ i a ~ e d check cieanng system urth 4 reglorial clcarirzg h o ~ s e s ~ ~ ’ to enhance the efficiency of cheek cIeanng. which t\ ould replace a ~ t a n ~ ~ a ~ clearing sqstern. The neu system has s h o r ~ c ~ e ~ i thc setrl unt pcriod to ;t p a t exturid by e ~ ~ ~ ~ ~ i n ~ al l checks from any bank ~ r a i i c ~ e s to be presented and cleared in the nearest regional clearing house.
18. ~ 4 1 ~ r ~ ~ ~ ? t ~ ~ ~ ~ ~ lkEler ~~~~~~~~~~~~~~~. At present, only two ATPvls are being operated in Bhutan by BNR u.ithm i t s p r e r ~ ~ i s ~ s . However. i t s usage i s very riitnsmal. because current f u ~ i c ~ i ~ n ~ of ATM are not i ~ ~ t c ~ ~ l i a ~ g c a b ~ e bettvecn branches and Iimitt‘d to m l y a cadi ~ ~ i t l i ~ ~ a t ~ a l and balance inquiry. I W E 3 IS currently p ~ a n n i n ~ to expand the f ~ n c ~ i o n s o f AThl further to include: fund transfer: utility p a ~ m e n ~ s ~
2s
-__^
1 i I 2005 2006 2004
I
J
Changes % 2004-2006
Annex 2: Ma jor Related Projects F j n ~ ~ ~ ~ d by the Sank a ~ ~ ~ r other Agencies
BHUTAN: Private Sector D ~ ~ r ~ I o p ~ ~ ~ t Project
Title
Aug. ‘113
Mar. ‘06
Description
3 If
Annex 3: Results Framework and Monitoring
BHUTAN: Private Sector Development Project
Results Framework
The objective o f the project i s to - - increase productive employment in Bhutan through promotion o f enterprise development in the IT and IT enabled- services (ITES) sector, enhanced IT skills, and improved access to finance.
Component 1: Development of IT/ITES Sector Development the IT/ITES sector In Bhutan through attracting ITiITES f i r m s in the IT Park, and increase in the private investment in the ITiITES sector.
ComDonent 2: Development of I T Skills Program Availability o f a stream o f trained IT manpower to support the development o f the IT/ITES Sector.
Component 3: Strengthening the Financial Sector through I T use Gradual growth in IT use b y the financial sector to achieve greater efficiency
Evidence o f increased employment generation in the IT sector through the PSD Project, specifically including the following measures:
Cumulative job creation in the ITIITES sector supported by the
Evidence o f timely and satisfactory progress toward the delivery o f Component 1 outputs, as planned, including the following specific measures:
Leads generated for new
Number o f companies successfully
Per cent o f lettable space leased out
investments in the IT Park
incubated in the IT Park;
Evidence o f timely and satisfactory progress toward the delivery o f Component 2 outputs, as planned, including the following specific measures:
Per cent o f students clearing ITES industry ‘competency assessment’ that i s widely recognized; and Per cent o f students trained are successfully employed b y the private sector.
Evidence o f timely and satisfactory progress toward the delivery o f Component 3 outputs, as planned, including the following specific measures:
Number and value o f financial transactions b y using ATMs; and Volume o f fund transfer transactions among banks channeled through the EFT system.
To verify the timely and satisfactory completion o f Component 1 outputs.
To verify the timely and satisfactory completion o f Component 2 outputs.
To verify the timely and satisfactory completion o f Component 3 outputs.
3 1
2 2
2 [ 2
rr 0
E
W El L 0 Y
.I
.I
1
s a
m c, I
R
42 L
m c,
W a E 2
0 0 [I
0 v1 rri
0 wl e N
3 3 3. 3 wl z -
3 -
3
3 s 3
3
3 3 3 3 3
Annex 4: Detailed P : Private Sector ~ ~ ~ e ~ o ~ ~ ~ ~ ~ Project
LNo. - -- I Component 1 Amount@JS$mil) 1
m.
33
Park to suit requirements o f IT/ITES companies,38 and i s more l ike ly to be active in marketing the Park to prospective tenants.
7. Given the nascent stage o f Bhutan’s IT industry and the challenges and constraints in attracting IT f i r m s to locate in Bhutan, the RGoB will share some o f the investment r isks by (i) making land available for the Park as an equity contribution f rom the government, with the equity amount being determined through a competitive bidding process; (ii) investing in ancillary infrastructure for the Park e.g. roads, power, waterhewage etc.; and (iii) ensuring a fixed annual revenue stream for the private sector for a period o f 5 years with government agreeing to lease in about 10,000 SFT o f space in the Park. The lease amount shall not exceed US$2 mi l l ion. The proposed business model for the IT Park would be incorporated into an RFP for launching the bidding process.
8. The leased shell space f rom the Park would be used or leased out by RGoB for the purposes o f establishing an incubation facility, a shared technology center and a data center. The RGoB will invest in developing a shared technology center, data center and incubation centre with investment o f about US$700,000, US$300,000 and US$330,000 respectively. The investment may be in the shape o f software testing tools and/or a render farm. The exact nature o f the investment in technology infrastructure will be determined in consultation with the Park developer and other stakeholders.
9. The construction cost for IT Parks in India i s estimated at about $30 to $35 per SFT. Assuming the most pessimistic scenario, the construction cost in Bhutan should not exceed $80 per SFT. With the provision o f $2 mi l l ion under the project for the IT Park, i t should be possible for a private sector developer to build 25,000 SFT without undertaking any significant risk. RGoB will be leasing-in 10,000 SFT from the IT Park for 5 years. The remaining 15,000 SFT will necessarily have to be leased/sold to IT/ ITES companies by the developer. This in itself should constitute a strong motivation for getting companies to locate in the Park. In the more optimistic scenario, the private sector would invest in the vicinity o f $5 m i l l i on and would be able to attract global players to set up operations within the Park.
10. Ancillary infrastructure: In addition, the RGoB shall invest in providing ancillary infrastructure l ike water, sewerage, power f rom alternative feeders and high speed connectivity. The connectivity proposed for the Park would have to include both fiber optic and V S A T so as to provide redundancy. Moreover, the proposed data center in the IT Park would need to be connected with the Government Wide Area Network (WAN), whi le the shared technology center would be connected to the RUB WAN to al low wider use o f the facility.
11. Policy issues: For the successful implementation o f the IT Park, the RGoB has undertaken key pol icy and institutional reforms. The commitment to move forward o n a fast-track basis i s also reinforced by the meeting o f project readiness criteria.
12. Leased l ine prices: At present the cost o f broadband connectivity in Bhutan as compared to costs prevailing in the region, i s very high as can be seen f rom the table below. The table compares the cost o f an E l leased link offered by Bharat Sanchar Nigam Ltd. (BSNL) in India and by Druknet in Bhutan. As can be seen from the table the current cost in Bhutan i s roughly 3 times that in India.
38 In case a private sector developer does not come forth for setting up the IT Park, other options shall be explored, Le. establishment o f IT centers along the Phuentsholing-Thimphu-Par0 fiber optic corridor, as designed in the IFC/SEDF feasibility study - and keeping within the project costs.
34
BSNL3’ Dmknet4’
13. Whi le currently the cost o f leased lines in Bhutan i s higher than that o f the region, the RGoB i s committed to bringing down prices and i s currently working out various options. Discussions have progressed o n two fronts in this regard. The incumbent operator - Bhutan Telecom i s at the final stages o f negotiating with an Indian party- Reliance Group - for larger international bandwidth at a lower cost. The RGoB, through the MoIC, i s also holding parallel negotiations with Indian Videsh Sanchar Nigam Ltd. (VSNL) and internally with Bhutan Power Corporation to have i t s own fiber connectivity. M o I C i s confident that they will successfully conclude negotiations by the end o f the year and offer competitive pricing, equivalent to India.
14. Other relevant developments in the area o f connectivity include: Samden Tech, a private ICT player i s planning to r o l l out WiMAX in urban centres across Bhutan in the coming year. Samden Tech i s partnering with a large private equity fund which focuses o n the Telcom sector. Tashi group - one o f the largest private sector enterprises in Bhutan - hopes to use their newly acquired cellular license to r o l l out GSM, GPRS and edge technologies. All in all, domestic and international competition i s expected to bring down connectivity costs in the near future. If at the time o f the operationalization o f the PSD project there i s any remaining differential f rom regional rates, RGoB i s committed to bearing this cost in the short run.
15. FDI Policy 2002 and Labor & Employment A c t 2006: Up till the time the Bhutanese workers are trained, the RGoB has agreed to al low foreign skilled workers. The Foreign Direct Investment Policy o f 2002 permits the employment o f skilled foreigners in Bhutan where such sk i l ls are not locally available. According to the policy, “Notwithstanding the objective of employment of nationals, foreign companies wi l l be allowed to bring in expatriate personnel in areas where there are shortages of Bhutanese with requisite skills. ” In recognition o f the need for highly trained staff at senior levels, RGoB i s committed to relaxing restrictions o n the employment o f non-nationals, and shall make more flexible labor and investment regulations related to foreign workers for the I C T sector, under the Labor & Employment Act. MoIC has already secured a commitment from the Ministry of Labor and Human Resources (MoLHR) via a letter dated 16 Feb. 2007.
16. The privacy o f the digital data: Some Provisions for protection o f digital data and information privacy exist under Bhutan Information, Communication & Media Act (BICMA, 2006), including the consequences o f infringement. Documentation i s being drafted by RGoB that highlights these relevant provisions on privacy under the BICMA, along with the provisions in the draft contract l a w to provide a degree o f confidence that data protection concerns are adequately addressed under the existing/proposed legislation in Bhutan.
17. Acquisition of land for IT Park Land has been allocated for the IT Park at Wangchutaba, near Thimphu. The Government has given clearance to transfer f ive acres land to the Ministry o f Information and Communications (MoIC). An Allotment Order was issued on 8 March, 2007 to transfer land to MoIC. At the same time, a suitable alternative site has been identified at Par0 so as to provide a possible alternative, in case the private sector considers i t necessary to locate the Park close to the international airport.
39 Source: http://www.bsnl.co.in/service/intemet-tariffl .htm as accessed on February 5, 2007. 40 Source: http://www.druknet.btimodules.php?name=Leaseline as accessed on February 5, 2007.
35
18. Fast-tracking of clearances for the Establishment of the IT Park: Investments into the IT Park will be given priority, fast clearance by an Empowered Task Force (ETF), already constituted by the Council o f Ministers, under the direction o f an Executive Order issued by the Prime Minister o f RGoB on March 1, 2007. The ETF will be co-ordinated by the MoIC, and will have as i t s membership the head o f each o f the key ministries/departments relevant for new business registration & ICT investment in Bhutan. Mol% wi l l act as the single point of contact for the investor and wi l l ensure clearances are processed in a rapid and time bound manner. The ETF comprises: the Director General (DG), Department o f Debt and Aid Management (DADM); DG, Dept. o f Industry; Director, Dept. o f Labor; Director, Dept. o f Revenue and Customs; Director, Dept. o f Trade; Managing Director (MD), Royal Monetary Authority (RMA); MD, Bank o f Bhutan (BOB); Mayor Thimphu City Corporation; MD, Bhutan Power Corporation; MD, Bhutan Telecom Ltd.; and Secretary General, Bhutan Chamber o f Commerce and Industry (BCCI). Specifically, the focal persons, shall be collectively responsible for: (a) expediting land allotment, registration, environmental, utilities and other related clearances for the establishment o f the IT Park; (b) expediting FDI and other related clearances for participation o f foreign f i r m s in the development o f the IT Park; and (c) simplifying any other existing procedures and norms that wil l fast-track the implementation o f the project.
19. Advance preparedness measures for targeting potential investors for the IT Park: A consultant has been hired by M o I C to help with preparatory work for the IT/ ITES and sk i l ls development components. The task o f targeting potential investors for the IT Park (i.e. the first component) requires substantial advance preparation and lead time. In this regard, the consultant has prepared a draft Pre Qualification bidding document to procure the IT Park developer within a PPP framework. The RGOB intends to ho ld meetings with potential investors by end April. This will be well-advanced by the time o f project effectiveness.
(ii) I T Promotion (US$I.O million)
20. For the successful design and implementation o f the project, coordination with different government agencies and with the private sector i s a key imperative. Under the Bhutan Information, Communications and Media Act 2006, the M o I C as the lead ministry i s empowered to direct, coordinate, encourage, advise and support ICT development in the country. Towards this end, this sub-component will support M o I C to establish an IT/ITES Promotion & Program Implementation Agency (PIA). The PIA shall promote and facilitate the development o f IT/ ITES industry in Bhutan.
21. The Agency functions shall include but not l imi ted to the following: to act as a ‘One Stop’ shop to cater to al l needs o f IT/ITES companies for setting up or facilitating their IT/ITES business ventures in Bhutan; to act as a bridge between private IT/ITES companies and various government bodies; to identify the IT demands and requirements in financial institutions and link them with IT/ ITES companies and IT training institutions; to study the laws, regulations and strategies o f various competitor countries and carry out market intelligence and exploring new markets for Bhutanese IT/ ITES industry; arranging participation o f Bhutanese IT/ ITES industry in domestic and international IT/ ITES events; providing protocol, hosting and match-malung facilities for foreign delegates and investors; and to develop a marketing p lan to help local IT and ITES companies reach out to potential clients abroad, attract and facilitate foreign IT/ ITES and related f i r m s to establish their development and other facilities in Bhutan.
22. This agency would be a lean organization that would rely on use consultants, academic institutions, private sector personnel and government resources to aggressively reach out to IT investors and present Bhutan’s value proposition. The PIA would be headed by a Director, and other staff may include: a Deputy Director; a Program Manager who will be able to multi-task
36
across a l l program components - with a business and finance background and project management sk i l l s f r om private sector; and support staff. For managing the immediate task o f coordination and IT promotion for setting up the IT Park, the functions shall be assumed by the senior functionary o f MoIC.
Comprehension and Writing Abilitv
Component 2: Development of IT/ITES Skills Program (US$2.0 million)
comprehension Message clarity, comprehension
23. Availabil ity o f a stream o f trained IT manpower i s a pre-requisite for the success and sustainability o f the IT Park in Bhutan. T h i s component shall focus o n development o f ski l ls, through collaboration with international institutions, at the fo l lowing three levels (a) Generic Skdls for the IT/ ITES Sector; (b) Distance learning facilities/CMS for IT Skills development; and (c) IT Entrepreneurship Development Program.
Office Software Usage Numerical and Analytical Concentration and Accuracy
24. Generic Skills for IT enabled services: This level o f program would focus o n improving sk i l ls required for IT enabled services including English language - i.e. listening and speaking - analytical ability, mathematical ability, computer sk i l ls and inter-personal ski l ls . The project would support the following activities: introduction and implementation o f an ‘assessment o f competency’ test that would entail assessing candidates o n key IT sk i l ls through a standard assessment, thus making it easier for f i r m s to screen candidates and also provide training need analysis to candidates; training o f teachers in institutions under Royal University o f Bhutan (RUB); introduction o f remedial training for students in government/private institutions; and conducting Just-in-Time (JIT) training for potential candidates for employment with identified investors.
M S Off ice tools, browsing Numerical ability, logical reasoning, comprehension
26. Development of skilled IT Professionals through Distance learning facilities/CMS: T o help develop skilled IT professionals in Bhutan, this sub-component would support (a) setting up o f distance learning infrastructure in institutions imparting higher-level IT/ ITES sk i l ls training; and (b) the adoption o f Course Management Systems (CMSs) to facilitate a better learning environment for students.
27. Distance learning infrastructure: IT programs are currently being conducted in RIM and in Sherubtse College. Introduction o f engineering courses in IT at the College o f Science and Technology in Phuentsholing are also underway. In addition to these courses, the Samtse College o f Education offers a Distance Teacher Education Program which would be used to develop competencies in generic sk i l ls for the IT/ ITES sector. The College will also be offering Post Graduate Diploma in School Guidance and Counseling through distance mode towards the latter part o f 2007. This sub-component would finance videoconferencing (VC) facilities for facilitating distance learning initiatives in IT s k i l l s being imparted at the above four institutions, along with the Vice Chancellor, RUB’S office in Thimphu.
28. Course Management Software: Recent trends in higher education are veering towards a hybrid approach o f complementing face-to-face teaching with on-line learning. This has meant that the use o f Course Management Systems (CMSs) i s becoming critical for posting course content, assessment and course discussion. RUB i s keen to develop in-house competencies for using C M S solutions. However course management systems are s t i l l maturing as a market. A careful review o f the market products, as wel l as their match with RUB’S own strategies, will therefore be necessary. A number o f open source and commercial C M S software are currently available. Open source solutions l ike Moodle and Sakai are becoming increasingly popular, while many institutions are adopting homegrown solutions around tools such as Microsoft SharePoint and Xythos. In view o f the fact that use o f C M S would provide a richer learning environment for students and would allow linking up with resources l ike MIT’s Open courseware this component shall be included under the current Project.
29. An I T entrepreneurship development program would be conducted under the project in collaboration with a leading business school. The program will a im at helping potential entrepreneurs to work on their o w n business ideas and ventures, and concretize their plans to become real wor ld entrepreneurs. The program would have a short academic component combined followed by a corporate attachment module. The academic module would focus, among other things, o n areas such as identification and evaluation o f opportunities for new ventures; concept analysis and business plan development; establishing and managing an IT business; and l ive case studies with successful IT entrepreneurs. The Corporate attachment would involve embedding each student with one o f the leading IT companies most relevant to their future business, so that they gain an understanding o f how business i s managed in real life, and also develop networks for helping them once they get started on their own. An attachment could also be arranged with a reputed venture capital firm to get a better understanding o f how to access capital. The total program duration would be for about a year and could rotate between the business school and the attachment modules, so that candidates can be properly equipped to venture on their own.
Comwnent 3: Strengthening Financial Sector through I T Use (USD1.O million)
30. A strong financial sector i s critical for the growth o f private sector in Bhutan. This second component o f the PSD Project supports strengthening o f financial sector through the use o f IT.
38
The two components o f the project i.e. the development o f the IT/ ITES sector and the IT development in the financial sector are l inked with strong synergies in both IT and financial industry. The development and application o f IT for private sector development and financial sector strengthening i s the common link between the two components. Whi le the f i rs t component aims to support government’s efforts to develop IT/ITES industries to generate income and employment in the private sector; the second component reinforces these efforts through improved access to finance for PSD growth. The two components are also complimentary with strong synergies: Shared IT infrastructure such as data centers in IT Park, coupled with the improvement o f IT human sk i l ls and connectivity, can further enhance financial IT development, and vice versa.
3 1. The a im o f this component i s to achieve greater efficiency in the financial sector, through gradual growth o f IT use, thereby leading to better financial services for the private sector, bank customers and the government. As B o x 1 depicts, this component comprises the fol lowing three main activities: (i) IT system up-gradation in the Bank o f Bhutan (BOB); and (ii) developing a ‘Financial sector IT development strategic plan’; and (iii) establishing the Inter-bank Electronic Fund Transfer Clearing System (EFTCS) at the RMA.
BOX 1: The architecture o f the project
I - - - - - - - (ii) ‘Financial Sector IT development Strategic Plan’ . - - - - - - - - I
I 1- - - -1 I I I I I
I I I I
I .......................... ............,.................. I I I I
I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I
t
E-DaVmeflt: ATM/CD
Customers
I I I I I I
(iii) Inter-Bank EFT Clearing System I I I I
I I I I I I I I I I
k D I I I I I I I I I I I I I I I I I I I I I I I I I I I I
I ._-------_-
(0 Modernization of Bank of Bhutan through IT system upgrade (US$ZOOK)
32. Notably unbalanced IT development exists between BNB and BOB, which has been hampering the development o f nationwide financial IT infrastructures including inter-bank electronic fund transfer system. Since the current IT system in BOB was developed in 1995 as an in-house product only for the internal operation purpose, there has been almost n o IT investment in BOB. Only 9 branches out o f 26 have been computerized, furthermore, there are n o network connections through Leased L ine or V S A T even among computerized branches. Almost entire
39
financial operation and transactions in BOB are currently being carried out manually, which i s time-consuming and contributes additional costs to BOB. This underdeveloped IT system in B O B further leads to operational inefficiency in the banhng sector, which in turn has been impeding the private sector growth in Bhutan.
33. BOB i s also deeply aware o f a general public perception that BOB i s technologically backward and i t s employees are not aware o f latest financial IT technology. In addition, improvement in performance o f BNB after leveraging technology and expected competition with new commercial banks4’ are also putting pressure o n BOB.
34. Given that nationwide financial IT infrastructure cannot be efficiently built up without enhancing the level o f IT system in BOB, the project puts i t s priority to supports IT system upgrade in BOB in a way to enable BOB to accommodate the newly designed inter-bank Electronic Fund Transfer Clearing System, at the same time to streamline i t s operational procedure and data f l ow within and among the branches. Details o f IT system upgrade and capacity building will be guided by a bilateral complimentary TA provided by the IFC/SEDF on a cost sharing basis.
35. Whi le IDA budget o f U$200K i s allocated for the physical investment support for IT system upgrade, BOB has confirmed that the rest o f project costs will be borne by BOB from i t s o w n budget. This counter funding scheme has been devised to create strong ownership o f IT system for BOB, as wel l as to catalyze IT development in BOB, which have been hesitant to invest in the development o f IT system despite large liquidity and on-going prof i t realization.
(ii) TA: Developing %inancia1 sector IT development strategic plan ’ (US$SOK)
36. Given the rapid changes and growth in the financial and IT industry, IT development in the financial sector in Bhutan needs to be carried out in a more holistic way and an innovative manner f rom the inception stage. Among other things, it involves development o f concrete strategy, regulatory & legal framework and institutional arrangement, coupled with a detailed technical implementation plan for financial IT infrastructure.
37. This sub-component shall support to develop a ‘Financial sector IT development strategic plan’ (the ‘PLAN’) with main focus on the development o f an electronic retail payment system in Bhutan. The PLAN will contain two main elements: (i) pol icy fi-amework for the electronic financial transactions; and (ii) technical framework for development o f e-payment system.
38. In terms o f the policy framework, the P L A N will set out a comprehensive and detailed IT development strategy with a clear vision, and spell out a l l necessary legal, regulatory and institutional arrangement for the electronic financial transactions. The PLAN will identify and draft a l l the laws and regulations which need to be revised or newly developed to accommodate the electronic financial transaction, including the RMA A c t (1 982), the Negotiable Instrument A c t (1997) and the Financial Service Ac t (to be enacted). T o date, even though RMA has been fully aware o f the operational inefficiency and out-dated IT system in the financial institutions, i t could not regulate them to accommodate standard practice. In this regard, RMA also needs to be fully given authority to supervise and regulate financial institutions and enforce the standard IT system and e-payment operational practice to them.
39. Technical framework will cover the assessment o f the current payment system and financial IT system at both national and institutional level, which will be accompanied by the
4 1 Two new private commercial banks are expected to be licensed within 2007.
40
detailed EFTCS development plan and recommendation o n the expansion o f e-payment instruments for commercial banks with a year wise implementation action plan.
40. ‘Financial Sector IT Task Force’ (the ‘Task Force’) supported by ‘IT Technical working group’ (the ‘ W o r h n g Group’)42 has been already set up to carry out the preparation and implementation o f the PLAN in collaboration with a consultancy service firm to be hired. Given the significant importance o f the PLAN for the future o f banking sector in Bhutan, strong involvement and ownership o f the Task Force and Working Group during the entire course o f preparing and implementing the P L A N wil l be the key elements for the success o f this project. This sub-component shall be carried out in collaboration with IFC/SEDF, which also provides resources for the technical assistance.
(iii) Establishing an Inter-bank Electronic Fund Transfer Clearing System (US$75OK)
41. Payment system in Bhutan i s s t i l l heavily dependant o n cash and the paper-based instruments, o f which transactions must be followed by the physical movement f rom region to region. Even though BNB i s providing some electronic financial services such as ATM and credit card acquiring service, their usages are very minimal and limited only within BNB’s own network system. Whereas demands o n the electronic payment system are notably growing, RMA and commercial banks have not met the needs o f the private sector, bank customers and the government.
42. In order to support private sector growth by expanding the e-payment services in Bhutan, this sub-component shall support the establishment o f a inter-bank Electronic Fund Transfer Clearing System (EFTCS) in the RMA. Given the current rudimentary stage o f e-payment system in Bhutan, EFTCS will be developed in different phases guided by PLAN. I t will f i rst start f rom the basic EFTCS with key features within the IDA budget allocation coupled with counter funding f rom participants, then moving o n to a highly developed e-payment system with more advanced IT applications in the future. The details o f development EFTCS will be spelled out in the PLAN.
43. EFTCS will process high-volume and low-value financial transactions occurring in participating commercial banks at a l o w cost. In this scheme, participating banks will electronically submit i t s payment instructions to EFTCS installed in the RMA and inter-bank clearing and settlement will be carried out on the basis o f electronic data and files. Settlements will be made at the end o f each clearing and settlement cycle through the posting o f net balances into a single settlement account o f each participating bank held in the RMA.
44. It will significantly improve the clearing and settlement o f low-value electronic payments instruments such as utility bill collection, government payment and collection, credit transfer, recurrent and direct debit, thus gradually placing paper-based instruments and cash. In addition, EFTCS will enable the further development o f new and modem e-payment instruments to be offered to the bank customers.
42 ‘Financial Sector IT Task Force’ comprises director level staff from RMA, BOB, BNB, RICB, BDFC, DIT, BT and BCCI, and ‘IT Technical working group’ manager level IT staff from same institutions.
41
45. Cost estimates and funding sources. Whi le IDA supports this component with both physical investment and TA advisory services amounting up to US$1 million, rest o f the project cost will be borne by IFC/SEDF, BOB and RMA as shown below (in U S OOOS).
Sub-components
a/ Cost estimates are subject to change, accordingly !inding sources f r o m IFC/SEDF and other counter funds.
42
Annex 5: Project Costs
BHUTAN: Private Sector Development Project
Local Foreign Total u s $000 u s $000 us $000 Project Cost By Component andor Activity
A. Development of the ITDTES Sector (i) I T Park
Ancillary infrastructure Rental for space Shared technology center Data Center Incubation center
(ii) IT Promotion
670 6 70 2,000 2,000
700 700 300 300 330 330
. I
IT Promotion and Project administration 1,000 1,000 Sub total 5,000 5,000
B. Development of the Skills Development Program (i) General preparatory work including TA, M&E and
(ii) Generic sk i l l s capacity building
ITES industry competency assessment Teacher training Remedial Training JIT training
Videoconferencing CMS
(iii) IT ski l ls
50 50
I 7 5 I 7 5 30 30
5 75 5 75 200 200
200 200 I25 125
(iv) IT Entrepreneurship Development 645 645 Sub total 2,000 2,000
C. Strengthening Financial development through IT use
(i) Modernization o f Bank o f Bhutan through IT system upgrade Bilateral TA and capacity building program for I T system upgrade in the BOB
(ii) Developing ‘Financial sector IT development
(iii) Establishing an Inter-bank Electronic Fund strategic plan’
2,000 2,000
80 80
150 150
1,200 1,200 Transfer Clearing System
Sub total 3,430 3,430 Total Project Costs 10,430 10,430
Other financing sources
IFCiSEDF 140 140 Counter fund from the RMA 450 450
Counter fund from BOB 1,840 1,840 Total of otherJinancing Source 2,430 2,430
Total Financing Required from IDA 8,000 8,000
43
Annex 6: Implementation Arrangements
BHUTAN: Private Sector Development Project
Partnership arrangements
South Asia Enterprise Development Facility ( I F U S E D F )
1. The IFC/SEDF has collaborated o n this project f rom the inception stage. IFC/SEDF undertook the feasibility study on the IT Park component. It has also been actively involved in the Access to Finance (ATF) program in Bhutan since 2003. Leveraging o n this experience, the IFC/SEDF has contributed to the design o f the financial sector IT component. I t shall continue to collaborate in the project in the form o f technical assistance for both: (i) preparing a ‘Financial sector IT development strategic plan’ (the ‘PLAN’); and (ii) providing a bilateral complimentary TA for the IT system upgrade in BOB o n a cost sharing basis
2. Bo th a policy framework and a technical framework for the development o f electronic retail payment system in Bhutan would be the main contents o f the ‘PLAN’ to be developed in collaboration with the IFC/SEDF. Given the significant importance o f the PLAN for the future o f banlung sector in Bhutan, strong involvement, ownership, inputs f rom the RMA and ‘Financial Sector IT Task Force’ (the ‘Task Force’) supported by ‘IT Technical workmg group’ (the ‘Working would be the key elements for the success o f the project. In this regard, the IFC/SEDF will play a role as a main coordinator i s working closely with the RMA, Task Force and Working Group during the entire course o f undertaking this TA including drafting a TOR, selecting a consultancy firm, preparing and implementing the PLAN.
3, Given that this TA will be provided for the RMA in collaboration with the IFC/SEDF and the IDA, a l l three institutions would enter into a trilateral MOU by using a IFC/SEDF’s standard MOU format. The MOU would be a basis o n which a consultancy firm i s procured and the payment f rom IDA i s made. W h i l e the total cost estimate o f the TA i s approximately US$lSOK, IDA contribution o f US$5OK will be transferred to the IFC/SEDF through the RMA; afterwards the IFC/SEDF will in turn pay the consultancy firm the entire bill44.
Asian Development Bank (ADB)
4. ADB has a couple o f on-going TAs as wel l as a sector program for the support o f the financial sector development in Bhutan. The team i s maintaining a close collaboration with the ADB on the financial IT component, particularly in three areas: (i) legal and regulatory framework for the electronic payment system; (ii) development o f overall payment and settlement system in Bhutan; and (iii) strengthening the supervisory function o f RMA for the payment systems.
5. The Financial Service Ac t (FSA) i s being prepared under ADB’s Financial Sector Development Program. The F S A i s to be submitted to the National Assembly by June 2008 for enactment to strengthen the legal and regulatory framework and financial sector supervision o f the RMA. In this regard, the team shall continue to discuss the development o f the F S A with the ADB in a way to accommodate the electronic financial transactions through EFTCS and to give
43 ‘Financial Sector IT Task Force’ comprises director level staff from RMA, BOB, BNB, RICB, BDFC, DIT and BCCI, and ‘IT Technical working group’ manager level I T staff from RMA and financial institutions. 44 T h e internal accounting procedure o f the SEDF also requires that the consultants be paid from i t s own account.
44
the RMA full authority to supervise and regulate financial institutions for the e-payment operational practice.
6. In addition, the linkage between the recently developed 'Automated check clearing system' with support f rom ADB and the 'EFT Clearing System' to be developed under the PSD Project also need to be further strengthened. Loolung forward, given that financial IT development and a national payment structure should be undertaken in a holistic manner, the ADB and the Wor ld Bank would collaborate o n a payment system by sharing information and ideas, informing each other o f the project progress and exchanging constructive inputs.
Institutional and implementation arrangements
Overall project and components ' management
7. A key element for the proposed program to succeed i s to have strong institutional arrangements in place from the very inception o f the Program. Towards this end, the M O I C - the designated agency for the overall project management and coordination - shall establish an IT/ITES Promotion & Program Implementation Agency (PIA) by May 2007. The PIA will be responsible for coordinating & facilitating all the program components with the various external parties involved, including RGoB's bodies. In particular, the PIA wil l promote and facilitate the development o f IT/ITES industry, and will be responsible for implementing component 1. The Agency wil l develop i t s work plan aimed at addressing a l l the obstacles facing the growth o f the ITES sector. The P I A i s expected to be operational by August 2007.
8. PIA wil l be supervised and monitored by Department of Information Technology (DIT)/MOIC and directed and supported by the two Program Task Forces (PTFs) - the Program Task Force for IT Skills Development, and the Program Task Force for Financial Sector IT Development (see illustration below). The PTFs play a dual role. They are an integral part o f the Governing Board (GB) o f PIA, as wel l as each serving as an implementation partner of PIA for their respective program areas. Both PTFs have already been constituted.
9. The Governing Board (GB) of the PIA will be a combination o f the 2 PTFs, chaired by the Secretary, MoIC, where the Director, DIT will be the Convener o f the GB. This arrangement shall ensure that there will be a separation between the executive functions o f the PIA, which will be under the purview o f the GB, from i t s day to day administrative functions, which will under the leadership o f the Director o f the PIA. The P I A i s expected to be operational by September 2007, fo l lowing the recruitment o f the Director, who will, in turn, finalize the staffing o f P I A along with DIT/MoIC.
10. PIA will be guided by an Advisory Council (AC). The AC will comprise leading professionals f rom the local and foreign I C T industry and academia as we l l as donors and c iv i l society organizations. They are expected to provide policy and strategic direction to the PIA. The primary role o f the A C i s to provide advice on the appropriateness o f the current work program the P I A will be pursuing in response to the global trends and local ICT industry needs. The AC will also be able to give invaluable feedback and insights from the Industry on the effectiveness o f the strategies, the reception to the initiatives by the market place etc. The AC will meet typically bi-annually and will be constituted by end June 2007.
1 1. The Program Steering Committee (PSC) will be chaired by the Secretary Finance, and co-chaired by Secretary, MoIC, and the heads o f the Royal Monetary Authority (RMA), the Royal University o f Bhutan (RUB), and the Bank o f Bhutan. The PSC will meet with the P I A at least quarterly to review progress & performance. However, the Secretary, MOIC, as the
45
Chairman o f the Governing Board & Director, DIT, along with the PTFs, will have a Board meeting at least monthly to guide the PIA’S leadership and make practical recommendations where necessary. The Director, DIT, will also assist PIA with any government road blocks it may encounter during implementation. The Director wi l l grant the necessary approvals to the PIA and in particular retain the responsibility for approving al l procurement & disbursements recommended by the PIA leadership in a timely & expeditious manner, using DIT’S resources.
~
MOlC As Line Ministrv
Institutional Arrangements for the PIA
<Governing Board> monthly
I Advisory Council
I
Council of Ministers
; Executive I Order bv PM 1- - - - - - -,_ - - - - - -
Program Implementing Agency (PIA) Director Deputy Director Program Manager
I
Partners in
Donors Civil Society NGOs
Component I - Development of IT/ITES Sector
12. This component shall be managed by the PIA. Investments into the IT Park will be given priority, fast clearance by an Empowered Task Force (ETF), already constituted by the Council o f Ministers, under the direction o f an executive order by the Prime Minister. The ETF will be co-ordinated by the MoIC, and will have as i t s membership the head o f each o f the key ministries/departments relevant for new business registration and I C T investment in Bhutan. MoIC wi l l act as the single point of contact for the investor and wi l l ensure clearances are processed in a rapid and time bound manner. The ETF comprises: the Director General (DG), Department o f Debt & Aid Management; DG, Department o f industries; Director, Department o f labour, Director, Department o f Revenue & Customs; Director, Department o f Trade; Managing Director (MD), RMA; Mayor, Thimphu ci ty corporation; MD, Bhutan Power Corporation; MD, BOB; MD, BT; and Secretary General, BCCI.
Component 2 - Development of IT Skills Program
13. The IT Skills Development PTF shall oversee and coordinate the IT s lu l l s development program. It shall be chaired by Vice Chancellor o f RUB with Director Academics, RUB as the
46
Secretary o f Task Force. Other members include: Director, Ministry o f Education (MoE); Deputy Director DIT; Director Bhutan Vocational Qualification Authority (BVQA), MOHLR; Head HRD, Royal Civil Service Commission (RCSC); and one representative f rom BCCI.
Comvonent 3 - Strengthening Financial Sector through I T Use
14. Financial I T Task Force supported by the IT Working Group. Given the importance o f involvement o f a l l the relevant stakeholders in the development o f a national payment system, ‘Financial Sector IT Task Force’ (the ‘Task Force’) supported by ‘IT Technical working group’ (the ‘Working has been set up to implement the project, as wel l as to identify and coordinate financial IT development needs from financial institutions and private companies. The Task Force and the Working Group wil l have regular meetings during the course o f the project and shall remain actively involved in design and implementation o f the project, with support f rom a consultancy firm.
15. M a i n roles o f the Task Force and the Working Group include, but not restricted to: (i) making the necessary ,policy decisions relating the development o f national payment and settlement systems; (ii) participating the process o f selecting a consultancy firm; (iii) preparing and implementing the PLAN; (iv) ensuring that the payment system are designed and developed in accordance with the international norms and best practices; (v) developing the legal and regulatory framework and institutional arrangement to accommodate the new electronic payment instruments; (vi) collaborating with some o f the neighboring central banks to arrange training and seminars to promote awareness o f the latest development in the payment system; and (vii) preparing a basic and common ‘operational manual’ for electronic financial systems that defines some o f the best practices in the financial IT to reduce the operational risk.
16. Royal Moneta y Authority of Bhutan. As RMA has the main responsibility for ensuring a sound financial transaction through the national payment system, the institution has a central role in the development o f an effective national payment system, including supervision o f relevant IT development initiatives o f the financial institutions in Bhutan. Towards this end, the Financial Institutions Supervision Div is ion (FISD) o f the RMA, in collaboration with the Information Technology Divis ion (ITD), will take the responsibility for the overall project implementation and coordination o f the project activities regarding: (i) developing ‘Financial sector IT development strategic plan’; and (ii) establishing an Inter-bank Electronic Fund Transfer Clearing System.
17. Bank of Bhutan. Cognizant o f the urgent need for the financial IT development and general public perception o f i t s technological backwardness, BOB has expressed i t s full ownership and commitment to the project. ‘IT system up-gradation Task Force’, chaired by the deputy managing director, has been set up to oversee and coordinate the implementation o f the financial IT system up-gradation in BOB. The Task Force shall work closely with the consultancy firm and the IFC/SEDF during the course o f the project implementation.
Monitoring and evaluation o f outcomeshesults
18. biannually. RMA will have primary responsibility for monitoring and evaluation (M&E).
The indicators developed in the Results Framework (see Annex 3) will be monitored
45 ‘Financial Sector IT Task Force’ comprises director level staff from RMA, BOB, BNB, RICB, BDFC, DIT, BT and BCCI, and ‘IT Technical working group’ manager level IT staff from same institutions.
47
Annex 7: Financial Management and Disbursement Arrangements
BHUTAN: Private Sector Development Project
Country Issues
1. Improving public financial management and accountability i s a central part o f the reform program in Bhutan. Diagnostic studies conducted earlier by the Bank and other donors have indicated that while the core elements o f an effective financial management system are largely in place, several major challenges remain. First, there i s a need to improve the current budgeting and accounting computer systems to provide a fully l inked system that enables monthly and annual reporting at the entity and the national level. Second, external and internal audits are not as effective as they should be in ensuring that systems o f internal financial controls work well. Third, there i s a need to improve the reliabil i ty and consistency o f reporting by using the format o f the Cash basis IPSAS. Fourth, adoption o f international standards for auditing will help provide the basis for assuring competent financial reporting and transparency. Finally, there i s a need to further strengthen the capacity o f the oversight institutions, at the legislative level, to enable RGOB to meet the financial management and transparency demands arising f rom increased revenues and spending expected over the coming years.
2. With these considerations in mind, the RGOB has been pursuing several reform initiatives in the areas o f accounting and audit. Many o f the steps taken in the areas o f budget execution, monitoring and cash management have produced visible positive results, and provide a strong trajectory for project financial management improvement. The RGOB has demonstrated i t s will to continue the project financial management reforms, evidenced by the scale and variety o f actions underway. Overall, the reform program in this area i s progressing well, though substantial further effort i s needed if the RGoB i s to meet i t s goals in substance as wel l as in form.
3. in Bhutan:
Ongoing work notes the following strengths o f the existing financial management system
0 The existence o f detailed guidelines for the budgeting and monitoring o f public funds, especially at the individual transaction level. The system provides good procedural transaction control over individual items o f expenditure and receipts. All donor funds for development activities are included in the budget.
The independence f rom the Executive o f the external auditor, the Royal Audit Authority (RAA), i s wel l established and recognized. Audits are regularly carried out and the Annual Audit Report o f the RGOB i s issued on a consistent basis (usually about 12 to 15 months after the end o f the year). Annual reports are submitted to H i s Majesty the King and the National Assembly, and made publicly available.
The ongoing computerization o f a l l major payment, accounting and payroll-related functions, when fully integrated and networked, will help to significantly improve the quality, timeliness and reliability o f accounting and financial information.
Financial Management Assessment of Implementing Entities
4. The key implementation (spending) agencies have been identified as follows: . Component 1 : Establishment o f an IT ParWITES sector
48
9 Ministry o f Information & Communications (MoIC)
Component 2: Development o f Skills Development Program . > Royal University o f Bhutan (RUB)
Component 3: Strengthening o f Financial Development through use o f IT
9 Royal Monetary Authority o f Bhutan (RMA) and 9 Bank o f Bhutan (BOB)
5 . The institutional and financial management arrangements at the four agencies i s summarized as follows:
MoIC i s one o f the ten central ministries o f RGoB, with five departments - one o f which i s the Department o f Information Technology (DIT) and the key agency for the project. DIT as part o f the M o I C works within the public financial management framework o f RGoB. The financial management arrangements are based o n established RGOB’s 2001 Financial Rules & Regulations (FRR), which provide the required control framework for accounting, reporting as wel l as procedural transaction control over individual items o f expenditure and receipts. The Ministry accounts for i t s expenditures in the Budget and Accounting System (BAS) o f RGoB.
RUB was established under the Royal Charter with the University Council as the supreme governing authority. The University i s headed by a Chancellor and enjoys the status o f an autonomous body. The financial management arrangements are based on established RGOB’s FRR and a l l expenditures are accounted for in the BAS.
R M A was established under the Royal Monetary Authority o f Bhutan Act, and i s a corporate body with i t s own paid up capital, owned whol ly by RGoB. Whi le the financial management arrangements at RMA are based on established RGOB’s FRR, RMA as a body corporate maintains i t s own computerized accounting and reporting systems. RMA accounts are audited by a firm o f chartered accountants, appointed by the RAA. The RAA also conducts supplementary audits.
BOB was set up under the Royal Charter as a corporate body with paid up capital owned in part by State Bank o f India. The Bank o f Bhutan today stands as the largest commercial Bank in Bhutan with a network o f 26 branches and 3 extension counters. Whi le the financial management arrangements at BOB are based on established RGOB’s FRR, BOB as a body corporate maintains i t s own manual accounting and reporting systems. BOB accounts are audited by a firm o f chartered accountants, appointed by the Royal Audit Authority (RAA). The RAA also conducts supplementary audits.
As part o f the preparation activities, an assessment o f the adequacy o f the financial management arrangements has been carried out for RMA and BOB. T h i s was a summary assessment based on a review o f the annual audited financial statements and audit reports for the last two years and financial ru les & regulations (for RMA - BOB follows the RGoBs FRR 2001). The assessment concluded that the financial management systems at the two we l l established financial institutions are satisfactory in terms o f transactional control and accounting. A study conducted by the Bank on State Owned Enterprises and Corporate Governance (SOE-CG), January 2007 concluded that while SOE governance in Bhutan follows many aspects o f good practice, and numerous OECD Guidelines recommendations have been established, there remain
49
several opportunities to strengthen the accounting and auditing regime, by way o f clarifying the accounting and auditing standards, improving disclosure o f explicit and impl ic i t subsidies etc. The Accounting and Auditing Report on Standards and Codes for Bhutan will address these issues in more detail.
Table 1. Summary of Risk Risk
Wi th multiple implementing agencies under different sectoral jurisdictions, designing financial management arrangements for the project pose several challenges, specifically by way o f meeting the Bank’s requirement o f submission o f consolidated quarterly interim financial reports as wel l as a single project audit report.
Weak capacity leading to submission o f incomplete documentation required for traditional SOE method o f disbursement
7. Given the Bank’s knowledge and familiarity o f the government financial processes and accounting systems, n o separate assessments were carried out for M o I C and RUB. Nonetheless, lessons learnt f rom the closed and ongoing Bank financed projects have been factored into the design o f financial management arrangements for the project:
Assessr Risk
Rating M
M
Special Account exhausted due to lumpiness o f payments.
M
I
Overall bsk Rating I M
:nt and Mitigation Measures Risk Mitigation Measures Incorporated
into Project Design It has been agreed that an ITES Promotion & Program Implementation Agency (PIA ) wil l be established within MoIC, to be responsible for coordinating & facilitating a l l the program components with the various external parties involved, including RGoB’s bodies, including consolidation and submission o f quarterly/annual financial reports.. It has also been agreed that RAA will audit the consolidated project annual financial statements. The project will use interim unaudited financial reports used for project reporting as supporting documentation for purposes o f disbursement. Under this arrangement, the requirement for submitting additional documentation i s minimal. Nonetheless, the Bank will provide support until the implementing agencies are familiar with Bank requirements. Disbursements based o n interim unaudited financial reports. will a l low the quantum o f the advance to be responsive to fund requirements o f the project
H - High, S - Substantial, M - Modest, N - Negligible
Strengths & Weaknesses
8. RGOB i s familiar with management o f external funds, as wel l as utilization, accounting and reporting for the same, even though this will be the f i rs t time that any o f the four implementing agencies will be implementing a Bank financed operation. The financial management arrangements at M o I C and RUB are based on established financial management arrangements o f RGOB. RMA and BOB as state owned financial institutions also generally fo l low the financial rules o f RGoB. The Financial Institutions Act, 1992 and the Prudential Regulations, together with the Companies Act, provide fairly sound legal and regulatory framework for a l l financial institutions in Bhutan and include the requirements for each financial institution to have an audit committee.
50
Weakness Country Level B A S i s s t i l l new and the accounting staff i s unfamiliar with the system. The system i s not networked on a real time basis and information i s transferred on an offl ine basis, often resulting in delays in consolidation o f financial statements. T h i s severely impairs the state’s abil ity to prepare in-year budget reports required to make meaningful management decisions.
Resolution
Evidence f rom the external audit reports, identifying a large number o f irregular transactions, suggests that the transactional controls are often not complied with and are circumvented.
Internal audit mechanism i s not effective.
Internal audit function exists in al l ministries, but i t s operation i s very limited. With a present strength o f ten internal auditors placed in six ministries, the size o f the function i s not commensurate with the requirement. In addition, there i s n o uniformity in the organizational structure - in some ministries they report to the Minister as wel l as the Secretary. For the internal audit function to be effective RGOB needs to ensure that there i s an appropriate structure particularly with regard to professional independence; there i s sufficient breadth o f mandate, access to information and power to report; staff trained in the use o f professional audit methods, including risk assessment techniques.
I t has been agreed that the internal auditor designated to each o f implementing agencies will review the project activities in such a manner that each o f the spending uni ts will be covered at least once every financial year. I t has also agreed that any exceptional internal audit reports on project activities will be made available to RAA and IDA during project review/supervision.
RGOB has embarked o n an ambitious B A S user training plan for dzongkhag and geog level, formed a B A S Core Group to understand the user needs and work o n upgrading the BAS.
At the project level, consolidated interim unaudited financial reports wil l be prepared on a quarterly basis. Quarterly interim unaudited financial reports wil l f o rm the basis for withdrawals f rom the IDA Grant. The external audit reports assign the origin o f irregularity to individual officers. The control mechanisms (along with the requirement o f obtaining clearances f rom the RAA for important career developments) help in the follow-up processes o f elicit ing responses, resulting in adjustments or recoveries. The increasing reduction in the total irregularities in monetary terms from the earlier years suggests that this additional control mechanism i s more effective. Developing an appropriate institutional framework for the internal audit function in RGOB i s an identified area o f reform. Recent developments include the development o f a Mission Statement and Code o f Ethics for the internal audit function. Going forward, RGOB i s working to determine the TA requirements, which can be financed from the follow-on IDF Grant.
51
Weakness Financial management capacities are noted to be weak. There i s also a shortage o f capable and experienced accountants in RGOB.
Financial Management Arrangements
Resolution The project i s designed to use RGOB’s own accounting systems (as also for RMA and BOB) and will thus not require additional staff. Staffing arrangements in place are considered adequate for the purposes o f the project.
9. The guiding principles for designing the financial management arrangements for the project are to use the current RGoB financial management systems, to the extent feasible, as these are considered satisfactory and meeting the essential fiduciary requirements. K e y aspects o f financial management are as follows:
10.
All payments to contractors, consultants and suppliers are considered as expenditure, other transfers inter departments or spending un i ts are considered as advances; The project interim financial reports will encompass the total project and thus reflect a l l project activities, financing, and expenditures, including counterpart funds and funds f rom other donors. Thus, the format and contents o f the financial reports have been designed to reflect contributions by way o f third party payments for technical assistance made by IDF/SEDF and counterpart funding by B o B / R M A under Component 3.
Standard Books o f AccountsLRecords will be maintained at each o f the implementing agencies. A register o f f ixed assets, indicating assets created/acquired through the project will also be maintained. Particular attention will be given to maintenance o f works and contractor’s registers. The PMU shall also be responsible for checking payment certificates submitted by the contractors/suppliers and certifying verified payments. Security deposits deducted fi-om the contractor bills but transferred to temporary suspense accounts, pending releases will be considered as expenditures eligible for disbursements. Penalties collected from contractors/suppliers as liquidated damages under the project will be adjusted from expenditures reported under the project.
Budgeting: For Component 1 and 2, the project will be budgeted for as separate lines under the MoIC and RUB in a manner that will a l low for al l project-related expenditures to be separately identified, accounted and reported in the consolidated Budget and Accounting System (BAS) reports. For Component C, the project wil l be budgeted for by RMA and BOB under separate lines in a manner which will allow for the project expenditures to be easily identified. At RGoB level, these expenditures will be budgeted for under Common Public Expenditures (CPE) as grants and recorded as expenditures on fund releases. Each o f the four implementing agencies will be responsible for preparing and consolidating their Annual Work Plans by December each year for the following financial year, in order to feed the information into RGOB’s budget cycle. This integration will allow the B A S reports to provide information o n the project spends by components/sub components in sufficient detail to prepare quarterly interim unaudited financial reports required for financial monitoring and preparation o f withdrawal claims f rom the Grant.
11. Funds Flow, accounting and Disbursement Arrangements: Project funds wil l be deposited in advance into the designated account maintained in Ngultrum to be opened at the Bank o f Bhutan. The designated account will be segregated and used only to deposit advances for the project and to make payments for eligible project expenditures. The designated account will be operated by the DADM in MOF. Funds will be withdrawn fi-om the designated account on a quarterly basis and transferred as an advance to the Government Budget Fund Account by
52
DADM. These transfers are based o n requests f rom the implementing agencies for project activities. Based on the approved requests, the DPA in the MOF will release funds to the respective LC accounts (bank accounts for RMA and BOB) o f the implementing agencies. A L C i s DPAs authorization to the Bank o f Bhutan (RGOB’s bankers) t o honor payments f rom each implementing unit up to the limit set in the LC.
12. The implementing agencies will issue checks against the L C to meet the project expenditures and account for the same in B A S (this applies to M o I C and RUB only). RMA and BOB will account for the project receipts and expenditures in their accounting systems. On a quarterly basis, the implementing agencies will submit a copy o f the financial report generated f rom the B A S (and their own accounting systems) to the PIA, MoIC. The PIA will consolidate the information and prepare financial management reports, the fo rm and contents o f which have been agreed with IDA. Replenishments into the Designated Account will be based on interim unaudited financial reports and wil l be processed by DADM o n a quarterly basis. The Inter im unaudited financial reports will report on activities o f the project and provide information on expenditure made in the previous quarter and forecast for two subsequent quarters. Quarterly disbursements would be made based on these financial reports, providing funds for two subsequent quarters after adjustment for past disbursements.
Figure 1: Funds & Information Flow Arrangements for IDA funds
53
13. The project envisages third party payments made by IFC/SEDF for bilateral technical assistance and capacity building program under Component C (RMA and BOB), partly financed by the two financial institutions. IFC wil l directly engage consultants for the purpose and make payments, seeking a reimbursement f rom RMA and BOB for their counterpart shares in the total bilateral TA costs. Whi le BOB’S share will be met f rom their counterpart funds, the RMA share i s eligible for funding under the IDA grant. For the purpose, RMA will fo l low the standard fund f l ow and reporting procedures.
Figure 2: Funds & Information Flow Arrangements for bilateral TA assistance/capacity building funds from IFC/SEDF
Send payment
$
Technical Assistance Consultants
. FundFlow I _ ._ ._ ._._._._._._ Information Flow *u 14. Internal Control and Internal Auditing. RGOB’s 2001 Financial Rules & Regulations (FRR) provides the required control framework for procedural transaction control over individual items o f expenditure and receipts. The FRR also provides detailed guidance o n internal controls including safeguarding o f cash, control over inventories, segregation o f duties and delegation o f authority for approvals and operating the bank accounts. It has been agreed that the internal auditor designated to each o f the implementing agencies will review activities o f the project in such a manner that each o f the spending units will be covered at least once every financial year. I t has also agreed that any exceptional internal audit reports o n project activities will be made available to RAA and IDA during project reviewhpervis ion. No separate TORS for internal audit were considered necessary.
15. Retroactive financing: RGoB proposes retroactive financing o f SDRl3,OOO (USS20,OOO equivalent) to cover various procurement and advances for the works to be incurred before the effective date o f the grant.
16. Financial Reporting: Information on project related expenditures will be compiled by the PIA i.e. for payments made by M o I C and RUB on the basis o f B A S generated financial reports and financial reports submitted by RMA and BOB to the PIA. This information wil l be uti l ized to prepare quarterly Inter im un-audited financial reports for the project. The interim un-
54
audited financial reports will report opening and closing bank balances, expenditure incurred during the period and the level o f advances and will form part o f the Project Reports, required to be submitted to IDA within 45 days o f close o f each quarter.
Implementing Agency Ministry o f Information and Communications, RGoB
17. Auditing: Consolidated annual project financial statements will be audited each year by the Royal Audit Authority, which i s the Supreme Audit Institution in Bhutan and acceptable to IDA. The format o f the annual financial statements will consist o f consolidated annual financial statements o f the project along with a statement reconciling credit disbursements, as per claims submitted to IDA and balances available in the designated Account, as reported in the Inter im unaudited Financial Reports wel l as a management letter. The PIA wil l be responsible for submitting the consolidated annual project financial statements to RAA by September 30 o f each financial year. The consolidated annual financial statements submitted by the P C U for purposes o f audit will include an assurance f rom the management on the correctness, completeness and conf i rm the use o f project funds for intended purposes. The Terms o f Reference for the audit have been prepared in agreement with the Bank and agreed with the RAA. The audit reports shown below will be monitored in the Audit Reports Compliance System.
Audit Auditors Annual Project Financial Royal Audit Statements, including Authority designated account
Supervision Plan
18. F rom a financial management perspective, the project wil l need regular supervision. This wil l be done through a combination o f periodic desk reviews and f ie ld visits. Special focus will be given to building o f staff capacity and timeliness and quality o f financial information.
55
Annex 8: Procurement Arrangements
BHUTAN: Private Sector Development Project
General
1. The proposed project has three main components in which IDA share would be U S $ 8 mill ion. The component 1 focuses o n the development o f IT/ ITES sector by establishing an IT Park and related infrastructure and IT promotion services. Component 2 covers the development o f IT s k i l l s program whi le the third component focuses on the strengthening the financial sector through IT deployment.
2. Procurement under Component 1 covering IT Park, under a PPP model, i s complex and involves selection o f an IT Park developer through an international competitive selection process. The IDA share o f the IT park infrastructure component will be US$4 mill ion, along with U S $ 1 mi l l ion for the other sub-component covering IT promotion. Procurement under Component 2 covering s k i l l developments will account for IDA’S share o f US$ 2. Procurement under Component 3 for strengthening the Financial Sector through IT use will be the remaining U S $ 1 mill ion. IFC/SEDF wil l fund U S $ 100,000 to hire a consultant to develop the financial sector development strategy plan. Bank o f Bhutan (BOB) and Royal Monetary Authority ( M A ) will provide counter part funds for the balance cost o f component 3.
3. Procurement for the proposed project would be carried out in accordance with the Wor ld Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated October 2006 and “Guidelines: Selection and Employment o f Consultants by Wor ld Bank Borrowers” dated October 2006, and the provisions stipulated in the Financing Agreement. The general description o f various items under different expenditure category i s described below. For each contract to be financed by the Grant, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, pr ior review requirements, and t ime frame will be agreed between the Borrower and the Bank project team in the Procurement Plan by appraisal. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. The updated plan shall be approved by the Bank.
Procurement of Works
4. Works procured under this project, would be a part o f scope o f the IT park developer. This developer will be selected through international competitive bidding. The said entrepreneur shall then be free to procure goods, works and services required for the facil i ty f rom eligible sources, following i t s own procedure. The project envisages that RGOB may be required to provide certain enabling works l ike road access, sewerage connections, electricity substation etc. Department o f Information Technology (DIT) will arrange such enabling works f rom nodal bodies l ike Thimphu Ci ty Corporation for sewerage, Bhutan Power Corporation for electricity connection etc., as per norms o f utility providers. However, it should be possible for the IT park developer to arrange for the enabling works directly f rom the nodal agencies with the support of DIT. In such an event, this aspect will be covered in the PPP engagement documents. Development o f distance learning infrastructure in component 2, may involve some c iv i l works in the form o f buildingdaddition to existing facilities. T h i s will be handled by Royal University o f Bhutan (RUB). Any procurement carried out by RUBDIT, will be done using the Bank’s
56
Standard Bidding Documents (SBD) for al l ICB and National SBD agreed with (or satisfactory to) the Bank. The N C B conditions applicable for Bhutan are as follows:
National Competitive Bidding (NCB) Provisions
5. All N C B contracts shall be awarded in accordance with the provisions o f Paragraphs 3.3 and 3.4 o f the Guidelines for Procurement under IBRD Loans and IDA Credits, (October 2006). In this regard a l l N C B contracts to be financed f rom the proceeds o f the Grant shall fo l low the fol lowing procedures:
a.
b.
C.
d.
e.
f.
g*
6.
Only the model bidding documents for NCB agreed with the bank shall be used for bidding.
Invitations to bid shall be advertised in at least one widely circulated national daily newspaper, at least 30 days pr ior to the deadline for the submission o f bids.
N o special preference will be accorded to any bidder either for price or for other terms and conditions when competing with foreign bidders, state owned enterprises, small-scale enterprises or enterprises fi-om any given state.
Except with the prior concurrence o f the Bank, there shall be n o negotiation o f price with the bidders, even with the lowest evaluated bidder.
Re-bidding shall not be carried out without the pr ior concurrence o f the Bank. The system o f rejecting bids outside a predetermined margin or bracket o f prices shall not be used.
Extension o f bid validity shall not be allowed without the pr ior concurrence o f the Bank: (i) for the f irst request for extension if it i s longer than four weeks; and (ii) for al l subsequent requests for the extension irrespective o f the period {such concurrence will be considered by the Bank only in cases o f Force Majeure and circumstances beyond the control o f the Purchaser/Employer} .
Rate contracts entered into by the state will not be acceptable as a substitute for N C B procedures. Such contracts will be, however, acceptable for any procurement under Shopping Procedures.
Procurement of Goods: Goods procured under this project would include: procurement o f distance learning infrastructure l ike VSAT, networking hardware etc, under Component 2 and I C T goods for financial sector up-gradation under component 3. Procurement under component 1 wil l be undertaken by RUB. The procurement under component 3 will be undertaken by RMA and BOB for the respective goods and equipment. Component 3 may include ATM, networking hardware, computers and accessories and customized software as wel l as general purpose software. The procurement will be done using Bank’s SBD documents. Considering the nature and sophistication o f the procurement, application o f NCB i s not envisaged. During the appraisal o f the project, the concept o f Project Implementation Agency (PIA) emerged to provide technical guidance and coordination among different components. DIT plans for procurement o f computers, laptop, printer etc and also a vehicle to the PIA. Procurement o f vehicles are not normally allowed by RGOB who recommends use o f hired vehicle. In case a vehicle i s permitted to be procured, i t will be through State Trading Corporation o f Bhutan who consolidates al l vehicle purchase o f RGOB for better control.
57
7. Procurement of non-consulting services and under BOO/BOT/BOOT, concessions and similar private sector arrangements and performance-based procurement: The selection o f IT park developer will be the key component. The developer will be selected fol lowing international competitive bidding acceptable to the Bank and in accordance with the provisions o f paragraphs 3.13(a), 3.14 and 3.15 o f the Guidelines for Procurement under IBRD Loans and Credits issued by the Wor ld Bank in October 2006. Since the Bank does not have standard bidding documents for this type o f procurement, the Bidding Documents will be prepared by the Borrower in consultation with the Bank and must be satisfactory to the Bank. The Borrower must al low a l l eligible bidders f rom eligible count ies to bid, and will not grant domestic preferences. RGOB has engaged a consultant f rom i t s own resources to develop a bidding document for selection o f the IT Park developer.
8. Selection of Consultants: The project envisages selection o f two consultants for developing the Financial Sector IT Development Strategic Plan under Component 3 for RMA and BOB which will be selected jo in t ly by IFC/SEDF. The funding will be for RMA related consultancy. The project will bear partial cost o f US$ 50,000 (balance o f US$lOO,OOO funded by IFC/SEDF). N o other major hiring o f consultant i s expected except engagement o f some individual specialists to cover manning o f the PIA. The Director for the P I A may be an International Individual consultant init ially to be engaged for two years and will be supported by two local individual consultants. Short l i s t s o f consultants for services estimated to cost less than $200,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.
9. Training: Under component 2, the project will procure various specialized services. These will include: Generic Skills Developments for IT enabled services, assessment o f graduates, training need analysis, entrepreneurship development program etc. Whi le i t may be possible to source some o f the specialized services competitively, for reasons o f quality and expediency, the sourcing may be o n single source basis covering Universities, Government Research institutions, Training Institutions, and any special organizations. All single source selection would have to meet the Guidelines and will have to be prior cleared with the bank o n case to case basis.
10. The project would cover cost sundry items, office rentals and utilities, vehicle hire and maintenance and fees payable to utilities for electricity, sewerage , license fees and any other project implementation related expenses, except cost o f Borrower’s c iv i l servants would be procured using the implementing agency’s administrative procedures which were reviewed and found acceptable to the Bank.
Operational Costs:
Assessment of the agency’s capacity to implement procurement
1 1. Selection o f IT park developer will be handled by Department o f Information Technology (DIT) under M O I C . Procurement in DIT i s handled by AFD (Administration and Finance Department) who has a Procurement Officer in the team. DIT undertakes procurement o f complex telecommunication equipment. The team has handled recent selection process o f Private partner in Bhutan Telecom. I t was indicated that the team had developed the bidding process including managing the final auction on i t s own. RUB will handle procurement under sk i l ls development and also development o f distance learning infrastructure. RUB has handled procurement under the current Bhutan Education project. Procurement under Component 3 (strengthening IT in RMA and BOB) will be handled by RMA and BOB. B o t h the organizations fo l low RGOB’s Procurement manual which i s under modification with Bank’s assistance. The manual i s generally acceptable. Procurement under DIT, RUB, BOB and RMA i s managed by Procurement Officers who are found capable as evidenced in other Bank funded project.
58
12. An assessment o f the capacity o f the Implementing Agency to implement procurement actions for the project has been completed o n receipt o f filled up questionnaire. The organizational structures for implementing the project covers dedicated project staff responsible for procurement and are adequately supported with adequate delegation.
13. Most o f the issues/ r isks concerning the procurement component for implementation o f the project have been assessed at the time o f appraisal. The procurement staff who will handle procurement are not familiar with Bank procedures and also standard bidding documents although they are very conversant with RGOB procedures. The knowledge gap i s small and can be bridged by training. The staff would be provided training in Bank procedures immediately after effectiveness o f the project. The procurement o f IT park developer will be complex. DIT will be using bank’s standard documents and the selection process will be prior reviewed. Further DIT has handled complex procurement earlier o n i t s own .These are expected to reduce the r isks to a great extent. However, the procurement process would need close monitoring and advise at a l l stages in procurement.
14. The overall project risk for procurement i s Medium at appraisal.
15. The Borrower, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team o n April 12, 2007 and i s available at respective implementing units. I t will also be available in the Project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.
Frequency of Procurement Supervision
16. In addition to the pr ior review supervision to be carried out f rom Bank offices, the capacity assessment o f the Implementing Agency has recommended half-yearly supervision missions to visit the f ie ld to carry out post review o f procurement actions
59
Annex 9: Economic and Financial Analysis
BHUTAN: Private Sector Development Project
Introduction
1. The analysis focuses o n the financial and economic feasibility o f the IT Park to be supported by the PSD Project. The IT Park i s designed to be developed and managed by a private developer with i t s own investment, while the government makes the land available for the IT Park as an equity contribution and ensures a fixed annual revenue stream for the private developer by leasing in about 10,000 SFT o f space in the IT Park. In this context, the financial analysis has been carried out f rom the perspective o f the government: i t identifies the project’s money in f l ow and outflows to and f rom the government stemming from development and management o f the IT Park. Economic analysis looks at the project f rom the perspective o f the entire society and measures the effects o f the project on the economy as a whole.
Project costs and benefits
2. The financial analysis considers the expected government income generated from the IT Park as ‘financial benefits’ and the expected expenses that the government needs to pay during the course o f development and management o f the IT Park as ‘financial costs’. The model o f the economic analysis also takes into consideration employment generation and net increase in exports as main the ‘economic benefits’.
. Financial Benefits: (i) rental o f the incubation center; (ii) rental o f the shared technology center; (iii) rental o f the data center; and (iv) tax revenues generated f rom the business in the IT Park. Financial Costs: (i) provision o f the land as an equity contribution; (ii) development o f ancillary infrastructures such as water, power and connectivity; (iii) a shared technology center; (iv) incubation center; and (v) labor cost. Economic Benefits: (i) employment generation inside the IT Park; (ii) employment generation outside the IT park; and (iii) net increase in exports.
. Basic assumptions
3. The fol lowing set o f basic assumptions have been made for the analysis:
(i)
(ii)
(iii)
(iv)
Constant prices. All the data in the financial projections are based on constant prices. Impact o f inflation has not been taken into consideration in the projection; Time horizon. The analysis has been undertaken for a time horizon o f 20 years with 2 years o f the development period and 18 years o f the operation period; Discount rate. In the analysis, discount rate has been set at lo%, the interest rate at which the government can borrow from local commercial banks for 20 years. Depreciation. Fixed assets are depreciated using the straight-line method over the 40 year Period. Provision o f the land as an equity contribution i s also considered a capital expenditure to be amortized over 40 years; Dividend to the government. While the government provides the land for the IT Park as an equity contribution, the analysis assumes that the government wil l not receive dividend income. Speed to the full capacity. The IT Park i s not expected to attain full capacity utilization immediately after commencing production. I t i s assumed that on average the IT Park wil l have an average capacity utilization o f 25% each year, consequently reaching to the full capacity in fourth year after commencing production;
(v)
(vi)
60
Tax revenues. Tax revenues generated through the IT Park include sales tax, income tax from labor employed in the IT Park and the supplier industries, and corporate tax on the industries in the IT Park. Tax revenues are assumed to be US$0.04 per US$l.OO value o f total p r o d ~ c t i o n ; ~ ~ Tax exemption and relie$ I t i s assumed that taxes are exempted for in i t ia l 3 years and reduced by 50% for the following 3 years; Employment generation inside the Park. An area o f approximately 50,000 SFT i s expected to be developed for the building spaces with a space for one person being about 50 SFT. Considering corridors and common facilities, i t i s assumed that the IT Park would generate 700 jobs at the full capacity; Revenue generation per person. According to Nasscom-McKinsey Report (2002), revenue generation per seat in the business process outsourcing (BPO) services sector in India was estimated between US$17,000 - US$24,000. Revenue generation per person in the IT Park in Bhutan i s assumed to be US$17,000; Employment generation outside the Park. Empirical studies4’ have shown that each new position in the BPO/IT industries’ generates 3 further jobs in the rest o f the economy; and Net increase in exports. I t i s assumed that 80% o f the total production will be targeting export markets. The value o f net increase in export excludes the value o f imported materials, labor cost and other operational expenses.
Financial Benefits Rental o f incubation center Rental of Shared Technology center Rental of data center space Tax Revenue
Financial Costs Sub Total
Land provision (equity contribution) Ancillary infrastructure Shared technology center Incubation Center
Labor cost Leasing-in the space
Sub Total Net financial cash flow Cumulative financial cash flow
Summary of Results
4. Park project generate a financial IRR o f 6.76%.
Financial Analysis. The analysis, which i s based on a discount rate o f lo%, indicates that the IT
46 McKinsey Global Institute. 2003. “Offshoring: I s it a win-win game?- India example.” 47 (i) According to the Nascom-Mckinsey report 2005, IT/BPO industry in India has created 700,000 direct jobs with 2.5 million indirect employment opportunities; (ii) ‘OFFSHORE TO SRI LANKA (2006)’ published by the World Bank also says that ‘There i s evidence that since many I T related jobs are relatively well paid, each new position generates further 3 jobs in the rest of the economy - a highly desirable impact that does not accompany the development of low-end manufacturing jobs.’
61
5. Economic Analysis. The economic analysis indicates that the IT Park project yields an economic NPV o f US$30.6 mi l l ion with an economic IRR being 125.2% for a period spanning 20 years, which means that this project i s economically viable enough to generate employment and increase net exports.
Economic analysis (Unit: Us Thousand)
Economic Benefits Financial Benefit
Economic IRR I 125.2% Economic NPV I 30,599.1
62
Annex 10: Safeguard Policy Issues
BHUTAN: Private Sector Development Project
1. The screening category o f the project i s B. The safeguard policy o n Environmental Assessment (OP/BP/GP 4.01) i s the only Wor ld Bank safeguard policy to be triggered by the project. The results o f the social screening indicate that n o acquisition o f privately owned land or displacement o f people i s anticipated under the project, including any land for access roads or ancillary infrastructure. Hence the OP 4.12 on Involuntary Resettlement and OP 4.10 on Indigenous Peoples are not triggered by the project.
2. The Environmental Assessment pol icy i s applicable given the construction and operation o f the IT+ Park facility. The IT Park i s expected to have a few buildings for office, training facilities and conference rooms, technology center and other ancillary buildings. The IT Park will have n o manufacturing facilities. Hence potential environmental impacts o f the IT Park are not expected to be significant and could be easily managed with proper design o f the facilities and management o f IT Park operations. An environmental screening o f the proposed IT site that was conducted by M o I C during project preparation and Bank safeguard staff visit to the site suggests that the land identified for this purpose in Thimphu i s stable and has a gentle slope (10-15 degrees) and shows n o s igns o f scars or erosion. I t i s not located in an environmental sensitive location. The construction o f the IT Park will also wi l l not entail additional road and power access infrastructure as the proposed IT site has direct road and power access available.
3, Methodology for Addressing Safeguard Issues: Whi le the potential environmental impacts are not expected to be significant, and are largely expected to be construction related. The identification o f such impacts i s possible only after the private developer has been selected and the design and lay-out o f the facilities in the IT Park has been determined. The private developer i s expected to be identified through a competitive selection process in the second year o f project implementation. The IT Park developer would be responsible for conduct o f an EA and EMP that would be satisfactory to the Bank. The EMP will ensure that a l l environmental issues are considered in the design and operation o f the IT Park and i t s facilities. The E M P for the IT park and associated infrastructure should ensure the incorporation o f solid and liquid waste disposal facilities, drainage and erosion control measures and other environmental management considerations (that are identified during the EA process) as part o f the design and operation o f the IP Park and i t s facilities as wel l as the management o f construction related impacts. RGoB has Environmental Assessment policies and procedures that are equivalent to that o f the Bank’s and the EA and EMP will have to comply with these policies and. The Bank will review and clear the EA and EMP documents.
4. Specifically the EMP will include the following:
(a) identification o f site specific construction related environmental issues related to the IT Park and associated infrastructure and corresponding measures to manage any such impacts as wel l as improve the environmental conditions within the site; and
(b) integration o f appropriate service facilities in the design o f the IT Park in particular measures for solid and liquid waste disposal, water supply, drainage and erosion control.
63
Annex 11: Project Preparation and Supervision
BHUTAN: Private Sector Development Project
Planned Actual PCN r e v i e w 12/14/2006 Initial PID to PIC 0 1/3 1/2007 Init ial I S D S to PIC 01/25/2007 Appra isa l 04/02/2007 Negot iat ions 04/24/2007 Board/RVP approval 06/2 0/2 0 07 Planned date o f effectiveness 09/15/2007 Planned date o f m id - te rm rev iew 03/01/2009 Planned closing. date 06/30/2012
K e y inst i tut ions responsible for preparat ion o f the project : The Wor ld Bank Group - IDA and IFC/SEDF
Bank s ta f f and consultants who w o r k e d on the pro iect included: N a m e T i t l e Unit Asya Akhlaque Senior Economist (Task Team Leader) SASFP Randeep Sudan B. Man ju Sri Kumar Haththotuwa Kyoo-Won Oh Syed Hye Ma lco lm Jansen Afshan H. Khawaja Debabrata Chakraborti Manvinder Mamak Philip Beauregard Sudhakar G. Kaveeshwar Tenzin Dolma Norbhu Jose Antonio Garcia Garcia Luna Kashmira Daruwalla Karma
Senior ICT Policy Specialist Senior I C T Policy Specialist Financial Sector Specialist Program Assistant, Bhutan Senior. Environmental Specialist Senior Social Scientist Senior Procurement Specialist Senior Finance Management Specialist Senior Counsel Manager Senior I C T Policy Specialist Financial Sector Specialist Senior Procurement Specialist Senior Financial Markets Specialist
CITPO SASFP SASFP SASFP SASES SASES s m s S A R F M L E G M S ISGEA CITPO CGFPS CITPO IFC/SEDF
Wendy Werner Business Enabling Environment IFC/SEDF Bank funds expended to date on project preparation:
1. Bank resources: US$367.5K* 2. Trust funds: 3. Total: US$367.5K
Estimated Approval and Supervision costs: 1. Remaining costs to approval: U S $ 4 0 K 2. Estimated annual supervision cost: U S $ l OOK
*Note: The reason behind the high project preparation cost i s that an earlier PCD was prepared in 2003 with an IDA allocation o f US$15 mil l ion. The project was delayed at the request o f the RGoB. By the time, the RGOB sent a request in 2006, the project had to be redesigned as most o f the original components were no longer relevant, and the IDA allocation was reduced to U S 8 mil l ion.
64
Annex 12: Documents in the Project File
BHUTAN: Private Sector Development Project
A. Project Feasibility Study
1. IFC/SEDF: Bhutan IT Park and Distance Learning Center Feasibility Study, April 2006.
B. Bank Staff Assessments
1. Wor ld Bank: Do ing Business Report, 2007 2. Wor ld Bank: Bhutan Private Sector Survey, December 200 1 3. Wor ld Bank: e-SAR; The South Asia Region I C T strategy and implementation plan, March 2005 4. Wor ld Bank: Country Assistance Strategy for the Kingdom o f Bhutan, November 2005 5. Wor ld Bank: Aide Memoire PSD Project Re-design mission, October 2006 6. Wor ld Bank: Aide Memoire PSD Project Pre-appraisal mission, February 2007 7. Wor ld Bank: Project Concept Note, December 2006 8. Wor ld Bank: ISDS, December 2006
C. Other
1. 2. 3. 4. 5. 6. 7. 8.
9.
RGoB, Div is ion o f Information Technology: ICT Master Plan, June 200 1 RGoB: The Ninth Five-Year Development Plan, 2002-2007 RGoB, Div is ion o f Information Technology: Bhutan ICT Policy and Strategy A D B : Bhutan Financial Sector Review and Strategy, March 2002 ADB: Financial Sector Development Program, November 2006 BIS: Core Principles for Systemically Important payment Systems, January 200 1 BIS: General guidance for national payment system development, January 2006 PriceWaterhouseCoopers and InfoDev: International Best Practice for Establishment o f Sustainable IT Parks: Review of experiences in select countries, including three country studies, August 2006 McKinsey Global Institute. 2003. “Offshoring: I s i t a win-win game?- India example.”
65
Annex 13: Statement of Loans and Credits
BHUTAN: Private Sector Development Project
Difference between expected and actual
disbursements Original Amount in US$ Millions
Project ID F Y Purpose IBRD I D A SF GEF Cancel. Undisb. Orig. Frm. Rev’d
M o s t recent est lmate ( la test year avai lable, 1999-05)
Poverty (%of popuiatio n below natio nal po verty line) Urban population (%of totalpopuiation) 11
Childmalnutrition (%ofchi/drenunder5) B
Life expectancyat birth (pars) 64 Infant mortality(per IOOOlive births) 67
Access to an improvedwtersource (%ofpopulation) 62 Literacy(%ofpopulation age a+) Gross primaryenrollment (%of school-age population)
Male Female
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
1985 1995
GDP (US$ biiiions) 0.18 0.30 Gross capital formation/GDP 42.8 45.7 Exports of goods and services1GDP M.7 38.0 Gross domestic savingslGDP 7.3 40.6 Gross national savingsiGDP -12.4 43.4
Current account balanceIGDP -42.2 -113 Interest payments1GDP 0.0 0.9 Total debt/GDP 5.0 35.2 Total debt service/exports 0.0 0.9 Present value of debt/GDP Present value of debt/exports
1985-95 1995.05 2004 (average annual gro vdh) GDP 5.7 6.9 7.5 GDP per capita 3.0 3.9 4 9 Exports of goods and services 6.8 3.6 7.6
S o u t h LOW- As la i ncome
1,470 684
1005
17 2.1
29 63 66 45 64 60 10 16 0 5
2004
0.73 61.0 28.2 47.7 53.4
-7.3 0.7
61.4 6.0
81.6 299.8
2,353 580
1364
19 2.3
31 59 80 39 75 62 0 4 10 99
2005
0.84
2005 2005-09
5.6 3.3
3evelopment diamond'
Life expectancy
T GNI Gross
capita enrollment per w a r y
I
Access to imDrOved wtersource
---Bhutan Lo wincome gro up
I E c o n o m i c rat ios.
Trade
T
Indebtedness
Lowincome group
STRUCTURE o f the ECONOMY
(%of GDP) Agnculture Industry
Services
Household final consumption expenditure General gov't final consumption expenditure Imports of goods and services
M anufactunng
(average annualgrovdh) Agnculture Industry
Services
Household final consumption expenditure General gov't final consumption expenditure Gross capital formation Imports of goods andservices
M anufactunng
1985 1995 2004
446 336 258 230 344 379
5 8 0 8 7 7 323 320 363
694 410 326 233 8 2 8 8 502 429 415
1985.95 1995-05 2004
2 9 3 2 2 5 0 4 8 4 7 3 8 2 3 7 4 6 4 9 8 3 9 5
-24 t 2 -3 3 5 2 8 7 0 2 7 0 147 0 7 6 5 7 0 9 4
IGrowth o f expor ts and Impor t s (%) I 20
10
0 5
-Exports d l n p O r t S
Note:2005 data are preliminaryestimates. This table was producedfrom the Development Economics LDB database. 'Thediamonds showfourkeyindicators in thecountry(in bo1d)comparedvdth its income-groupaverage tfdata aremissing, thediamondvd
be incomplete.
67
$985
r
70
"
Annex 15: Royal Government of Bhutan’s Letter of ICT Sector Policy BHUTAN: Private Sector Development Project
MINISTRY OF FINANCE ROYAL GOVERNMENT OF BHUTAN
Tashichho Rzong Thirnphu- Bhutan.
Mr. Preful C. Fate1 Vice Resident, South Asia Region The World Bank 1818HSb#&N.W. WoshingtoR D+C. 20433 U A A
Dear Mr. Patch
tcnm of KTSsclor Poticy for the Bhutan Prlvdc Stcror Devdopmmt ypso/ proiCa
On behalf of the Royal Gova-mmt of Bhutan (‘RGoB’), we would like 10 wnv& our
As YOU arc a w n , one of the key pllars of the RGOB’s Ninth Five-Yenr Wan (zO02-2aOS) - which also serves as the Povcrty Reduotim Strategy Paper OpRSP) - envisages reduotion an povnty and pornotion of sustainsbb economio growth by strengthening t h role of the private seetor. With employment gemation emerging as a kcy ohalltags for Bhutan, the private sccta has been dwignated BS thc ‘engine of grovdh’ fwcrtatingncw job oppommitiea, As articulated in the Private Sector Policy md Stnuem p a p , thc RGoB is fo1lO;arirtg o two-prong strategy: (i) improving the overall business environment by undertaking 0ross-sa;tord polby reforma; and (ii) frcilitating the growth of niche or priori& mm as potential sources of growth and unploynrcat gcmr%tion.
Ovw the last few years, Ihe Covcnunent has undertakan a number of important poticy and tnsttrutional r e f m that arc cxpccted to bring significant inptonmenr in the busliness mvironmmt. The World Bank hw supported implementation of ttre first phase of policy reforms for PSD growth through a first Development Policy Grant (DP(3), analytical work, and technics4 rrssistmm. The DPG supports RGoB‘s efforts in the arcas of labor, FDI and regutatmy policy reforms. Sam of the reaults we already visible through incnasod m>l, flexible labor ngulations, and a reduction in business start-up days. These action0 drmonsh& the GovmrnCnt’s oammimrmt to sceelerote poverty reduction through privatc-sector led growth and job creation,
RGoB i s seeking support for the dcveiopmont of prfo&y scctolrs as a potential sou& of growth. Informatton and communicP8ions technology (Icrr) is identified w one such priority sector - both 8s an industry and as a dcvclopmcnt enabler, Md to strye as an atboctive and viable potentid source of employment creation, parbculwty to counter a p d n g prclblcm of youth uncmployrncnt. With its small population spread o m a difficult, mountarnous terrain, o c ~ e s s to globat markets,
sincac appreciation to the World Bank for its continumg support for the dewlopmart of Bhutan.
technology and services are considered by RGbB ~f cssLntial for its development tfforts, The proposed Private Sector Development Project (the ‘PSD Project’) underpins our efforts ta strengthen the IGT sector by promoting enterprise development in the iT/ITES indusay, and by expandlog IT application to the financial actor, The ICT sector also holds promiw for improving productiviry and increasing competitiveness in existing
To underline Bhutln’s commitment to the proprn, the Honorable prime Minister of RGoB, Lyonpo Khandu Wangchuk issued m Executive Order on March I 2007, which decrees the tstabtishment of an IT Park in Bhuhn as a ‘fiat-track’ project that shall receive expeditious attantion and considorations of all concerned agencies and gcvemmcnt-owed corporations with mgmd to land allotment, registration, utilities, FDI and other nac- polby clearances for thc partrcipation offoreign f m s .
c and private sectgr industries.
Scctor 3eckgrounid
Information Technology (IT) is li mlativeiy new and embryonic industry in Bhutan, and its development is being i n f d by the nPfPrRtaricln and Communfwrions Tecknalogy (ICZJ Plum, which lays out three broad policy otrjcrtives: (i) the use of IT 85 an integral tool to enhance good governance; Iii) the developmnt o f IT and IT-anabled industria in the private sector to generate income and employmenl; and (iii) the use of IT applications to improve the livelihood of all Bhutanese.
To guide ICT development, the Bhurm ICTPdfcy andSmuegy (BPPS) has bben formulated which calls for balancad and sustainable development based on five pillars: policy, infiastntcturc, human capacity, content and applications, rurd enterprim, In June 2006, the &kWm orm mi ion, Comnrrurrfcd~on dE Media Act (lCh&) was approved. One pupae of the ICMA is to encourage local and foreign investment in the ILT and media induatrtcs by providing a modem regulatory framework that fosters a convergence of infomation, computing, mdia, and communhtiono technologies, and which Eaciliul(es privatization and competition. Provisions for the pratcdian of digital data and information privacy exist under thc ICMA, including the consequences of infringcment. Documentation i s being drafted by RGoB to highlight the ICMA’s relevant privacy provisions, along with those in the draft contract law to provide a degree o f confidence that data protection concerns 8ft adequately addressad under existing and proposed legislation,
The PSI) Project
RGOB wishes to act rapidly to denlop its IT sector, and Is requesting Bank’s suppart in selting up of an information re~hnology (IT) park, expanding its IT skills developmmt program and strengthening the financial sector through deployment of TT. For succcssfbl implementation df the PSD Project, we would like to inform you that the followving technical and palicy initiativcrs regarding the IT and skills sub-components, along with ‘project readiness’ rne~sures have bean undertaken by the Government.
hwed line prices: While cumntly the cost o f lased lines in Bhutan is higher than that of the region, the RGoB is committed to bringing dawn prices and is cunentty working out vdous o p t h to do so. First, the Bhutan Telecom is in negotiation with Refiance in India for cstilblishing a mofe competitive rate; (ii) the MolC-RGoB is in negotiation with Vi&& Sanchar Nigam Ltd. ( V W ) in India for estabbhing a more competitive rate; and (iii) Tashi Group - one of the largmt private sector enterprises in Bhutan and that has been licensed to establish a mobile phone company -- is currently negotiating directly with an Indian gatewgy provider for international connectivity, and have received indications that they will be ctrarged regionttlly competitive rates for accassing connectivity. Domestic and international competition shall bring down connectivity costs in the near fuhw q a t the rlme of (he expected operafionalkcWn of the PSDpject &re is cmy mmining dilgerentialjrdm regional ram, RGoB is caamirre$~o bearing this cwt in the s h r i run.
8.
PTSkfJIS and Training: The availability of a stream of trained IT manpower is a pte-rtquisite for the success and sustainability of the IT Pa& in Bhutan. IT programs are ourrently baing conducted at the Royal Institute o f Management (RIM) md at Sherubtse College. The introduction of enginwring courses in IT at tbe Colfege of Science and Technology in Phuentsboiing are also undenuay. The National Institute of Mueation at Ssmtse offers a Distance Teacher Education Program, which would be used lo develop competencies in generic skills for the ITllTES sector. A substantial pl#lion of the PSD project shall focus on develqment of IT skills, through call*boration with international institutions. at the folhwing three levels (a) Generic Skills for the r r M E S Sector; (b) Distance learning facilities and h p t i o n of w r s e management systems (CMSs) at Royal University of Bhutan (RWB) far IT Skills; and (c) IT Entrepreneurship hvelopmcnt Program.
F’DI Policy 2002 and Labor dc Eiaplq%mr Act ZOW: Up till the time tha Bhuuvlese workera arc trained, the RCSOB has a r e 4 to allow foruign skilled workers, The Fonign Direct lnvestmmt Policy o f 2002 pernits the employment of skilled foreigners in Bhum where such skills are not locally available. According to ths policy, “Notwithriading the objealw of employwefit a/ natfanals, &reign companies will be allowed to briflg in apafrhte personnel in cyea where here are shriuges of BhurMasc wilfi requisire sk#s. ” In recognition of the need for highly trainad staff at senior levels, RGoB is commiaed to relaxing ysbictiats on the employment of non-naticanals, and shall make mom flexible labor and invesEmsnt regulations related to foreign workers for the ICT awlor, undw the Labor & Employment Act. MoFC hus &e& secuped a commirmentjionr the Minatty of Labor and Humon R c s o ~ ~ c ~ s . (MoLHR) via a lemr &led 16 Feb. 2007.
C. Pro.icct R-
Rcguisltton of Iamdfor IT Park Land has been allocated for tha IT Park at Wangchufabg near Thimphu. The Govament has given clcsrancs to m s f e r five acres land to the Ministry of Information 8nd Communications (MoIC), An Allormen! q e r )VQF luyed on 8 M m h , 2007 io trunder lurid tu MdC. At the same, a suitable atterneEZve slta has been identified at Para 50 ej to
provide a possible alternative, in case the private sector considers it necessary Lo locab the Park close to the international airport.
Advance pepredness measures fw targeting patmWl investots fw ihe IT Park componerrr: A consultant has been hired by MoIC to help with prepsratory work in this regard, A &ah RFP has bean prepared, and is currently under review by the key stakchalders. The RGoB intends to hold meetings with potential investors by end April, ?%& procesJ will be well-wtuanced k~ the rime of project efectbenem,
hstiru&md hrangemenls: A k0y element for the proposed program to succbed i s to haw m n g institutional arrangements in place fiopn the very imption of the Program. Towards this end, the Ministry of Information gt Communication (NOIC) -the de;oignated agency for the overall proja management and coodinetion - shalt establish an ITES Promfitkm 4% PrOgrom Xrnpluaeutatloa Agency VU). The PIA will bc ttsponsible for coordinating & facilitating all the program components with the various external parties involved, including RGoB’s bodies, In pankular the PIA wilt promote C facilitate the development of iT-enabld services industry (ITES) in Bhutan. The Agency will develop its work pian aimed at addressing all the obstacles facing the growth of the ITES sector.
PIA will be supewised & honjlored by MOIC/D/Tand gztided by an Advisory C w r l l (AC) and dhcied & ~ ~ p p ~ r t e d by the two Program Task F o r a s (PTPr) - the Program Task Force for lT Skills Development & the Program Task Force far Financial Sector IT Davelopmmt. The Gavedplg Board (GB) of the PIA will be a combination of the 2 PTFs, &&td by tbc shcretary, MoIC, whtre the Director, DIT will be the Convener of the GB. This anangement shall mure that then will be a separation between the executive Atnctions ofthe PIA, which will be under &e purview of the GB, from its day to day administrative functions, which will undar the leadership of the Director of the PIA. The PEA is expacted to be operational by September 2007, following the recruitment ofthe Director, who will, irilturn, finalize the staffing of PIA along with DITMoiC
The AC will comprise leading professionals from the local bc foreign ECT industry dt acadehla as well as dmon & civil society organizations. Thcy we expected to provide poky and strdegic direction to the PIA. Tho primary role of the AC is to provide advice ofl the appropriateness of the current work program the PIA wilt be pursuing in response to the global trends dk local ICT industry needs. The AC will also be able to give invaluable fsedback & insights from the Industry on the effectiveness o f the strategies, the reception to the initiatives by the market place etc. I h e AC will meet typically bi-annuslty 8r will be constituted by end June 2007. The PTFs play a dual role. They arc an integral part of the GB of PIA, 8s well 85 each w i n g as M irnplmentation paftner uf PIA for their respective program a r m . Both PTFs have drdy been constitutsd. The IT Skills Development PTF will be chaired by Vim Chancellor of RUB with Mr. Ymka, Director Academics RUB, as the Secretary of Task Force. Other members include: Dimtor+ Mob Deputy Director DIT; Director Bhutan Vacational Qualification Authority (BVQA), MOHLR Read W, Royai Civil Service Commission (RCSC); and one reprembtire f m BCCl. The Financial Sector IT PTF comprises director level staf f fiom RMA, BOB, BNB, RICB, BDFC, DIT, 5T and BCCI, and ‘1T Ttschnical working group’ manager law) IT staff from seme institutions.
The Program Steerlag Commitkc (PSC) wilt be chaired by the sccratary Finance, BE uo-chair#l by swetafy, MoiC & amprises the labour s#cmy, and tlw? M s of the Royal Monitory Authority (RUA), the Royal University o f Bhutan (RU8). the Bank of Bhutah T l r~ PSC will mcrt with the FtA at least quartwly to review progrtsss & perfixmna. Howver, ule Secretary, MQIC, as the Chairman of !he Governing Mud dt Vi&, DIT, along with the PITS, will haw a Board W i n g at kast monthly 10 guide the PIA'S kadership & mkke pl.srctid racommetldatk>ns where necessary. .The Director, DIT, will also wlst PJA with my govment road btocks it may e n c o w during implementation. The D~FWOF will g m t the necessary trppmwh to the PIA & in parricsrhr retdn the responsibilipfior approving dl procurammf & dljbursements ternmended by the P a !eadersh@ in a ttmety & expedllious manner, using DR'S rbs0we.r.
W A N G D U EW A N G D U EP H O D R A N GP H O D R A N G
T R A S H I G A N GT R A S H I G A N G
TRASHITRASHI'YANGTSE'YANGTSE
SSaannkkoosshh
KKuurruu
PPaarroo CChhuu
TToorrssaa
HHaaaa CChhuu
WWaanngg CChhuu
PPhhoo CC
hhuu
MMaann
ggddee
BBuummtthhaanngg
MMaann
aass
TToonnggssaa CChhuu
KKuulloonngg CChhuu
ShingkarapShingkarap
ThunkarThunkar
DaifamDaifam
WamrongWamrong
PanbangPanbangPankaPanka
YebilaptshaYebilaptsha
TangTang
KisonaKisona
TendruTendru
TangoTangoChariChari
KhasadrapchuKhasadrapchu
LobesaLobesa
NganglamNganglam
MongarMongar
PheuntsholingPheuntsholing
ParoParo
HaaHaa
SamtseSamtse
ChhukhaChhukhaDagaDaga
DamphuDamphu
SarpangSarpang
ZhemgangZhemgang
TrashigangTrashigang
LhuentseLhuentse
JakarJakarTrongsaTrongsa
WangdueWangdue
PunakhaPunakha
GasaGasa
SamdrupSamdrupJongkhaJongkha
PemagatshelPemagatshel
LingmithangLingmithang
TrashiTrashi’Yangtse’Yangtse
THIMPHUTHIMPHU
G A S A
THIMPHU
PUNAKHA
P A R O
H A A
S A M C H I
M O N G A R
PEMA-GATSHEL
SAMDRUPJONGKHAR
B U M T H A N G
L H U E N T S E
C H H U K H A
DAGANA
T R O N G S A
T S I R A N G
Z H E M G A N G S A R PA N G
W A N G D U EP H O D R A N G
T R A S H I G A N G
TRASHI'YANGTSE
Shingkarap
Thunkar
Daifam
Wamrong
PanbangPanka
Yebilaptsha
Tang
Kisona
Tendru
TangoChari
Khasadrapchu
Lobesa
Nganglam
Mongar
Pheuntsholing
Paro
Haa
Samtse
ChhukhaDaga
Damphu
Sarpang
Zhemgang
Trashigang
Lhuentse
JakarTrongsa
Wangdue
Punakha
Gasa
SamdrupJongkha
Pemagatshel
Lingmithang
Trashi’Yangtse
THIMPHU
Sankosh
Kuru
Chu
Paro Chu
Torsa
Haa Chu
Wang Chu
Pho C
hu
Man
gde
Bumthang
Man
as
Tongsa Chu
Kulong Chu
To Alipur Duar
To Goalpare
To Goalpare
To Gamba
To Cona
To Guahati
H i m a l a y a M o u n t a i n s
89°E 90°E 91°E
89°E 90°E 91°E
92°E
27°N
28°N
27°N
28°N
BHUTAN
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.
