ASIAN DEVELOPMENT BANK Operations Evaluation Department

COUNTRY ASSISTANCE PROGRAM EVALUATION

FOR

BHUTAN

In this electronic file, the report is followed by the Management response and the Board of Directors Development Effectiveness Committee (DEC) Chairperson summary of a discussion of the report by the DEC.

Country Assistance Program Evaluation

CAP: BHU 2005-03 (Final)

Country Assistance Program Evaluation for Bhutan

May 2005

Operations Evaluation Department

Asian Development Bank

CURRENCY EQUIVALENTS Currency Unit ngultrum (Nu) Year Nu1.00 $1.00 1985 0.081 Nu12.4 1990 0.057 Nu17.5 1995 0.031 Nu32.4 2000 0.022 Nu44.9 2004 (JanAug) 0.022 Nu45.3

= =

ABBREVIATIONS ADB ADF ADTA BDFC CAP CAPE COS CSP CSPU DADM DOP DOR GDP GEPF HIES IMF MOF MTEF MTSF MW NBC NTTA PPTA RETA RMA SASEC SDR SME TA TVET UN UNHCR Asian Development Bank Asian Development Fund advisory technical assistance Bhutan Development Finance Corporation country assistance program Country Assistance Program Evaluation country operational strategy country strategy and program country strategy and program update Department of Aid and Debt Management Department of Power Department of Roads gross domestic product Government Employees Provident Fund Household Income and Expenditure Survey International Monetary Fund Ministry of Finance Medium-Term Expenditure Framework Medium-Term Strategic Framework megawatt National Bank of Bhutan National Technical Training Authority project preparatory technical assistance regional technical assistance Royal Monetary Authority South Asia Subregional Economic Cooperation Special Drawing Rights small and medium enterprise technical assistance technical and vocational education and training United Nations UN High Commissioner for Refugees

NOTES (i) The fiscal year (FY) of the Government ends on 30 June. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2004 ends 30 June 2004. In this report, $ refers to US dollars.

(ii)

Director General, Operations Evaluation Department Director, Operations Evaluation Division 1 Evaluation Team Leader

: : :

Bruce Murray R. Keith Leonard Carl Amerling

Operations Evaluation Department, CE-9

CONTENTS Page EXECUTIVE SUMMARY MAPS I. II. INTRODUCTION COUNTRY BACKGROUND AND EVALUATION FRAMEWORK A. Socioeconomic Context of Asian Development Bank Operations B. Methodology and Analytical Limitations PROGRAM ADMINISTRATION, COORDINATION, AND PERFORMANCE A. Program Administration B. Aid Coordination C. Portfolio Performance iii vii 1 3 3 11 11 11 12 14 18 18 20 24 37 37 44 53 54 54 56 58 60 61

III.

IV. PROGRAM RESPONSIVENESS AND OUTCOMES A. Responsiveness of Country Operational Strategy B. Responsiveness of Country Assistance Programs C. Project Relevance, Efficacy, and Efficiency Evaluation Results V. PROGRAM IMPACT, SUSTAINABILITY, AND ATTRIBUTIONS A. National-Level Impacts of Lending and Nonlending Programs B. Sector-Level Impacts of Lending and Nonlending Programs C. Evaluation of Institutional Capacity Building in Country Assistance Programs

VI. EVALUATION SYNTHESIS A. Key Strengths of the Program B. Key Weaknesses of the Program C. Crosscutting Issues D. Lessons Learned E. Implications and Recommendations for the Future Strategy and Program

Carl Amerling, principal evaluation specialist (team leader), who was responsible for the preparation of this report, led an Operations Evaluation Mission to Bhutan and conducted document reviews and key informant interviews. He also guided the fieldwork undertaken by Montague Lord and Bindhya Jha, international consultants, and Yogesh Tamang, Dawa Sherpa, and Kunzang Yonten, local consultants. Ma. Rosa Ortega, evaluation officer, supported the team with research assistance from Manila. The guidelines formally adopted by the Operations Evaluation Department (OED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. To the knowledge of the management of OED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report.

ii

APPENDIXES 1. 2. 3. 4. 5. 6. Bhutans National Development Strategies and Asian Development Bank Strategies Description of Country Strategy and Assistance Programs for Bhutan Portfolio Performance of Lending Program Matrix for Assessing Effectiveness of Lending and Nonlending Operations Legislative Changes Supported by Asian Development Bank Assistance Complementarity of Funding Agency Strategies and Assistance Programs

Page 65 72 85 90 100 105

SUPPLEMENTARY APPENDIX (available upon request) A. Sector Reviews

Attachments: 1. Management Response on the Country Assistance Program Evaluation for Bhutan 2. Development Effectiveness Committee Chairpersons Summary of the Committees Discussion on 9 June 2005

EXECUTIVE SUMMARY Bhutan is a landlocked country with rugged terrain on the southern slopes of the eastern Himalayas. The emergence of Bhutan from its self-imposed isolation in the 1960s led to a dramatic improvement in the countrys economic situation. Real economic growth averaged over 7% a year in the 1980s, 1990s, and is expected to continue up to 2007. The result was an improvement in per capita gross domestic product (GDP) from $239 to $741 between 1980 and 2003. The production base has been diversified away from agriculture toward services and industry sector activities. Electricity is the most important export product of the country. Since 2000, the hydropower sector has been earning 45% of government revenue through electricity exports; this is expected to increase to 90% by the end of 2006. The Royal Government of Bhutan is following a cautious development path to raise the living standards of the population without undermining the countrys unique natural and cultural heritage. Bhutan has one of the worlds few remaining biologically diverse systems. The major challenge the Government faces is the conservation of Bhutans unique ecological system and cultural heritage while responsibly using these resources and their revenues to meet the economic and social needs of the population. Rather than focusing on economic development, the Government aims to maximize gross national happiness, which is based on indicators such as culture, education enrollment, environmental protection, governance, health coverage, and income. Bhutan became a member of the Asian Development Bank (ADB) in April 1982 and the operations began in October that year. From 1983 to 2003, ADB approved 18 loans totaling $107.86 million and 85 technical assistance (TA) grants (63 advisory and 22 project preparatory) amounting to $32.03 million. The objective of this Country Assistance Program Evaluation (CAPE) study is to assess the performance of ADBs country operational strategies (COSs) and country assistance programs (CAPs) for Bhutan during 19832003, and to derive lessons and make recommendations for more effective future operations. The CAPE adopts the standard evaluation framework used by ADBs Operations Evaluation Department to assess the performance of CAPs, as well as individual projects, programs, and TA grants after completion. It uses six evaluation criteria. The first three, assessing project outcomes in the CAPs, refer to relevance, efficacy, and efficiency. The other three assess project impact in terms of socioeconomic impact, institutional development impact, and sustainability. The study identified the key strengths and opportunities, as well as lessons derived from ADBs operations in the last 20 years, with a view to assessing implications for the future strategy and programs. These lessons will be used to support the formulation of the new country strategy and program (CSP) scheduled for 2005. For most of the period under review, strategic planning, as set out in formal COSs/CSPs, did not play a major role in guiding ADBs operations in Bhutan. The 1991 COS was the only formal strategy prepared during the 18 year period from 1982 to 2000. During this period, ADB operations were guided more by pragmatic country programming missions and generally clearly articulated Government priorities. Since 2000, ADB has placed more emphasis on developing formal country strategies for Bhutan. A CSP was approved in 2000 and a new CSP is under formulation. A synthesis of findings indicates that during the period under evaluation, ADB operations shared a common set of priority areas that encompass institutional capacity

iv building, private sector development, physical and social infrastructure development, environmental protection, and human resource development. The lending and nonlending programs during the period were dominated by social infrastructure, energy, agriculture and natural resources, and finance. The lending program can generally be regarded as responsive/relevant to the Governments development priorities during the period. Although the program was relatively balanced, it did not support the oft-cited strategic objective of supporting private sector development through nontraditional activities designed to diversify the economic base of the country and diversify its exports. Poverty reduction became the overarching goal of ADB in 1999 when the Poverty Reduction Strategy was approved, and was one of the five strategic thrusts under ADBs Medium-Term Strategic Framework in the 1990s. In 19832003, 43% of ADBs projects in Bhutan had poverty reduction as either a primary or secondary objective. More specifically, 18% of the projects had a poverty focus as the primary objective and another 25% had poverty reduction as a secondary objective. The primary focus of the majority of loans was directed at economic growth (48%) or human development (35%). The secondary focus of the loans was similarly concentrated, albeit somewhat less, on these two objectives, but also included environmental protection (14%), private sector development (10%), and good governance (9%). The focus on poverty reduction projects evolved somewhat with ADBs shift toward poverty reduction as its overarching objective. Given the moderate/significant shift in project design toward the poverty reduction focus of ADB in the latter part of the review period, the lending program is regarded as responsive/relevant to the changes in ADBs strategic thrusts. About one third of the advisory TA (ADTA) grants had as their primary objective human development, measured in terms of both the combined value of the ADTAs and their number. Other important objectives were economic growth (29% of the combined value of ADTAs), followed by private sector development (17%) and governance (16%). Only one TA during 19832003 had poverty reduction as its primary objective. The modest poverty reduction focus indicates that the nonlending program was partly responsive/partly relevant to the changes in ADBs strategic thrusts during the period evaluated. The TA program was, however, responsive/relevant to the Governments objectives. One of the strengths of ADBs operations in Bhutan has been its consistency with the Governments development strategy. Since the beginning of operations in 1983, ADBs activities in Bhutan have been guided by the Governments 5-year plans. This has strengthened Government ownership, contributed to generally good portfolio performance, and to positive on-the-ground results. Lending and nonlending programs have been geared toward assisting the Government in meeting its priority development objectives by continued interventions to strengthen infrastructure, improve the quality of social services, ensure good governance, promote private sector development, generate employment, and preserve and promote Bhutan's culture and environment. This approach was especially useful in the 1980s and 1990s when only the 1991 COS was available to guide ADB operations. The shift to diversifying the economy under the Sixth Five-Year Plan (19861991) and the commissioning of the Chhukha hydropower plant in 1986 paved the way for ADBs important contributions toward supporting increased exports of surplus energy and larger government revenues in the years that followed. ADB has continued to support this strategy under the subsequent three 5-year plans, as the Government has sought to encourage: greater national self-reliance; the preservation of cultural heritage; the promotion of spiritual and nonmaterial human progress; the equitable distribution of the benefits of socioeconomic progress; and economic, environmental, and social sustainability.

v Another strength was the long-term sustainability of many of ADBs interventions. Successful sector interventions have been associated with recurrent and sustainable assistance, while those that have performed poorly have been associated with intermittent and sporadic interventions. The effectiveness of ADBs projects in the energy sector has been largely due to continuous support for the major intervention areas over the last 20 years. Assistance for rural electrification, institutional and capacity development, and the establishment of a policy and legal framework to restructure the sector was implemented in a sequenced manner, building on earlier interventions. The approach has succeeded, in marked contrast to sectors such as industry where there has been an inadequate program and a lack of implementation cohesiveness over the long run. As a result, projects have been implemented in an ad hoc, sporadic manner resulting in ineffective outputs and impacts. This experience argues strongly for focusing ADB interventions in a selected number of sectors in which both ADB and the Government agree that ADB should be involved for a decade or so. There have also been shortcomings to some ADB interventions that provide lessons for the future, including (i) inadequate explanations in some COSs and CSPs for the reasons for substantive program changes; (ii) lack ownership of ADB assistance by some government agencies; (iii) insufficient sensitivity of some project designs to cultural and religious beliefs; (iv) lack of flexibility in some project designs; (v) inadequate integration of projects with one another when there was potential for complementarities; (vi) inadequate coordination of some projects with development partners; and (vii) project implementation delays resulting from inadequate local budget allocations, shortage of skilled local staff, frequent changes of project staff, weak procurement and contracting capabilities, insufficient delegation of authority, weak monitoring and coordination, and delays in consultant recruitment. These experiences point to the following recommendations for the future strategy and programs of ADB. Increasing Assistance to Bhutan. Because of Bhutans good economic performance and rising per capita GDP, there is likely to be a reduction of grants and loans from other development partners in the near future. Increasing ADBs assistance to Bhutan within the Performance Based Allocation Framework is consistent with ADBs policy of rewarding good performing policies. Sectoral Focus and Selectivity. The CAPEs assessment of performance has been positive in most sectors and, based on evaluation findings, there are no compelling reasons to withdraw from sectors. The sectoral composition of the future operations should be determined during the CSP in partnership with the Government and taking into account the programs of other donors. The number of sectors should be limited to those in which ADB will be involved for a decade or so. Grant Financing, Cofinancing, and Funding Agency Coordination. The Government will continue to focus its requests for donor support on grant financing to avoid the debt-servicing commitments associated with loans. ADB should increase its efforts to mobilize cofinancing and developing partnerships with other donors, particularly in areas directly related to the Millennium Development Goals. Portfolio Monitoring and Establishment of a Resident Mission. Frequent missions to monitor and review projects are essential to prevent implementation delays, poor contract award performance, and low disbursement performance. Those missions should encourage joint efforts between ADB and the executing agencies in project assessments for

vi project performance rating. Project monitoring, supervision, and review by ADB, especially for ADTAs, need to be based on measurable performance indicators adopted, to monitor the progress and results of both lending and nonlending assistance. These reviews are particularly important in cases where there are several stakeholders such as ADB, the Government, the implementing team, and possibly other development partners under cofinancing arrangements. ADBs experience in the Asia Pacific Region is that resident missions (RMs) contribute to improved project implementation. Establishing an RM would allow ADB to play a more active role in the local donor community and respond more rapidly to requests from the Government and executing agencies. The establishment of an RM is justified and would be consistent with ADBs policy on RMs. ADB should carefully assess the operational benefits and the costs related to the establishment of an RM in Bhutan. CSP Targets and Indicators. A set of measurable output and outcome target indicators for each sector should be established in the next CSP to ensure that the CSP is results based, can be monitored through the CSP updates, and adjustments can be made when conditions require. Such indicators would also help to improve the evaluation of the CSP, both self evaluation by the concerned operational department and independent evaluation by the Operations Evaluation Department. Financial Sector Competitiveness. ADB will need to expand its interventions in the regulatory framework of the financial sector if sector is to achieve optimal results from future projects based on lines of credit or other forms of loan finance. Notwithstanding some liberalization of interest rates in the past two years, with only two banks in the country, there is a need to eliminate duopoly practices that have resulted in excessively high interest rates, which undermine private sector development and which are often not passed on to investors in the form of higher deposit interest rates. Private Sector Development. Promotion of the private sector needs to adopt a more practical approach than in the past. The formulation of the next CSP should consider whether part of the strategy should be to increase ADB direct support for the private sector. Successful development of the private sector will require the development of informal enterprises and small formal sector enterprises. This development will necessitate greater support for target groups and participating financial institutions through giving broad-based support in the form of both financial and nonfinancial services; building good-practice financial delivery systems adapted to small business capabilities; generating business development services that provide skills, appropriate business training, information, and market and credit access; and making regulatory and institutional changes to reduce barriers to entry by microenterprises. These types of interventions have significant implications for poverty reduction. Although both ADB and the Government included development of the private sector in strategy and planning papers, insufficient specific interventions were actually implemented to support such development. Focused interventions are required in sectors with substantial impact on the enabling environment for private sector development. Given the need for a sharper focus in the ADB program in Bhutan, ADB should ensure that interventions are made in those areas that potentially have the greatest impact on enterprise development.

Bruce Murray Director General Operations Evaluation Department

I. INTRODUCTION 1. The overall objective of this Country Assistance Program Evaluation (CAPE) study is to assess the performance of the country operational strategies (COSs) and country assistance programs (CAPs) of the Asian Development Bank (ADB) for Bhutan during 19832003, and to derive lessons and make recommendations for more effective future operations by ADB and improved coordination among funding agencies.1 After the COS and CAP for the period 2001 2003 were prepared for Bhutan in 2000, ADB instituted a procedure that combined the COSs and CAPs for each developing member country (DMC) into the country strategy and program (CSP). For Bhutan, CSP updates (CSPUs) were prepared for 2001, 2002, 2003, and 2004. A full CSP is scheduled to be prepared in 2005 and will cover 20062010. 2. The first ADB COS was prepared in 1991. The overall objective was to assist the Royal Government of Bhutan to diversify the economy by (i) strengthening the capacity for economic management and development administration, (ii) improving physical and social infrastructure, (iii) promoting private sector development, and (iv) protecting the environment. With loan assistance limited to relatively small magnitudes, a key feature of the operational strategy was the emphasis on ADBs catalytic role through technical assistance (TA) for the preparation of projects and mobilization of cofinancing, particularly on grant terms. TA projects were mostly for advisory and operational purposes and were used to support the institutional strengthening of a number of agencies, to prepare action plans, and to address financial and capital market development. 3. The 2000 COS was finalized following close consultation with the Government. The COS aimed to support poverty reduction in Bhutan by promoting economic growth and social inclusiveness. It targeted the income and employment generation impact of private sector-led development through improved policy formulation and greater efficiency of financial intermediaries in an effort to address ADBs overarching objective of poverty reduction.2 The main focus of poverty reduction efforts under the COS was to enable the Governments commitment to be realized under the strategic theme of improving the quality of life of all. In 2001, a country-specific poverty reduction strategy was adopted to guide future ADB operations in Bhutan. The result of that strategy was the Poverty Reduction Partnership Agreement between the Government and ADB, which (i) set out a long-term vision of poverty reduction, (ii) defined immediate and medium-term goals, (iii) determined concrete short-term actions, and (iv) established monitoring and evaluation arrangements to effectively guide the allocation of ADBs resources and future interventions. 4. Recent CSPUs have adapted ADBs operations in Bhutan to the decentralized approach taken by the Government under its Ninth Five-Year Plan, and required that ADB intensify its dialogue with stakeholders both at national and local levels in setting project priorities and the policy reform agenda. CSPUs now reflect ADBs new performance-based allocation system to allocate Asian Development Fund (ADF) resources to eligible developing member countries, based on a set of common criteria yielding an initial allocation, or base case. For Bhutan, the

The present CAPE study was prepared under the direction of Carl Amerling, principal evaluation specialist, Operations Evaluation Department, by a team consisting of Montague Lord, multisector project evaluation and strategy specialist; Bindhya N. Jha, institutional development evaluation specialist; Yogesh Tamang, domestic multisector project evaluation specialist; Dawa Sherpa, domestic financial specialist; and Kunzang Yonten, domestic institutional development specialist. ADBs poverty reduction strategy was contained in its report: ADB. 1999. Fighting Poverty in Asia and the Pacific: The Poverty Reduction Strategy of the Asian Development Bank. Manila. Poverty reduction was adopted as ADBs overarching objective.

2 base-case allocation of ADF was set at $10 million, which has recently been substantially increased to $20 million because of Bhutans good performance.3 5. The CAPE study follows the standard evaluation framework used by ADBs Operations Evaluation Department to assess the performance of CAPs, as well as individual projects and TAs after completion.4 It uses six evaluation criteria. The first three are used to assess project outcomes in the CAPs and refer to relevance, efficacy, and efficiency. The other three assess project impact in terms of socioeconomic impact, institutional development impact, and sustainability. The performance of the COS can only be assessed in terms of relevance. From these results, the study derives the key strengths and opportunities, as well as lessons from ADBs operations in the last 20 years, with a view to drawing implications for the future strategy and programs, including the CSP scheduled for 2005. 6. Because of the large concentration of TAs in capacity building, the CAPE study focuses on the impact of the grants extended for institutional development and the related performance of the sector thereafter. These capacity-building grants were provided for several ministries and governments in all major sectors. The present assessment measures the extent of advisory TA (ADTA) contributions to (i) the delivery of services to the public; (ii) the institutional arrangements, including bureaucratic and technical processes; and (iii) the various existing policies in the sectors in terms of fiscal management, governance, and human resource development. Lessons were identified on how capacity could be enhanced, as well as the process of institutional change. Recommendations are formulated in terms of their sustainability and scope for further capacity development. 7. The report is divided into six chapters. Following this introductory chapter, Chapter II describes the socioeconomic situation of Bhutan during the review period and presents the evaluation framework and methodology used in this study. Chapter III evaluates ADBs country strategies from the perspective of their responsiveness to ADBs overall strategy and the overall program balance and coherence. Chapters IV and V evaluate the CAPs in terms of their outcomes and impacts, respectively, following the assessment criteria described above. Chapter VI presents the overall evaluation results and rating for the COSs and CAPs, and the key strengths, opportunities, lessons learned, and recommendations for ADB and the Government. Six appendixes are attached: Appendix 1 provides background information on the countrys national development strategies and those of ADB; Appendix 2 provides background information on the COS priority areas and the CAP structure by sector; Appendix 3 summarizes the portfolio performance of the lending program; Appendix 4 summarizes the outcome and impact assessments of the projects; Appendix 5 reviews the legislative changes supported by ADB-related assistance; and Appendix 6 summarizes the complementarity of strategies and assistance programs of other funding agencies.

The performance criteria were (i) prudence in macroeconomic management; (ii) progress in improving the effectiveness of the regulation and supervision of the financial system and of the legislative and regulatory framework to underpin private sector development; (iii) efforts to improve quantity and quality of expenditure on social services; (iv) efforts to improve policies, regulations, and institutions in support of the environment; and (v) a rating of at least satisfactory during reviews of all ongoing ADB projects. Satisfactory scores on these criteria were required for the base case. Actual lending levels also depended on progress made on key issues of the sectors in which ADBs lending was being programmed and the level of ADBs ADF resource availability. For details, see ADB. 2000. Guidelines for the Preparation of Project Performance Audit Reports. Manila.

3 II. A. COUNTRY BACKGROUND AND EVALUATION FRAMEWORK

Socioeconomic Context of Asian Development Bank Operations

8. Bhutan became a member of ADB in April 1982 and ADB operations began in October that year. In February 1983, the Government requested assistance to finance several highpriority public sector projects that were grouped under a multiproject loan5 and a TA project.6 As part of its operational strategy in the country, ADB helped mobilize grant resources for projects, and provided loans only when grants were insufficient. Over 19832003, ADB approved 18 loans totaling $107.86 million and 85 TA grants (63 ADTA and 22 project preparatory [PPTA]) amounting to $32.03 million. 1. Economic Achievements

9. Bhutan, a landlocked country on the southern slopes of the eastern Himalayas, shares boundaries with India to the south and the Tibet region of the Peoples Republic of China to the north. It has a total land area of 47,000 square kilometers. The terrain is rugged and the altitude ranges from 200 to over 7,500 meters above sea level. The emergence of Bhutan from its selfimposed isolation in the 1960s led to a dramatic improvement in the economic situation of the country. Real economic growth averaged over 7% a year in both the 1980s and 1990s, and maintained that rate of expansion in 20012003. The result has been a tripling of per capita gross domestic product (GDP) from $239 to $741 between 1980 and 2003.7 The production base of the economy has also diversified. Agriculture contributed about one half of the countrys total output in the mid-1980s, while services represented 30% of GDP and industry accounted for the remaining 20%. By 2003 the contribution of industrial output had risen to 39.5% of GDP, exceeding that of agriculture (33.2%), though the contribution of services remained virtually unchanged from two decades ago. 10. Despite the strong economic progress that has been made since the opening up of the economy, numerous challenges remain. Bhutan is predominantly rural (91.5% of the population live in rural areas) and, notwithstanding road links to all district administrative centers, road access remains limited. By 2004 the countrys total road length was 4,020 kilometers (km), around half of which was paved. Road density is estimated at 73 km per 1,000 square kilometers. There is one international airport at Paro, west of the capital, Thimphu, from which two 80-seat jets fly to Bangladesh, India, Myanmar, Nepal, and Thailand. The service has been upgraded with the purchase of two Airbus 120-seater aircrafts. 11. Electricity remains the most important export product of the country. Of the estimated potential of 30,000 megawatts (MW) of hydropower, Bhutan had an installed capacity of about 460 MW by March 2005. The Chhukha hydropower project produces 336 MW, the Kurichu project produces 60 MW, and the Basochu project 60 MW. The Tala hydropower project, which will have a capacity of 1,020 MW, should be fully commissioned by March 2006. The Government has started a detailed project report for the Punatsangchu hydropower venture with an estimated capacity of 870 MW. The national demand for power is estimated to be around 90 MW, and the rest is exported to India. Since 2000, the hydropower sector has been earning
5

ADB. 1983. Report and Recommendation of the President to the Board of Directors on a Proposed Multiproject Loan and Technical Assistance Grant to the Kingdom of Bhutan. Manila (for $5.0 million, approved 22 September 1983). ADB. 1983. Technical Assistance to the Kingdom of Bhutan for Multiproject. Manila (for $75,000, approved 22 September 1983). International Monetary Fund. 2004. World Development Outlook Database. New York.

4 45% of government revenue through electricity exports. This is expected to rise to 90% by the end of 2006. Rural electrification is a priority and the Government plans to spend Nu15 billion on transmission in rural areas. 12. The agriculture sector absorbs about three fourths of all workers and is gradually shifting from subsistence farming to cash crop production. The main crops produced are apples, maize, paddy rice, and potatoes. Bhutan has 72% forest cover, and the National Assembly has decreed that 60% of Bhutans area will remain forested. Environmental protection is an important aspect of the Bhutanese national goal of gross national happiness (paras. 23 and 133), in part stemming from the countrys Buddhist values. In 1992 the Bhutan Trust Fund for Environmental Protection was established with contributions from other countries and from funding agencies. The fund has around $30 million and uses its income to finance environmentally useful projects. The National Environment Commission is currently drafting an environment protection bill as umbrella legislation for all existing acts related to the environment. 13. In the past, Bhutans manufacturing sector was small, technologically backward, and state dominated. Most private enterprises were involved in cottage industries. The number of industrial establishments, however, nearly tripled from 3,705 in 1996 to 9,016 in 2000, boosted by the commissioning of the Chhukha power project, which allowed the development of more power-intensive industries such as calcium carbide, cement, and ferro-alloys. The growth of construction is also related to the development of hydropower projects. The energy sectors contribution to total GDP rose from 12% in 1985 to 18% in 2002, largely as a result of the Basochu, Kurichu, and Tala hydropower projects. The importance of hydropower projects is evident in the financial turnover of the Penden Cement Authority, which almost tripled between 1996 and 1998. The construction of the Punatsangchu project, expected to start after the Tala project is completed, will maintain the existing growth momentum in the construction industry. 14. Tourism is an important source of foreign exchange. The country is promoted as the last Shangri-La and the Government has adopted a low-volume, high-value strategy to manage the development of tourism and mitigate potential adverse impacts. The number of visitors tripled from 2,748 in 1992 to 7,559 in 2000. Following a slump in 2002 because of the September 11, 2001 terrorist attacks in the United States, tourism arrivals into the country recovered to 9,249 in 2004. 2. Social Issues

15. Considerable progress has been made in Bhutans human development indicators from the initial measures of the 1960s. The latest 2004 Human Development Report of the United Nations Development Programme (UNDP) classifies Bhutan at the lower end of the medium development countries, with a ranking of 136 out of 175 countries on the human development index, up from 142 in 1998 and 159 in 1990.8 Life expectancy has increased dramatically, from 35 years in 1961 to 66 years in 2001. Similarly, between the mid-1980s and the early part of this decade, the infant mortality rate and the maternal mortality ratio have been reduced from 127 to 74 per 1,000 live births and from 1,710 to 420 per 1,000 live births, respectively.9 Basic health care is free, and Bhutan has invested large resources into ensuring universal primary health care. By the mid-1990s, 90% of the population had access to free basic health care, up from
8

UNDP. 2004. Monitoring Human Development: Enlarging Peoples Choices. New York. The estimate is based on a UN estimate of Bhutans population of 2.1 million, rather than the Governments official estimate of 650,000, which would suggest a substantial upward revision in Bhutans human development index ranking. Human development indicators are from UNDP. 2004. Bhutan: Socio-Economic Indicators. New York, and Appendix 2, table A2.2.

5 65% in 1987. Similarly, 58% of the rural population and 70% of the urban population had access to safe water supplies, compared with combined 31% in 1987. Piped sanitation systems have either been completed or are under construction in the two largest cities of Thimphu and Phuentsholing and four other towns. Major advances in immunization to 90% of children have virtually eliminated neonatal tetanus, polio, and diphtheria. Malaria and leprosy have been brought under control, although malaria remains a problem in the southern part of the country. The program to iodize salt has significantly reduced iodine deficiency. The most common remaining causes of morbidity are acute respiratory infections, followed by diarrheal diseases, skin infections, and tuberculosis. 16. Much of the progress has been due to improved basic health infrastructure. Between 1961 and 1998 the number of hospitals increased from four to 28, including 145 basic health units, one indigenous hospital, and 11 indigenous units. The main issues facing the countrys health authorities are (i) the scarcity of skilled personnel for service delivery and for health promotion and disease prevention programs, and (ii) the financial support needed for a highly dispersed and expanding health care system. These difficulties are compounded by population growth, although it decelerated from 3.1% per year in 1994 to 2.5% in 2001. The Government aims to achieve a replacement rate of two surviving children per woman by 2012 by (i) increasing the contraceptive prevalence rate, currently 24% but rising; (ii) expanding education programs, targeting not only girls and women but also boys and men; and (iii) changing traditional attitudes with respect to the benefits of small families, particularly in an economy where large families are often popularly seen as a solution to perennial domestic labor shortages. 17. Considerable progress has also been made in education over the past 30 years. The adult literacy rate has risen from an estimated 10% in 1970 to 54% in 2001. Considering that fewer than 450 children attended secular primary schools in the late 1950s and that the country had no secondary schools at that time, educational achievements in Bhutan have been impressive. By early 2004, 85% of children of primary school age were enrolled in school. The total student population was 139,931, who were taught by 4,220 teachers, many of whom were hired from India (though the numbers are diminishing as Bhutan produces more trained teachers). The Government is committed to providing 10 years of education for all children by the year 2015, to meet the UN goal of education for all. 18. The education system consists of 253 primary and community schools, 51 junior high schools, 21 high schools, 7 private schools, and 10 other institutions providing specialized education as well as tertiary and vocational training (including one degree college). Free education is provided from the primary to the tertiary level. Besides free tuition, this includes free textbooks and, in some places, meals and boarding facilities. The educational structure consists of 1 year preprimary, 6 years of primary, 4 years of secondary, 2 years of junior college, and 3 years of a degree program. Since 1961, the medium of instruction has been English. Dzongkha, the national language, is taught as a second language (since there was a shortage of Bhutanese teachers when the education system was established). This system has enabled Bhutanese students to gain access to opportunities for international-standard education at universities abroad. 19. Creating employment opportunities is now seen as a new challenge for the Government. With 50,000 Bhutanese school and university graduates expected to be looking for jobs within the Ninth Five-Year Plan period (FY20032007), the Ministry of Labor and Human Resources, created in July 2003, has shifted its focus to technical and vocational training, and to employment promotion services. The ministry has been organizing a job fair as an annual event

6 since 2002 to introduce youth to a diversifying job market in the hope of encouraging them to take blue-collar jobs. Notwithstanding the major improvements in basic education facilities, the country faces shortages of skilled and semiskilled workers. Problems include the following: (i) the technical and vocational training system has not been demand driven; (ii) the quality of training provided has been poor; (iii) the institutions offering training have been weak; and (iv) job seekers with even basic educational qualifications have been reluctant to accept training for many vocational occupations or trades. The problems are being addressed by the Government, with the assistance of ADB and other aid agencies. While technical skills remain inadequate, this weakness will continue to be a major barrier to reduced dependence on expatriate labor; to industrial growth; and to the local, productive absorption of a growing labor force. Rural-urban migration is not a major source of urban unemployment since most of the rural population remains in rural areas. The situation is, however, likely to change, and increased urbanization is likely to be a major trend in Bhutan. 20. Bhutanese women do not suffer from significant gender discrimination. They have equal status with men and enjoy the same level of freedom under the law. Property inheritance laws are favorable to women, and most households are headed by women. Women's participation in decision making at community meetings is as high as 70%. The percentage is lower at district (dzongkhag) and village-block (geog) levels, but participation is being actively promoted at those levels and is increasing. Representation in the National Assembly and employment in government service are heavily biased in favor of men, though this bias has shown some signs of weakening in recent years. Some gender imbalance exists in the primary and secondary school enrollment rates, but it is not marked, and the situation improved in the 1990s. In terms of vocational and tertiary education, however, there is still a marked gender imbalance. 21. Despite the absence of active gender discrimination in Bhutan, and the approximate and improving balance found in many areas of social life, a number of issues impact adversely on women. These include the high fertility rate, high maternal mortality ratio, high infant and child mortality rates, and the gender gap in the adult literacy rate. These have improved enormously since the mid-1980s, but they remain poor in absolute terms. The impact of these problems is particularly severe among the smaller, more remote communities, where isolation provides an extra dimension to the difficulty of resolving them. 22. Poverty remains a major concern of the Government. About one out of four persons suffers from food poverty, while more than one in three suffers from income poverty.10 Although the incidence of poverty in rural areas is five times greater than in urban areas, rural-urban migration has risen by about twice the rate of population growth in the last decade. There is growing concern about the potential rise of urban migrant households living in hutments or shanties. The relatively high per capita income of the country and incidence of poverty suggest that income inequality is high. Gini coefficient estimates, nevertheless, indicate only moderate inequality in rural and urban areas, according to the Household Income and Expenditure Survey (HIES) 2000.11 It is possible that other measures, such as income shares received by income quintiles, would find a different incidence of inequality but such data are not yet available.12 The

10

The food poverty line is based on the expenditure of households whose total expenditure is sufficient to meet the minimum food requirements, estimated at Nu612.10 ($13.5) per capita a month. The income poverty line is based on the expenditure of households whose food expenditure is adequate to meet the minimum food requirements and is estimated at Nu748.10 ($16.5) per capita a month. 11 The Gini coefficient in urban areas was between 0.36 and 0.42, while that in rural areas was 0.35. 12 The recently completed Bhutan Living Standards Survey 2003 provides information on health and education, as well as national poverty and inequality indicators.

7 Government envisages that sustainable poverty reduction will be achieved through rapid and equitable economic growth with balanced regional development. 3. Government Institutions and Administration

23. The Government is following a cautious development path to raising the living standards of the population without undermining the countrys unique and fragile natural heritage. Bhutan has one of the worlds few remaining biologically diverse systems. A major challenge that the Government faces is the conservation of the countrys unique ecological system while responsibly using these resources and their revenues to meet the economic and social needs of the population. The Governments aim is to maximize gross national happiness rather than focus exclusively on economic development. Gross national happiness is based on indicators such as culture, education enrollment, environmental protection, governance, health coverage, and income. 24. Policy and program priorities to increase gross national happiness are outlined in the Governments 5-year plans, which are directed to the achievement of Bhutans 2020 vision.13 The priorities established for achieving the 2020 vision are classified under five thematic headings: human development, culture and heritage, balanced and equitable development, governance, and environmental conservation. In 1998, the king relinquished his position as the head of government and devolved executive power to the Council of Ministers, which is headed by the prime minister. A hereditary monarchy since 1907, Bhutan started drafting a constitution in November 2001, which is expected to be promulgated within 3 years. Legislation, policies, and institutions are being established in anticipation of the constitutions ratification. Legislative power rests with the National Assembly, which is composed of 154 members, of whom 100 represent the 20 districts and business community. In recent years, numerous acts have been adopted, modernizing the Bhutanese legal system, based on Buddhist and Indian laws and on English common law, to strengthen the rule of law in the countrys changing political environment. The Governments authority has been decentralized from the central Government to the districts and blocks, which are represented by district development committees and block development committees. Bhutan is divided into 20 districts, or dzongkhags, each of which is headed by an elected district officer (dzongda), under whom are 201 elected gups. In 2002, the National Assembly created a new structure for local governance at the block level. Each local area is responsible for creating and implementing its own development plan, in coordination with the district. 25. Prior to joining ADB in April 1982, Bhutan had completed four development plans between 1962 and 1981. The fifth plan, covering FY19821987, aimed to increase Bhutans economic self-reliance and to ensure that by the end of that period recurrent expenditure would be met from internal resources. While the first five plans established the basis for subsequent developments, diversification of the economy did not begin until the Sixth Five-Year Plan (FY19881992) and the commissioning of the Chhukha hydropower plant in 1986, which produced increased exports of surplus energy and larger government revenue. Diversification of the economy continued under the subsequent three 5-year plans, as the Government sought to encourage greater national self-reliance. Those plans also focused on preserving the cultural heritage; promoting spiritual and nonmaterial human progress; ensuring stability and economic, environmental, and social sustainability; and dispersing the benefits of socioeconomic progress widely and equitably. Table 1 provides a summary of the aims and strategies of the nine 5-year plans.
13

Royal Government of Bhutan. 1999. Bhutan 2020: A Vision for Peace, Prosperity and Happiness. Bhutan: Planning Commission.

8 Table 1: Bhutans National Development Strategies by Five-Year Plan

Plan and Period First Plan FY19621966 Goals Create basic infrastructural facilities covering roads, power, communications system, transport, agriculture, and animal husbandry. (i) Improve agricultural and horticultural output; (ii) improve the level of education with greater emphasis on quality rather than quantity; (iii) improve and upgrade cattle, pigs, and poultry; (iv) establish an adequate network of communications to provide economic outlets for surplus produce to the plains of India; (v) restock depleted forest reserves in southern Bhutan; (vi) explore the possibility of exploiting the gypsum and limestone deposits and the establishing a cement factory to augment the revenues of the state; and (vii) explore the possibility of starting a tea plantation and forestbased industries. Strategy Created a technical and administrative framework for governance that helped provide for the development of projects in roads, education, transport, health, forestry, agriculture, power, animal husbandry, and industries. Continued focus on construction of roads and the creation of a technical and administrative framework for governance. Specifically: (i) improved agricultural and horticultural output by introduction of improved methods and better seeds with a view to obtaining adequate surplus for providing a boost to the economy of the country; (ii) improved the level of education with greater emphasis on quality rather than quantity, to create cadres of qualified technical personnel at all levels for staffing the various services; (iii) improved and upgraded cattle, pigs, and poultry by cross-breeding, both to improve the available sources of protein diet for the local population as well as to provide a marketable surplus; (iv) established an adequate network of communications to provide economic outlets for the surplus produce to the plains of India by construction and improvement of existing roads and the establishment of proper transport services and facilities; and (v) restocked depleted forest reserves in southern Bhutan by a proper forestation program and explored the possibility of exploiting the forests in northern Bhutan initially to meet the construction needs of the Government by the establishment of logging activities and a sawmill near Thimphu. Sector developments directed at agriculture, forestry, electricity, mining, and public health, specifically by (i) expanding agricultural production through intensive methods of cultivation, use of high yielding varieties of seeds, and improved irrigation facilities; (ii) setting up cooperative marketing societies to eliminate middlemen and ensure fair prices to the farmers for their produce; (iii) coordinating development of selected areas so that people feel the necessary impact of planning and development and thereby also rectifying existing regional imbalances to the extent possible; (iv) improving and upgrading the local livestock by distributing good breeds of cattle, pigs, birds and to extend veterinary facilities all over the country; (v) continuing development of infrastructure facilities such as construction of roads, bridges, and power supply for rapid economic growth; (vi) accelerating the pace of industrial development through setting up small and medium industries, industrial estates, and providing incentives to private parties for establishing demand/ resource-based industries; (vii) improving education facilities with emphasis on quality rather than on quantity; (viii) providing medical and health services with a view to extending them to more people, especially those living in interior regions; (ix) providing special amenities in Thimphu and developing it in a planned integrated manner; and (x) protecting and preserving ancient monuments. Continued sector developments directed at agriculture, forestry, electricity, mining, and public health.

Second Plan FY19671971

Third Plan FY19721976

(i) Expansion of agricultural production, (ii) set up cooperative marketing societies, (iii) coordination and concerted development of selected areas, (iv) improvement and upgrading of the local livestock, (v) continued development of infrastructure facilities, (vi) accelerated pace of industrial development, (vii) improvement of education facilities, (viii) provision of medical and health services, (ix) provision of special amenities in Thimphu and its development in a planned integrated manner, and (x) protection and preservation of ancient monuments.

Fourth Plan FY19771981

Develop sector-specific activities in areas identified as having priority for the country, namely agriculture, forestry, electricity, mining, and public health.

9
Plan and Period Fifth Plan FY19821987 Goals (i) Achieve an acceptable and sustainable rate of growth of the economy; (ii) attain over time economic self-reliance and specifically in the fifth plan, to attain a level of internal resources generation adequate to cover the normal maintenance expenditure of Government; (iii) achieve greater distributional equity among various sections and regions; and (iv) involve the people directly in the planning and execution of development programs. Strategy Strategies to be followed in the formulation and implementation consisted of (i) development of dzongkhag self-reliance, (ii) decentralization of development administration, (iii) increase in people's participation, (iv) control of maintenance expenditure, and (v) mobilization of internal resources.

Sixth Plan FY19881992

(i) Strengthen the development Strategy focused on diversification of the economy largely administration of the Government; based on the exploitation of the countrys natural resources. (ii) preserve and promote national identity; (iii) mobilize internal resources; (iv) enhance rural development; (v) improve rural housing and resettlement; (vi) consolidate and improve development services; (vii) develop human resources; (viii) promote peoples participation; and (ix) promote national self-reliance. Strengthen development administration, promote national identity, mobilize internal resources, enhance rural incomes, improve rural housing, consolidate development services, develop human resources, and promote peoples self-reliance. Collective pursuit of gross national happiness. Strategy focused on (i) strengthening the development administration, (ii) preserving and promoting national identity, (iii) mobilizing internal resources, (iv) enhancing rural incomes, (v) improving rural housing and resettlement, (vi) consolidating and improving development services, (vi) developing human resources, and (vii) promoting peoples participation and self-reliance. Addressed key policy issues related to (i) achieving national self-reliance, (ii) ensuring sustained growth, (iii) strengthening national security, (iv) preserving and promoting cultural and traditional values, (v) promoting regional balanced development, (vi) improving the quality of life, (vii) developing human resources, (viii) decentralizing, (ix) privatizing, and (x) developing the private sector. Strategy focused on increasing domestic revenue by improving tax collection and administration mechanism and by enhancing the tax base; implementing rural access program to improve quality of life and income of the people; investing in areas where employment generation can be maximized; initiating a planning approach that addresses the decentralization process; consolidating existing infrastructure and services; developing human and institutional capacity; enhancing private sector development; managing external assistance effectively; and granting autonomy to the dzongkhags for use of tax collected at the dzongkhag level to finance development programs.

Seventh Plan FY19931997

Eighth Plan FY19982002

Ninth Plan FY20032007

(i) Improve the quality of life and income, especially of the poor; (ii) ensure good governance; (iii) promote private sector growth and employment generation; (iv) preserve and promote cultural heritage and environment conservation; and (v) achieve rapid economic growth and transformation.

Source: Ministry of Finance.

26. Notwithstanding the general prudence of the Government, fiscal management risks remain. These risks are associated with (i) the narrowly based dependence of government revenues on the export of energy to India; (ii) the narrowness of the domestic revenue base; and (iii) the countrys large and increasing foreign exchange reserves, which could lead to a slowdown of further inflows of aid or terms closer to commercial rates. The proportion of loans in

10 official development assistance has increased steadily. According to the UNDP estimates for total disbursements of development partners between 2001 and 2002, total grants fell from $88 million to $77 million, whereas loans increased from $17 million to $26 million, partly because international financial institutions continue to offer the Government loans on concessional terms. In the near future those types of loans may no longer be available to Bhutan. Bhutans current per capita income is $855, and will soon increase beyond $925, which is the cut-off point for International Development Association eligibility.14 27. As part of the Governments accession negotiations with the World Trade Organization, it established new regulations at the end of 2002 providing a binding framework for approval of foreign direct investment. Foreign companies will now receive national treatment on their investments and have access to many sectors, including mineral processing, agriculture and postharvest production, animal husbandry, light industry, electrical and energy-intensive industries, tourism, transport, road and bridge construction, education, information technology, finance, and housing. The following limitations in the enabling environment for the private sector, however, exist: (i) the new policy restricts investments to a minimum of $1 million for manufacturing and $500,000 for services to protect domestic small and medium enterprises (SMEs); (ii) foreign ownership of Bhutanese enterprises is limited to a maximum of 70%; (iii) foreign companies operating through joint ventures will only be able to employ a limited number of foreign workers; and (iv) foreign companies must report a net convertible currency profit when repatriating profits. International joint ventures in Bhutan are guaranteed balanced treatment under the law with domestic enterprises. While limitations exist, full compensation is guaranteed in the case of nationalization of joint ventures. 28. The Government faces problems associated with illegal immigration. Its magnitude was first reported to the National Assembly in 1987 by one of the peoples representatives from southern Bhutan. The representative highlighted the urgent need to conduct a thorough census. 29. In 1988, the Government conducted a census in which village committees composed of village elders with sound knowledge of their village and people assisted government officials. The result of the census revealed a very large number of illegal immigrants and unnatural population growth in the southern districts. On realizing the gravity of the situation, the Government instituted a mechanism to identify illegal immigrants. Between 1991 and 1993, thousands of Nepali-speakers, including poor Nepali-speakers from India and Nepal, claiming to be Bhutanese refugees congregated in refugee camps run by the UN High Commissioner for Refugees (UNHCR) in Nepal. By 1995, the camps were home to 85,000 refugees. There are now more than 100,000 living in seven camps, around 10% of whom were born in the camps. The governments of Bhutan and Nepal are attempting to resolve the issue. In December 2003, the members of the Bhutanese Verification Team were attacked by camp residents while conducting a briefing on the terms and procedures for those eligible to return. Since then, there has been further deterioration in the general security situation in Nepal, making repatriation process difficult. After peaceful negotiations conducted by the Government of Bhutan over several years failed, the Royal Bhutan Army conducted military operations in December 2003 to evict an estimated 3,000 Indian militants belonging to three insurgent groups from the Indian states of Assam and West Bengal, from the forests of southern Bhutan. During the operation, all the militants were removed from the country.

14

For details on official development assistance to Bhutan from all development partners, see Appendix 5.

11 B. Methodology and Analytical Limitations

30. The data and information used in this CAPE study derive from a variety of sources, including focus group interviews, matrix of key questions, surveys, desk review of existing data, statistical analysis, and field visits. Initially, the evaluation team conducted a comprehensive desk review of ADB files, documents, and related materials for the past projects to examine strategies, economic and sector work, portfolio performance, project results, and project, sector, and thematic evaluations. Other relevant documents on assistance from other funding agencies were also reviewed, and interviews were conducted among ADB staff with past and present involvement in Bhutan projects. The Operations Evaluation Mission (OEM) met with relevant stakeholders, such as representatives of the Government, funding community, nongovernment organizations, and beneficiaries in Bhutan. The views of all stakeholders were documented to form a picture of ADBs activities, their effects, and their results. Field visits were undertaken to several project sites to hold discussions and interviews with executing and implementing agencies (EAs/IAs) for past and present projects. The study team conducted semistructured surveys to determine perceptions of the strengths and weaknesses of ADBs strategy and overall assistance. Case studies were undertaken, following the standard evaluation framework described above in para. 5.

III. PROGRAM ADMINISTRATION, COORDINATION, AND PERFORMANCE A. Program Administration

31. The Department of Aid and Debt Management (DADM) coordinates ADBs activities in Bhutan.15 ADB has provided some support to DADM through the $116,000 Strengthening the Debt Management Capacity of the Department of Aid and Debt Management,16 approved in July 2002. The project examined the needs for effectively monitoring loans and was followed up by another ADTA in 2004. DADM currently lacks the capacity to monitor disbursements and other information about TAs once they have been implemented. 32. With regard to loans, DADM also lacks information on interest servicing, particularly denominated in SDR, for both capitalized and government-paid portions. ADF loans from ADB vis--vis the loans from the World Bank and the International Fund for Agricultural Development are denominated in various currencies. Accordingly, the currency of disbursements and repayments are at ADBs discretion. With the growing loan portfolio of the country and taking into account the need to strengthen debt management capacity, DADM requested that ADB consider amending its policy on the repayment side. DADM also requested that the summary statement of amounts (ID LAR801 in ADBs loan financial information system) should have a column denoting the various currencies equivalent to SDR. 33. The Country Portfolio Review Mission for 2001 noted difficulties being experienced by government officials over administrative procedures from various development partners, and their effects on portfolio performance. The issue involves both the need for greater harmonization of funding agency strategies, programs, and projects; and the need for improved implementation procedures by the Government for those programs and projects. To help address the latter requirement, UNDP prepared a National Execution Manual in collaboration
15

A new DADM unit, under the proposed name of Aid Coordination Division, is currently being established to coordinate aid of the 37 development partners. 16 ADB. 2002. Technical Assistance to the Kingdom of Bhutan for Strengthening the Debt Management Capacity of the Department of Aid and Debt Management. Manila (for $116,000, approved 4 July 2002).

12 with the Government to streamline procedures and requirements consistent with current practices during project implementation. ADB contributed to that process through an ADTA for the Improvement of a Regulatory Framework for Procurement and Contracting project,17 which produced a procurement manual that was adopted in all projects. In addition to benefiting the public sector projects, resulting to more transparent regulatory framework, it also facilitated private sector investment. 34. The Government subsequently requested another ADTA for strengthening capacity building of the Construction Development Board. The Capacity Building of the Construction Development Board18 improved the system of managing and administrating the process of contractor registration and classification and improved its transparency. It also produced a management information system comprising both manual and automated processes that enhanced the Construction Development Boards capacity to administer procurement and contracting procedures. The outputs of both TA 2802-BHU and TA 3156-BHU (footnotes 17 and 18) contributed to improving aid management in Bhutan. The CAPEs overall assessment of program management identified these lessons. 35. Ensuring Stakeholder Ownership of ADB Assistance. As provided for in ADB policies, the recruitment of consultants is undertaken by ADB for all grant assistance. More Government involvement during the process would ensure ownership as well as desirable outputs. The OEM believes that this can be done within the framework of ADBs current policies. ADB could seek informal involvement of the EA before short listing and during the evaluation of consultant proposals. Measures to strengthen the participation and ownership of EAs and other stakeholders during formulation and implementation of TAs were discussed at a stakeholders workshop held in Thimphu during the CAPE mission in AugustSeptember 2004. 36. Increasing the Frequency of Review Missions. Because ADB does not have a physical presence in the country, missions to monitor and review projects are essential to prevent implementation delays, poor contract award performance, and low disbursement performance. While this situation is similar in other countries, review missions are especially important in Bhutan because of the terrain and poor communications facilities, and because EAs may be institutionally weak, have few qualified project staff, and be familiar with ADB policies. ADB needs to continue supervising and monitoring projects more closely than in other countries. The assessment of project performance under a project performance rating should be a joint effort between ADB and the EAs. 37. Improving Counterpart Support. The 2003 Country Portfolio Review Mission noted that implementation of TA, particularly in the financial and energy sectors, had been adversely affected by the lack of adequate counterpart support provided by the EAs because of the lack of government ownership for the projects. Better coordination between ADB and EAs is needed to improve counterpart support. B. Aid Coordination

38. About three fourths of the assistance to Bhutan is provided on a grant basis. In 2002, 31 development partners reported a combined $77 million of grant assistance and another $26 million in the form of loans, mainly highly concessional loans from ADB (ADF), the World
17

ADB. 1997. Technical Assistance to the Kingdom of Bhutan for Improvement of a Regulatory Framework for Procurement and Contracting Project. Manila (for $400,000, approved 23 May 1997). 18 ADB. 1999. Technical Assistance to the Kingdom of Bhutan for Capacity Building of the Construction Development Board. Manila (for $400,000, approved 8 January 1999).

13 Bank (International Development Association), the Government of Austria, and the International Fund for Agricultural Development. India is the largest bilateral development partner, followed by the governments of Japan, Denmark, Switzerland, Austria, and Netherlands. Among the multilateral institutions, ADB is the largest development partner, followed by the UN agencies and the World Bank. In 2002, the last year for which comparative data are available,19 ADB accounted for 42% of multilateral development assistance to Bhutan and 13.8% of development assistance from all sources. The sectors receiving most of the assistance are energy; agriculture, natural resources, forestry, and fishing; health; transport; and a broad classification under multisector aid. Together these sectors absorb about 70% of all assistance. Appendix 6 provides details on the distribution of assistance from the development partners and details of the principal activities. 39. Development partners are coordinated by means of a variety of formal and informal channels. At the informal level there is considerable interaction among development partners with representative offices in Bhutan. The relatively small size of the community in Thimphu and number of representative offices there encourages interagency dialog and, at times, close collaboration and information sharing. Because it does not have a resident mission (RM), ADB is not as actively involved in local donor coordination as some other donors. 40. At the more formal level, recurrent discussions have taken place through roundtable meetings, where development partners have an opportunity to exchange plans and discuss policy issues, and coordinate funding for priority sectors. The roundtable meetings usually take place at the beginning and middle of each 5-year development plan. The seventh roundtable meeting took place in 2000 to address the Ninth Five-Year Plan, which relies on external assistance for as much as 45% of its funding. The eighth roundtable meeting was held in Geneva in February 2003 and was attended by high-level representatives from 18 bilateral and 27 multilateral and other agencies. It focused on three thematic issues: the Ninth Five-Year Plan and resource mobilization; poverty reduction; and decentralization and the management of local-level development, as well as the Nu13,500 million (about $294 million) resource gap needed to finance projects under that 5-year plan. 41. Mobilizing grant cofinancing was an important element of the first decade of ADBs operations in Bhutan. Two of ADBs loans to Bhutan have been cofinanced with the Danish International Development Agency (DANIDA): the Second Multiproject project of 1984, and the Urban Centers Sewerage project of 1987. Of the 85 TAs that ADB has provided to Bhutan, seven were cofinanced with Denmark, Norway, and Switzerland for a total of $5.9 million. However, all of this TA cofinancing took place prior to 1993. Cofinancing was planned with UNDPs Global Environment Facility to support a mini-hydropower component for ADBs Sustainable Rural Electrification project20 but the project failed to materialize due to processing delays on the part of the Global Environment Facility. 42. There has not been any cofinancing in the last 10 years. The reduction in cofinancing reflects, in part, the Governments clear identification of areas for different donors to avoid duplication of donor activities and clear priorities for the use of loans (e.g., infrastructure; financial sector; private sector development) and grant (e.g., agriculture; social sectors) funds. However, other funding agencies continue to assist Bhutan in areas that are being supported by ADB. For instance, Norway has recently signed a second phase to its institution-building
19 20

OECD. 2004. Geographical Distribution of Financial Flows to Aid Recipients 19982002. France. ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the Kingdom of Bhutan for the Sustainable Rural Electrification Project. Manila (for $10.0 million, approved 25 November 1999).

14 activities in the energy sector, and support to the sector is also being provided by Austria. Germanys Gesellschaft fr Technische Zusammenarbeit and the Canadian International Development Agency both have activities in the education sector, most recently in vocational training. Denmarks DANIDA portfolio covers health, urban development, and environment and natural resource management. There have been some examples of successful donor coordination involving ADB (e.g., ADBs rural electrification loans following a master plan supported by Japan; other donors using a road masterplan developed by ADB; ADB working with UNDP for the Bhutan Living Standard Survey). However, the need for more donor coordination was repeatedly mentioned during OEMs field work by other agencies, including UNDP. UNDP has been active in poverty monitoring, and proposed modifications to ADBs activities in this area that were never taken up. The lack of coordination with other development partners in strengthening research and diagnostic work in some instances limited the effectiveness and ultimate impact of ADBs assistance (Chapter V, Section A.2). Aid coordination remains weak and only partly satisfactory, despite the existence of formal and informal arrangements for monitoring and coordinating existing and programmed activities among development partners. C. Portfolio Performance 1. Loan and Technical Assistance Portfolio Performance

43. Nineteen loans were approved by ADB for Bhutan as of 31 December 2004, amounting to $111.16 million, including one loan for urban centers sewerage that was canceled and never utilized.21 Eighty-five TAs (63 ADTAs and 22 PPTAs) amounting to $32.03 million were approved between 1983 and 2003. Sector-wise, social infrastructure had the highest share in loans, both in terms of amount (28%) and number of projects (22%), followed by energy (25% in amount and 17% in number of projects), and transport and communications (18% in amount and 17% in number of projects). Of the 18 implemented and ongoing loans, eight loans (44.4%) experienced delays in loan effectiveness, ranging from 5 to 60 days, or an average of 30 days. For the ADTAs, agriculture and natural resources had the highest share both in terms of amount (27%) and number of projects (21%), followed by finance (18% in amount and 21% in number of projects), and others (16% in amount and 24% in number of projects). For the PPTAs, transport and communications had the highest share in terms of amount (25%), followed by energy and social infrastructure (both at 23%). 44. The number of active loans for any given year peaked in 1990, when nine loans were ongoing. By the end of 2004, the loan portfolio for Bhutan consisted of 18 outstanding TAs (Table 2) and five public sector ADF loans (Table 3), with a net loan amount of $45 million.22 There were three PPTAs and eight ADTAs ongoing in the TA portfolio, totaling $4.2 million. Of
21

Another loan (ADB. 1987. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance to the Kingdom of Bhutan for the Urban Centers Sewerage Project. Manila), was canceled before implementation at the request of the Government. The loan was approved in May 1987 from ADBs Special Funds (SF) resources, and it became effective in June 1991. The total project cost was estimated at $6.3 million and the project components covered service areas and wastewater stabilization ponds in Thimphu, Phuentsholing, and Gaylegphug. The project encountered numerous problems associated with further study of extensive use of septic tanks rather than construction of piped sewage systems, which was counter to the Governments priority of rural development and making only essential investments in urban areas. The project was substantially modified at the recommendation of both the Government and ADB, but cost overruns appeared during the tendering for civil works in the Thimphu component. The Government was not in a position to increase its contribution to the project and believed the project was no longer financially viable with the loan financing. The loan was canceled in April 1991. 22 ADB. 2004. Annual Report on Loans and Technical Assistance Portfolio Performance for the Period Ending 31 December 2003. Manila.

15 the completed PPTAs, four did not lead to loans due to the Governments financial and resource constraints and borrowing priorities. As a result, PPTA resources can be assessed as having been moderately utilized. Table 2: Approved Technical Assistance Outstanding, by Sector
Approval Date Nov-03 Dec-03 Sep-03 Sep-03 Amount ($'000) TASF JSF Total 450 0 400 500 0 400 0 0 450 400 400 500

TA No. Title Agriculture and Natural Resources 1. 6131 South Asia Subregional Economic Cooperation Tourism Development Plan 2. 6159 Regional Air Quality Management Energy 3. 4188 Capacity Building of the Bhutan Electricity Authority 4. 4189 Establishing the Druk Hydropower Corporation Finance 5. 3687 Financial Sector Review 6. 3905 Strengthening the Capacity of the Royal Monetary Authority and Royal Securities 7. 4386 Strengthening of the Payment and Settlement System 8. 4398 Strengthening the Debt Management of the Department of Aid and Debt Management 9. 6087 Small- and Medium-Sized Enterprise Growth and Development in the South Asia Region Social Infrastructure 10. 4019 Industrial Estate and Dry Port 11. 4042 Housing Sector Reform Transport and Communications 12. 4138 Road Network Expansion Others 13. 3513 Public Sector Resource Management 14. 3669 Strengthening the National Statistical System 15. 4120 Strengthening Environmental Sector Capacity 16. 6010 South Asia Subregional Economic Cooperation (SASEC) II 17. 6090 Private Sector Cooperation in the SASEC Subregion 18. 6156 Subregional Economic Cooperation in South and Central Asia Total

Type RETA RETA ADTA ADTA

ADTA ADTA

Jul-01 Aug-02

300 0

0 334

300 334

ADTA ADTA

Sep-04 Sep-04

275 225

0 0

275 225

RETA

Dec-02

750

750

PPTA ADTA PPTA ADTA ADTA ADTA RETA RETA RETA

Dec-02 Dec-02 Jul-03 Oct-00 Jun-01 May-03 Dec-01 Dec-02 Dec-03

700 500 0 0 600 150 500 150 600 6,100

700 500 500 300 600 150 500 150 600 7,634

500 300 0 0 0 0 0 1,534

ADTA = advisory technical assistance, JSF = Japan Special Fund, No. = number, PPTA = project preparatory technical assistance, RETA = regional technical assistance, TA = technical assistance, TASF = technical assistance special fund. Source: Technical Assistance Information System.

16

Table 3: Approved Loans Outstanding, by Sector

Loan Amount Approved Actual ($ million) ($ million) 10.000 9.400 9.462 9.886

Sustainable Rural Electrification Rural Electrification and Network Expansion Social Infrastructure 3. 1625(SF) Urban Infrastructure Improvement 4. 1830(SF) Basic Skills Development Transport and Communication 5. 1763(SF) Road Improvement Total Lending
No. = number. Source: Loan Financial Information System.

Loan No. Energy 1. 1712(SF) 2. 2009(SF)

Title

Approval Date Nov-99 Sep-03

Closing Date Mar-05 Mar-07

5.700 7.000 9.600 41.700

5.902 8.002 10.428 43.680

Jul-98 Jun-01 Oct-00

Jun-05 Mar-07 Jun-05

45. For 20042006, ADB programmed an indicative lending level of $28.2 million, or an average of $9.4 million per year. The proposed ADF lending levels are, however, subject to the outcome of the annual performance-based allocation and the overall ADF resource availability. The results of the assessment form the basis for triggering high, base, or low lending scenarios each year. The ADB allocation process consists of two steps based on common country performance assessment criteria, on the one hand, and country-specific criteria, on the other. In the former category, Bhutan has performed well and has been ranked in the first quintile of ADF recipient countries. In the latter category however, the overall assessment, based on countryspecific performance triggers contained in the 2001 CSPU, indicated a base-case scenario in part reflecting less than optimal portfolio management of ADB projects and delays in privatization. In the 20042006 CSPU, a new set of country-specific criteria was included, which formed part of the overall policy dialogue with the Government. 2. Project Performance Ratings

46. The first two loans, approved in 1983 and 1984, encountered significant time overruns in implementation. The delays were mainly caused by a shortage of qualified and experienced project implementation staff and unfamiliarity of the EAs and IAs with ADB procedures. Over time, portfolio performance improved and by 2003, no loans in the Bhutan portfolio were reported to be in the at-risk category. Since 1995, overall performance of the Bhutan portfolio has been rated satisfactory. Of the five ongoing loans, one was rated highly satisfactory while the remaining four were rated satisfactory in both implementation progress and development objectives. While one problem loan23 was noted during 20012002, there were no potential problems or problem loans in the portfolio by 2003. The portfolio performance in terms of project performance ratings of ongoing loans as of 31 December 2003 was better than the regional and ADB-wide averages.

23

ADB. 1997. Report and Recommendation of the President to the Board of Directors on Proposed Loan and Technical Assistance Grant to the Kingdom of Bhutan and a Proposed Equity Investment in Bhutan National Bank in the Kingdom of Bhutan for the Financial Sector Intermediation Facility. Manila (for $4.0 million, approved 23 October 1997). The loan account was closed on 23 December 2002.

17 3. Financial Performance

47. Contract Awards. For the period from 1984 to 2003, contract award performance varied, from a low of 25% (in 1988) to a high of 373% (in 2000) of annual projections for both project and programs (Figure 1). Delays in contract awards in the first 10 years were significant, and resulted in several of the projects being rated as unsatisfactory. Although there was room for yet more improvement, from 1994 to 2003 the trend for contract awards improved, except in 1999 when the actual contract awards were 60.5% of the annual projections. The actual contract awards for 2003 were 89% of the projected $8 million. The contract award ratio for project loans in 2003 was 36%, double the ADB-wide average of 16% for ADF project loans.

400

Figure 1: Percent of Actual Contract Awards to Annual Projection, 19852003

300 Percent

200

100

0 1985 1988 1991 Source: Loan Financial Information System. 1994 1997 2000 2003

48. Disbursement Ratio. While Bhutans 2003 disbursement ratio (23%) was above the ADB-wide average of 20%, disbursement performance of the portfolio of active BHU loans was 83% of the target. A comparison of Bhutans and the ADB-wide disbursement ratio trends from 1987 to 2003 of all active loans is shown in Appendix 3. Except for 1997, 2000, and 2002, Bhutans overall disbursement ratio trend was generally consistent with the ADB-wide trend. It peaked at 49.7% in 1997, but declined to 6.4% in 2000 due to the delayed release of the second tranche for the program loan. The second tranche was released in 2002. The low disbursement performance in 2003 was due to the damage and disruptions caused by the 2002 floods, most noticeably in the south of the country. 49. Audit Compliance. Noncompliance and delays in the submission of audited accounts were often experienced during the initial years (19841990). With the strengthening of EAs and IAs, improvements were gradually made. By 2003 only one loan (of the four loans requiring submission of audited accounts) encountered a delay, which was less than 6 months. In 2002, the submission of two loans for audited accounts was delayed. 4. Country Portfolio Review

50. Country Portfolio Reviews (CPRs) have taken place annually for at least the past 10 years. The 2003 CPR produced an action plan emphasizing timely decision making with regard to implementation matters. It was agreed that project steering committees, which are the

18 current high-level forum for resolution of interministerial issues, especially those related to project implementation, should be more frequently used. Other issues included the importance of adequate staffing with the correct skills mix in the establishment of project implementation units (PIUs) and that frequent turnover of project managers adversely affected project implementation. TA implementation has been adversely affected by the lack of adequate counterpart support provided by the EAs. An action plan for 20032004 was prepared emphasizing (i) full authority of EAs and IAs in approving draft bid documents and award of contracts; (ii) full staffing with the right skills mix of project management units; and (iii) establishment and functioning of project steering committees. On the action plan prepared in 2002, 13 actions were identified. Of these, nine were fully complied with, while three were in partial compliance and one was ongoing. Overall, the CPRs were useful and contributed to improving portfolio performance. 51. OEMs assessment of past portfolio performance offers the following lessons for future CSPs: (i) adequate staffing with the correct skills mix is just as important as the establishment of PIUs; (ii) frequent turnover of project managers adversely affects project implementation; and (iii) despite the improvements that have been made with ADB support (a) government procurement procedures remain cumbersome and financial authority of project managers is low, and (b) financial and technical capacity of local contractors remains weak. Recommendations include the need to (i) enhance capacity of project implementation staff, especially with respect to ADB procedures and policies; (ii) enhance technical capacity of EA staff regarding sector knowledge, especially in the financial and energy sectors; (iii) better assessment of existing policy framework with implications for phasing and sequencing of sector reforms; (iv) adaptation to local conditions (road maintenance and management system); (v) improve coordination for cofinancing operations; (vi) ensure adequate financial resources for operations and maintenance, especially in the roads sector; (vii) address institutional weaknesses and build capacity thru long-term TA commitment; and (viii) actively engage high-level government officials to ensure ownership and government commitment. IV. A. PROGRAM RESPONSIVENESS AND OUTCOMES

Responsiveness of Country Operational Strategy 1. Country Operational Strategy 1991

52. ADBs initial program in Bhutan was undertaken independently of any operational strategy. As a result, the initial operational focus was fairly wide ranging, with assistance being provided in a variety of sectors. The first multisector loan consisted of a set of six public sector subprojects in agriculture, forestry, transport, communications, and water supply and sanitation.24 The second multisector loan addressed the Governments emphasis on building basic physical infrastructure and improving the socioeconomic conditions of the people by supporting water supply and sanitation as well as education.25 Both loans aimed to support the Fifth Five-Year Plan (FY19821987) by increasing the countrys self-reliance and expanding physical and social infrastructure.
24

See footnote 5. The six subprojects comprised improvements to an existing agricultural workshop, provision of forest logging and road construction equipment and construction of forest roads, a 58 km new district road, 10 suspension bridges, solar panels for 18 wireless stations, water supply improvements in two urban centers, and provision of solid waste and septage collection equipment for five urban centers. 25 ADB. 1984. Report and Recommendation of the President to the Board of Directors on a Proposed Second Multiproject Loan to the Kingdom of Bhutan. Manila (for $7.4 million, approved 13 December 1984). The two subprojects comprised the Urban Centers Water Supply and Sanitation subproject, and the Royal Institute of Management subproject.

19 53. After nearly a decade of experience, the first COS was prepared in 1991 to assist Bhutans efforts to diversify the economy. It emphasized (i) strengthening the capacity for economic management and development administration; (ii) improving physical and social infrastructure; (iii) promoting private sector development; and (iv) protecting the environment. The operational strategy was based on a 1989 study suggesting that ADB adopt a catalytic role by using TA preparing development projects and mobilizing cofinancing, particularly grants. Consequently, the focus of operations became the provision of TA for project preparation, policy research and development, and institution strengthening. 54. The 1991 COS preceded ADBs first Medium-Term Strategic Framework (MTSF) for 19921995 and 19951998, but incorporated some of its specific thematic priorities to guide operations in the medium term, such as encouragement of private sector development, strengthening public sector management capacity, human resource development, and natural resources management. These thematic priorities were generally consistent with ADBs subsequent MTSF objectives of economic growth, poverty reduction, improving the status of women, human development, and environmental protection.26 The 1991 COS did not, however, explicitly address poverty reduction or gender-related issues. Poverty was generally recognized as being a central issue for Bhutan and some operations were designed to address poverty, albeit indirectly. Bhutans gender indicators suggest that gender issues did not need to feature prominently in the COS. The 1991 COS is considered responsive to ADBs strategic thrusts at that time. 2. Country Operational Strategy 2000

55. The second COS, finalized in 2000, does not differ fundamentally from the earlier one, and seeks to maintain continuity with the 1991 COS. It aims to support poverty reduction in the country by promoting economic growth and social inclusiveness and by supporting the Governments strategic theme of improving the quality of life of all segments of the population. ADBs overarching objective of poverty reduction is being addressed through the income and employment generation impact of private sector-led development brought about by an improved policy setting and more efficient financial intermediation. ADBs specific interventions have been directed toward reducing physical infrastructure constraints, developing the domestic skills base, improving the urban environment, and supporting sustainable provision of high-quality social services. 56. The 2000 COS is consistent with ADBs 1999 Poverty Reduction and Private Sector Development Strategies, which together form the building blocks for the 20012015 Long-Term Strategic Framework (LTSF).27 The Poverty Reduction Strategy identifies the three pillars of pro-poor, sustainable economic growth; good governance; and social development to guide the preparation of COSs and CAPs for developing member countries. The LTSF identifies three core areas for ADB operations: (i) sustainable, broad-based economic growth, including investments both in physical and social infrastructure, with environmentally sound development; (ii) inclusive social development, including investments in social support programs to improve equity and empowerment of women and disadvantaged groups; and (iii) governance for effective policies and institutions, including support for public sector reform, and for legal and

26

The 19921995 MTSF included facilitating progress in population planning rather than human development, while the 19951998 MTSF specified human development (including population planning). The term human development referred to that adopted by UNDP for its human development index. 27 ADB. 2001. Moving the Poverty Reduction Agenda Forward in Asia and the Pacific: The Long-Term Strategic Framework of the Asian Development Bank (20012015). Manila.

20 judicial reforms.28 These three core areas are complemented by three crosscutting themes aimed at promoting private sector development, regional cooperation and integration, and environmental sustainability. Implementation of the LTSF through three medium-term strategies and the Poverty Reduction Strategy support ADBs operational goals established under the Millennium Development Goals (MDGs).29 The 2000 COS is responsive to ADBs thematic and strategic thrusts for the period. B. Responsiveness of Country Assistance Programs 1. Program Support by Sector

57. Sector-based lending activities favored Figure 2: Distribution of Assistance, social infrastructure and energy during the by Sector period, with one half of the value of project 12.5% 11.1% commitments going to these two sectors (Figure 2). The focus was in line with the COS to 17.4% strengthen the countrys physical and social 22.4% infrastructure. Relatively large support was also provided to transport and, to a lesser extent, 24.1% 11.0% agriculture and natural resources, and finance. 1.6% Energy Agriculture In contrast, little support was given to the Industry Finance industry and nonfuel minerals sector, despite the Transportation and Social Infrastructure 1991 COS strategic objective of diversifying the Communications Multisector economy, particularly in terms of fostering private sector-led growth that would be capable Source: Loan and technical assistance documents. of promoting exports to countries other than India. Nor was much emphasis given to the encouragement of the private sector, despite ADBs overall strategy to promote its development and its emphasis in the 1991 COS. 58. For nonlending activities, the sector-based allocation of ADTAs favored agriculture and natural resources, and finance. Together these two sectors received 45% of the total value of ADTAs in the period under review. Two other sectors favored by ADTA-based support were transport, and energy. Social infrastructure received fairly limited ADTA support (9.4% of the total), though there was fairly large program lending to that sector. In the environment, ADB has contributed to the formulation and improvement of environmental assessment guidelines, as well as to the implementation of environmental assessment regulations. 2. Program Support by Country Operational Strategic Objective

59. The COSs share a common set of priority areas that encompass institutional capacity building, private sector development, physical and social infrastructure development, environmental protection, and human resource development. Table 4 summarizes the distribution of lending and nonlending activities in terms of number and value of projects in each priority area. In line with COS objectives during the review period, lending activities focused on physical and social infrastructure development, whereas nonlending activities were largely directed toward institutional capacity building. Both infrastructure development and capacity building had a roughly similar number of projects, but two thirds of ADBs financing was directed to infrastructure development, compared with only one eighth directed toward capacity building.

28 29

ADB. 1999. Fighting Poverty in Asia and the Pacific: The Poverty Reduction Strategy. Manila. For details, see Appendix 2.

21 Table 4: Composition of Approved Loans and Technical Assistance by Objective of Country Operational Strategy, 19832003 Distribution by Number of Projects (%) Loans ADTAs Total 11.1 16.7 16.7 5.6 22.2 16.7 11.1 20.6 9.5 20.6 4.8 7.9 9.5 27.0 18.4 11.7 16.5 4.9 15.5 13.6 19.4 Distribution by Amount of Assistance (%) Loans ADTAs Total 7.2 24.9 9.7 1.1 27.7 17.9 11.5 26.9 11.4 18.2 3.7 9.4 13.2 17.1 11.1 22.4 11.0 1.6 24.1 17.4 12.5

Sector Agriculture/Natural Resources Energy Finance Industry Social Infrastructure Transport Multisector

ADTA = advisory technical assistance. Source: Based on Appendix 2, tables A2.1 to A2.3.

60. Overall, the lending and nonlending programs during 19832003 were dominated by social infrastructure, energy, agriculture and natural resources, and finance, and can generally be regarded as responsive/relevant to the COS objectives during the period. Although the CAPs generally translated the COSs into relatively balanced programs, they did not support the oftencited strategic objective of supporting private sector development through nontraditional activities designed to diversify the economic base of the country and diversify its exports. 61. During 19831991, lending and nonlending assistance focused on programs in the agriculture and natural resources sector and multisector. With the first COS in 1991, emphasis shifted to the energy sector until 1998, and then, based on succeeding strategies and plans, to social infrastructure until 2003. While total agriculture lending and nonlending amounted to $14.0 million during 19831991 (or 30.2% of the total portfolio for the period), only one ADTA and no loans have been provided since 1992 to the agriculture and natural resources sector. The agriculture projects had a clear linkage to reducing poverty and increasing rural incomes. However, ADB lending for agriculture ended because of the governments clear preference to use grants for this sector. The energy and financial sectors accounted for 43.2% and 22.2%, respectively, of the total lending and nonlending programs. Since 1999, social infrastructure has become the principal sector for ADB assistance at 41.1%, followed by energy at 25.2%. While most sectors show a fluctuating trend across the three periods, lending to the transport sector has grown steadily since 1983. Table 5 summarizes the total lending and nonlending programs for the different periods. The Graduation Policy in 1998 did not have an impact on ADBs lending to Bhutan during the period under review. The country remains eligible for ADF financing.

22 Table 5: Composition of Approved Loans and Technical Assistance by Amount of Assistance ($ million)
Sector Agriculture/Natural Resources Energy Finance Industry Social Infrastructure Transport Multisector Total 19831991 Loan ADTAs Total 7.8 6.2 14.0 0.0 2.5 1.2 7.1 4.5 12.4 35.5 0.0 0.9 0.6 1.1 0.9 1.2 10.9 0.0 3.4 1.7 8.2 5.4 13.6 46.4 19921998 Loan ADTAs Total 0.0 0.7 0.7 17.5 8.0 0.0 5.7 5.2 0.0 36.4 1.4 1.7 0.4 0.5 1.1 1.5 7.3 18.9 9.7 0.4 6.2 6.3 1.5 43.7 19992003 Loan ADTAs Total 0.0 0.0 0.0 9.4 0.0 0.0 17.0 9.6 0.0 36.0 1.5 2.0 0.0 0.8 1.4 1.7 7.3 10.9 2.0 0.0 17.8 11.0 1.7 43.3

ADTA = advisory technical assistance. Source: Loan and technical assistance documents.

3.

Program Support for Poverty Reduction

62. Poverty reduction became the overarching goal of ADB in 1999 when the Poverty Reduction Strategy was approved. Previously, it was one of the five strategic thrusts under ADBs MTSF in the 1990s. The Strategy covering 20012005 extends the poverty focus of the earlier MTSF to core poverty interventions, poverty interventions, and other development interventions. It further classifies the earlier thematic focus into seven categories, namely, economic growth, environmental protection, good governance, gender and development, human development, private sector development, and regional cooperation.30 63. Table 6 shows the classification of loans to Bhutan on the basis of their primary and secondary focus, in accordance with ADBs classification system.31 About 18% of the projects had a poverty focus as the primary objective and another 25% had poverty reduction as a
30 31

For details, see Appendix 2. The classification system for loan projects was introduced in 1992 to monitor lending for the five strategic thrusts in the 19921995 MTSF through COSs and CAPs for developing member countries. The classification encompassed (i) promoting economic growth, (ii) supporting human development including population planning, (iii) reducing poverty, (iv) improving the status of women, and (v) promoting sound management of natural resources and the environment. The thematic list was modified as ADB updated its strategic directions, first in 1995 to remove some ambiguities and make the guidelines more rigorous, and later to align it with the strategic priorities in the Poverty Reduction Strategy and the LTSF adopted in 1999 and 2000, respectively. In 2000, the system of project classification was changed from classifying projects by their primary and secondary objectives in accordance with the old MTSF five strategic thrusts, to classifying them by (i) poverty focus under three categories: core poverty intervention, poverty intervention, and other development intervention; and (ii) thematic focus under seven categories: economic growth, environmental protection, good governance, gender and development, human development, private sector development, and regional cooperation. Among the important criteria-specific modifications were the following: (i) the human development share of projects was reduced from 50% to 20%, and the list of coverage was expanded to include food security and nutrition, improvements in working conditions, and social protection; (ii) reduction of poverty became ADBs overarching goal, taking precedence over all other development objectives; (iii) improvement in the status of women was renamed gender and development, and targeted female beneficiaries were reduced from two thirds to one third of total direct beneficiaries, while the total share of costs was reduced from 50% to 20%; the environment share was reduced from 50% to 20%. For details, see ADB. 1992. Guidelines for the Classification of Loan Projects in Terms of the Banks Strategic Development Objectives. Manila; ADB. 1995. Guidelines for the Classification of Loan Projects in Terms of the Banks Strategic Development Objectives. Manila; and ADB. 2000. Loan Classification Conforming to the Poverty Reduction Strategy. Manila.

23 secondary objective. The total, 43%, was close to the ADB-wide target of 40% adopted in 1999. The primary focus of most loans was either economic growth (48%) or human development (34%). The secondary focus of the loans was concentrated, albeit somewhat less, on these two objectives. The portfolio addressed crosscutting issues such as environmental protection (14%), private sector development (10%), and good governance (9%). The focus on poverty reduction projects evolved with ADBs shift toward poverty reduction as its overarching objective. The two projects whose primary objective was poverty reduction (Sustainable Rural Electrification [footnote 20], and Rural Electrification and Network Expansion32) were approved in 1999 and 2003, respectively. Similarly, two of the three projects with the secondary objective of poverty reduction (Health Care Reform Program,33 and Road Improvement34) were approved in 2000. These four loans together accounted for 85% of the total value of loans approved between 1999 and 2003. It is clear from this analysis that ADB developed a loan portfolio in Bhutan that was strategically aligned with its overarching poverty reduction objective. Table 6: Composition of Approved Loans by Primary and Secondary Thematic Focus, 19832003
Value Item Primary Focus Poverty Focus Thematic Focusa Economic Growthb Environmental Protectionb Gender and Developmentb Human Developmentb Private Sector Development Good Governance Regional Cooperation Secondary Focus Poverty Focus Thematic Focusa Economic Growthb Environmental Protectionb Gender and Developmentb Human Developmentb Private Sector Development Good Governance Regional Cooperation
a b

Number % 100.0 18.0 47.5 0 0 34.5 0 0 0 100.0 25.1 28.7 13.6 0 13.6 9.7 9.3 0 No. 18 2 11 0 0 5 0 0 0 18 3 4 4 0 3 3 1 0 % 100.0 11.1 61.1 0 0 27.8 0 0 0 100.0 16.7 22.2 22.2 0 16.7 16.7 5.6 0

$'000 107,860 19,400 51,230 0 0 37,230 0 0 0 107,860 27,100 30,930 14,630 0 14,700 10,500 10,000 0

Covered under the Medium-Term Strategy for 20012005. Covered under other strategic areas in the 19921998 Medium-Term Strategic Framework, in addition to the poverty reduction strategic thrust. Source: Based on Appendix 2, table A2.1.

32

ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grants to the Kingdom of Bhutan for the Rural Electrification and Network Expansion. Manila (for $9.4 million, approved 30 September 2003). 33 ADB. 2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Bhutan for the Health Care Reform Program. Manila (for $10 million, approved 21 September 2000). 34 ADB. 2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Bhutan for the Road Improvement Project. Manila (for $9.6 million, approved 03 October 2000).

24 64. A similar classification scheme was applied to ADTAs in terms of their primary objectives (Table 7).35 The classification results show that only one TA, had a direct poverty reduction focus. About one third of the ADTAs had human development as their primary objective, measured in terms of both the combined value of the ADTAs and their number. Other important objectives were economic growth (29% of the combined value of ADTAs), followed by private sector development (17%) and governance (16%). Table 7: Composition of ADTAs by Poverty and Thematic Focus, 19832003
Value Item Poverty Focus Thematic Focusa Economic Growthb Environmental Protectionb Gender and Developmentb Human Developmentb Private Sector Development Good Governance Total
a

Number % 0.4 No. 1 12 4 1 20 11 14 63 % 1.6 19.0 6.3 1.6 31.7 17.5 22.2 100.0

$'000 100 7,268 1,338 30 8,503 4,238 3,940 25,417

28.6 5.3 0.1 33.5 16.7 15.5 100.0

ADTA = advisory technical assistance. Covered under the Medium-Term Strategy for 20012005. b Covered under other strategic areas in the 19921998 Medium-Term Strategic Framework, in addition to the poverty reduction strategic thrust. Source: Based on Appendix 2, tables A2.1 to A2.3.

65. As a result of the shift in project design toward the poverty reduction focus of ADB in the latter part of the review period, the lending program is regarded as responsive/relevant to the changes in ADBs strategic thrusts. For ADTAs, however, the modest poverty reduction focus indicates that the nonlending program was partly responsive/partly relevant to the changes in ADBs strategic thrusts during the period being evaluated. C. Project Relevance, Efficacy, and Efficiency Evaluation Results36 1. Agriculture and Natural Resources

66. Agriculture is the largest sector of the economy, accounting for slightly less than one third of GDP in 2003. It plays a key role in generating income and employment opportunities, as well as providing national food security and conserving natural resources. Nearly 80% of the population live in agriculturally dependent rural areas. The incidence of income poverty in rural areas, 41%, is five times higher than the 6.4% incidence in urban areas.37 Yet output growth in the agriculture sector is lagging behind other sectors and the sectors share of GDP is expected to fall from 50% in 1986 to 25% by the end of the Ninth Five-Year Plan in 2007.

35

The classification was carried out by the CAPE team members. Although the classification was somewhat less rigorous than the process carried out for loans, it nevertheless provides a good indication of the composition and evolution of project designs in Bhutan and responsiveness to changes in ADBs strategic thrusts. 36 See Appendix 4. 37 International Monetary Fund. 2004. Bhutan: Poverty Reduction Strategy Paper. IMF Country Report No. 04/246. Washington, DC.

25 67. ADBs lending and nonlending activities in the sector during 19832003 consisted of two loans with a combined approved amount of $7.78 million, four PPTAs totaling $883,000, and 13 ADTAs totaling $6.84 million. These amounts correspond to 7.2% of the value of all loans made during the period, 13.4% of all PPTAs, and 26.9% of ADTAs. ADBs interventions covered irrigation, forestry, institutional development, human resources development and training, and livestock development. In addition, one of the multisector loans approved in 1983 contained subprojects for agriculture and forestry sectors and three regional TAs for Bhutan and other South Asian countries targeted to vegetable research and a related research center.38 68. Nearly all agricultural lending and nonlending activities took place during the first 10 years of ADBs operations in Bhutan. The two loans were approved in 19851986, and 12 of the 13 ADTAs were approved between 1984 and 1993. The dollar amount of those 12 ADTA projects represented half of all approved ADTAs during 19841993. In contrast, agriculturebased ADTA projects in 19942003 represented only 2% of all TAs. The outputs of these nonlending activities were concentrated in the first half of the period under review. The reduction in ADBs activities in this sector in later years was a consequence of the Governments preferences with regard to borrowing for certain sectors and using grant assistance for others, including agriculture. ADBs decision to exit from the agriculture sector was consistent with the Governments policy choices. 69. The first agricultural loan (Chirang Hill Irrigation)39 was closed in 1992. Only $1.09 million of the $3.48 million approved amount was disbursed because of the outbreak of antigovernment violence in southern Bhutan. As a result, there was limited achievement of the project outputs in the targeted district in terms of improvements in the irrigation areas, soil conservation, watershed management, and the provision of extension services for the promotion of crop diversification. Because of limited cultivatable land, irrigation is essential if Bhutan is to achieve national food security, sustainable agricultural production, and enhancement of rural incomes. Subsequent support was provided by the Irrigation Action Plan40 and Irrigation Program Strengthening.41 These two ADTAs supported the Governments National Irrigation Policy of 1992 by establishing an action plan, and by supporting an expanded policy that extended the program to horticultural crops. Cofinancing took place with the Netherlands Development Organization (SNV) in the second of these ADTAs. Planned cofinancing of Phase II of the Irrigation Program Strengthening project with the Netherlands Government, however, did not materialize. 70. The second loan (Highland Livestock Development),42 despite delays in implementation caused by religious constraints on cattle slaughter, was generally successful in improving livestock productivity, providing meat for the domestic market, and substantially increasing rural

38

The RETAs consisted of the following: (i) South Asian Vegetable Research Planning and Consultation Workshop (RETA 5373), approved 23 March 1990 for $100,000; (ii) South Asia Vegetable Research Network (RETA 5461), approved 25 September 1991 for $600,000; and (iii) RETA to Asian Vegetable Research Development Center for South Asia Vegetable Research Network, Phase II (RETA 5719) for $600,000. 39 ADB. 1985. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and a Technical Assistance to the Kingdom of Bhutan for the Chirang Hill Irrigation Project. Manila (for $3.48 million, approved 17 September 1985). 40 ADB. 1993. Technical Assistance to the Kingdom of Bhutan for the Irrigation Program Strengthening Project. Manila (for $350,000, approved 22 September 1993). 41 ADB. 1997. Technical Assistance Grant to the Kingdom of Bhutan for the Irrigation Action Plan. Manila (for $300,000, approved 7 March 1997). 42 ADB. 1986. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and a Technical Assistance to the Kingdom of Bhutan for the Highland Livestock Development Project. Manila (for $4.3 million, approved 2 December 1986).

26 household incomes.43 Apart from the favorable impact on poverty reduction and private sector development, the project was instrumental in reducing environmental degradation produced by free grazing in the forest. It was consistent with the high priority given by the Governments Fifth and Sixth Five-Year Plans to the sector and ADBs strategy. There was also successful coordination with other development partners. The Government of Norway cofinanced the project and provided a TA grant for equipment and vehicles used for milk collection, a turnkey milk processing plant, and training services. Another TA project, Women in Development Profiles in Highland Livestock Development,44 was important in terms of its impact on gender equity since it helped explain the role of women in Bhutanese society, especially as it related to their key role in livestock rearing and other agricultural activities. 71. Several ADTAs have provided support through training and human resources development programs through the Ministry of Agriculture. They included Manpower Development and Training,45 Institutional Strengthening to the Ministry of Agriculture and Its Operational Departments,46 and Agricultural Extension Course.47 Each of these TAs was considered timely for and relevant to the Governments needs to improve the quality of its staff at a time when there was a shortage of trained and skilled professionals in the Department of Agriculture. A similar finding applied to the ADTAs that sought to reduce or eliminate constraints on various public sector programs in agriculture, such as the emergency food supply program of the Food Corporation of Bhutan,48 the establishment of rural service centers under the Planning and Development of Integrated Rural Services Centers,49 and the countrys various incentive and subsidy schemes in the Study of Agricultural Incentives and Subsidies.50 Outcome assessments of these ADTAs were generally favorable, with scores ranging from above partly relevant/efficacious/efficient (2.3) to fully relevant/efficacious/efficient (3.0). Policy reforms were supported by these TAs but lack of data prevented an effective assessment of their possible impact. For example in the case of TA 795-BHU (footnote 50), which was directed at streamlining incentives and subsidies, consultants were unable to quantitatively assess the likely effect of proposed reforms on government revenue. 72. In summary, projects in the agriculture sector were generally found to be relevant, in their design, to Bhutans and ADBs development strategies. The project directed at irrigation activities generally supported poverty reduction and rural household income improvements. as the irrigation facilities helped raise living standards in predominantly poor villages and were propoor initiatives that were in line with ADB and government priorities. In the livestock subsector, ADBs interventions helped farmers improve their cattle breeds, thereby increasing their
43

Scoring on all socioeconomic impact criteria was ranked as favorable (3 out of 4), and institutional impact was ranked between modest and moderate (2.5 out of 4). For details, see the Supplementary Appendix to this document, which is available on request. The loan was evaluated by both a project performance audit report and a project completion report. Both evaluations found the loan to be successful in achieving its major objectives and in building a base for the continued development of the sector. 44 ADB. 1988. Technical Assistance to the Kingdom of Bhutan for the Women in Development Profiles in Highland Livestock Development Project. Manila (for $30,000, approved 7 September 1988). 45 ADB. 1985. Technical Assistance to the Kingdom of Bhutan for the Manpower Development and Training Project. Manila (for $687,000, approved 17 September 1985). 46 ADB. 1987. Technical Assistance to the Kingdom of Bhutan for the Institutional Strengthening to the Ministry of Agriculture and Its Operational Departments Project. Manila (for $350,000, approved 4 December 1987). 47 ADB. 1988. Technical Assistance to the Kingdom of Bhutan for the Agricultural Extension Course Project. Manila (for $75,000, approved 5 July 1988). 48 ADB. 1985. Technical Assistance to the Kingdom of Bhutan for the Food Corporation of Bhutan and Agricultural Marketing Systems Project. Manila (for $162,000, approved 12 December 1985). 49 ADB. 1985. Technical Assistance to the Kingdom of Bhutan for the Planning and Development of Integrated Rural Services Centers Project. Manila (for $350,000, approved 20 November 1985). 50 ADB. 1986. Technical Assistance to the Kingdom of Bhutan for the Study of Agricultural Incentives and Subsidies Project. Manila (for $40,000, approved 2 September 1986).

27 incomes and living standards. For natural resources, the Master Plan for Forestry Development51 was particularly important to the development and sustainability of the Governments programmed activities. The Renewable Resources Sector Development Plan52 was important for the watershed conservation of the Wang river. A number of agricultural interventions largely targeted institutional capacity building of the Ministry of Agriculture at a time when the ministry had shortages of trained and skilled human resources to plan and manage projects in the line departments. Overall, nonlending projects in the agriculture sector were efficacious and efficient. Projects generally achieved their intended outputs and objectives as designed in the project documents, and they generally enhanced the efficiency of their targeted subsector activities. Several lessons can be drawn from ADBs experience in the agriculture sector. 73. Incorporating Cultural and Religious Sensitivities in Project Design. In countries with a rich cultural and religious heritage such as Bhutan, it is important to sensitively address issues in project design, such as the culling of animals, where religious sentiments militate against it. The cohesiveness of integrated components in the design of a project such as the Highland Livestock Development loan contributes to the success of projects, even when there are weak individual components. For instance, the lack of incentive structures needed to overcome competing interests in land use under that loan created delays that could have been foreseen. A similar consideration applies to the need to target extension services to the special needs of farmers, rather than standardized programs. This situation arose in the Highlands Livestock Development loan (footnote 42) where training of subtropical farming systems was provided to farmers from temperate pasture zones in Tala. 74. Ensuring an Integrated Approach to Project Implementation. Unified approach to agro-industrial development means that projects need to be integrated and interconnected. In the case of the Highlands Livestock Development loan (footnote 42), the privatization of milkand meat-processing plants was marred by shortages of milk and cattle for the facilities. In the milk processing plant in Phuentsholing, production was sustained by the use of skim milk powder and butter oil. 75. Ensuring Policy Consistency of Projects. A common problem among the ADTAs was the lack of formal coordination with senior officials through a steering committee or similar mechanism. These mechanisms were often not adopted because senior officials were overextended. The lack of oversight, for example, in the Irrigation Program Strengthening (footnote 40), led to inconsistencies between the Governments policy advocacy issues and those recommended by consultants under the TAs. This issue should be considered in the design of future TAs. 76. Monitoring and Evaluating SME Support. Private sector development through the promotion of microenterprise and SME activities is one the objectives of both ADB and the Government. Projects should include monitoring and evaluation (M&E) mechanisms for the private sector development-related activities in each project. There was a noticeable absence of information on the extent to which lending and nonlending activities contributed to these activities. In keeping with ADBs new thrust on managing for development results, M&E initiatives are needed to establish relevant benchmarks and clear monitorable sector indicators.

51

ADB. 1988. Technical Assistance to the Kingdom of Bhutan for the Master Plan for Forestry Development Project. Manila (for $738,000, approved 9 June 1988). 52 ADB. 1991. Technical Assistance to the Kingdom of Bhutan for the Renewable Resources Sector Development Plan Project. Manila (for $100,000, approved 25 February 1991).

28 2. Energy

77. The energy sector accounts for about 11% of GDP and provides the Government with 45% of its total revenue. The latter is expected to reach 90% of revenue by the end of 2005. National demand is around 90 MW and the rest is exported. Installed capacity is about 460 MW and there is an estimated potential of 30,000 MW of hydropower. 78. About 20% of the population has access to electricity. Rural electrification is a priority in the Ninth Five-Year Plan, during which the Government plans to spend Nu15 billion ($331 million) on electrical transmission and distribution in rural areas. This will be a pro-poor initiative. Meanwhile, the country is dependent on other fuel sources. Fuelwood still accounts for 70% of national energy consumption and the country imports around 500 tons a year of liquefied petroleum gas from India. 79. An important part of development in the energy sector has been the implementation of institutional reforms. The Government split the Department of Power in 2002 into three agencies: the Bhutan Power Corporation (BPC), the Department of Energy, and the Bhutan Electricity Authority. The breakup was consistent with ADB recommendations as a means of improving sector efficiency and strengthening sector governance, institutional capacity, planning, and legal infrastructure. Under the new framework, the Bhutan Electricity Authority functions as the regulatory body for enforcing rules and regulations and the BPC is responsible for the utility functions of the Department of Energy, whose tasks include planning and policy formulation for the energy sector. ADB is also involved in an ongoing study to examine the feasibility of establishing the Druk Hydropower Corporation to consolidate all governmentowned power stations under its corporate structure, under the Establishing the Druk Hydropower Corporation TA.53 80. Over 19832003, ADBs total commitments to the energy sector ranked second to social infrastructure, accounting for 22.4% of all lending and nonlending activities. The energy sector accounted for one fourth of all loans in 19832003 and 11% of all ADTAs. There were three loans during the period totaling $29.9 million, and six ADTAs totaling $2.9 million. The two major objectives of the assistance program to the energy sector were (i) strengthening and reforming the sector to improve efficiency; and (ii) strengthening and expanding the distribution system, especially in support of the rural electrification program. 81. The outcomes of ADBs lending and nonlending activities have generally been favorable. There have been three loans and three PPTAs for rural electrification. The Rural Electrification and Network Expansion project (footnote 32) was delayed by procurement and logistics-related problems, as well as the inexperience of local contractors. Nevertheless, it was satisfactorily completed. The Sustainable Rural Electrification project (footnote 20) was also delayed, in this case because of procurement delays, but was also completed in a satisfactory manner. The general quality of construction is good and all installations generally conform to the technical specifications. One of the important outcomes of these and other projects related to rural electrification was the standardization of plant and equipment for the BPC, which resulted in efficiencies for the sector when procuring plant and materials, operating and maintaining the system, training staff, and reducing inventories.

53

ADB. 2003. Technical Assistance to the Kingdom of Bhutan for Establishing the Druk Hydropower Corporation Project. Manila (for $500,000, approved 30 September 2003).

29 82. The Policy and Legal Framework for Power Sector Development TA54 contributed to developing a policy and legal framework for the energy sector to facilitate the creation of BPC. The final report contained the draft legislation for the Electricity Act and provided recommendations for restructuring the energy sector in Bhutan. It also recommended measures for the private sector to take part in the energy sector. Those outputs contributed to in the adoption of the Bhutan Electricity Act by the National Assembly in 2001 and the restructuring of the Department of Power. To date, however, there has been limited success in generating private sector participation in the sector. This is not surprising, given the limited capitalization of most private companies in Bhutan, Bhutans relative isolation, weaknesses in the enabling environment for the private sector, the fall in appetite among foreign investors after the Asian financial crises, and difficulties experienced in build-operate-transfer contracts in the energy sector in other countries. 83. ADB has made a significant contribution to the energy sector. Early in its operations, ADB defined its role, and has provided sustained support to rural electrification reform and institutional capacity building. ADBs future role in the energy sector is likely to stay focused on these two areas. The challenge will continue to be the promotion of increased involvement by the private sector in energy development and management. 3. Finance

84. The financial sector is becoming increasingly important as Bhutan moves from a subsistence to a market economy. The private sector, which is Bhutans engine for job creation, needs access to a growing range of financial services. The contribution of the financial sector in the economy has grown from 7% to 11% of GDP in the last 20 years. ADBs share of total lending and nonlending activities has matched the financial sectors present importance to the economy (11% of the total portfolio). The largest share of commitments in the sector during 19832003 occurred through ADTAs (18%). Lending activities to the financial sector were somewhat lower, at 10% of all commitments. 85. The development of the sector has occurred through both the diversification of financial entities in the country and the growing size of their activities. During the 1960s, the Bank of Bhutan was the only financial institution of any importance. Since then, a number of entities have emerged, including the Royal Monetary Authority (RMA), the Bhutan National Bank, and three nonbanking financial institutionsRoyal Insurance Corporation of Bhutan (RICB), Bhutan Development Finance Corporation (BDFC), and the National Pension and Provident Fund Plan. BDFC has been providing industrial loans to SMEs and rural credit to farmers throughout the country. Until recently, the RICB used its large capital base from the Government Employees Provident Fund (GEPF) to invest in real estate development and insurance services. Those GEPF funds were, however, recently transferred to the National Pension and Provident Fund Board. 86. Initial ADB support was directed toward the Governments strategy to develop the countrys industry sector and enhance exports to India and other countries. Over time, the strategy was realigned to supporting the Governments efforts to create an enabling environment for private sector expansion through institutional strengthening of both banking and nonbanking financial institutions, the liberalization of foreign trade and investment regimes, the provision of market-determined interest rates, and the preparation of a legislative and regulatory
54

ADB. 1998. Technical Assistance to the Kingdom of Bhutan for Policy and Legal Framework for Power Sector Development Project. Manila (for $500,000, approved 8 December 1998).

30 framework for the financial sector. ADBs lending and nonlending activities have accordingly shifted to supporting the Governments revised strategic focus in the sector. All TA projects and the Financial Sector Intermediation Facility (footnote 23) and the Financial Sector Intermediation Policy55 have sought to enhance the effectiveness of policy and institutional reforms, strengthen the capacity of financial institutions, and remove some regulatory impediments to financial sector activities. The two projects have been assessed as relevant. While one ADTA was found to be partly relevant (Strengthening the Banking Supervision Function of the Royal Monetary Authority),56 the other 12 ADTAs were considered relevant or partly relevant. 87. Most lending and nonlending activities were found to be successful in terms of the delivery of the expected outputs. The Restructuring of the Unit Trust of Bhutan to a Commercial Bank project57 was particularly successful. The new bank now operates with relatively modern technology and best management practices. The Capacity Upgrading of Financial Sector Infrastructure and Entrepreneurial Development58 was successful on the basis of the delivery of the intended project outputs that supported development of foreign direct investment regulations, the restructuring of GEPF and its transfer to the National Pension and Provident Fund Board,59 and the implementation of legislation under the Negotiable Instruments Act. Strengthening the Banking Supervision Function of the RMA (footnote 56) was one of the most important TAs undertaken. It resulted in a significant enhancement of RMAs capacity through the training courses and manuals prepared under the TA. Some of the important outputs achieved were significant strengthening of prudential regulations, and revision of an off-site examination manual. 88. Three TAs did not fully deliver their expected outputs. In the case of the Institutional Support to the Bhutan Development Finance Corporation project,60 the BDFC did not have sufficient staff or the software needed for project appraisal training of officials. With regard to the Upgrading of the Royal Insurance Corporation of Bhutan, Restructuring the Government Employees Provident Fund, and Introducing a Pension Scheme,61 the results were mixed. The GEPF restructuring was successful. Structures and organization requirements to manage and administer a pension scheme were designed and a pension scheme was started soon after the TA. Design and implementation of an institutional strengthening program for RICB was weak and had minimal impact. Similarly, the Strengthening the Capacity of the Royal Monetary Authority and Royal Securities Exchange project62 also had mixed results. It successfully delivered the outputs for the RMA. The benefits for the Royal Security Exchange of Bhutan
55

ADB. 1997. Report and Recommendation of the President to the Board of Directors on Proposed Loan and Technical Assistance Grant to the Kingdom of Bhutan and a Proposed Equity Investment in Bhutan National Bank in the Kingdom of Bhutan for the Financial Sector Intermediation Policy. Manila (for $4.0 million, approved 23 October 1997). 56 ADB. 1999. Technical Assistance to the Kingdom of Bhutan for Strengthening the Banking Supervision Function of the Royal Monetary Authority. Manila (for $600,000, approved 30 June 1999). 57 ADB. 1996. Technical Assistance to the Kingdom of Bhutan for Restructuring of the Unit Trust of Bhutan to a Commercial Bank Project. Manila (for $590,000, approved 13 February 1996). 58 ADB. 1997. Technical Assistance to the Kingdom of Bhutan for Capacity Upgrading of Financial Sector Infrastructure and Entrepreneurial Development Project. Manila (for $500,000, approved 23 October 1997). 59 ADB. 2001. Technical Assistance to the Kingdom of Bhutan for Institutional Development of the National Pension and Provident Fund Board Project. Manila (for $300,000, approved 12 December 2001). 60 ADB. 1988. Technical Assistance to the Kingdom of Bhutan for Institutional Support to the Bhutan Development Finance Corporation. Manila (for $270,000, approved 4 August 1988). 61 ADB. 1998. Technical Assistance to the Kingdom of Bhutan for Upgrading the Royal Insurance Corporation of Bhutan, Restructuring the Government Employees Provident Fund, and Introducing a Pension Scheme. Manila (for $500,000, approved 7 December 1998). 62 ADB. 2002. Technical Assistance to the Kingdom of Bhutan for Strengthening the Capacity of the Royal Monetary Authority and Royal Securities Exchange. Manila (for $334,000, approved 23 August 2002).

31 included the drafting of legal frameworks, such as the Financial Services Act, RMA Act, and insurance regulations. 89. Among the loans, the Bhutan Development Finance Corporation project63 was rated as partly successful. It achieved the objective of providing foreign currency loans to industries, which were needed to broaden the industrial base, but the level of loan repayments was unsatisfactory. Loan funds were focused on only a few large projects instead of intended SMEs. It also failed to attract sufficient private sector investment to develop into an efficient development finance institution as envisaged during project formulation. In the Bhutan context, perhaps these expectations were overly optimistic. The other two loans are considered successful in terms of their output delivery. The Financial Sector Intermediation Policy project (footnote 55) made it possible for the Government to institute reforms for strengthening the financial sector and legal frameworks, and thereby better address the needs of SMEs, and enabled the Government to cover the cost of restructuring the GEPF project. Equity participation by Citibank and ADB gave investor confidence and encouraged private sector participation. 90. Five of the 13 ADTAs were rated efficient in terms of cost-effectiveness, but all encountered completion problems within the initially scheduled time frame. The Capacity Upgrading of Financial Sector Infrastructure and Entrepreneurial Development TA (footnote 58) encountered problems associated with consultant selection at the start of the project. The Restructuring of the Unit Trust of Bhutan to a Commercial Bank TA (footnote 57) also faced difficulties with consultant selection, but those difficulties did not compromise the quality of the deliverables. In the Strengthening the Banking Supervision Function of the Royal Monetary Authority TA (footnote 56), lack of coordination and weak needs assessment resulted in four contract variations and a significant extension of the project time frame. 91. ADBs interventions in the financial sector have been consistent with the Governments priorities, as reflected in its 5-year plans. ADBs overarching objective of poverty reduction was addressed through income and employment generation of private sector-led development, brought about by an improved policy setting and more efficient financial intermediation. In the early years of ADBs activities in Bhutan, its support to BDFC through ADTAs was particularly important to its success. During the 1990s, ADBs support to BDFC through the Bhutan Development Finance Corporation project (footnote 60) was instrumental in developing the agencys SME financing. In the latter part of the 1990s, the Government implemented reforms to enhance competition, mobilize resources, and help develop the private sector. ADBs assistance in the establishment of a second commercial bank supported the Governments strategy during the period. 4. Industry

92. The Industrial Estates project64 was designed to improve infrastructure by upgrading, consolidating, and rehabilitating some existing industrial estates and establishing a new one in Thimphu. A training component was added in 1992 at the request of the Government to improve the capacity of the EA, the Department of Trade and Industry. Part of the loan was canceled, reducing the loan amount to $0.77 million during implementation because of a reduction in the
63

ADB. 1986. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Bhutan for the Bhutan Development Finance Corporation Project. Manila (for $2.5 million, approved 13 December 1986). 64 ADB. 1988. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and a Technical Assistance Grant to the Kingdom of Bhutan for the Industrial Estates Project. Manila (for $1.15 million, approved 8 September 1988).

32 project area. The project was scheduled for completion in 1992 but it only closed in 1994. This was due to delays in land acquisition because of negotiations with land owners, shortages of skilled labor, changes in the investment regime, inadequate office and communications facilities, turnover of local managerial staff, and inadequately trained staff in the project office. Project outputs included several infrastructure improvements in the area covered by the project, and the creation of about 600 job opportunities in the industrial estates. 93. In a related TA targeting the promotion of the private sector, the Study on Promotion of Export Oriented Industries65 sought to (i) review existing problems and prospects of industrial development, (ii) analyze export incentive schemes and assess their impact, (iii) provide diagnostic reviews of major manufacturing industries, (iv) identify potential export products, (v) prepare product profiles on selected export-oriented industries, (vi) develop an implementation program for training of personnel involved in industrial planning and development, and (vii) develop recommendations for future TA. These outputs were useful for the future work of the Department of Trade and Industry, but the coverage of the study was too ambitious and many of the recommendations were neither fully considered by the Government nor implemented. While most of the outputs were met, little substantive impact resulted from the TA. Efforts to promote exports by encouraging the adoption of various proposals made by the study failed to materialize. 5. Social Infrastructure

94. Social infrastructure, encompassing the education, health, and urban infrastructure subsectors, was the largest recipient of ADB assistance during the evaluation period. Loan commitments to the sector represented nearly 28% of all commitments. ADTAs in this sector accounted for 9% of the total. From 1983 four loans were approved to the sector, totaling $28.4 million. Five ADTAs totaling $2.4 million, and seven PPTAs amounting to $1.5 million, were also approved. In total ADB committed $32.3 million to these sectors. 95. The education sector had an acute shortage of technical schools capable of producing skilled and semiskilled workers. Major problems included the lack of a demand-driven technical and vocational training system, the poor quality of training, and the fact that job seekers with only basic educational qualifications were reluctant to accept training for many vocational occupations or trades. While these challenges are being addressed by the Government with the assistance of ADB and other development partners, they are more severe today as the growing number of school leavers seek employment in a relatively small formal sector dominated by the public sector. 96. In general, ADBs technical and vocational education and training (TVET) projects have achieved their expected outputs. The Technical Education and Vocational Training project66 enhanced the quality of the Royal Bhutan Polytechnic training program and increased the programs output from 45 graduates in 1991 to 82 in 2001, despite problems with insurgents. The project design was relevant to its targets and objectives and remained unchanged during project implementation. The dual objectives of the project to expand the Polytechnics and the National Technical Training Authoritys (NTTA)67 capability and TVET program quality were

65

ADB. 1989. Technical Assistance to the Kingdom of Bhutan for Study on Promotion of Export Oriented Industries. Manila (for $300,000, approved 16 November 1989). 66 ADB. 1989. Technical Assistance to the Kingdom of Bhutan for Technical Education and Vocational Training Project. Manila (for $100,000, approved 28 April 1989). 67 Now the Department of Human Resources.

33 achieved. Although some of the project outputs of the Basic Skills Development project68 are yet to be achieved because a year and a half remain before completion (September 2006), the project has already achieved most of its expected outputs. All stated outputs of the Institutional Improvements in Technical and Vocational Education and Training TA69 and the Institutional Development of the National Technical Training Authority TA70 have been achieved. 97. The results of the efficiency assessment indicate that, despite the reduced ADB funding level for the Technical and Vocational Education and Training project,71 all outputs were achieved. Delays related to cofinancing arrangements with UNDP notwithstanding, the project met all of the planned outputs within an extended period. Noteworthy among the various outputs was the successful upgrading of the NTTA as an autonomous institution for overall leadership and quality improvement. Based on these and other accomplishments, the project has been rated efficient in achieving its outputs and purpose. The Basic Skills Development project (footnote 68) suffered from a number of delays, especially during the construction stages, because of contractor-related problems and natural disasters. These problems contributed to a $1 million cost overrun. The ongoing Urban Infrastructure Improvement project72 has experienced minor delays and a small cost overrun. It was implemented in a poor location far from Thimphu and Phuentsholing. The TAs within the TVET subsector were implemented efficiently and did not suffer from major delays or cost overruns. 98. Overall, interventions in the education sector during the review period were in line with the original ADB strategic priority of promoting economic growth, and were consistent with the overarching goal of poverty reduction. Most interventions have attempted to remedy the acute shortage of trained personnel and are helping develop local skills to support the efficiency and productivity of public and private agencies. 99. The system in the health sector is based on the principles of primary health care, providing curative and preventive services. This integrated approach targets vulnerable groups made up of the poor, women, children, and rural populations through the following: the establishment of nationwide basic health units and the delivery of targeted services in communicable disease control; reproductive health services including family planning, immunization, water, and sanitation; and provision of essential drugs. Providing basic health services to widely scattered settlements throughout the countrys mountainous terrain has been central to the Governments social development and poverty reduction efforts. The main challenges to the health authorities have been the scarcity of skilled personnel for service delivery of health promotion and disease prevention programs, and inadequate financing for a highly dispersed and expanding health care system. 100. The Health Care Reform Program (footnote 33) is under implementation. Yet several outputs have already been produced, including a pilot study on expansion of user fees, implementation of user fees, establishment of the Bhutan Health Trust Fund, and development
68

ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Bhutan for the Basic Skills Development Project. Manila (for $7.0 million, approved 21 June 2001). 69 ADB. 1990. Technical Assistance to the Kingdom of Bhutan for Institutional Improvements in Technical and Vocational Education and Training Project. Manila (for $750,000, approved 27 September 1990). 70 ADB. 2000. Technical Assistance to the Kingdom of Bhutan for Institutional Development of the National Technical Training Authority. Manila (for $300,000, approved 27 October 2000). 71 ADB. 1990. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the Kingdom of Bhutan for the Technical and Vocational Education and Training Project. Manila (for $7.13 million, approved 27 September 1990). 72 ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Bhutan for the Urban Infrastructure Improvement Project. Manila (for $5.7 million, approved 30 July 1998).

34 of several primary health care interventions. Overall, the program has been efficient and is likely to be completed without significant delay. 101. The Health Care Reform Program (footnote 33) has made important contributions to the sustainability of long-term financing of health services. It introduced sector reforms to meet the current costs of improved services, stabilize the supply of essential drugs and vaccines, and introduce new vaccines and drugs. In addition, the program provided support for the establishment of the Bhutan Health Trust Fund to improve health indicators through improved governance, sustainable health care financing, and provision of services to the poor. However, the Bhutan Health Trust Fund has not been effective. Due to lower than projected interest rates, trust fund income has not been sufficient to meet health service budget requirements. The scope of ADBs involvement in the health subsector has been consistent with the Governments plans and objectives for the health sector and in line with ADBs strategy of promoting economic growth and poverty reduction. 102. In the urban infrastructure subsector, the main challenge has been Thimphus rapid population growth in the last 20 years, which has overwhelmed existing infrastructure. Both Thimphu and Phuentsholing now face severe problems in housing and water and sanitation, as well as a growing level of air pollution from vehicles. Although urban planning was introduced in the mid-1980s, it remains inadequate because of a shortage of trained staff, weak enforcement mechanisms, and inadequate financing. 103. In 2003, the Government established the National Housing Development Corporation. ADBs Housing Sector Reform TA73 has assisted in formulating an appropriate policy and institutional framework to develop a transparent and well-functioning land and housing market. This TA also helped strengthen the Department of Urban Development and Housings policy and regulatory activities. Likewise, the Capacity Building in the Urban Sector TA74 has strengthened the city corporations of Thimphu and Phuentsholing, as well as the Urban Development and Housing Department. There was one loan in the urban infrastructure sector, namely the Urban Infrastructure Improvement project (footnote 72). It is still under implementation. To date, the project has not experienced any major delays, though there has been a cost overrun of $0.2 million over the approved amount of $5.7 million. This project has contributed to the institutional strengthening of the Public Works Department and the Thimphu and Phuentsholing city corporations by enhancing their urban planning, design, and management systems. 104. In the urban infrastructure sector, the Capacity Building in the Urban Sector TA (footnote 74) has achieved its expected outputs, as have those of the Housing Sector Reform TA (footnote 73) and the Urban Centers Sewerage project (footnote 21). Most of the objectives of the Urban Infrastructure Improvement project (footnote 72) have been achieved, notwithstanding some delays and despite the fact that the project is still being implemented. 105. The interventions in the urban infrastructure sector during the last two decades have addressed the growing housing shortage and inadequacy of urban infrastructure created by rural-urban migration. ADBs urban development focus on the countrys two largest cities, Thimphu and Phuentsholing, has been correctly targeted. Continued support will be needed to remedy the problems being experienced in these two cities.
73

ADB. 2002. Technical Assistance to the Kingdom of Bhutan for Housing Sector Reform. Manila (for $500,000, approved 18 December 2002). 74 ADB. 1998. Technical Assistance to the Kingdom of Bhutan for Capacity Building in the Urban Sector. Manila (for $500,000, approved 2 June 1998).

35

6.

Transport

106. Bhutans land transportation system is almost totally dependent on an inadequate road network. There are 3,920 km of roads (1,560 km of national highways; 480 km of district roads; 1,220 km of feeder roads; and various urban and forest roads). Although most national highways and nearly half of the district roads and feeder roads are paved, conditions remain poor on 20% of national highways, 53% of district roads, and 86% of feeder roads. As the economy has developed and moved from a subsistence to a market orientation, there has been a corresponding increase in demand for reliable road transport services. In a market economy businesses and people need safe, market-responsive road transport to get goods to market, ensure timely delivery of inputs, and have access to social services (e.g., health, education, and government services). The present network is unable to support the growth in Bhutans vehicle fleet and traffic volumes, which have increased 18-fold over the last 20 years. 107. ADB's commitments to the transport sector reached $28.63 million, making this sector the third-largest recipient after social infrastructure and energy. There have been three loans, totaling $23.6 million; six ADTAs, totaling $3.36 million; and five PPTAs, totaling $1.63 million. These projects directly supported the Governments various 5-year plans since 1991 by contributing to the maintenance of the road network. The projects included the Roadworks Mechanization project,75 the East-West Highway Maintenance project,76 the Road Improvement project (footnote 34), and the Road Network Expansion project, which is still at PPTA stage.77 In addition, the Multiproject intervention (footnote 5) funded the construction of 34 km of road between Samchi and Dorokha, 73 km of forest roads and 10 suspension bridges. 108. When ADB began its operations in Bhutan in 1983, responsibility for construction and maintenance of the road network rested entirely with the Indian Border Roads Organization. Bhutan did not have any agencies involved in road construction and maintenance activities, or any local contractors capable of providing road construction and maintenance services. In the last decade, responsibility for the road network has been gradually transferred to the Department of Roads (DOR) of the Ministry of Works and Human Settlement. ADB and other development partners have given considerable institutional support to that agency. 109. Improved roads are one of the keys to improving regional connectivity. Both ADB and the Government recognize that Bhutan stands to gain from regional links and cooperation with neighboring countries, which can provide access to overseas markets. The Government is participating in dialogue on multimodal transport and communications through the ADB-assisted South Asia Subregional Economic Cooperation (SASEC), comprising Bangladesh, Bhutan, India, and Nepal. In the future, increased regional cooperation has the potential to contribute to Bhutans development. However, ADB has found it more difficult to support regional cooperation in South Asia than in some other regions. 110. ADBs transport sector support has been directed to maintenance and improvement of the road network and institutional-strengthening initiatives. Among the institutional-strengthening
75

ADB. 1986. Report and Recommendation of the President to the Board of Directors of a Proposed Loan and Technical Assistance Grant to the Kingdom of Bhutan for the Roadworks Mechanization Project. Manila (for $4.5 million, approved on 30 September 1986). 76 ADB. 1993. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grants to the Kingdom of Bhutan for the East-West Highway Maintenance Project. Manila (for $5.2 million, approved 18 November 1993). 77 ADB. 2003. Technical Assistance to the Kingdom of Bhutan for Road Network Expansion. Manila (for $500,000, approved 2 July 2003).

36 TAs are the Institutional Strengthening of the Public Works Department;78 Institutional Strengthening of the Department of Roads;79 Development of a Maintenance Management System;80 Construction Management;81 Capacity Building of the Construction Development Board (footnote 18); Road Planning and Management Strengthening;82 and Road Transport Network Development.83 111. Improvements in road sector governance were supported by the Road Sector Master Plan, completed in March 2001 under Road Planning and Management Strengthening TA (footnote 82). This became an important input to the Ninth Five-Year Plan. The resulting improved road policy and management system facilitated efficient budget allocations for road sector development and maintenance. The Road Act, drafted under this TA, was adopted by the National Assembly during its 82nd Session in JulyAugust 2004. 112. The outcome assessments of the lending and nonlending programs in this sector have yielded mixed results (Appendix 4, tables A4.1 and A4.2). In terms of relevance, all projects and TAs were consistent with ADBs wider strategic goals as enumerated in successive COS documents. The national highways improvement components, in particular, have supported propoor economic growth by improving transport efficiency through reduced travel time and transport cost, thereby supporting domestic trade and cross-border transport, and generating employment. 113. Completed operations have yielded mixed results in terms of delivery of planned outputs. In the case of the Development of a Maintenance Management System TA (footnote 80), the benefits were unsustainable because the system developed under the TA was excessively complicated and cumbersome to use after the departure of the consultants. As a result, the program was not used. Not all outputs were achieved in the case of the East-West Highway Maintenance project (footnote 76). The Government was only partially satisfied with the installed Road Maintenance Management System, and the project experienced a 35% reduction in road kilometers covered. Moreover, the consultants were more focused on their responsibilities toward ADB, as their employer, rather than their client, the project management office (PMO). Lack of attention toward the needs of the client diluted the local PMO staff's sense of ownership of, and responsibility for, the project works. In another intervention, the 100 km of road survey and design planned under the Institutional Strengthening of the Department of Roads (footnote 79) was not completed; only 51.7 km was. 114. In terms of efficacy, the post-project economic internal rate of return (EIRR) in most cases was found to be lower than that anticipated at appraisal because of low traffic volumes along the project roads. The estimated benefits in terms of aggregate savings in vehicle operating costs were also found to be lower than the original expectations. The cost of passenger and freight transport did not decrease as anticipated at appraisal, possibly because
78

ADB. 1986. Technical Assistance to the Kingdom of Bhutan for Institutional Strengthening of the Public Works Department. Manila (for $350,000, approved 30 September 1986). 79 ADB. 1991. Technical Assistance to the Kingdom of Bhutan for Institutional Strengthening of the Department of Roads. Manila (for $530,000, approved 6 September 1991). 80 ADB. 1993. Technical Assistance to the Kingdom of Bhutan for Development of a Maintenance Management System. Manila (for $390,000, approved 18 November 1993). 81 ADB. 1993. Technical Assistance to the Kingdom of Bhutan for Construction Management. Manila (for $740,000, approved 18 November 1993). 82 ADB. 2000. Technical Assistance to the Kingdom of Bhutan for Road Planning and Management Strengthening. Manila (for $954,000, approved 20 July 2000). 83 ADB. 1998. Technical Assistance to the Kingdom of Bhutan for Road Transport Network Development. Manila (for $650,000, approved 3 December 1998).

37 of increased fuel costs and, to some extent, lower than anticipated quality of the roadworks. Opposition to levied user charges has also affected the adequacy of roads. Only about 25% of road sector operation and maintenance costs are sourced through levied user charges. The national objective of achieving full cost recovery remains elusive due to the relatively low volume of vehicles and relatively high cost of construction and maintenance. However, only one out of three projects, the 1986 Roadworks Mechanization project, returned an EIRR of less than the standard efficiency benchmark of 12% (10.1% project performance audit report estimate versus 18.4% at loan appraisal). 115. Cost requirements for some projects were not estimated accurately at the preparation stage either because of design weaknesses or incorrect unit cost assumptions. In the case of the East-West Highway Maintenance project (footnote 76), there were substantial cost overruns. The final cost of the roadworks ($5.54 million) was 24% over the appraisal estimate, and the average cost per km was $21,400, was nearly double the appraisal estimate of $11,300. As a result of these cost overruns, the project scope was substantially reduced. Additionally, the design of some road sections needed to be revised as original designs did not account for the impact of extreme climatic conditions. 116. In conclusion, ADBs interventions in the transport sector during the review period were in line with the strategic priorities of the COSs, as well as the Governments plans, policies, and socioeconomic development objectives. Road maintenance and improvements provide direct benefits to a large number of poor. ADB played a key role in enhancing institutional development and capacity building of the sector institutions, as well as improving and promoting the sustainability of such critical infrastructure as the East-West Highway. Nevertheless, while ADBs sector strategy has emphasized road maintenance and upgrading, future CSPs will need to consider significant additional investments in further upgrading the network for it to meet the rapidly growing demand for road transport. V. PROGRAM IMPACT, SUSTAINABILITY, AND ATTRIBUTIONS

117. This chapter examines the impact and sustainability of the lending and nonlending programs provided under the CAPs in 19832003 at the national and sector levels, as well as through institutional capacity-building mechanisms. It also evaluates whether these CAPs were effective in the implementation of the COS. Project impact assessments attempt to evaluate whether project outputs lead to desired outcomes, which in turn produce an impact that are usually intended to be sustainable in the long run.84 A. National-Level Impacts of Lending and Nonlending Programs 1. Poverty Reduction a. Poverty Profile

118. Per capita income in Bhutan in the mid-1980s was under $200 a year, or less than $0.55 a day.85 Apart from low average income in the country, there was considerable income
84

Output refers to the result of an activity or a number of activities, while outcome is the immediate benefit from an activity. Illustrations of output indicators are the proportion of people having access to irrigation, rural roads, education, and health services as a result of a project. Examples of outcome indicators are increased agricultural productivity, incomes, schooling completion rate, or reduced mortality rate as a result of a project. 85 Derived from data in ADB. 2004. Key Indicators 2004. Manila. These figures are in line with those in ADB. Country Operational Program Paper, 19911993. Manila.

38 inequality in the population. The 1992 HIES showed a Gini coefficient of 0.56. The highest household decile received 36% of total income, while the lowest 50% received only 13%. Although the incidence of malnutrition was apparently low when ADB first began operations in the county, life expectancy was only 47 years at birth and medical facilities were inadequate. Adult literacy amounted to only 15% of the population. In 1996, the National Nutrition Survey indicated that some 38% of children under five were malnourished and over half were stunted. 119. By 2002, per capita income had reached $836 a year, bringing the average income to $2.30 per person per day. The GDP growth rate from 1999 to 2002 ranged from 5.3% in 2000 to 7.7% in 2002.86 ADB forecasts for the same period ranged from 5.5% to 7.0%. The human development index increased from 0.33 in 1984 to 0.51 in 2001, with particularly large gains in basic social services and infrastructure because of strong public policies and programs providing basic health, education, and water and sanitation services to all parts of the country.87 Despite these achievements, income poverty remained widespread. Using a benchmark of 2,124 calories per person per day as the minimum caloric intake, in 2001 the absolute poverty linethe food poverty lineshowed 29% of the rural population and 2.4% of the urban population to be poor, with a national average of 25.3%. The upper poverty linethe income poverty linefor the same year showed 41.3% of the rural population and 6.4% of the urban population to be poor, with a national average of 36.3%. 120. Subsistence agriculture in rural areas is still generally sufficient to provide for household food security in most regions of the country, partly because of the small population size and fairly equitable distribution of landholdings. The extended family and village systems provide security for the most vulnerable groups, and a system of lending and borrowing food during the off-season helps the poorer families, as do the Bhutan Food Corporations fair price shops. As a result, the quality of life is apparently higher would be inferred from international comparisons of socioeconomic data. b. Asian Development Bank Program for Poverty Reduction

121. Understandably, poverty alleviation was not a major focus of the first decade of ADBs initial operations program in Bhutan because (i) ADB had not identified poverty reduction as an explicit objective during that period, (ii) the Government preferred that ADB finance projects that focused on economic growth, and (iii) the Government prefers to finance direct poverty reduction projects with grants rather than loans.88 122. After ADB adopted poverty reduction as a strategic priority, ADB sharpened its focus on poverty in Bhutan operations, particularly through the use of knowledge products. ADB provided TAs to help define the nature and extent of poverty in Bhutan. Under that assistance, the Government produced the sample HIES for 2000 and the Poverty and Assessment Analysis (PAA) to assess the impact of government policies and programs on quality of life.89 The PAA constructed a qualitative and quantitative database on selected living standard indicators covering both income and nonincome dimensions at the block and district levels. Ten living standard aspects were covered: household income, education, health, economic activities, nonmaterial needs, physical facilities, environment, transport, communications, and position of
86 87

ADB. 2004. Asian Development Outlook 2004. Manila. UNDP. 2002. Human Development Report. New York. 88 ADB. 1991. Country Operational Program Paper: Bhutan, 19911993. Manila. 89 The two TAs were ADB. 1997. Technical Assistance to the Kingdom of Bhutan for Strengthening the Central Statistical Organization. Manila (for $400,000, approved 9 September 1997); and ADB. 2000. Technical Assistance to the Kingdom of Bhutan for Poverty Assessment and Analysis. Manila (for $100,000, approved 19 May 2000).

39 women. Subsequently, ADB provided financing to strengthen the statistical capabilities of the Planning Commission, mainly through the Central Statistical Organization, to provide the capability for regular updates of the household survey of living standards.90 ADB also supported the Bhutan Living Standards Survey 2003 (footnote 12), which provides information on health and education as well as a detailed consumption module that are being used to determine national poverty and inequality indicators and poverty proxies. c. Assessment of Asian Development Bank Program for Poverty Reduction

123. ADBs assistance in producing the sample HIES for 2000 and the PAA report was an important input into helping to develop the Governments approach to development and poverty reduction. This resulted in a greater focus on groups living in rural areas that had been left behind in the earlier development process. Although the Government did not adopt an explicit poverty reduction strategy following the HIES, it committed to achieving the MDGs by signing a Poverty Partnership Agreement with ADB in October 2001. Bhutans satisfactory progress on achieving the MDGs was noted in the CSPU for 20052006. Under the Ninth Five-Year Plan, the Government adopted an Integrated Rural Development Program comprising, among others, agricultural support services, improved rural access, and targeted food aid programs; with decentralization, development programs are expected to result in improved governance and delivery of social services to the poor. The results of the HIES were also incorporated into Bhutans Poverty Reduction Strategy Paper. ADB lending programs for the road network, urban infrastructure, rural electrification, and SME development in the next 3 years until 2008 will support the Government in reducing poverty. 124. Table 8 lists the loans and TAs undertaken during 19832003 and assesses their impact on poverty. One TA, the Poverty Assessment and Analysis TA (footnote 89), was rated as having a substantial direct impact. Five of the seven loans approved, totaling 37% of ADB lending to Bhutan and one TA were rated as having a moderate but indirect impact. Three TAs were rated as having a negligible impact. The remaining two loans and seven TAs were rated as having a modest impact. These results suggest there is room to sharpen the focus on ADBs overarching goal of its program in the country. However, given the Governments strong preferences for the use of loans and grant assistance and its views of ADBs competitive strengths, there will be constraints on the degrees of flexibility ADB has to mold the Bhutan program in a manner that is consistent with ADBs corporate objectives. If there are trade-offs between DMC ownership and ADBs corporate objectives, the language in ADBs MTSF clearly states that DMC views should prevail.

90

ADB. 2004. Proposed Technical Assistance to the Kingdom of Bhutan for Building a Poverty Monitoring System. Manila.

40 Table 8: Rating of Asian Development Bank Poverty Reduction Impact in Bhutan, 19832003
Loan/TA No. 1. 3443 2. 2009(SF) 3. 1830(SF) 4. 1712(SF) 5. 1375(SF) 6. 808(SF) 7. 1030 8. 4042 9. 3669 10. 3525 11. 3022 12. 740(SF) 13. 1465 14. 1381 Type ADTA Loan Loan Loan Loan Loan ADTA ADTA ADTA ADTA ADTA Loan ADTA ADTA Title Poverty Assessment and Analysis Rural Electrification and Network Expansion Basic Skills Development Sustainable Rural Electrification Rural Electrification Highland Livestock Development Women in Development Profiles in Highland Livestock Development Housing Sector Reform Strengthening the National Statistical System Institutional Development of the National Technical Training Authority Capacity Building in the Urban Sector Chirang Hill Irrigation Institutional Strengthening of the Bhutan Development Finance Corporation Institutional Improvements in Technical and Vocational Education and Training Technical and Vocational Education and Training Industrial Sector Study for the Establishment of a Development Financing Mechanism Institutional Development of the Bhutan Development Finance Corporation Agricultural Extension Course Highland Livestock Development Date 2000 2003 2001 1999 1995 1995 1988 2002 2001 2000 1998 1992 1991 1990 1990 1984 2002 1988 1986 Rating 4.0 3.0 3.0 3.0 3.0 3.0 3.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 1.0 1.0 1.0

15. 1035(SF) Loan 16. 614 ADTA 17. 3910 18. 1001 19. 825 ADTA ADTA ADTA

ADTA = advisory technical assistance, No. = number, TA = technical assistance. Note: Sorted on the basis of poverty reduction impact. Ratings were derived using the degree of poverty alleviation impact as follows: 1 = adversely affects poor; 2 = no poverty impact; 3 = design incorporates measures to improve well-being of poor; 4 = project poverty impact extends well beyond original project area or target group (Appendix 4). Source: Based on individual project ratings, available upon request.

2.

Private Sector Development

125. The private sector has moved from primarily agriculture-oriented activities with some trading in the mid-1980s to the current broader range of activities covering mining, light manufacturing, agro-industry, and service industries supporting tourism and transport facilities. The formal private sector remains small by any standard. About 100 medium-size companies dominate the private sector. Most enterprises are cottage or mini-enterprises with fewer than 10 employees and invested capital of less than $10,500, according to a World Bank-sponsored private sector assessment.91 By the end of the current decade, about 90,000 school graduates, rural migrants, and others will be looking for employment in a formal sector that currently has only about 60,000 people, 36,000 of whom are in the private sector. With such a narrow employment capacity in the formal sector, the creation of another 90,000 jobs poses a formidable challenge. In the future, the private sector will be the major creator of jobs, jobs that are necessary to ensure that the people can escape poverty. Creating an enabling environment so that the private sector can grow and flourish is a strategic priority.
91

The World Bank private sector assessment was conducted in collaboration with the Ministry of Trade and Industry, Bhutan Chamber of Commerce and Industry, and UNDP (World Bank, 2002).

41 126. The private sector faces fundamental constraints related to the lack of entrepreneurial capacity; Bhutans remote and landlocked location; the small domestic market of about 800,000 people, notwithstanding preferential access to Indias 1 billion-plus market; lack of skilled Bhutanese workers and the apparent unwillingness of many Bhutanese to undertake unskilled work; a rudimentary and noncompetitive financial system offering a narrow range of financial services at relatively high cost; high transport costs because of poor roads and expensive air transport; and limited links with extraregional markets because of the dominant trading relationship with India. While some progress has been made in addressing these problems, many constraints to private sector development remain (e.g., improvements needed in the skill levels of Bhutanese workers, access to credit from an underdeveloped financial sector, weaknesses of the transport infrastructure, development of external links through more diversified trade and foreign direct investment inflows of capital and technology, and weaknesses in the legal/regulatory framework). 127. The World Bank private sector assessment surveyed 11 areas covering training, technology, infrastructure, entrepreneurship, firm data, investor confidence, labor market issues, business support services, trade and exports, financial markets, and contractual relations. When asked about the single largest problem confronting them, Bhutanese firms ranked them as (i) lack of skilled labor (20% of all firms); (ii) noncompetitiveness of products relative to foreign supplies (17%); (iii) bureaucratic obstacles (16%); and (iv) inadequate and costly financing (16%). Together, these four problems accounted for 70% of the top difficulties facing enterprises. Problems of bureaucratic obstacles were associated with labor policies, tax policies, and access to land, which contradicted the generally held perception that the Government is friendly to business and supportive of private sector activities. A list of specific hindrances to business development was subsequently put forward in 2003 to the Government by the Committee for Private Sector Development.92 Of the 11 issues mentioned, by 2004 four had been remedied.93 128. The findings of the World Bank private sector assessment were only partly incorporated into the CSPU for 20022004 that stated that ADB will continue to build on its past initiatives, for they remain appropriate for the country, and to blend them with the policy initiatives of other external agencies, particularly the International Monetary Fund, World Bank, and UNDP. Those initiatives were directed at (i) supporting an improved policy setting and more efficient financial intermediation; (ii) improving road transport and expanding power transmission and distribution; (iii) establishing necessary legal and institutional framework and examining viable financial modalities for private sector participation in hydropower development; and (iv) strengthening vocational, technical, and basic skills. In the policy and regulatory environment, ADB committed to (i) liberalization of foreign trade, exchange, and investment regulations; (ii) liberalization of interest rates so that they reflect the true underlying cost of
92

The list covered (i) reducing financial charges for banking transactions; (ii) adopting competitive, market-based interest rates; (iii) introducing a customer credit rating system; (iv) lowering the existing 300% collateral requirement and equating it with the feasibility of the proposed project; (v) valuing assets based on the market; (vi) developing expertise in financial instruments such as bonds, venture capital, and leasing; (vii) discouraging banks from investing fixed deposits outside the country; (viii) increasing the limit of consortium funding from Nu20 million to Nu50 million; (ix) providing foreign exchange for importing raw materials from regional markets; and (x) investing more funds in infrastructure development. 93 Namely, the liberalization of interest rates under ADB Loan 1565 (issue ii); restrictions on investing fixed deposits outside the country, under RMA directives (issue vii); foreign exchange provision for raw material imports, unless the inputs have a negative environmental effect (issue ix); and infrastructure development for rural access roads, under the directive of the Ninth Five-Year Plan (issue x). Additionally, some efforts are being made to introduce a customer rating system under the RMAs newly established Credit Information Bureau (issue ii); lowering collateral requirements in the case of the BDFC (issue v); and, to a limited extent, developing financial instruments in the case of Druk Air bond issues (issue vi).

42 resource mobilization, intermediation, and risk; and (iii) preparation of transparent legislation and regulatory procedures. 129. Three ADB loans totaling $10 million (10% of the total portfolio) were designed to support the private sector by addressing issues in the financial sector. This lending was supported by nine ADTAs totaling $2.5 million (2.5% of the ADTA portfolio) to address policy, legal, regulatory, and institutional issues. Of the nine ADTAs, four had a substantial impact on the private sector, three had a moderate impact, and two had limited impact. Among the loans, that for the Bhutan Development Finance Corporation found that BDFC has a long way to go in providing foreign currency funds required for implementing industrial projects in the private sector and assisting the Government in its efforts to develop the private sector. Yet the loan was considered successful in meeting its primary goal of increasing foreign currency resources of BDFC, promoting economic activity, and creating job opportunities. For the Financial Sector Intermediation Facility (footnote 23) and Financial Sector Intermediation Policy (footnote 55) loans, the evaluation found that there is a deeply entrenched problem of lack of transparency in business practices and lack of a governance structure in the financial sector. A number of recent regulatory acts have been passed in an attempt to address these issues. 3. Environmental Protection

130. The Government assigns a high priority to protecting the environment and to environmentally sustainable growth. Over 70% of Bhutans land is under forest cover, and the Government intends to maintain at least 60% forest cover. This goal is in line with the concept of gross national happiness, which includes environmental preservation as one of its four platforms, the others being economic development, cultural promotion, and good governance. 131. ADBs CAP for 20012003 describes the major threats to the environment as follows: (i) high rates of population growth resulting in increasing pressure on the natural resource base, especially on land resources (with negative impacts in terms of land degradation and soil erosion as all arable lands are currently utilized and new marginal lands are being brought into cultivation); (ii) additional risks of land degradation and diminished regeneration capacity of pastures and forests, due to higher demand for livestock products and possible increases in overgrazing; (iii) higher deforestation risks, due to population growth and related demands in terms of fuelwood, materials, and nonwood forest products; (iv) increased risks of soil erosion due to rapid and improper road network development; (v) high rural-urban migration flows and increasing pressure on the already poor urban infrastructure and adjacent land resources, especially in terms of inadequate solid waste management and sanitation systems; (vi) possible negative effects on the environment and cultural integrity that could result from rapid and unplanned tourism development; and (vii) additional possible negative impacts due to industrialization, water resources development (including hydropower), and indiscriminate growth of mining activities. Despite generally successful efforts to conserve its natural resources, however, the country is under increasing pressure from urbanization, industrialization, and growing infrastructure such as roads and sewage systems. 132. ADB has supported the drafting of environment protection controls through two TA grants, the Strengthening Environmental Sector Capacity94 and the Strengthening EIA (Environmental Impact Assessment) Capabilities and Preparation of Environmental

94

ADB. 2003. Technical Assistance to the Kingdom of Bhutan for Strengthening Environmental Sector Capacity. Manila (for $150,000, approved 27 May 2003).

43 Guidelines.95 The environment has not been a major feature of ADBs operations in Bhutan. This is consistent with the priorities set out in the COSs and the Governments desire to secure grant financing for environment. In any country, it is necessary for ADB to be selective. Thus, it is not essential for ADB to be a leading donor in the environmental field. 4. Governance

133. Bhutans transition from an isolated kingdom to a more modern economy with a pluralistic decentralized form of government represents a fundamental change in the system of governance. As mentioned, good governance is one of the four platforms of gross national happiness. As part of the process to improve the public administration and local governance system, the Government established Dzongkhag Yargye Tshogchung (District Development Committees) in 1981 and Geog Yargye Tshogchung (Block Development Committees) in 1991 to decentralize the administration system in the country. Before those changes were made, planning and all development activities in Bhutan were centralized. With the decentralization process, there has been greater participation in the governance process by the people, while ensuring that the Government can continue mobilizing and managing resources and extending technical support for effective local governance. 134. In 1998 a new system of government was established, with the king remaining the head of state but no longer the head of government, a responsibility that is now annually rotated among 10 members of the Cabinet of Ministers who are nominated by the king and elected by the National Assembly out of 13 nominations. The benefits of these changes are widely appreciated, and most observers give credit to the Government for the restructuring of authority. It is generally recognized that the civil service is staffed by dedicated and committed officers and led by ministers and other senior staff who exhibit professionalism. In Bhutan, corruption is not a major problem. When corrupt practices surfaced in the past, corrective actions were swift and severe. OEM discussions on policy and governance issues with government officers, even on issues that might be regarded as politically sensitive, were conducted openly and directly, without the need for using euphemisms for fear of causing offense. 135. The World Banks indicators of governance place Bhutan in the 56 percentile of countries for the average of its six indicators in 2002 (the last year for which comparative data are available). This rating is 10 percentage points higher than 6 years earlier because of substantial improvements in the individual ratings for voice and accountability, government effectiveness, rule of law, and control of corruption. Where Bhutan has lost ground is political stability and regulatory quality, and it continues to have a low rating in voice and accountability (despite the improvement, of 14%), and regulatory quality (3%). Its strongest ratings are in control of corruption, government effectiveness, and political stability. 136. ADB had not done broad analytical work in the area of governance but this is being remedied with the production of the Bhutan Governance Assessment that will be completed in 2005. ADB has made some major contributions to strengthen governance in the sectors in which it has been involved. These are described in the earlier sector write ups. Appendix 5 summarizes ADBs contributions to supporting the development of Bhutans legal framework. ADB has supported the drafting of the Financial Institutions Act (1992), the Moveable and Immovable Property Act (1999), amendments to the Company Act (2000), Negotiable Instruments Act (2000), Bankruptcy Act (1999), Foreign Direct Investment Policy (2002),
95

ADB. 1996. Technical Assistance to the Kingdom of Bhutan for Strengthening EIA [Environmental Impact Assessment] Capabilities and Preparation of Environmental Guidelines. Manila (for $350,000, approved 13 February 1996).

44 Financial Services Act (drafted in 2004), Royal Monetary Authority of Bhutan (drafted in 2004), Insurance Regulations (drafted in 2004), Bhutan Municipal Act (1999) and the Road Act (2004). 5. Gender

137. Gender relations in Bhutan tend to be more egalitarian than in many other societies, especially those in most South Asian countries. Bhutanese women enjoy considerable freedom and are treated as equal to men by the law. However, lack of education in the past led to a lower representation of women in high government posts. According to the 2000 Bhutan National Human Development Report prepared by the Planning Commission, this situation is changing. Women hold 20% of civil service posts and are increasingly choosing to become doctors, mechanics, engineers, entrepreneurs, and decision makers. 138. Despite the absence of gender discrimination in Bhutan, and the approximate and improving balance found in many areas of social life, a number of issues negatively impact on women, including the high fertility rate, high maternal mortality ratio, high infant and child mortality rates, and the gender gap in adult literacy. While these problems are being addressed and conditions have improved since the mid-1980s, they remain as major obstacles for women, especially in smaller, more remote communities where isolation provides an extra dimension to the difficulty of resolving them. 139. ADB has helped address these issues through a series of projects in the health sector, especially the Health Care Reform Program (footnote 33). That loan, completed in 2002, provided support for the countrys core health program and vulnerable groups, particularly women and children. It included reform measures to strengthen gender equity in training and career opportunities by increasing the number of female health workers, breaking down barriers to womens access to health care, and thereby improving the health status of women and children. The emphasis on reproductive health services, including the establishment of more emergency obstetrical care facilities at district hospitals, also reduced maternal mortality. There has been limited direct ADB gender assistance because of the limited incidence of gender discrimination in the country. Although the law provides women with equal status and freedom as men, participation of women in economic activities has not yet been adequately addressed. A county briefing paper on women is being finalized to assess gender issues and to identify how ADB could further promote Bhutanese women's role in development through policy support and capacity building. A social sector profile was prepared to present an overview of social sector issues in Bhutan. The profile examines the constraints and opportunities in health and nutrition, education and training, and water supply and sanitation, and identifies ADB's strategy for future assistance in the relevant sectors. B. Sector-Level Impacts of Lending and Nonlending Programs 1. Agriculture and Natural Resources

140. Despite agricultures declining importance to the economy, it still plays a key role in generating income and employment opportunities, as well as in providing national food security and conserving natural resources. Bhutan is a predominantly rural country. About 80% of the population live in agriculturally dependent rural areas where the incidence of income poverty is five times higher than in urban areas. As a result, projects targeting agricultural and rural-based activities can potentially have an impact on poverty.

45 141. ADBs lending and nonlending agriculture activities were concentrated in the first half of the 19832003 period. The dollar amount of 12 agriculture-related ADTAs represented 50% of all approved ADTAs during 19841993. This was commensurate with the sectors contribution to the countrys overall economic activity, as agricultural output represented 50% of GDP in the mid-1980s. 142. Poverty reduction and improved rural household incomes were targeted by ADTAs supporting the integrated rural development program under the Governments 5-year plans, as well as the Highland Livestock Development loan (footnote 42). That loanas well as related ADTAs that included agricultural support services, improved rural access, and targeted food-aid programswere implemented during the 1980s and early 1990s. ADBs involvement in the integrated rural development program was not sustained. Other development partners, notably Japan International Cooperation Agency/Government of Japan and the Food and Agriculture Organization of the UN, provided assistance to the agriculture sector during the 1990s.96 143. The Highland Livestock Development loan was consistent with the priority given by the Governments Fifth and Sixth Five-Year Plans to the agriculture sector and by ADBs overarching objective to reduce poverty, develop the private sector, and generate income for rural households. A related project, Women in Development Profiles in Highland Livestock Development (footnote 44), was important in terms of its impact on gender equity since it helped explain the role of women in Bhutanese society, especially as it related to their responsibilities and tasks in livestock rearing and other agricultural activities. 144. ADBs lending for agriculture-based projects was sharply curtailed in the second half of the review period, in large part due to the Governments preference to use grant assistance to support the agriculture sector. Agriculture-related ADTA projects approved during 19942003 represented only 2% of all TA approvals. Lack of sustainability of loans, particularly the followup to the Highland Livestock Development project, undermined support for the Governments Seventh Five-Year Plan for the development of the renewable resource sector in four zonal subplans, although the resulting shortcomings were partly mitigated by new initiatives of other funding agencies in various aspects of agricultural and horticultural development. 145. ADBs limited ADF and TA resources for its Bhutan programs necessarily limited the scope of its activities in key sectors of the economy. Focus and selectivity became necessary. Given the importance of the agriculture sector to the economy, lending and nonlending activities by ADB and other development partners are likely to have substantial positive impacts on income, employment, national food security, and natural resources conservation. ADBs decision to shift its portfolio from a share of agricultural projects that was commensurate with the importance of the sector to the countrys gross national product to one that nearly eliminated all activities in the sector undermined the sustainability of some of the earlier projects. In particular, the activities that could have been sustained through subsequent projects were those related to the integrated rural development program, follow-ups to the Highland Livestock Development project, gender issues in rural communities, and the diversification of the sector into products with greater value-added content. 2. Energy

146. Electrification of rural areas has helped create the environment necessary for incomegenerating opportunities. A reliable supply of affordable power is a necessary prerequisite for
96

UNDP. 2003. Bhutan: Joint Donor Database Report for 2002. Available: www.undp.org.bt.

46 the establishment of small-scale cottage industries. Electricity also promotes a cleaner environment, with the concomitant health benefits of replacing kerosene lamps with electric lights, improving cooking conditions through electric cooking appliances, and better preserving food through the use of refrigerators. 147. According to the project performance audit report for the Rural Electrification project,97 focus group interviews have revealed that the quality of life has improved for household members in rural areas. Children benefited through the extra hours available for study after dark. Adults have enhanced their literacy by attending nonformal education classes organized between 7pm and 10pm by the Department of Education (DOE). Women now experience a significant decrease in eye and respiratory ailments caused by excessive indoor smoke emitted from the firewood stoves and kerosene wick-lamps. Electrification has led to reduced cooking time and effort. The time saved is spent on other productive activities such as farm work. Cases of theft, burglary, and vandalism in homes, religious temples, and monasteries have decreased in electrified villages. In addition, it provided avenues for recreation and relaxation through media, such as radio and television, as well as time to associate with neighbors and relatives. Reduction in the use of firewood and kerosene has meant not only cost savings but also reflect less time and effort spent in collecting firewood and going to replenish their kerosene supplies from the nearest town. 148. The environmental impact of rural electrification has been positive, especially in terms of reduced consumption of fuelwood and a reduction in pressure on forests, cutbacks on the use of smoke-emitting kerosene appliances, and their replacement by clean energy. Fuelwood consumption has been reduced by about 75%, thereby helping to reduce the depletion of forest cover. Indoor air pollution in households has been largely eliminated with the use of electric appliances for cooking and heating. Use of kerosene has dropped by about 90% in ADBfinanced project areas, and many shops throughout the country now sell electric rice cookers. 149. By providing business opportunities, ADBs energy loans have strengthened private sector construction companies working on rural electrification. ADB has provided capability to help contractors understand tender documents and procedures, and private companies have the capacity to participate effectively in bidding and in implementing contracts. Private sector contractors have also benefited from the bilaterally funded power projects by winning some contracts for local works. 3. Finance

150. Prior to ADBs financial sector assistance, there were few financial institutions in Bhutan, with little or no modern technology. To support the financial sector, ADB implemented a series of activities, starting with an Industrial Sector Study and a Feasibility Study for the Establishment of a Development Financing Mechanism,98 which eventually resulted in the establishment of BDFC. Additionally, ADB supported a series of initiatives to establish a new commercial bank, the Bhutan National Bank, to stimulate competition and create efficiency in the banking system. The effects of three loans and more than a dozen ADTAs over the last 20 years have had a noticeable positive impact on the size and efficiency of the financial sector. Training provided to BDFC personnel under various ADB projects has been essential to their
97

ADB. 1995. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the Kingdom of Bhutan for the Rural Electrification Project. Manila (for $7.5 million, approved 19 September 1995). 98 ADB. 1984. Technical Assistance to the Kingdom of Bhutan for the Industrial Sector Study and a Feasibility Study for the Establishment of a Development Financing Mechanism. Manila (for $230,000, approved 13 July 1984).

47 capacity to carry out loan appraisals. At present, two thirds of BDFCs loan portfolio is directed at industry-based businesses. Loans and rural credit cover only a small fraction of the overall loan portfolio. 151. Policy reforms have been supported by two loans, the Financial Sector Intermediation Facility project (footnote 23) and the Financial Sector Intermediation Policy (footnote 55). These loans were instrumental in generating over 1,800 new jobs, and helped expand manufacturings contribution to GDP from 5% in 1985 to 7.2% in 2003. The Bhutan Development Finance Corporation loan (footnote 63) helped many SMEs operating in the fruit and vegetable subsector, as well as numerous businesses in manufacturing, trade, and services. One of the most prominent beneficiaries of that project was Bhutan Board Products Ltd., a medium-size company producing high-quality particle board for the Indian market, as well as furniture as a by-product to add value to its main product. Box 1 describes that case in the context of its two loans from BDFC. 152. Although support for the projects in the financial sector did not explicitly target poverty reduction as one of their principal objectives, there were indirect impacts on poverty reduction. The Industrial Sector Study and a Feasibility Study for the Establishment of a Development Financing Mechanism (footnote 98) supported the establishment of BDFC for the purpose of providing financing to, among others, rural farmers and small entrepreneurs interested in setting up a business. The rural credit program of BDFC has provided opportunities for farmers to increase their activities and generate some commercial activity that has enabled them to increase their standard of living. More recently, ADTAs to restructure the GEPF and establish the National Pension and Provident Fund Plan99 have indirectly supported poverty reduction by providing income to retired civil service workers who might otherwise be caught in a poverty trap. 153. Good governance in the financial sector has been promoted through a series of capacity-building measures and institution-building activities. The Strengthening the Banking Supervision Function of the Royal Monetary Authority TA (footnote 56) made a significant contribution to good governance by upgrading the RMAs institutional capabilities. The Royal Monetary Authority Act was revised under the Strengthening the Capacity of the Royal Monetary Authority and Royal Securities project (footnote 62). That TA strengthened the RMAs autonomy and supervisory function, as well as providing a legal and regulatory framework for the insurance and capital markets. The Institutional Development of the Bhutan Development Finance Corporation TA (footnote 60) supported the separation of BDFC from government operational influence, and thereby ensured that BDFC would be able to operate as an autonomous entity with rural and industrial lending units.
Box 1. Bhutan Board Products Ltd: Private Sector Development Challenges for a Bhutan Development Finance Corporation Loan Recipient This medium-size Bhutanese company produces high-quality particle board for the Indian market, as well as furniture as a by-product to add value to its main product. The company was a recipient of a $629,009 loan in 1991 and another in 1994 for $318,370 from the ADB-supported Bhutan Development Finance Corporation (BDFC) to purchase machinery and equipment for its factories. It completed repayment of the loans this year, and it is now seeking financing for another loan to modernize its equipment as a means of competing in the Indian market. The BDFC loan was instrumental in allowing the company to develop. Had the company not received the loan, it is unlikely that it would be in operation today, according to the managing director.
99

ADB. 2001. Technical Assistance to the Kingdom of Bhutan for the Institutional Development of the National Pension and Provident Fund Bureau. Manila (for $300,000, approved on 12 December 2001).

48
Despite the large and fast-growing Indian particle and furniture markets, competition in those markets is growing. Until recently, Bhutan had enjoyed a competitive advantage over other countries because of its bilateral free-trade arrangement with India. But Indias recent liberalization on imports from outside the region means that Bhutan now has to compete on an equal footing with suppliers from Southeast Asia and the Peoples Republic of China. The company may be able to compete with these other suppliers by developing niche markets for its high-quality products. Moreover, the abundance of forests in the country provides a relatively inexpensive and reliable supply source of wood. It leases government-owned land but, in addition to the cost of leasing the land, it must give the trunk of the felled trees to the Government and can only keep the branches. Bhutan Board Products is now cultivating and harvesting trees from its own land to lower its extraction costs to lower input costs and increase supplies. In addition to its ready access to wood, the company also enjoys low rates for electricity and the abundant water supply of the country. Regulations within Bhutan are generally low and do not impose a significant impediment to doing business in the country. The company faces a number of constraints to its continued expansion. Labor costs are high relative to Southeast Asia and the Peoples Republic of China, though the Bhutanese quality of workmanship partially compensates for the relatively high wages. Most of the workers used by Bhutan Board Products are Bhutanese, since Indian and other foreign workers can only be employed in cases where there are no Bhutanese workers to fill the positions. This requirement makes the company vulnerable to the mobility of highly demanded skilled workers and artisans. In the case of the furniture products, for example, the company relies on old-fashioned designs because it has been unable to find a reliable designer to develop a line of modern furniture. The company also faces both particularly high transport costs because of the poor road network in the country, and a lack of scale economies that are potentially available to companies operating in larger countries.
Sources: Operations Evaluation Mission field interviews with company management; project files.

154. Sustainability of the projects undertaken in the last 20 years is critical to the financial sector since it remains underdeveloped and is in need of further strengthening. Lack of absorption capacity for the excess liquidity that has been built up in the financial system remains an important issue for the economy, and the ability of the country to promote private sector development. Loans 1565 and 1566 (footnotes 23 and 55) have sustained a number of policy reforms to strengthen the financial sector and facilitate the development of the private sector. The Financial Sector Review TA100 has underscored the need to have a fully operational development bank to support rural areas and to fund SMEs. These efforts will be needed to sustain the institutional capacity building and the credit lines provided under earlier assistance initiatives. 4. Social Infrastructure

155. It is difficult to measure the magnitude of the social infrastructure sector in Bhutan and quantify its importance to the economy. Like many other developing countries, Bhutans information base for assessing levels of expenditures in the health and education sectors is weak. Yet their importance is undeniable. The Ninth Five-Year Plan specifically addresses technical training for particular programs designed to: build capacity to deliver and coordinate technical and vocational training within the country; prepare a national technical and vocational training policy; and develop a master plan to guide activities and programs in the subsector. Health improvements underlie the Governments Bhutan 2020: A Vision for Peace, Prosperity and Happiness to make gross national happiness the ultimate objective of its development plan. The Government is committed to establishing a relevant and cost-effective health care delivery
100

ADB. 2001. Technical Assistance to the Kingdom of Bhutan for the Financial Sector Review. Manila (for $300,000, approved 23 July 2001).

49 system based on the primary health care approach, effectively delivering health care services to all. This would be a pro-poor initiative. For the urban infrastructure sector, the Government recognizes that it faces a major challenge in reversing and preventing a further deterioration in the situation as regards the housing shortage, sanitation conditions, and water supplies. For these reasons, ADBs commitments to the social infrastructure sector in Bhutan have exceeded all other sectors in terms of lending. 156. ADBs impact from its lending and nonlending activities in the TVET subsector has been wide-ranging. It includes (i) enhanced access to basic skills training and employment for women and youth; (ii) improved capacity of the TVET system; (iii) increased overall female enrollment ratios in skills training programs; (iv) strengthened collaboration among Technical and Vocation Education Section (TVES) institutes; (v) improved partnership between the public and private sectors; (vi) greater human resource management capabilities in the DOE and TVES of the Division of Education; (vii) strengthened institutional capacity of DOE, TVES, and vocational training institutes; (viii) increased capacity of related technical training institutions in terms of both physical facilities and staff needed to handle a larger student population; (ix) establishment of the NTTA to formulate policies and implement planned activities related to TVET; and (x) an improvement in the quality and relevance of training programs that are responsive to the needs of employers in the private sector. The sustainability of ADBs interventions has been addressed through improvements in the institutional capacity of DOE, NTTA, TVES, Royal Training Institute, and Royal Bhutan Polytechnic, as well as through the establishment of. Overall, ADBs lending and nonlending activities in the TVET subsector are considered sustainable. Box 2 discusses the performance of the ongoing Basic Skills Development Project approved in 21 June 2001.
Box 2. Basic Skills Development Project In 2004, 5,860 students passed class X or dropped out of school. A total of 3,533 are expected to continue higher studies in government and private schools, 350 will repeat, and 2,117 students will seek jobs. One of the problems, according to the Department of Employment, was the easy accessibility of foreign workers that employers found cheaper and more skilled. There are rapidly increasing numbers of women job seekers who face limited employment opportunities. The employment problem is synonymous with the youth problem. About 60% of those currently unemployed are between the ages of 15 and 24 years and some 80% of them are in urban areas. The Ministry of Employment estimates that, by the end of the Ninth Plan (2007), about 50,000 school graduates and 20,000 rural migrants will be looking for work and, by 2020, about 267,000 students will enter the job market. The need to create jobs is a major concern of the Government, as unemployment threatens to become one of its biggest problems. The Government recognizes the magnitude of this potential problem and has accorded high priority to finding solutions. To ensure that the Bhutanese youth are adequately equipped to enter the job market the National Technical Training Authority (NTTA, now the Department of Human Resources) was established in 1999 with a mission to develop a skilled and productive workforce. Development of human resources, particularly employable skills, has become a priority national issue. In 2001, NTTA used a $7 million loan from ADB to implement the Basic Skills Development Project (BSDP). BSDP seeks to (i) strengthen the Government capacity for policy making, planning, managing, and monitoring the delivery of efficient, flexible, cost-effective, and better basic skills training, and for rationalizing the existing technical and vocational education and training (TVET) system; (ii) promote more equitable access to basic skills training for people living in remote areas, for the poor, women, and other disadvantaged groups; (iii) improve the quality of basic skills training through nationally accepted skills standards, testing, and certification, and quality support systems for programs and materials development and instructor training; (iv) increase the quantity and national coverage of basic skills training provision through upgrading and extension of facilities, extension campuses, and new training production centers; and (v) promote effective utilization of basic skills through enhanced relevance of skills training, positive

50
values toward skills and manual work, and career guidance, counseling, and employment placement services. At the policy level, the project supports the strengthening of the new TVET system by introducing four key TVET policies: (i) national vocational qualifications; (ii) equitable access promotion; (iii) private sector partnership; and (iv) cost sharing to provide direction and rationale in decision making, training operations, and other activities to establish and operate the training system. Before the start of the project, an introductory management training program using a participatory approach was implemented under the ADTA. This promoted business process reengineering within NTTA by establishing a management cycle linking planning, implementation, and evaluation into an annual operational cycle and introducing management by objectives. Together with appropriate staff development programs, the project will strengthen NTTAs performance by integrating the individual work programs with the overall organizational goal. BSDP, although still under implementation, has already had a positive impact through improved access and increased training capacity. The Department of Employment stated that there were sufficient vocational training opportunities for school leavers now but they were not ready to take them up. This adds another dimension to the problem, which is exacerbated by the reluctance of young job seekers to join the private sector because they believe that private jobs have no security, wages and salaries are low, working hours are long, there are no retirement benefits, and career opportunities are not attractive compared with the civil service. After the implementation of BSDP, NTTA initiated an apprenticeship program through which interested students were sent for hands-on training at various private companies (e.g., bulldozer operators, barbers, auto mechanics, plumbers, and electricians). However, the program failed to attract students. We had 300 seats for the program last year (2003) but only 100 registered with us, said Karma Tshering, Director, Department of Employment. Of the 100, about 60 quit after a few months. Although BSDP has been efficiently formulated and designed, it has not effectively addressed or promoted dignity of labor, an all-important aspect, given the Bhutanese culture of shunning blue-collar jobs due to deeply embedded preconceived notions. The adoption of the Labor and Employment Act will, to a certain extent, address this issue through ensuring that private employers improve working conditions, pay better wages and salaries, improve job security, adopt and regulate retirement benefits, improve safety and hygiene, take adequate measures against industrial accidents and compensation, and introduce improved and fair rules of employment. This trend of shunning blue-collar jobs is gradually changing as employment and economic compulsions gradually outweigh the negative perceptions. The Department of Employment has noted that over the past few years unemployed youth are slowly but surely taking up blue-collar jobs. Overall, BSDP is proving to be an effective tool in the Governments efforts to meet the increasing training demands and employment challenges faced by the nations youth, particularly those from the poorer sections of society, and women.
Sources: Operations Evaluation Mission field interviews with Basic Skills Development Project staff; project files.

157. The impacts of the Health Care Reform Program (footnote 33) have been significant. Among its notable effects have been (i) the development and establishment of the Bhutan Health Trust Fund, a financing mechanism for purchasing vaccines, essential drugs, needles, and syringes; (ii) a strengthened capacity for health management, (iii) improved quality assurance and public regulatory functions; (iv) strengthened primary health care; and (v) the implementation of cost recovery mechanisms. Sustainability of health sector financing has been a key feature of the Health Care Reform Program. It addresses major policy measures that are intended to promote a more enabling environment for the Government to pursue its ongoing health programs. The program was designed in consultation with other major aid agencies, and its implementation is expected to support the effectiveness and sustainability of various health programs.

51 158. In the urban infrastructure sector, ADBs activities have had a number of impacts, including (i) improved quality of life of the residents of Thimphu and Phuentsholing; (ii) improved urban environment; (iii) development of effective and sustainable management of urban services; (iv) improved environmental facilities; (v) establishment of effective and efficient project management systems; (vi) strengthened institutional capacity of Public Works Department design cells, the National Urban Development Corporation, and the city corporations of Thimphu and Phuentsholing; (vii) greater sustainability of services through the establishment of an affordable tariff system for utilities; (viii) improved access and affordability to low- and medium-income housing; (ix) acceleration of policy reforms in the housing sector; and (x) promotion of public-private sector partnerships. The Capacity Building in the Urban Sector TA (footnote 74) supported a sustainable housing sector policy and strategic framework. Training provided through the TA strengthened the Urban Development and Housing Department. The Urban Infrastructure Improvement project (footnote 72) has helped the two city corporations effectively deliver and manage urban services on a sustainable basis. Additionally, the introduction of water and sewerage tariffs, promoted under the Urban Centers Sewerage TA (footnote 21), will promote sustainability of services through cost recovery measures. 5. Transport

159. Bhutans economy is highly dependent on its road network and the network, and the development of the road network, is driven by the priorities of the Government. The Seventh, Eighth, and Ninth Five-Year Plans have emphasized upgrading and maintenance of existing roads, rather than the construction of new ones. This objective has been difficult to achieve since roads are vulnerable to landslides along the countrys steep hillsides. 160. ADBs lending and nonlending activities in the road sector have aimed to promote efficient economic growth, thereby reducing rural poverty. ADBs assistance in the road sector has focused on the rehabilitation and maintenance of the main road network, as well as on transport network planning and management. The assistance to the sector has provided a number of benefits through (i) improved access to local, regional, and international markets; (ii) increased employment opportunities and incomes, especially in rural areas; (iii) increased private sector activity, especially in rural areas; (iv) enhanced public-private sector partnerships, especially in the construction and maintenance of the road network; and (v) institutional strengthening of DOR and the Construction Development Board. ADB interventions have been instrumental in gradually developing capacity of local contracting and consulting industries. Other development partners have complemented ADBs activities, for example, with the World Bank supporting the development of feeder roads. 161. The Road Act, prepared with assistance of the ADBs Road Planning and Management Strengthening TA (footnote 82) was adopted by the National Assembly in 2004. This legislation clearly defined (i) responsibilities and rights of road users and affected communities; (ii) construction, rehabilitation, maintenance, and use of roads, as well as providing a safeguard against adverse environmental impacts on users and the community at large; (iii) compensation to be paid for the acquisition of land for road construction, including that for right-of-way; (iv) user levies to recover the cost of maintaining the national road network; (v) agency responsibilities for monitoring and enforcing the provisions of the legislation; and (vi) penalties for violating the road statutes. This was a significant step in improving the legal framework for the road sector. 162. The sustainability of benefits from institution strengthening and capacity building of the transport sector has had mixed results. For the East-West Highway Maintenance TA, an

52 engineer from DOR was assigned to work full time with the Road Maintenance Management System consultants to learn to gather and input data, and continue to produce the outputs from this system after TA completion. The engineer, however, left DOR after the project was completed for health reasons, and no substitute had been trained to replace him. As a consequence, no DOR staff knew how to operate the system. The same is true of the Bump Integrator 24 and the Benkleman Beam equipment used to assess road conditions. To date, only the consultants engaged to conduct a road network study under another ADB-funded TA have used the equipment. ADB learned from this experience. The Capacity Building of the Construction Development Board TA (footnote 18) was designed to ensure that that staff trained as administrators of the Management Information System would not be transferred for a minimum of 1 year after completion of the TA. Further transfers would not be permitted until the administrators had trained other staff within the Construction Development Board, line ministries, and EAs. 163. The improvement works completed under the road projects have significantly reduced the deterioration of the road network and increased its sustainability. Adequate maintenance of existing infrastructure will largely determine the sustainability of these projects. This, in turn, depends primarily on the ability and willingness of the Government to allocate sufficient financial resources to road maintenance. 164. Maintenance of the East-West Highway is strategically important for the country since the highway provides the only link between the eastern, central, and western regions of Bhutan that does not pass through India. Furthermore, the highway supports economic activity in the transport corridor, increases mobility and employment around the regions traversed by the highway, and enables the Government to implement its socioeconomic policies and administer education and health programs throughout a large part of the country. The impact of ADBs lending activities for the highway (footnote 76) has been marred by various problems that resulted in cost overruns and the inability to achieve some of the anticipated outcomes. Major lessons learned from this project include: (i) In countries like Bhutan, project designs need to provide flexibility during implementation. The inclusion of only three types of periodic maintenance interventions in the East-West Highway Maintenance project proved excessively rigid and impractical. A sector-type approach would have avoided many of the necessary ad hoc adjustments. The fact that reconstruction was excluded from the original design, despite its apparent importance at the time of appraisal, suggests that the project was driven by short-term interests related to the loan size rather than a long-term program view for the highways development. The Road Maintenance Management System was introduced without being adapted to local conditions. ADB, in consultation with DOR, should have exercised greater diligence in identifying the main design features of the system in light of the systems suitability for the special conditions of Bhutan and the countrys institutional capacity. In the case of the Development of a Maintenance Management System TA (footnote 80), the maintenance system was unsuccessful because it introduced complicated systems that local staff were unable to operate after the departure of

(ii)

(iii)

(iv)

53 the consultants. A simpler and faster system would have been more appropriate, given the available institutional capacity.
(v)

ADBs general policy of financing supervisory services from loan funds was not followed under the Project. ADB should stress the importance of professional construction supervision and generally take a tough stand on loan financing as this would help instill a desirable sense of ownership and responsibility in the executing agency. At the same time, given Governments reluctance to borrow for specialist services, ADB mission leaders should also seek grant cofinancing opportunities whenever possible. There are obvious intrinsic merits in the maintenance of assets, and the maintenance interventions under the Project were given an unnecessary economic justification. Given the largely unverifiable nature of the assumptions made, ADB should abandon the practice of such unnecessary economic analysis. The economic evaluation for road maintenance projects should focus on the timeliness and cost-effectiveness of the proposed interventions.

(vi)

C.

Evaluation of Institutional Capacity Building in Country Assistance Programs

165. Institutional capacity building has been a core element of ADBs interventions in Bhutan since the beginning of its assistance to the country. Indeed, most of the ADTAs have been directed at capacity building, and many of the loans have contained capacity-building components. Overall ADBs institutional development impact assessment for both lending and nonlending activities has been modest to moderate (2.4 overall score for ADTAs; 2.6 for loans).101 ADB was most successful in building capacity in the energy sector, scoring near moderate for ADTA and moderate to substantial for loans. ADB interventions in the energy sector were especially important for the capacity building that was needed in the BPC and Bhutan Electricity Authority to restructure the sector. ADB-supported capacity-building impacts related to rural electrification were also essential for the delivery of power supplies to rural communities and households. 166. ADB was also successful in building institutional capacity in the financial, transport, and social infrastructure sectors. In the financial sector, the creation of the Bhutan National Bank was central to the improved efficiency of the sector, and capacity building was an essential part of that process. Although there have been relatively few capacity-building projects for the Bhutan National Bank, ADB-supported software contributions were instrumental in improving the manner in which the bank conducted business. In the transport sector, ADB was successful in helping the government agency plan and execute road projects, although some of its interventions designed to build road maintenance capacity were overly sophisticated and not successful. In the social infrastructure sector, capacity-building efforts were successful in strengthening institutions in the urban infrastructure, education, and health sectors. 167. ADB was less successful in building institutions in two other sectors. In the agriculture sector, only two of the 13 ADTAs were considered to have a moderate to substantial impact on institution-building efforts. Those were the Irrigation Program Strengthening TA (footnote 40) and the Institutional Strengthening to the Ministry of Agriculture and Its Operational Departments TA (footnote 46). The two TAs that had a negligible institution-building impact were for the Food Corporation of Bhutan and Agricultural Marketing Systems TA (footnote 48)
101

For details, see Appendix 4, tables 4.3 and 4.4.

54 and the Manpower Development and Training TA (footnote 45). The former, undertaken in 1986, did not produce any significant visible results in terms of improved capacity of the Food Corporation, nor did it lead to the types of policy recommendations that had been requested by the Planning Commission and Ministry of Agriculture. In the industry sector, the Industrial Estates TA102 lacked properly trained staff in the project office to effectively carry out the targeted capacity-building goals. The Study on Promotion of Export Oriented Industries (footnote 65) was too ambitious in its scope to effectively implement the required policy and regulatory changes.

VI. A.

EVALUATION SYNTHESIS

Key Strengths of the Program

168. ADBs Program Consistency with the Governments Development Strategy. Since the beginning of its operations in 1983, ADBs operations in Bhutan have been guided by the Governments 5-year plans. During the past two decades, ADBs operational program has evolved to meet changing Government priorities and its views of ADBs comparative strengths. Lending and nonlending programs have been designed to help the Government in meeting its priority development objectives by continued interventions to strengthen infrastructure, improve the quality of social services, promote good governance, promote private sector development, generate employment, and preserve and promote Bhutan's culture and environment. This approach was especially appropriate since strategic analysis, as set down in formal COSs/CSPs, did not play a major role in guiding ADB operations. Between 1982 and 2000, only one COS was prepared in 1991. Since 2000, ADB has prepared CSPs more frequently. Because of the Governments clear priorities, the composition of ADB lending changed. ADB exited from some sectors (e.g., agriculture) and began operations in other sectors (e.g., power) over the 20-year period. The consistency between ADBs operations and Government priorities is a key explanatory factor for the good performance of ADBs program in Bhutan and for the achievement of significant development results (Table 9).

102

ADB. 1986. Technical Assistance to the Kingdom of Bhutan for Industrial Estates Development. Manila (for $140,000, approved 29 August 1986).

55 Table 9: Aggregate Loan and Technical Assessment Ratings by Sector (Operations Evaluation Mission estimates for all completed loans and TAs)
Outcome Assessment Sector Relevancea Agriculture and Natural Resources Loans TA Energy Loans TA Finance Loans TA Industry and Nonfuel Minerals Loans TA Social i Infrastructure Loans TA Transport and Communications Loans TA Multisector Loans TA Others
j

Impact Assessment Sociod economic Institutional Developmente Sustainability

f

Efficacyb

Efficiencyc

Overall

Government Priority for ADB Involvementh

2.6 2.8 3.4 3.1 2.6 2.9

2.0 2.8 3.7 3.2 2.7 2.8

2.0 3.1 2.8 3.0 2.2 2.6

2.0 3.4 3.8 3.4 2.2 2.6

2.3 2.4 3.5 2.8 2.3 2.3

3.0 2.9 2.9 2.9 2.1 2.5

2.3 2.9 3.4 3.1 2.4 2.6

Low Low High High High High

2.6

2.4

3.0

2.2

2.2

2.5

2.5

Low Low

3.1 3.1

3.0 3.1

2.5 3.2

3.0 3.2

2.9 2.7

2.8 3.0

2.9 3.1

High High

2.7 2.7 2.6 3.0

2.2 2.9 2.5 3.0

1.5 2.8 2.3 3.0

2.5 2.9 2.8 3.0

2.4 2.3 2.2 2.3

2.5 2.5 2.0 2.6

2.3 2.7 2.4 2.8

High High Moderate Moderate Low

Loans

TA 2.7 2.7 2.6 2.9 2.4 2.5 2.6 High = not applicable, TA = technical assistance. a Relevance ratings are: 4.0 (highly relevant), 3.0 (relevant), 2.0 (partly relevant), 1.0 (irrelevant), and (not applicable). b Efficacy ratings are: 4.0 (highly efficacious), 3.0 (efficacious), 2.0 (partly efficacious), 1.0 (inefficacious), and (not applicable). c Efficiency ratings are: 4.0 (highly efficient), 3.0 (efficient), 2.0 (partly efficient), 1.0 (inefficient), and (not applicable). d Socioeconomic ratings are: 4.0 (substantial), 3.0 (moderate), 2.0 (modest), 1.0 (negligible), and (not applicable). e Institutional development ratings are: 4.0 (substantial), 3.0 (moderate), 2.0 (modest), 1.0 (negligible), and (not applicable). f Sustainability ratings are: 4.0 (very likely), 3.0 (somewhat likely), 2.0 (uncertain), 1.0 (unlikely), and (not applicable). g For the overall assessment, highly successful (HS) is >3.5; successful (S) is between 2.8< S <3.5; partly successful (PS) is between 1.6< PS <2.5; and unsuccessful (US) is <1.6. h Based on ADB. 2003. Country Strategy and Program Update (20042006): Bhutan. Manila, as well as discussions with the Department of Aid and Debt Management of Bhutan and the South Asia Regional Department of the Asian Development Bank. i Primarily urban infrastructure. j Primarily for law and public sector management. Note: Refer to Appendix 4 for the Matrix for Assessing Effectiveness of Lending and Nonlending Operations. Source: Operations Evaluation Mission.

169. Ensuring Long-Term Sustainability of Interventions. Successful ADB sector interventions have been associated with recurrent and sustainable assistance. Those that have performed poorly have been associated with intermittent and sporadic interventions. The

56 effectiveness of ADB energy projects is due in part to continuous support over 20 years. Assistance to rural electrification and institutional and capacity development for the restructuring of the sector, as well as the establishment of a policy and legal framework to restructure the sector, have been implemented in a sequenced manner, building on earlier interventions. This is a major success story. The lesson is that ADB should focus on selected sectors, become a trusted partner in the sector, develop deep sector expertise in ADB, and promote excellence in ADB-supported assistance for those sectors. Excellence is to be judged by on-the-ground results. 170. Pioneering Role of ADB in Two Sectors. ADB has played a pioneering role in two sectors (rural electrification and finance) in helping the Government develop a coherent strategy and in providing loan and ADTA support for implementation. The results of these interventions have been generally relevant, and ADB has recognized their importance, particularly in relation to poverty reduction and, potentially, the promotion of private sector development. 171. Strong Support for Policy and Regulatory Reforms. ADB has supported the modernization of the Bhutanese legal system, based on Buddhist and Indian laws and English common law. It is essential to strengthen the legal and regulatory environment and to develop an equitable and transparent set of rules within the countrys changing political and economic environment. This process has been strategically important in light of the Governments decentralization of authority from the central Government to the districts and village blocks. In the energy sector, ADB has helped establish an appropriate policy and legal framework that contributed to restructuring the sector, and in the financial sector, ADBs assistance has helped establish an appropriate regulatory system for the nascent banking system. Appendix 5 summarizes the legislative changes that have been supported by ADB-related assistance, and describes the significant impact that the legislative changes have had on many sectors, and the economy as a whole. ADB can be proud of the impact of its assistance in this area. 172. Effectiveness of Capacity-Building Efforts. The concentration of TAs in capacity building provided to various ministries and government agencies was appropriate and contributed to (i) more effective delivery of services to the public; (ii) improved institutional arrangements, including those at the administrative and technical levels; and (iii) improved policies and regulations in the sectors in terms of fiscal management, governance, and human resource development. B. Key Weaknesses of the Program

173. Inadequate Explanation of Substantive Program Changes in COS/CSP. Consistent ADB support over a decade or more on some key activities has helped maximize the welfare effects of programs, projects, and institution-building initiatives. The COS/CSP is supposed to be the major mechanism used to ensure such program cohesiveness and sustainability. However, the reality is that only one COS was prepared between 1983 and 2004. When a major program shift occurred as in the 1991 COS (e.g., withdrawal from agriculture), ADB did not fully explain the motivation for the change in its lending and nonlending activities in the 1990s. Recognizing the importance of the agriculture sector to better food nutrition and improved household incomes, the COS stated that one of the main strategic aims of ADBs program was to raise productivity in the sector. From an operational point of view, the Governments farming system approach suggested the need to drop the Highland Livestock Development II project. That project was to be replaced with two loans entitled Agricultural Development I and Agricultural Development II in 1992 and 1994, respectively. Those loans were never processed

57 and the subsequent COS did not explain the motivation for dropping those loans or for the substantial shift in the sector-based focus of the ADB program. While it appears that ADB made the right tactical decisions and responded to clear Government priorities, these decisions were not driven by the strategies enumerated in the COS. They reflect pragmatic decisions made during annual country programming missions. ADB now places more emphasis on CSPs and prepares them more frequently. It remains to be seen whether future CSPs will play a more strategic role in guiding future ADB programs in Bhutan. 174. Inadequate Stakeholder Ownership of ADB Assistance. Implementation of some TA, particularly in the financial and energy sectors, had been adversely affected by the lack of adequate counterpart support from the EAs. Under ADB policies, recruitment of TA-financed consultants rests with ADB. For most of the TAs, government officials were not materially involved during the identification and selection process and have, therefore, tended to disassociate themselves from TA implementation. Lack of stakeholder ownership has often led to inadequate mechanisms for formal coordination with senior officials through steering committees or other channels. The lack of oversight has sometimes resulted in inconsistencies between government policy advocacy issues and those recommended by consultants. A more participatory approach in the early stages of the project cycle would ensure a mutual understanding between ADB and stakeholders about the scope and intended outputs of the proposed assistance, and ultimately lead to improved efficiency, better TA accountability, and better impact and results from ADBs key knowledge-based products. 175. Insufficient Recognition of Local Conditions in Project Design. The cohesiveness of integrated components in design, such as of the Highland Livestock Development loan (footnote 42), has contributed to project success, despite some weak individual components. The lack of incentive structures needed to overcome competing interests in land use under that loan created delays that should have been foreseen and appropriate mitigation processes should have been developed. Under the East-West Highway Maintenance project (footnote 76), the Road Maintenance Management System was introduced without its adaptation to local conditions. While Bhutan needed an information system to manage road maintenance, ADB in consultation with DOR should have exercised greater diligence in identifying the main design features of the system in light of the systems suitability for the special local conditions and institutional capacity in Bhutan. Providing technologically advanced systems that exceed the institutional capacity of the EA is not an effective form of development assistance. The economic evaluation of road maintenance should have focused on the timeliness and costeffectiveness of the proposed interventions. 176. Insufficient Flexibility and Simplicity in Project Designs. Project designs have not always incorporated sufficient flexibility during their implementation phases. In the case of the East-West Highway Maintenance project, for example, the plan for only three types of periodic maintenance interventions proved excessively rigid and impractical. With hindsight, a sectortype approach would have been more appropriate. The strategic significance of the road and the substantial backlog of repair work should have been ascertained during the project design process. The complexity of project designs sometimes caused project delays because of inadequate local skills. In the case of the Roadworks Mechanization project (footnote 75), DOR was constrained by lack of staff resources both in terms of numbers and qualifications. Similarly, in the case of the Road Planning and Management Strengthening project (footnote 82), DOR had limited professional staff resources and struggled to acquire the skills and experience needed to construct and maintain the national road network.

58 177. Lack of Integrated Approach to Project Implementation. A number of projects were developed as single, stand-alone interventions that did not have adequate support from complementary projects. In the case of the Highlands Livestock Development loan (footnote 42), the privatization of milk- and meat-processing plants was hampered by the lack of adequate supplies of milk and cattle for the facilities. In the case of the Sustainable Rural Electrification project (footnote 20) there were inadequate surveys and the BPC had to reorder additional material (steel power poles), the result of which was additional project costs and implementation delays. 178. Inadequate Coordination of Projects with Development Partners. Inadequate coordination with other development partners has limited the effectiveness and ultimately the impact of ADBs assistance. There is a perception among donors with offices in Bhutan that ADB has been relatively weak in the area of donor coordination. This reflects, in part, the fact that ADB does not have a local presence in Bhutan. Thus, coordination with local donors is done sporadically during mission. There were some weaknesses in this area related to specific project. For example, ADB did not fully consider the recommendations of UNDP in its poverty assessment assistance. Similarly, the lack of significant cofinancing with other development partners possibly reflected a desire to avoid delays that can arise when trying to coordinate with development partners, as occurred with the Technical and Vocational Education and Training project. 179. Project Implementation Delays. Project implementation delays continue to occur, largely as a consequence of inadequate local budget allocations, shortage of skilled local staff, frequent changes of project staff, weak procurement and contracting capabilities, executing agencies insufficient delegation of authority, weak monitoring and coordination, and delays in consultant recruitment. Public sector officials complain of the lack of sufficient project preparatory time and resources, and the fact that consultants are prone to rush project preparation to meet perceived ADB deadlines, rather than focusing on more crucial details and issues that would save time and reduce costs during project implementation. ADB should draw on past experience to develop more realistic schedules for both project processing and project implementation that reflect local conditions. C. Crosscutting Issues 1. Poverty Reduction

180. Poverty reduction has consistently been one of ADBs key strategic objectives. A classification of loans in the Bhutan portfolio on the basis of their primary and secondary focus found that 43% of the projects have had poverty reduction as either a primary or secondary objective (18% primary, 25% secondary). This slightly exceeds the ADB-wide 40% target included in the 1999 Poverty Reduction Strategy. The primary focus of most loans was directed at economic growth (48%) or human development (34%). The secondary focus of loans was similarly concentrated, albeit somewhat less, on these two objectives. Secondary objectives also included environmental protection (14%), private sector development (10%), and good governance (9%). The focus on poverty reduction increased as a result of ADBs shift toward poverty reduction as its overarching strategy in 1999. ADB appears to have succeeded in translating its strategic objective of poverty reduction into tangible projects that were consistent with Government priorities. However, project profiles often suggest that projects are targeting the poor in an effort to conform with ADBs overarching goal. Apart from assisting in the measurement of poverty in Bhutan, ADBs pro-poor strategy and programs will help indirectly reduce poverty through support for basic skills development, health, rural electrification, urban infrastructure, rural roads, private sector development, and integrated rural development.

59 2. Governance

181. The decentralization of the public sector and the implementation of district- and blocklevel development planning have contributed positively to the general perception of a government process that is based on participation, transparency, accountability, information flow, and good governance. ADBs law and development activities were generally successful and had a positive strategic impact. ADB should continue to focus its support to the country on promoting good governance through activities that support the legal and regulatory framework, decentralization and local governments, improved government efficiency, the rule of law, and the control of corruption. Governance issues can also be built into projects and TAs targeting the other major goals, especially the areas supporting poverty reduction through pro-poor activities. 3. Environment

182. Environment-related constraints relate to the growing competition for land and water resources; topographical factors increasing the cost of power, transport, and communications; and limited access to and supply of raw materials located in remote areas. Environmental management criteria should be increasingly incorporated and integrated into the countrys development planning, especially as such planning relates to the industrial policy formulation process for the establishment of appropriate environmental quality standards, together with the corresponding effluent and emission standards, and the establishment of adequate bureaucratic and administrative procedures for enforcement of environmental regulations. The Governments environmental management and capacity-building activities have been supporting these mechanisms, but they will need continued support from ADB and other development partners to succeed. Although ADB made some important contributions related to environmental management (e.g., assistance in the development of sectoral environmental guidelines and standards), this was not a major strategic focus in ADBs Bhutan operations. This is consistent with the need for selectivity. ADB cannot be involved in all areas in a major way, despite the undoubted importance of strengthening environmental management. 4. Private Sector Development

183. Private sector development is a relatively weak aspect of the development efforts of ADB and the Government in Bhutan. ADBs program had some positive impacts in this area by deepening and strengthening the financial sector, improving financial regulations, providing training for skilled workers and professionals, expanding credit availability through establishing commercial credit lines, and improving infrastructure. All of these activities have helped develop a better enabling environment for the private sector. Both the Bhutan National Bank and BDFC are increasingly offering credit at more competitive terms and demand for their loans is growing. However, fundamental challenges, such as ensuring that credit is channeled to profitable enterprises and that financing is provided to entrepreneurs operating in the informal sector, have not yet been addressed by these institutions. As in most other countries, the financial institutions are clearly reluctant to venture into SME and microlending. Meaningful development of the private sector will depend on the ability of small businesses, often operating in the informal sector, to access credit. 184. For ADB, potential areas of further support include (i) improving the legal and regulatory framework, particularly in the finance and trade sectors; (ii) facilitating greater lending assistance for microenterprises at competitive interest rates; (iii) supporting foreign direct investment promotion for employment generation and export diversification; (iv) promoting SME

60 activities in all sectors of the economy; and (v) strengthening the Bhutan Chamber of Commerce and Industry. As the key representative of the private sector, the chamber lacks dynamism, initiative, and adequate capability to promote the interests of the private sector. Resolving this situation will be essential to the private sectors ability to influence the policy and regulatory environment, support enterprise development, provide skills development programs, and collaborate with foreign chambers of commerce and industry to support technology transfer and know-how. At present, the capacity needed is lacking for developing an SME business development center, as are the mechanisms to monitor and evaluate the impact of their training programs on the entry and operation of businesses. ADB projects should include monitoring and evaluation mechanisms for private sector development-related activities. There was a noticeable absence of information on the extent to which lending and nonlending interventions contributed to these activities. Benchmarks and monitoring systems are essential for resultsbased management. An improved financial and regulatory environment would facilitate entry and operating conditions for microenterprise development. This is important since microenterprises have the potential to create many of the jobs that Bhutan needs. 5. Gender

185. Gender imbalances are evident as regards to womens health care. Some gender imbalances also remain in secondary school enrollment rates, while a marked gender imbalance is seen in vocational and tertiary education. ADBs gender-related activities should continue to be focused to provide support to projects targeting gender imbalances in the health and education subsectors. D. Lessons Learned

186. Performance Benchmarks. CSPs will become more relevant and operationally useful if (i) they are designed using a results-based approach; (ii) outcomes of the previous CSP are examined in terms of their efficacy, efficiency, capacity development, and socioeconomic impact; (iii) there is a thorough analysis of all factors leading up to any changes in general or sector-specific strategies; and (iv) there are specific benchmarks for monitoring policy reform and project outcomes. 187. Integrated Program Approach. In a results-oriented CSP, development effectiveness is improved if projects are designed and implemented in the context of the overall portfolio and other complementary interventions. The objective is to develop a strategy which has an impact that is greater than the sum of the parts. 188. Providing Adequate Time and Resources for Project Preparation. A number of projects encountered delays in the implementation of some of their components, suggesting that in the future more time and resources need to be allocated to project preparation to identify possible bottlenecks and possible remedial measures. During this study, public sector officials complained about the lack of sufficient project preparatory time and resources, and the fact that consultants are prone to rush the project preparation to meet ADB deadlines, rather than focusing on details and issues that would have saved time and reduced costs during project implementation. Adequate funding for project preparation is also needed. These are direct costs associated with poorly designed projects. There were instances where road projects had to be redesigned or rebudgeted due to underresourcing of project design work, often with adverse consequences for the subsequent timing and cost of project implementation. ADB should focus on project quality and development effectiveness during project processing, rather than the date of Board approval of the loan.

61 189. Institutional Capacity Building. On the institutional side of ADBs programs, ADB assistance has tended to underestimate the time needed for institutional capacity building. A longer-term view of capacity-building needs and implementation processes is required. Standalone capacity-building ADTAs can be weakened when they target technical skills improvements at the individual level rather than broader institutional capacity building through improved management, operational, functioning, and budgeting systems. 190. Stakeholder Ownership. Considerable scope remains for improving the participation of both government agencies and the private sector in designing and implementing projects, with a view to strengthening project ownership. E. Implications and Recommendations for the Future Strategy and Program

191. Implications for ADB Activities of Government Revenue from the Tala Power Project. By the end of the Ninth Five-Year Plan, when the Tala hydropower project will start functioning, it is expected that Bhutan will be able to meet its development budget through internal revenue. However, ADB and other funding agencies will continue to have a role to play in assisting the country to help reduce poverty by increasing incomes; creating jobs; improving their access to basic services; reducing their vulnerability to natural and man-made shocks that give rise to food insecurity; enhancing their access to information, health, and education; and expanding their opportunities to participate in private sector development (primarily through SME and microenterprises). The Government has recognized these needs in the Ninth FiveYear Plan and embodied their effects in the development philosophy of enhancing gross national happiness. ADB and the funding community will need to continue providing considerable assistance if poverty is to be substantially reduced in Bhutan. 192. Benchmarking Best Practices as a Means of Guiding Needed Changes in the Policy and Regulatory Environment. A key strategic challenge is to develop a sound enabling environment for the private sector. Bhutan would benefit from the development of an information system to identify best practices to encourage the development of private businesses and the application of the procedures that lead to these practices. Benchmarks for the investment climate would include indicators to measure Bhutans competitiveness against that of other countries, including specific aspects of public administration, the independence and efficiency of the legal and regulatory system, tax levels, macroeconomic stability, financial market conditions, and capital controls. It would also involve information systems on qualitative factors affecting investment decisions, including factors attracting foreign direct investment that measure the business-friendliness of the country. Developing these types of indicators would be useful to guide needed changes in the policy and regulatory environment affecting business operations in the country. 193. Need for Sustainability of Institution Strengthening. Consistent involvement of ADB over long periods of time has characterized the more successful capacity-building interventions. In the case of the energy sector, the substantial impact of several of the interventions reflects the effective sequencing of activities over time. In contrast, industry sector-related interventions failed to have a significant impact because of the intermittent nature of ADB support. Leaving large numbers of recommendations made in the voluminous studies entirely to government officials to implement is not a recipe for success. Experience shows that few recommendations were in fact put forward to senior policy makers by those officials after the consultants departed. ADBs early assistance to capacity building helped ameliorate weak institutions and improve governance. Particularly noteworthy changes have been made to the energy, financial, and social infrastructure sectors. Continued improvements of institutions in these sectors are,

62 nevertheless, essential if they are to adapt to the changing needs of the country as the economy becomes increasingly modernized. Maintaining the level of nonlending assistance will be needed in future programs for the country. The process of accession to the World Trade Organization is under way. Bhutan needs to adapt its institutions to strengthen their competitive capabilities in light of that greater openness. Experience in other countries indicates that World Trade Organization access generates many forces for change in the economic management system. While such changes are likely to be positive in the long run, capacity building will be needed in the short term to cope with the wide-ranging changes to the economic governance system. 194. Increasing Assistance to Bhutan. Because of Bhutans good economic performance and rising per capita GDP, there is likely to be a reduction of grants and loans from other development partners in the near future. Increasing ADBs assistance to Bhutan within the Performance Based Allocation Framework is consistent with ADBs policy of rewarding good performing policies. 195. Grant Financing, Cofinancing, and Funding Agency Coordination. To limit its debt exposure, the Government will continue to focus its requests on grant financing, particularly in areas like health and education. ADB has not aggressively pursued partnership arrangements and cofinancing as part of its operations in Bhutan. ADB should make major efforts to deepen its partnerships with other members of the development community and significantly expand its efforts to mobilize cofinancing, improve knowledge sharing, and widen its access to technical resources. ADF resources will remain limited and there is a possibility of graduation of Bhutan from a Group D to a Group C borrowing member country. Use of cofinanced grant assistance to support ADB project implementation is likely to be supported by other development partners, and could play a major role in improving ADBs effectiveness in development assistance. 196. CSP Targets and Indicators. A set of measurable output and outcome target indicators for each sector should be established in the next CSP, scheduled to be prepared in 2005 and covering 20062008. They should be linked to priority areas of ADB and the Government to ensure that the CSP is results based, the CSP can be monitored through the CSPUs, and adjustments can be made when conditions require. This would be consistent with ADBs movement toward results based CSPs and the type of information that is supposed to be included in the sector roadmaps. The strategy and prioritization of activities should, however, be left to the results-based CSP, as well as to the findings of the full poverty analysis of the country. 197. Sector Selectivity and Focus. There are development needs in all sectors in Bhutan. Based on the generally good performance, the CAPE findings do not lead to recommendations to exit from sectors. The decision on sector focus can be left to the CSP process. The selection of the sectors should be based on (i) strategic considerations as to the key issues to be addressed in the future; (ii) portfolio performance-reward the good sectors; (iii) analysis of the priorities of other funding agencies (to avoid duplication); (iv) government policies and priorities; (v) ADBs competitive advantage and likely size of the lending envelop; and (vi) a long-term commitment for continuous involvement in the sector. 198. Linkages among Culture, Environment, and Private Sector Development. Economic development in Bhutan faces various constraints related to (i) the growing foreign influence on the countrys unique cultural heritage; (ii) the expansion of tourism facilities in the country, and the promotion of Bhutan as a prime tourist destination; (iii) topographical factors increasing the

63 cost of power, transport, and communications; and (iv) limited access to and supply of raw materials located in remote areas. These cultural and environmental constraints suggest the need to incorporate and integrate environmental management criteria into the countrys development planning, especially as it relates to the private sector development policy. Essential to this process will be the establishment of appropriate environmental quality standards, together with the corresponding effluent and emission standards, and the establishment of adequate bureaucratic and administrative procedures for enforcement of environmental regulations and the maintenance of Bhutans cultural heritage. While the Governments environmental management and cultural heritage programs have strongly supported these areas, the Government will need continued support from the funding community. Specific requirements on the part of ADB include the integration of environmentally and culturally friendly mechanisms in all of its projects, especially those related to infrastructure, to minimize potential adverse impacts of projects and programs on the countrys culture and environment. 199. Financial Sector Competitiveness. ADB should expand its interventions in helping to develop the financial sector regulatory framework if that sector is to achieve optimal results from future projects based on lines of credit or other forms of loan finance. With only two banks in the country, there is a need to eliminate duopoly practices that have resulted in high interest rates, notwithstanding recent declines in those rates. 200. Private Sector Development. Promotion of the private sector needs to adopt a more practical approach than in the past. The formulation of the next CSP should consider whether part of the strategy should be to increase ADB direct support for the private sector. Successful development of the private sector will require the development of informal enterprises and small formal sector enterprises. This development will necessitate greater support for targets groups and participating financial institutions through giving broadbased support in the form of both financial and nonfinancial services; building goodpractice financial delivery systems adapted to small business capabilities; generating business development services that provide skills, appropriate business training, information, and market and credit access; and making regulatory and institutional changes to reduce barriers to entry by microenterprises. These types of interventions have significant implications for poverty reduction. Although both ADB and the Government included development of the private sector in strategy and planning papers, insufficient specific interventions were actually implemented to support such development. Focused interventions are required in sectors with substantial impact on the enabling environment for private sector development. Given the need for a sharper focus in the ADB program in Bhutan, ADB should ensure that interventions are made in those areas that potentially have the greatest impact on enterprise development. 201. Portfolio Monitoring and Establishment of a Resident Mission. Frequent missions to monitor and review projects are essential for good portfolio performance and to prevent or address problems related to implementation delays, poor contract award performance, and low disbursement performance. Those missions should continue to build on the collaborative efforts between ADB and the EAs in project assessments for project performance rating. The establishment of an RM would (i) improve loan and TA processing and administration, (ii) development partner and nongovernment organization coordination, (iii) information dissemination, (iv) facilitate preparation of country operational strategies and assistance plans, (v) promote subregional cooperation, and (iv) generally strengthen and ensure timely delivery of an increasingly complex program of assistance. Project monitoring, supervision, and review by ADB, especially for ADTAs, need to be improved, and measurable performance

64 indicators need to be developed to monitor the progress and results of both lending and nonlending assistance. Without such indicators, ADB has little basis for objectively measuring performance and reviewing progress with the EAs. Such reviews are particularly important in cases where there are several stakeholders such as ADB, the Government, the implementing team, and possibly other development partners under cofinancing arrangements. The establishment of an RM is justified and would be consistent with ADBs policy on RMs.103 ADB should carefully assess the operational benefits and the costs related to the establishment of an RM in Bhutan.

103

ADB. 2000. Resident Mission Policy. Manila.

Appendix 1

65

BHUTANS NATIONAL DEVELOPMENT STRATEGIES AND ASIAN DEVELOPMENT BANK STRATEGIES A. National Development Strategies and Plans

1. Bhutan emerged from isolation and almost total dependence on subsistence agriculture in 1961 with the initiation of the first of its 5-year development plans. The First and Second FiveYear Development Plans (FY19621971) concentrated on the construction of roads and the creation of a technical and administrative framework for governance. The Third and Fourth FiveYear Development Plans (FY19721981) incorporated sector developments directed towards agriculture, forestry, electricity, mining and public health. The Fifth Plan (FY19821987) reflected wider developmental considerations covering (i) economic growth to increase domestic selfreliance, (ii) the decentralization of developmental administration to improve the effective of government, and (iii) the wider dispersion of benefits deriving from economic progress. The Sixth Plan (FY19881992) focused on the diversification of the economy largely based on the exploitation of the countrys natural resources. The commissioning of the Chhukha hydropower plant (336 megawatts) in 1986 marked the beginning of this diversification and provided a means by which to increase exports of surplus energy to India, and thereby provide increased revenue to the government. The Seventh Plan (FY19931997) aimed to (i) strengthen the development administration, (ii) preserve and promote national identity, (iii) mobilize internal resources, (iv) enhance rural incomes, (v) improve rural housing and resettlement, (vi) consolidate and improve development services, (vii) develop human resources, and (viii) promote peoples participation and self-reliance. 2. The Eighth Plan (FY19982002) supported the collective pursuit of gross national happiness and addressed key policy issues related to (i) achieving national self-reliance, (ii) ensuring sustained growth, (iii) strengthening national security, (iv) preserving and promoting cultural and traditional values, (v) promoting regional balanced development, (vi) improving the quality of life, (vii) developing human resources, (viii) decentralizing, (ix) privatizing, and (x) developing the private sector. According to the Government, only about 39% of the targets under the plan were achieved at its midpoint, mainly because of procedural delays in finalizing projects, as well as in receiving funds. Lack of adequate and qualified human resources was also a factor contributing to the delays, as was the lack of long-term master plans, particularly in sectors such as education, roads, and civil aviation. Another issue that emerged from the review of the Eighth Plan by the Government was the lack of intersectoral coordination. Two examples cited were (i) the need for the renewable natural resources sectors of agriculture, livestock, and forestry to work more closely with rural credit schemes; and (ii) the need for different sectors to work together in providing security to important infrastructures. Finally, the suitability of the planning process itself was mentioned as requiring review. 3. The Ninth Plan (FY20032007) has five overall goals: (i) improving the quality of life and income, especially of the poor; (ii) ensuring good governance; (iii) promoting private sector growth and employment generation; (iv) preserving and promoting cultural heritage and environment conservation; and (v) achieving rapid economic growth and transformation. The plan emphasizes the strengthening of infrastructure, improving the quality of social services, ensuring good governance, promoting growth of the private sector, generating employment, and preserving and promoting culture and the environment. Greater emphasize than in past plans was given to decentralization of development expenditures to the dzongkhags (districts) and geogs (cluster of villages). The district development committees (DYT) and block development committees (GYT) have been granted autonomy to make development plans, allocate resources, and make rules and regulations applicable within their jurisdictions.

66

Appendix 1

4. Bhutan 2020: A Vision for Peace, Prosperity and Happiness1 is a 20-year perspective strategy which sets the preferred direction for where Bhutan wants to be in the next two decades. It highlights the national goals, broad targets and overall policy principles for the next 20 years. It is based on the six main principles of (i) maintaining a distinct identity, (ii) strengthening unity and harmony, (iii) guaranteeing a nationwide stability for peace and prosperity, (iv) promoting self-reliance, (v) pursuing sustainable development, and (vi) demonstrating capacity to effectively respond to challenges and possibilities. B. Asian Development Bank Overall Strategies

5. ADBs overall strategic framework during its 20-years of operations in Bhutan can be divided into three distinct periods. The first period (19831991) was directed at the multiproject assistance and did not have a well-defined strategy or framework for assistance in the country. The second period (19921998) was guided by a series of 3-year rolling Medium-Term Strategic Framework (MTSF) papers that aimed to provide balanced socioeconomic growth that favored the poorer groups and protected the environment. The third period (1999present) began with the adoption of poverty reduction as the overarching goal of the institution and is the strategic framework that continues to guide ADBs operations in Bhutan. The strategic priorities were defined in the Poverty Reduction Strategy (PRS) of 1999, the Long-Term Strategic Framework (LTSF) covering 20012015, and the Medium-Term Strategy (MTS) for 20012005. ADBs present strategic framework, as elaborated in its PRS, LTSF, and MTS, supports the Millennium Development Goals (MDGs) established in September 2000 by 189 United Nations (UN) member countries for tackling poverty worldwide by 2015. Bhutans country operational strategy (COS) and its country assistance plans (CAPs) would, in principle, have addressed ADBs overall strategies in each of these periods. Whether they did in practice is assessed in Chapters III and IV of the main body of this report. 1. Second Period (19921998) Strategy

6. ADB strategic priorities for the 1990s were outlined in a 1989 panel report that emphasized the need to (i) balance ADBs focus on economic growth with social infrastructure development, (ii) improve the living standards of the poorest groups, (iii) protect the environment, and (iv) reorient the public sector.2 Based on these emphases, a series of 3-year rolling MTSF papers were prepared between 1992 and 1995 covering 19951998.3 The MTSF specified five strategic thrusts to guide the preparation of COSs and CAPs for developing member countries (DMCs), including support of (i) economic growth, (ii) human development, (iii) poverty reduction, (iv) women in development, and (v) environmental protection.4 It also redefined ADBs operating role from being project financier to project financier and catalyst of policy change and capacity development, on the basis of a lesson learned that it was virtually impossible to have good projects in a poor policy environment. Four priority areas were identified for ADB operations: (i) policy support; (ii) capacity building for development management; (iii) creating and strengthening productive capacity, infrastructure, and services; and (iv) regional cooperation. To ensure implementation of the MTSFs five strategic thrusts through COSs and CAPs for DMCs, a system of project classification was adopted during that

1 2 3 4

Royal Government of Bhutan. 1999. Bhutan 2020: A Vision for Peace, Prosperity and Happiness. Bhutan. ADB. 1989. The Asian Development Bank in the 1990s: Panel Report. Manila. ADB. 1992. The Banks Medium-Term Strategic Framework (19921995). Manila. These five strategic thrusts were abbreviated as EG, HD, PR, WID, and EP, respectively, for the purpose of project classification.

Appendix 1

67

time to classify projects by their primary and secondary objectives in accordance with the five thrusts. 2. Third Period (1999Present) Strategy

7. Poverty reduction became the overarching goal of ADB in 1999 when the PRS was approved.5 The PRS identified three strategic pillars to guide the preparation of COSs and CAPs for DMCs: (i) pro-poor, sustainable economic growth; (ii) good governance; and (iii) social development. It also specified three sector priorities: (i) agricultural and rural development, (ii) social sectors, and (iii) infrastructure and finance. In addition, it emphasized the need to develop a poverty reduction partnership agreement with each DMC, together with medium-term target indicators to monitor progress toward long-term development goals. Shortly after the PRS was approved, the PSD Strategy was approved in 2000 to promote private sector-led growth and its contributions to poverty reduction.6 These two strategies formed the major building block for the LTSF (20012015) approved in March 2001.7 The LTSF identifies three core strategic areas for ADB operations: (i) sustainable, broad-based economic growth, including investments both in physical and social infrastructure, with environmentally sound development; (ii) inclusive social development, including investments in social support programs to improve equity and empowerment for women and disadvantaged groups; and (iii) governance for effective policies and institutions, including support for public sector reform, and legal and judicial reforms. These three core areas are complemented by three crosscutting strategic themes aimed at promoting (i) private sector development (PSD), (ii) regional cooperation and integration, and (iii) environmental sustainability. 8. The LTSF also identifies the following four strategic operating principles for implementing ADB strategic thrusts to ensure a strong country focus, and selectivity of assistance programs: (i) ensuring country leadership and ownership of the development agenda and priorities; (ii) taking a long-term approach to development assistance, particularly in the prioritized sectors and areas to ensure greater selectivity; (iii) enhancing strategic alliances and partnership to ensure greater selectivity and complementarity; and (iv) measuring development impacts of assistance programs by developing indicators for short- and medium-term targets toward achievement of long-term development goals. To translate these strategic operating principles into concrete forms of assistance programs, the LTSF emphasizes innovations in modalities, which involves doing different things and doing things differently, including (i) a cluster approach, which involves sequencing lending and nonlending assistance to a particular sector to achieve a defined set of long-term goals, thus supporting a long-term development approach and greater selectivity; (ii) a sector-wide approach to ensure larger development impacts and increased government ownership in that sector; and (iii) new partnership modalities (e.g., with nongovernment organizations, civil society groups, and local governments) to support partnership development. 9. The LTSF is to be implemented through a set of three MTSs, the first one of which was approved in September 2001 and covers 20012005.8 It echoes the strategic thrusts and operating principles of the LTSF for country strategies and programs. Following the adoption of the PRS, the system of project classification has been changed from classifying projects by their primary and secondary objectives in accordance with the old MTSFs five strategic thrusts, to
5 6 7

ADB. 1999. Fighting Poverty in Asia and the Pacific: The Poverty Reduction Strategy. Manila. ADB. 2000. PSD Strategy: Promoting the Private Sector to Support Growth and Reduce Poverty. Manila. ADB. 2001. Moving the Poverty Reduction Agenda Forward in Asia and the Pacific: The Long-Term Strategic Framework of the Asian Development Bank (20012015). Manila. ADB. 2001. Medium-Term Strategy (20012005). Manila

68

Appendix 1

classifying by (i) poverty focus under three categories: core poverty intervention, poverty intervention, and other development intervention;9 and (ii) thematic focus under seven categories: economic growth, environmental protection, good governance, gender and development, human development, PSD, and regional cooperation.10 10. The MDGs are a series of goals, targets, and indicators adopted by 189 UN members in September 2000 for tackling worldwide poverty by 2015. They consist of eight goals: (i) eradicating extreme poverty and hunger; (ii) achieving universal primary education; (iii) promoting gender equality and empowering women; (iv) reducing child mortality; (v) improving maternal health; (vi) combating human immunodeficiency virus/acquired immunodeficiency syndrome, malaria, and other diseases; (vii) ensuring environmental sustainability; and (viii) developing a global partnership for development. The last goal is generally for more developed countries to adopt as a means to achieving the first seven goals. Each of these goals has corresponding targets, totaling 18, and a number of indicators for each target. ADB endorsed the MDGs in 2002 as a corporate commitment to poverty reduction, and incorporated the MDGs into its operations in Bhutan and elsewhere through its PRS, LTSF, and MTS. Table A1.1 summarizes Bhutans status in achieving the goals and targets of the MDGs. Table A1.1: Progress Towards the Millennium Development Goals and Targets Goals and Targets
Goal 1: Eradicate Extreme Poverty and Hunger Target 1: Halve, between 1990 and 2015, the proportion of people whose income is less than $1/day. The Bhutan Living Standards Survey (BLSS) of 2003, conducted by the National Statistics Bureau with support from ADB, estimated that 31.7% of the population is poor (4.2% of the urban population, and 38.3% of the rural population). This is based on an overall national poverty line estimated at Nu740 ($16.4) per capita per month. BLSS estimates that only about 4% of the population are below the food poverty line of Nu404 ($9.0) per capita per month. Assuming a poverty line of Nu1,000 ($22.5) per capita per month, or the equivalent of $0.75/day, would result in a national poverty incidence of 49.4% (13.4% urban and 57.9% rural). The Partnership Agreement targets lifting of the monthly average rural income from about Nu1,000 per head in 1999 to about Nu3,000 per head by 2012. Of children under 5, 58% were malnourished in 1990, and 19% in 2000. Goal 2: Achieve Universal Primary Education Target 3: Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling. Goal 3: Promote Gender Equality and Empower Women Target 4: Eliminate gender disparity in primary and secondary education, preferably by 2005, and in all levels of education no later than 2015. The girl-to-boy ratio in primary schools improved from 39 girls: 61 boys in 1990, to 47: 53 in 2000. The ratio in junior colleges, however, is still low at 35: 65. The target year in the Partnership Agreement is 2007.

Country Status

Target 2: Halve, between 1990 and 2015, the proportion of people who suffer from hunger.

9 10

Abbreviated as CPI, PI, and ODI, respectively. Abbreviated as EG, ENV, GG, GD, HD, PSD, and RC, respectively.

Appendix 1

69

Goals and Targets

Goal 4: Reduce Child Mortality Target 5: Reduce by two thirds, between 1990 and 2015, the under-5 mortality rate. Goal 5: Improve Maternal Health Target 6: Reduce by three quarters, between 1990 and 2015, the maternal mortality ratio. Goal 6: Combat HIV/AIDS, Malaria, and Other Diseases Target 7: Have halted by 2015, and begun to reverse, the spread of HIV/AIDS. Target 8: Have halted by 2015, and begun to reverse, the incidence of malaria and other major diseases.

Country Status
The infant mortality rate (below 1 year) improved from 70.7 per 1,000 live births in 1994 to 60.5 in 2000. The target for 2007 is 30 per 1,000 live births. The maternal mortality ratio improved from 380 per 100,000 live births in 1994 to 255 in 2000. The target for 2007 is 150 per 100,000 live births. Four people died from AIDS in 2001, and another 18 are known to be HIV-positive. But the actual number of HIV/AIDS cases in Bhutan is unknown. Specific programs were implemented to control or eradicate diseases such as leprosy, tuberculosis, malaria, diarrheal diseases, and acute respiratory infections.

Goal 7: Ensure Environmental Sustainability Target 9: Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources. The National Environment Strategy was prepared, and a national environmental action plan is being prepared.

Target 10: Halve, by 2015, the proportion of people without The proportion of people with access to safe drinking sustainable access to safe drinking water. water rose from 57% in 1999 to 78% in 2000. Government plans to achieve 100% coverage by 2007. Target 11: By 2020, achieve a significant improvement in the lives of at least 100 million slum dwellers. The Government will help build housing for low-income people, while promoting private sector participation.

HIV/AIDS = human immunodeficiency virus/acquired immunodeficiency syndrome. Source: ADB. 2004. Country Strategy and Program Update (20042006): Bhutan. Manila.

70

Table A1.2: Country Economic Indicators (19832003)

Appendix 1 Fiscal Year Item 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 A. Income and Growth 1. GDP per capita ($, current prices) a 2. GDP, growth (% in constant prices) 8.0 7.0 3.7 10.2 17.8 1.1 5.0 5.2 2.9 4.5 6.1 6.4 -2.0 3.6 3.9 Agriculture Industry 15.1 7.3 13.9 Services 6.6 10.1 5.2 3. Sectoral Shares Agriculture 52.6 43.2 Industry 19.0 25.3 Services 28.4 32.7 B. Savings and Investments (% of GDP) 1. Gross Capital Formation 32.0 103.5 28.0 2. Gross Domestic Savings C. Money and Inflation 1. Consumer Price Index, 1990=100 64.9 71.4 75.9 83.6 90.9 100.0 112.3 130.2 144.8 154.9 2. Money Supply (M2), % 29.6 13.5 23.1 22.6 16.0 11.2 7.0 3. Inflation Rate D. Government Finance (% GDP) 1. Revenue 2. Expenditure 49.2 3. Fiscal Balance (39.3) (7.8) (19.9) E. Balance of Trade/Payments 1. Current Account (% of GNP) Merchandise Exports ($ million, fob) 16.0 18.0 22.0 31.0 55.0 75.0 70.0 68.0 65.0 67.0 65.0 66.0 2. Merchandise Imports ($ million, cif) 72.0 73.0 84.0 93.0 87.0 127.0 90.0 78.0 97.0 128.0 90.0 92.0 3. Trade Balance (% of GNP) (3.8) 17.5 14.5 4.6 4. Merchandise Export Growth (%) 5. Merchandise Import Growth (%) 51.0 -17.2 4.8 0.6 0.0 0.0 0.0 6. Foreign Direct Investments (% million) F. External Payment Indicators 1. Gross Official Reserves (% million) 50.3 86.0 2. Debt Service ($ million) 0.0 0.0 0.0 0.2 0.5 1.3 6.5 5.2 7.2 5.9 7.1 7.5 3. Total External Debt ($ million) 1.8 2.7 8.8 21.0 40.2 67.1 73.9 83.5 86.3 89.2 96.6 104.5 = not available, GDP = gross domestic product, GNP = gross national product. a From 1983 to 1991, GDP growth rate was reorted at factor cost. Source: Various issues of Asian Development Bank Key Indicators . 1995 1996 1997 1998 1999 2000 2001 2002

7.4 4.0 3.5 13.4

6.0 6.4 8.4 3.4 39.1 34.8 26.1

7.6 4.0 3.5 13.4 37.6 37.8 27.6

6.1 1.9 8.6 6.6

7.6 5.2 11.6 5.9

5.3 4.5 2.2 9.5 33.2 37.3 29.5 22.4

6.6 3.2 13.4 6.6

7.7 2.5 12.1 8.0 33.9 37.4 31.6 48.1 27.9

169.7 184.6 196.6 224.0 234.1 244.4 36.0 9.4 58.6 16.4 31.4 16.1 9.5 8.8 6.5 10.6 6.8 4.0

7.6 3.4

28.5 2.5

0.1

(3.5)

(4.9)

103.0 100.0 118.0 108.0 113.0 112.0 128.0 137.0 169.0 188.0 (20.2) 60.8 6.1 20.3 4.2 11.5 26.6 24.3 10.0 10.8 42.0 0.1 1.4 (0.7) 0.0 0.0

9.2 15.5 0.0

0.0

124.3 249.7 274.4 295.3 284.7 321.7 9.8 6.9 72.0 9.2 7.0 6.6 6.3 105.8 113.0 119.6 171.0 183.8 203.3 265.2

Table A1.3: Country Social Indicators

Item 1983 1984 1985 1986 1987 1988 1989 1990 1991 Fiscal Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

A. Population Indicators a 1. Total Population (million) 1.32 1.35 1.38 1.41 1.44 1.47 1.51 1.54 1.58 1.61 1.65 0.56 0.58 0.60 0.62 0.64 0.66 0.68 0.70 0.72 Annual Poulation Growth Rate 2.38 2.10 3.20 2.90 3.10 2.90 3.60 2.40 2. (% change) B. Social Indicators 6.20 5.80 5.90 5.60 5.30 5.20 1. Total Fertility Rate (births per woman) 2. Maternity Mortality Rate 1710.00 770.00 800.00 0.00 500.00 380.00 380.00 500.00 (per 100,000 live births) 141.00 125.00 107.00 129.00 91.00 80.00 77.00 74.00 3. Infant Mortality Rate (below 1 year per 1,000 live births) 4. Life Expectancy at Birth (years) 43.00 59.00 49.00 53.00 66.00 61.00 63.00 Female Male 44.00 57.00 48.00 50.00 66.00 60.00 61.00 5. Adult Literacy (%) 23.00 25.00 28.00 34.00 Female Male 51.00 51.00 56.00 61.00 6. Gross Primary School Enrollment Rate (%) 19.00 15.00 20.00 19.00 16.00 60.00 60.00 19.00 Female 7. Gross Secondary School Enrollment (%) 1.00 2.00 2.00 2.00 9.00 Female 8. Child Malnutrition (% below age 5) 38.00 39.00 19.00 9. Population Below Poverty Line (national, %) 10. Population with Access to Safe Water (%) 30.00 60.00 Urban Rural 60.00 30.00 11. Population with Access to Sanitation (%) 80.00 Urban Rural 3.00 12. Public Education Expenditure (% of GDP) 13. Human Development Index 0.34 0.48 0.49 Rank 140.00 14. Gender-Related Development Index Rank = not available, GDP = gross domestic product. a Prior to 1994, the official estimates were in close agreement with the UN Series. The government changed the official series beginning 1994. Source: Various issues of Asian Development Bank Key Indicators .

Appendix 1

71

72

Appendix 2

DESCRIPTION OF COUNTRY STRATEGY AND ASSISTANCE PROGRAMS FOR BHUTAN

A.

Country Operational Strategy 19911993

1. The operational strategy of the Asian Development Bank (ADB) in Bhutan became somewhat more focused following a 1989 study suggesting that ADB adopt a catalytic role through technical assistance (TA) for the preparation of development projects and mobilization of cofinancing, particularly in terms of grants. The focus of operations was therefore the provision of TA for (i) project preparation, (ii) policy research and development, and (iii) institutional strengthening.1 Implementation was targeted at improving the capacity of the development administration, supporting the movement from a subsistence economy to one that was more diversified in its activities, supporting export-oriented activities to countries other than India, and developing physical and social infrastructure. Activities were also to support the development of the private sector, and provide policy support for (i) strengthening the development administration, (ii) improving domestic resource mobilization, and (iii) developing an appropriate trade policy regime. To that end, 13 TA projects were implemented during 1991 1993, nine of which were advisory and the remaining four were preparatory. Four loans totaling $19 million were programmed but loan disbursements did not exceed $5 million because of the Governments concern over external indebtedness. B. Country Operational Strategy 2000

2. ADBs overarching goal of poverty reduction was adopted to Bhutans development context based on (i) the nature and degree of poverty in Bhutan; (ii) the effectiveness of the Governments economic and social development programs in addressing basic human needs; (iii) the countrys access to grant funds from development partners; (iv) the countrys debtservicing and project implementation capacities; (v) the likely initiatives of other development partners; and (vi) the need to be selective in ADBs relatively small program for it to be effective. 3. Lack of detailed information on the incidence of poverty prevented the 2000 Country Operational Strategy (COS) from targeting specifically vulnerable groups. Instead, the COS addressed the generally income poverty suggested by 1996 per capita gross national product (GNP) estimates of $480 per head, or approximately $1.30 per head a day. It also recognized that the Governments social welfare policies have resulted in high levels of human capital and relatively widespread social well-being, a condition not found in many other Asian countries where abject poverty is apparent. The COS therefore addressed poverty in Bhutan through both its income dimension and its nonincome, social dimension that is unique to the countrys situation. Poverty reduction under these circumstances was to be tackled through initiatives that supported economic growth and measures to improve health, education, and other facilities of all groups in society, as well as targeted groups regarded as particularly vulnerable or disadvantaged that required special assistance. 4. The specific interventions for reducing poverty through income and employment generation were to be based on private sector-led development and the improvement of both the policy environment and financial intermediation. Specific constraints that were identified as needing to be remedied were (i) those related to physical infrastructure, particularly in road
1

ADB. 1991. Country Operational Program Paper, 19911993. Manila (Programs Department [West], Division II).

Appendix 2

73

transport and rural energy; (ii) those preventing development of the domestic skills base; (iii) those arising from rural-urban migration pressures on housing and urban infrastructure; and (iv) those related to the management and cost recovery of social services. The strategy therefore targeted major constraints to increased incomes and improved public service delivery, and to weaken the effects of the mutually reinforcing nature of these constraints. 5. In private sector development, ADBs strategy sought to strengthen the Governments ability to develop incomes and employment opportunities for the private sector by (i) strengthening the capacity of government agencies for macroeconomic management, governance, and development administration; (ii) improving the physical and social infrastructure; (iii) promoting private sector development through physical infrastructure development, skills training, financial sector strengthening, and legislative reform; (iv) improving the efficiency of public service delivery and cost recovery; and (v) protecting the environment and ensuring the environmental compatibility of ADB-sponsored projects. 6. A new COS was finalized in 2000 through close consultation with the Government. It aimed to support poverty reduction in Bhutan by promoting economic growth and social inclusiveness. Although the low Bhutanese income generally reflected widespread income poverty, the kind of abject poverty seen in some parts of Asia as a result of such low incomes was not evident in Bhutan. The Governments social welfare policies over many years had resulted in relatively widespread social well-being. Therefore, the main thrust of poverty reduction efforts under the COS was to enable the Governments commitment to be realized under the strategic theme of improving the quality of life for all. 7. Given the limited resource base of the program, ADB had to be selective and not try to spread available resources too thinly or to dissipate them through supporting too many objectives. Its overarching objective of poverty reduction was to be addressed through the income and employment generation impact of private sector-led development, brought about by an improved policy setting and more efficient financial intermediation. This would be complemented more specifically by ADB interventions to (i) reduce physical infrastructure constraints; (ii) develop the domestic skills base; (iii) improve the urban environment; and (iv) support sustainable provision of quality social services. The new COS did not differ fundamentally from the previous one; in fact, it sought to maintain continuity with it, especially with those thrusts that are considered to have as a positive development impact. C. Country Strategy and Program Update 20042006

8. The Country Strategy and Program Update 20042006 emphasized its consistency with the Ninth Five-Year Plan for strengthening infrastructure, improving the quality of social services, ensuring good governance, promoting private sector growth, employment generation, and preserving and promoting Bhutan's culture and environment. The lending and nonlending programs were therefore geared to assist the Government in meeting its priority development objectives by continued and follow-on interventions for the development of road infrastructure, rural electrification, and promotion of the private sector. These interventions were also consistent with ADB's overarching objective of poverty reduction in its developing member countries.

74

Appendix 2

Table A2.1: List of Approved Loans by Sector, 19832003

Loan Amount Loan No. Title Agriculture and Natural Resources 1. 740(SF) Chirang Hill Irrigation 2. 808(SF) Highland Livestock Development Energy 3. 1375(SF) Rural Electrification 4. 1712(SF) Sustainable Rural Electrification 5. 2009(SF) Rural Electrification and Network Expansion Finance 6. 934(SF) Bhutan Development Finance Corporation 7. 1565(SF) Financial Sector Intermediation Facility 8. 1566(SF) Financial Sector Intermediation Policy Industry and Nonfuel Minerals 9. 900(SF) Industrial Estates Social Infrastructure 10. 1035(SF) Technical and Vocational Education and Training Urban Infrastructure Improvement 12. 1762(SF) Health Care Reform Program 13. 1830(SF) Basic Skills Development Transport and Communications 14. 790(SF) Roadworks Mechanization 15. 1265(SF) East-West Highway Maintenance 16. 1763(SF) Road Improvement Multisector 17. 637(SF) Multiproject 18. 722(SF) Second Multiproject 11. 1625(SF) Approveda ($ million) 3.48 4.30 Actual ($ million) 1.10 4.83 Approval Date Sep-85 Dec-86 Closing Date 20-Mar-92 28-Sep-95 Rating PCR PPAR

GS

7.50 10.00 9.40

6.64 9.46 9.89

Sep-95 Nov-99 Sep-03

Apr-00 Mar-05 Mar-07

2.50 4.00 4.00

2.26 3.91 3.83

Dec-88 Oct-97 Oct-97

Nov-94 Dec-02 Jan-03

GS b S

PS

1.15

0.77

Sep-88

Dec-94

No rating S

7.13 5.70 10.00 7.00 4.50 5.20 9.60 5.00

4.57 5.90 9.94 8.00 4.99 5.22 10.49 4.31

Sep-90 Jul-98 Sep-00 Jun-01 Sep-86 Nov-93 Oct-00 Sep-83

Jan-01 Jun-05 Sep-02 Mar-07 Oct-94 May-98 Jun-05 Jul-90

No rating GS b

7.40 10.13 Dec-84 Jan-96 107.86 106.13 Total Lending GS = generally successful, PCR = project completion report, PPAR = project performance auditing report, PS = partly successful, S = successful, SF = special fund, U = unsuccessful. a Approved loan amount are denominated in special drawing rights (SDR). Based on existing rates during implementation and at the time of completion, the loan amount in $ value will vary, while the SDR equivalent remains the same. b In the absence of ratings using the new rating system (from 2001 onwards), the ratings under the old system were used for these loans. Source: Asian Development Bank loan documents.

No rating GS b

Appendix 2

75

Table A2.2: List of Approved Advisory Technical Assistance by Sector, 19832003

TA No. Title Approval Date May-84 Sep-85 Nov-85 Dec-85 TASF 248.00 337.00 400.00 162.00 350.00 Amount ($'000) JSF Others Total 248.00 687.00 400.00 162.00

Agriculture and Natural Resources 1. 598 Agriculture and Irrigation Planning 2. 706 Manpower Development and Training 3. 719 Planning and Development of Integrated Rural Services Centers 4. 729 Food Corporation of Bhutan and Agricultural Marketing Systems 5. 795 Study of Agriculture Incentives and Subsidies 6. 825 Highland Livestock Development 7. 931 Institutional Strengthening to the Ministry of Agriculture and Its Operational Dept 8. 983 Master Plan for Forestry Development 9. 1001 Agricultural Extension Course 10. 1030 Women in Development Profiles in Highland Livestock Development 11. 1485 Renewable Resources Sector Development Plan 12. 1956 Irrigation Action Plan 13. 2764 Irrigation Program Strengthening Subtotal Agriculture and Natural Resources Energy 14. 1729 Power Sector Institutional and Financial Development 15. 2400 Institutional and Financial Development of Department of Power 16. 3112 Policy and Legal Framework for Power Sector Development 17. 3307 Corporatization of Division of Power 18. 4188 Capacity Building of the Bhutan Electricity Authority 19. 4189 Establishing the Druk Hydropower Corporation Subtotal - Energy Finance 20. 614 Industrial Sector Study and a Feasibility Study for the Establishment of a Development Financing Mechanism 21. 1022 Institutional Support to the Bhutan Development Finance Corporation 22. 1465 Institutional Strengthening of the Bhutan Development Finance Corporation 23. 2284 Conversion of the Unit Trust of Bhutan to a Commercial Bank 24. 2532 Restructuring of the Unit Trust of Bhutan to a Commercial Bank

Sep-86 Dec-86 Dec-87

40.00 3,360.00 350.00

40.00 3,360.00 350.00

Jun-88 Jul-88 Sep-88 Feb-91 Sep-93 Mar-97

348.00 75.00

390.00

738.00 75.00 30.00 100.00

30.00 100.00 350.00 300.00 650.00

2,060.00

4,130.00

350.00 300.00 6,840.00

Jul-92 Sep-95

500.00 400.00

500.00 400.00

Dec-98 Nov-99 Sep-03 Sep-03 400.00 500.00 1,300.00 Jul-84 230.00

500.00 600.00

500.00 600.00 400.00 500.00

1,100.00

500.00

2,900.00 230.00

Aug-88 Jan-91

270.00 431.40

270.00 431.40

Jan-95 Feb-96

146.50 590.00

146.50 590.00

76

Appendix 2

Title Capacity Upgrading of Financial Sector Infrastructure and Entrepreneurial 26. 3111 Upgrading the Royal Insurance Corp. of Bhutan, Restructuring the Government Employees Provident Fund 27. 3212 Strengthening the Banking Supervision Function of the Royal Monetary Authority 28. 3596 Project Appraisal and Portfolio Management for Financial Institutions 29. 3687 Financial Sector Review 30. 3893 Strengthening the Debt Management Capacity of Department of Aid and Debt 31. 3905 Strengthening the Capacity of the Royal Monetary Authority and Royal Securities 32. 3910 Institutional Development of the Bhutan Development Finance Corporation Subtotal - Finance Industry and Nonfuel Minerals 33. 1031 Institutional Strengthening of the Department of Trade and Industry 34. 1223 Study on Promotion of Export Oriented Industries 35. 2213 Institutional Strengthening of the Ministry of Trade and Industry Subtotal - Industry and Nonfuel Minerals Social Infrastructure 36. 861 Urban Centers Sewerage 37. 1381 Institutional Improvements in Technical and Vocational Education and Training 38. 3022 Capacity Building in the Urban Sector 39. 3525 Institutional Development of the National Technical Training Authority 40. 4042 Housing Sector Reform Subtotal - Social Infrastructure Transport and Communications 41. 799 Institutional Strengthening of the Public Works Department 42. 1559 Institutional Strengthening of the Department of Roads 43. 1984 Development of a Maintenance Management System 44. 1985 Construction Management 45. 3156 Capacity Building of the Construction Development Board 46. 3470 Road Planning and Management Strengthening Subtotal - Transport

TA No. 25. 2902

Approval Date Oct-97

TASF

Amount ($'000) JSF Others 500.00

Total 500.00

Dec-98

500.00

500.00

Jun-99

600.00

600.00

Dec-00

400.00

400.00

Jul-01 Jul-02

300.00 116.00

300.00 116.00

Aug-02

334.00

334.00

Aug-02

200.00

200.00

1,377.90 Sep-88 250.00

3,240.00

4,617.90 250.00

Nov-89 Dec-94 400.00 650.00

300.00

300.00 400.00 950.00

300.00

Mar-87 Sep-90

350.00 750.00

350.00 750.00

Jun-98 Oct-00

500.00 300.00

500.00 300.00

Dec-02

500.00 1,600.00

800.00

500.00 2,400.00

Sep-86 Sep-91

350.00 530.00

350.00 530.00

Nov-93 Nov-93 Jan-99 Jul-00

390.00 740.00 400.00

390.00 740.00 400.00

1,280.00

954.00 2,084.00

954.00 3,364.00

Appendix 2

77

TA No. Title Multisector 47. 540 Multiproject 48. 783 Tariff Study for Public Services Subtotal - Multisector Others 49. 572

Approval Date Sep-83 Jul-86

TASF 145.00 60.00 205.00

Amount ($'000) JSF Others

Total 145.00 60.00 205.00

Project Planning and Dec-83 210.00 210.00 Implementation 50. 970 Institutional Strengthening of the Apr-88 230.00 230.00 Department of National Budget and Accounts of the Ministry of Finance 51. 1487 Institutional Strengthening of the Feb-91 600.00 600.00 Department of National Budget and Accounts (Phase II) 52. 1731 External Resource Management Jul-92 100.00 100.00 System 53. 1932 Strengthening the Ministry of Aug-93 100.00 100.00 Finance 54. 2531 Strengthening EIA Capabilities and Feb-96 350.00 350.00 Preparation of Environmental Guidelines 55. 2691 Further Strengthening of Min. of Nov-96 100.00 100.00 Finance 56. 2802 Improvement of a Regulatory May-97 400.00 400.00 Framework for Procurement and Contracting 57. 2860 Strengthening the Central Sep-97 400.00 400.00 Statistical Organization 58. 3443 Poverty Assessment and Analysis May-00 100.00 100.00 59. 3513 Public Sector Resource Oct-00 300.00 300.00 Management 60. 3669 Strengthening the National Jun-01 600.00 600.00 Statistical System 61. 3790 Institutional Development of the Dec-01 200.00 200.00 Department of Employment and Labor 62. 3796 Institutional Development of the Dec-01 300.00 300.00 National Pension and Provident Fund Bureau 63. 4120 Strengthening Environmental May-03 150.00 150.00 Sector Capacity Subtotal - Others 1,990.00 2,150.00 4,140.00 Total 10,462.90 10,324.00 4,630.00 25,416.90 = not available, EIA = Environmental Impact Assessment, JSF = Japan Special Fund, No. = number, TASF = technical assistance special fund. Source: Asian Development Bank loan and technical assistance documents.

78

Appendix 2

Table A2.3: List of Approved Project Preparatory Technical Assistance by Sector, 19832003
Approval Date Dec-83 Feb-84 Aug-85 Mar-92 Dec-93 Nov-97 Dec-01 245.00 600.00 700.00 Amount ($'000) JSF Others 298.00 50.00 235.00 300.00

TA No. Title Agriculture and Natural Resources 1. 573 Irrigation Rehabilitation 2. 584 Irrigation Rehabilitation (PBME) 3. 693 Highland Livestock Development 4. 1680 Western Watershed Conservation and Management Energy 5. 2043 Power System Development 6. 2912 Second Rural Electrification 7. 3825 Rural Electrification and Network Expansion Finance 8. 1699 Capital Market and Stock Exchange Center Development Industry and Nonfuel Minerals 9. 794 Industrial Estates Development Social Infrastructure 10. 547 Urban Centers Water Supply and Sanitation Program 11. 564 Royal Institute of Management 12. 979 Low-Income Housing Finance 13. 1154 Technical Education and Vocational Training 14. 2666 Urban Infrastructure Improvement 15. 3186 Health Care Financing and Reform Program 16. 3340 Basic Skills Development Transport and Communications 17. 687 Road Construction and Training 18. 809 Bridge Construction 19. 1682 Road Project 20. 3107 Road Transport Network Development 21. 4138 Road Network Expansion Multisector 22. 4019 Industrial Estate and Dry Port Development Total

TASF

Total 298.00 50.00 235.00 300.00 245.00 600.00 700.00

May-92 Aug-86

224.25 140.00

224.25 140.00

Oct-83 Dec-83 May-88 Apr-89 Oct-96 Apr-99 Dec-99 Jun-85 Oct-86 Mar-92 Dec-98 Jul-03

150.00 45.00 96.00 100.00 500.00 150.00 450.00 75.00 150.00 250.00 650 500

150.00 45.00 96.00 100.00 500.00 150.00 450.00 75.00 150.00 250.00 650.00 500.00

Dec-02

700.00 2,610.25

3,700.00

298.00

700.00 6,608.25

JSF = Japan Special Fund, PBME = project benefit monitoring and evaluation, TASF = technical assistance special fund. Source: Asian Development Bank loan and technical assistance documents.

Appendix 2

79

Table A2.4: List of Approved RETAs

Approval Date Aug-86 Amount ($'000) JSF Others

TA No. 1. 5215

Title ADB-EWC Symposium on Regional Cooperation in South Asia Round Table Conference on Distance Education for South Asian Countries South Asian Vegetable Research Planning and Consultation Workshop South Asia Vegetable Research Network South Asia Cooperative Environment Programme (SACEP) for Regional Environment and Natural Resources Information Centre II (RENRIC) RETA to Asian Vegetable Research Development Center for South Asia Vegetable Research Network (Phase II) First Meeting of the Private Sector Forum on Economic Cooperation in the Eastern South Asia Subregion Identification and Prioritization of Subregional Projects in South Asia Regional Round Table on Information and Communication Technology South Asia Subregional Economic Cooperation II Small- and Medium-Sized Enterprise Growth and Development in the South Asia Region Private Sector Cooperation in the SASEC Subregion South Asia Subregional Economic Cooperation Tourism Development Plan Subregional Economic Cooperation in South and Central Asia Regional Air Quality Management Total

TASF 80.0

Total 80.0

2.

5327

Mar-89

46.0

46.0

3.

5373

Mar-90

100.0

100.0

4. 5.

5461 5573

Sep-91 Mar-94

600.0 98.9

600.0 98.9

6.

5719

Jan-97

600.0

600.0

7.

5890

Dec-99

60.0

60.0

8.

5936

Sep-00

785.0

785.0

9.

5971

Dec-00

90.0

90.0

10. 11.

6010 6087

Dec-01 Dec-02

500.0 750.0

500.0 750.0

12. 13.

6090 6131

Dec-02 Nov-03

150.0 450.0

150.0 450.0

14.

6156

Dec-03

600.0

600.0

15.

6159

Dec-03

3,985.0

400.0 400.0

400.0 4,385.0

= not available, JSF = Japan Special Fund, No. = number, RETA = regional technical assistance, TASF = technical assistance special fund. Source: Asian Development Bank loan and technical assistance documents.

80

Appendix 2

Table 2.5: List of Economic, Thematic And Sector Work (19832003) Title Country Strategy and Assistance Programs 1. Country Assistance Plans 2. Country Operational Strategy Studies 3. Country Strategy and Program Update Country Economic Review 4. Country Economic Review Poverty Analysis 5. Poverty Assessment and Analysis Report 6. Poverty Reduction Partnership Agreement Other Economic Sector Work 7. Bhutan: In Pursuit of Gross National Happiness (video)
Source: Relevant Asian Development Bank databases.

Completion Year 1998, 1999, 2000 1991, 2000 2003

2001, 2003

2000 2002

1997

Appendix 2

81

Table A2.6: Composition of Approved Loans and Technical Assistance by Sector (19832003)
Loans Sector Agriculture/Natural Resources Energy Finance Industry and Nonfuel Minerals Social Infrastructure Transport and COmmunications Multisector Others Total No. 2 3 3 1 4 3 2 0 18 % 11 17 17 6 22 17 11 0 100 $ million 7.78 26.90 10.50 1.15 29.83 19.30 12.40 107.86 % 7 25 10 1 28 18 11 0 100 No. 4 3 1 1 7 5 1 0 22 PPTA $ % million 18 0.88 14 5 5 32 23 5 0 100 1.55 0.22 0.14 1.49 1.63 0.70 6.61 ADTA % 13 23 3 2 23 25 11 0 100 No. 13 6 13 3 5 6 2 15 63 % 21 10 21 5 8 10 3 24 100 $ million 6.84 2.90 4.62 0.95 2.40 3.36 0.21 4.14 25.42 % 27 11 18 4 9 13 1 16 100

= not available, ADTA = advisory and operational technical assistance, PPTA = project preparatory technical assistance. Source: Asian Development Bank loan and technical assistance documents.

Figure A2.1: Composition of Approved Loans by Sector, 19832003 Multisector 11% Transport 18% Agriculture and Natural Resources 7% Energy 25% Finance 10% Industry and Nonfuel Minerals 1%

Social Infrastructure 28%

Source: Asian Development Bank loan and technical assistance documents.

82

Appendix 2

Figure A2.2: Composition of Approved PPTAs by Sector, 19832003 Multisector 11% Transport 25% Agriculture and Natural Resources 13% Energy 23% Finance 3% Social Infrastructure 23% Industry and Nonfuel Minerals 2%

PPTA = project preparatory technical assistance. Source: Asian Development Bank loan and technical assistance documents.

Figure A2.3: Composition of Approved ADTAs by Sector, 19832003 Others 16% Multisector 1% Transport 13% Social Infrastructure 9% Industry and Nonfuel Minerals 4% Agriculture and Natural Resources 28% Energy 11% Finance 18%

ADTA = advisory technical assistance. Source: Asian Development Bank loan and technical assistance documents.

Appendix 2

83

Table A2.7: Composition of Loans, PPTAs and ADTAs by Sector, 20052006

Loans $ % million 25 0 0 50 0 25 0 0 100 3.70 7.00 9.70 20.40 PPTA $ % million 33 33 33 0 0 0 0 0 100 0.50 0.15 0.40 1.05 ADTA $ % million 20 20 0 0 20 0 0 40 100 0.50 0.40 0.30 0.50 1.70

Sector Agriculture and Natural Resources Energy Finance Industry and Nonfuel Minerals Social Infrastructure Transport and Communications Multisector Others Total

No. 1 0 0 2 0 1 0 0 4

% 18 0 0 34 0 48 0 0 100

No. 1 1 1 0 0 0 0 0 3

% 48 14 38 0 0 0 0 0 100

No. 1 1 0 0 1 0 0 2 5

% 29 24 0 0 18 0 0 29 100

= not available, ADTA = advisory and operational technical assistance, PPTA = project preparatory technical assistance. Source: Asian Development Bank loan and technical assistance documents.

Table A2.8: List of Expected Loans in the Pipeline by Sector, 20052006

Poverty Classification Thematic Priority Expected Loan Amount ($ million)

Title 2005 Transport and Communications 1. Road Network Total 2006 Agriculture and Natural Resources 1. Integrated Rural Development Industry and Trade 2. Urban Housing/Infrastructure Development 3. SME Development Total

Division

PI

ECO/REG

SATC

9.7 9.7

PI CPI PI

ECO/PSD ECO/PSD ECO/PSD

SAAE SASS SAGF

3.7 3.0 4.0 10.7

ADB = Asian Development Bank, CPI = core poverty intervention, ECO = sustainable economic growth, PI = poverty intervention, PSD = private sector development, REG = regional cooperation, SAAE = South Asia Agriculture, Environment and Natural Resources Division, SAGF = South Asia Governance, Finance and Trade Division, SASS = South Asia Social Sectors Division, SATC = South Asia Transport and Communications Division, SME = small and medium enterprises. Source: ADB. 2004. Country Strategy and Program Update (20052006): Bhutan. Manila.

84

Appendix 2

Table A2.9: List of Expected PPTAs in the Pipeline by Sector, 20052006

Sources of Funding and Amount ($'000) ADB Others Total

Title 2005 Agriculture and Natural Resources 1. Integrated Rural Development Total 2006 Energy 1. Renewable Energy/Rural Electrification Finance 2. Cluster TA for Financial Sector Total

Division

SAAE

500 500

500 500 150

SAEN

150

SAGF

400 550

400 550

= not available, ADB = Asian Development Bank, PPTA = project preparatory technical assistance, SAAE = South Asia Agriculture, Environment and Natural Resources Division, SAEN = South Asia Energy Division, SAGF = South Asia Governance, Finance and Trade Division. Source: ADB. 2004. Country Strategy and Program Update (20052006): Bhutan. Manila.

Table A2.10: List of Expected ADTAs in the Pipeline by Sector, 20052006

Sources of Funding and Amount ($'000) ADB Others Total

Title 2005 Agriculture and Natural Resources 1. Capacity Building to Implement Environmental Guidelines Subtotal Energy 2. Energy Efficiency Management Law and Public Sector Management 3. Implementing the Labor Law (standby) Subtotal Total

Division

SAAE

500 500

500 500 400 200 600 1,100

SAEN OGC

400 200 600 1,100

2006 Water Supply, Sanitation and Waste Management 1. Small Town Planning SASS 300 300 600 300 300 600 Law, Economic Management and Public Policy 2. Public Sector Economic Planning SAGF and Management Total

= not available, ADB = Asian Development Bank, ADTA = advisory technical assistance, OGC = Office of General Counsel, SAAE = South Asia Agriculture, Environment and Natural Resources Division, SAEN = South Asia Energy Division, SAGF = South Asia Governance, Finance and Trade Division, SASS = South Asia Social Sectors Division. Source: ADB. 2004. Country Strategy and Program Update (20052006): Bhutan. Manila.

Appendix 3

85

PORTFOLIO PERFORMANCE OF LENDING PROGRAM Table A3.1: Project Performance Ratings (%) (as of 31 December 2003) Implementation Progress HS S PS U 20.0 80.0 0.0 0.0 4.6 87.1 3.6 4.6 5.2 83.7 5.8 5.4 Development Objectives HS S PS U 20.0 80.0 0.0 0.0 2.6 93.8 3.1 0.5 2.8 92.2 4.0 1.0

Group Bhutan South Asia ADB-Wide

ADB = Asian Development Bank, HS = highly successful, PS = partly successful, S = successful, U = unsuccessful. Source: ADB. 2004. Annual Report on Loan and Technical Assistance Portfolio Performance for the Period Ending 31 December 2003. Manila.

Table A3.2: Financial Performance Indicators ($ million) 1999 2000 2001 2002 2003 Proj. Actual Proj. Actual Proj. Actual Proj. Actual Proj. Actual 2.7 2.7 0.0 1.9 1.9 0.0 10.0 10.0 0.0 12.6 14.1 0.0 5 0 0 1.6 1.6 0.0 2.1 2.1 0.0 10.0 10.0 0.0 13.9 15.5 0.0 1.1 1.1 (0.03) 1.0 0.0 1.0 5 0 0 2.7 1.2 1.5 2.0 0.5 1.5 12.5 7.5 5.0 8.9 2.4 99.1 4 0 0 10.1 5.2 4.9 6.9 2.0 4.9 19.6 9.6 10.0 16.3 6.4 42.6 5.8 1.0 4.9 1.0 0.0 1.0 5 0 0 8.8 7.4 1.4 8.1 6.7 1.4 6.6 6.6 0.0 20.1 19.6 22.5 4 0 0 7.3 12.7 7.3 6.4 0.0 6.3 6.7 12.1 6.7 5.9 0.0 6.3 7.0 0.0 7.0 0.0 0.0 0.0 16.9 37.9 20.1 22.7 0.0 101.9 5.7 5.8 (0.1) 1.0 0.0 1.0 5 0 0 2 0 0 14.6 8.0 6.5 13.9 7.3 6.5 0.0 0.0 0.0 43.3 28.4 105.7 12.8 6.4 6.4 1.0 0.0 1.0 5 0 0 8.4 8.4 0.0 5.8 5.8 0.0 0.0 0.0 0.0 28.7 28.7 0.0 4 0 0 7.5 7.5 0.0 4.7 4.7 0.0 9.4 9.4 0.0 23.3 23.3 0.0 3.3 3.5 (0.1) 1.4 0.0 1.4 4 0 0

Item Contract Awards Project Program Disbursement Project Program Loan Approvals Project Program Disbursement Ratio Project Program Net Resource Transfer Project Program Loan Service Payment OCR ADF No. of TA Projects Approved No. of PS Investments: Loans Equity

= not available, ADB = Asian Development Bank, OCR = ordinary capital resources, Proj. = project, PS = private sector, TA = technical assistance. Source: ADB. 2004. Annual Report on Loan and Technical Assistance Portfolio Performance for the Period Ending 31 December 2003. Manila.

86
Appendix 3

Table A3.3: Disbursement Trends (19872003)

1987 BHU Active Loans ($ million) Project loans Program loans BHU Disbursement ($ million) Project loans Program loans BHU Disbursement Ratio (%) Project loans Program loans ADB-wide Disbursement Ratio (%) Project loans 34.9 34.9 6.3 6.3 13.8 16.1 1988 1989 1990 27.4 27.4 7.8 7.8 15.4 12.2 36.5 36.5 12.8 12.8 18.2 11.6 44.1 44.1 16.6 16.6 19.4 16.5 1991 1992 . 35.9 35.9 21.0 21.0 19.8 18.7 30.7 30.7 18.0 18.0 15.5 15.2 1993 35.7 35.7 19.6 19.6 15.7 12.9 1994 31.7 31.7 17.0 17.0 18.8 15.6 1995 30.4 30.4 12.7 12.7 18.4 23.8 1996 19.7 19.7 5.3 5.3 17.7 15.8 1997 27.0 27.0 12.5 12.5 25.6 49.7 1998 26.6 22.7 3.9 11.6 9.1 2.4 29.3 20.7 61.3 1999 36.1 32.2 3.9 13.7 11.2 2.4 22.2 15.5 2000 47.7 34.0 13.7 13.9 11.4 2.4 20.5 6.4 42.6 2001 48.0 34.5 13.5 16.0 8.7 7.3 20.5 20.1 2002 40.1 36.2 3.9 19.9 6.1 13.8 22.2 28.4 105.7 2003 44.1 44.1 16.9 16.9 20.2 23.3

13.8 13.3

15.4 14.0

18.2 15.4

19.4 15.9

19.8 18.5

15.5 13.7

15.7 15.3

18.8 17.3

18.4 17.8

17.7 17.4

25.6 19.1

29.3 19.8

22.2 17.6

20.5 18.3

20.5 19.4

22.2 16.3

20.2 17.1

= not available, ADB = Asian Development Bank, BHU = Bhutan. Note: Data on disbursement ratio are available from 1987 onwards only. Source: Loan Financial Information System.

Appendix 3

87

Figure A3.1: Disbursement Ratio, 19872003

60 BHU 40 Percent ADB-wide

20

0 1987 1990 1993 1996 1999 2002

ADB = Asian Development Bank, BHU = Bhutan. Source: Loan Financial Information System.

88

Appendix 3

Table A3.4: Composition of Approved PPTAs by Sector in Three Periods (19832003)

Sector Agriculture and Natural Resources Energy Finance Industry and Nonfuel Minerals Social Infrastructure Transport and Communications Multisector Total No. 3 19831989 % $ '000 30 583 19901996 % $ '000 20 300 19972003 % $ '000 0

% 44

No. 1

% 20

No. 0

% 0

0 0 1

0 0 10

140

0 0 10

1 1 0

20 20 0

245 224

16 15 0

2 0 0

29 0 0

1,300

35 0 0

4 2 0 10

40 20 0 100

391 225 1,339

29 17 0 100

1 1 0 5

20 20 0 100

500 250 1,519

33 16 0 100

2 2 1 7

29 29 14 100

600 1,150 700 3,750

16 31 19 100

ADTA = advisory and operational technical assistance, No. = number, PPTA = project preparatory technical assistance. Source: Asian Development Bank loan and technical assistance documents.

Table A3.5: Composition of Approved ADTAs by Sector in Three Periods (19832003)

Sector Agriculture and Natural Resources Energy Finance Industry and Nonfuel Minerals Social Infrastructure Transport and Communications Multisector Others Total 19831989 No. % $ '000 10 50 6,090 0 2 2 1 1 2 2 20 0 10 10 5 5 10 10 100 500 550 350 350 205 440 8,485 19901996 % $ '000 12 450 12 18 6 6 18 0 29 100 900 1,168 400 750 1,660 1,250 6,578 19972003 % $ '000 4 300 15 31 0 12 8 0 31 100 2,000 2,950 1,300 1,354

% 72 0 6 6 4 4 2 5 100

No. 2 2 3 1 1 3 0 5 17

% 7 14 18 6 11 25 0 19 100

No. 1 4 8 0 3 2 0 8 26

% 3 19 28 0 13 13

0 2,450 24 10,354 100

= not available, ADTA = advisory and operational technical assistance, No. = number, PPTA = project preparatory technical assistance. Source: Asian Development Bank loan and technical assistance documents.

Appendix 3

89

Table A3.6: Composition of Approved Loans by Sector in Three Periods (19832003)

Sector No. 2 0 1 1 0. 1 2 7 19831989 $ % million 29 7.78 0 14 14 0 14 29 100 2.50 1.15 4.50 12.40 28.33 19901996 % 27 0 9 4 0 16 44 100 No. 0 1 0 0 1 1 0 3 % 0 33 0 0 33 33 0 100 $ million 7.50 7.13 5.20 19.83 % 0 38 0 0 36 26 0 100 No. 0 2 2 0 3 1 0 8 19972003 % 0 25 25 0 38 13 0 100 59.70 $ million 19.40 8.00 22.70 9.60 % 0 32 13 0 38 16 0 100

Agriculture and Natural Resources Energy Finance Industry and Nonfuel Minerals Social Infrastructure Transport and Communications Multisector Total

= not available, ADTA = advisory and operational technical assistance, No. = number, PPTA = project preparatory technical assistance. Note: The list does not include Loan 829-BHU which was cancelled. Source: Asian Development Bank loan documents.

90

Appendix 4

MATRIX FOR ASSESSING EFFECTIVENESS OF LENDING AND NONLENDING OPERATIONS 1. The following tables were used for the portfolio-wide assessment of lending and nonlending effectiveness in Bhutan: a) b) c) Individual project scoring and justification sheet. List of approved loans and technical assistance (TA) for 19832003. Summary scoring of loans and technical assistance projects.

2. For each project, a scoring and justification sheet for each loan and TA is to be completed, and the scores included in the summary score sheets. Score criteria and sub-criteria on a scale of 1 to 4 used the following grading system: Table A4.1: Grading System
Socioeconomic, and Institutional Development 4 Substantial 3 2 1 Moderate Modest Negligible Not applicable

Relevance Highly relevant

Efficacy Highly efficacious

4 3 2 1

Efficiency Highly efficient Efficient Partly efficient Inefficient Not applicable

4 3 2 1

3 Relevant 3 Efficacious 2 Partly relevant 2 Partly efficacious 1 Irrelevant 1 Inefficacious Not applicable Not applicable Source: Operations Evaluation Mission.

Sustainability Very likely Somewhat likely Uncertain Unlikely Not applicable

3. The following weighting scheme was used to arrive at an average for the criteria (e.g., relevance) which were drawn from its subcriteria components (items 1.1 through 1.7): a) b) Criterion average = mean average of sub-criteria, in general. Criterion average = non-mean average of sub-criteria where selected sub-criteria items did not have equal weight. Give justification for using non-mean average weighting scheme. If subcriterion was not relevant, was used and was not included in the calculation of criterion average.

c)

4. The following rationale was used when evaluating criteria and sub-criteria in the individual and summary project sheets: Table A4.2: Project Sheets
A. PROJECT OUTCOME ASSESSMENT Relevance 1.1 Priority context to country development strategy 1.2 Priority context to ADB development strategy 1.3 Coordination with development partners 1.4 Overall design concept

To what extent was the project relevant to attainment of the development priorities of the Government? To what extent was the project relevant to attainment of the overarching goals of the ADB? To what extend was the project design, implementation, monitoring and assessment undertaken in coordination with development partners? To what extent were the project components correctly formulated in order to deliver the targeted output(s)?

Appendix 4

91

PROJECT OUTCOME ASSESSMENT Design relevance How relevant was the assistance operation to the ADB and country strategy goals, objectives and priorities, and were they articulated in a clear and potentially measurable manner? 1.6 Design innovativeness To what extent was the design approach innovative or did it rely on a standard methodology and approach? 1.7 Design efficacy within overall To what extent did the operation relate to the sector or country portfolio portfolio, and analyze how it would contribute to the strategy, priorities and performance indicators for the sector or country? Efficacy 2.1 Achievement of project outputs To what extent were project outputs achieved? 2.1 Achievement of project outcomes To what extent were the project interventions delivered in a costeffective and timely manner? 2.2 Attribution of project outputs to To what extent was the project responsible for the outcomes, outcome achievements compared with other funding agencies and exogenous factors? 1.5 Efficiency 3.1 Cost-effectiveness of project intervention 3.2 Degree of timely delivery of project intervention To what extent were the project benefits delivered at least-cost compared with other alternatives? To what extent were the project interventions delivered efficiently in terms of the ADB's processing of the project, the organization and management of the executing and implementing agencies, and availability of counterpart funds? To what extent were the project benefits sustainable in relation to sector objectives? To what extent were the project benefits sustainable in relation to economic and social macro-level objectives?

B. 4.1 4.2 C. 5.1

PROJECT SUSTAINABILITY Project benefits sustainability relative to sector objectives Project benefits sustainability relative to macro objectives

5.2

5.3

5.4

5.5

PROJECT SOCIOECONOMIC IMPACT Degree of sectoral impact To what extent did the project contribute to the attainment of defined development goals at the sector level, as defined in the country operations strategy? Degree of macroeconomic impact To what extent did the project contribute to the attainment of defined development goals at the macroeconomic level, as defined in the country strategy and other key ADB policy documents? Degree of human and social impact To what extent did the project contribute to the attainment of defined development goals at the poverty and gender-related levels, as defined in the country strategy and other key ADB policy documents? Degree of environmental impact To what extent did the project contribute to the attainment of defined development goals at the environmental-related level, as defined in the country strategy and other key ADB policy documents? Degree of governance impact To what extent did the project contribute to the attainment of defined development goals of governance, as defined in the country strategy and other key ADB policy documents? INSTITUTIONAL DEVELOPMENT IMPACT Legal and regulatory environment To what extent did the project contribute to better definition, stability, transparency, enforceability, and predictability of institutional arrangements? Institutional strengthening Participatory attitudes of society To what extend did the project contribute to capacity building in the targeted institution(s)? To what extent did the project improve internal governance and use of resources?

D. 6.1

6.2 6.3

Macroeconomic or sector policy framework ADB = Asian Development Bank. Source: Operations Evaluation Mission.

92

Appendix 4

5. When scoring criteria and sub-criteria in the individual and summary project sheets, the following basis for evaluation of key factors was used: Table A4.3: Scoring Criteria
A. PROJECT OUTCOME ASSESSMENT Relevance 1.1 Priority context to country 1 = no relevance to country strategy; 2 = meets basic strategy development strategy requirements such as economic growth but without focus on poverty eradication; 3 = generally conforms to strategy and addresses crosscutting issues; 4 = fully fits strategy including a focus on poverty alleviation and takes into account policy and crosscutting issues. 1.2 Priority context to ADB 1 = no relevance to ADB strategy; 2 = meets basic strategy development strategy requirements such as economic growth but without focus on poverty eradication; 3 = generally conforms to strategy and addresses crosscutting issues; 4 = fully fits strategy including a focus on poverty alleviation and takes into account policy and crosscutting issues. 1.3 Coordination with development 1 = no coordination with development partners; 2 = meets basic partners coordination requirements but without clear division of work among partners; 3 = provides clear work division; 4 = takes leadership role in coordination. 1.4 Overall design concept consistency 1 = project components do not address target outputs; 2 = project components provide basic target outputs; 3 = project components clearly lead to target output; 4 = project components meet and exceed target outputs. 1.5 Design relevance 1 = no relevance to country strategy; 2 = meets basic strategy requirements such as economic growth but without focus on poverty eradication; 3 = generally conforms to strategy and addresses crosscutting issues; 4 = fully fits strategy including a focus on poverty alleviation and takes into account policy and crosscutting issues. 1.6 Design innovativeness 1 = project replicates designs previously shown to be undesirable/unsustainable; 2 = project is a standard copy of previous successful projects; 3 = project design includes innovative measures which have been successfully implemented; 4 = project has had a major impact nationally in based on new designs or approaches. 1.7 Design efficacy within overall 1 = implementation not completed/project dropped/ significant portfolio negative impacts reported; 2 = project only partly completed, major reformulation needed or significant cost deviations from appraisal; 3 = minor design problems which were eventually overcome, 4 = generally implemented within design and cost assessed at appraisal. Efficacy 2.1 Achievement of project outputs 1 = most project outputs were not achieved within project cycle; 2 = most project outputs were achieved; 3 = all project outputs were achieved; 4 = project outputs achieved well ahead of schedule. 2.2 Achievement of project outcomes 1 = most project outcomes were not achieved within project cycle; 2 = most project outcomes were achieved; 3 = all project outcomes were achieved; 4 = project outcomes achieved well ahead of schedule. 2.3 Attribution of project outputs to 1 = project was not responsible for outcomes; 2 = project contributed outcome achievements significantly to outcomes; 3 = project contributed as much as planned to outcomes; 4 = project contribution exceeded planned outcomes. Efficiency 3.1 Cost-effectiveness of project 1 = no economic impact; 2 = EIRR below 10%; 3 = EIRR above 10% intervention (or no calculation possible) ; 4 = EIRR as calculated at appraisal; 5 = significantly higher economic impact than calculated during appraisal. 3.2 Degree of timely delivery of project For projects which have already passed their original completion date, intervention 1 = four or more years delay in completion; 2 = up to three years delay in completion; 3 = up to two years delay in completion; 4 = completed and fully operating by scheduled completion date.

Appendix 4

93

PROJECT SUSTAINABILITY 1 = not functioning/defunct; 2 = functioning at less than 50% capacity; Project benefits sustainability 3 = fully functioning for less than 5 years; 4 = fully functioning for more relative to sector objectives than 5 years without public sector support. 4.2 Project benefits sustainability relative to macro objectives C. PROJECT SOCIOECONOMIC IMPACT 5.1 Degree of sectoral impact 1 = no economic benefits and no readily identifiable direct beneficiaries; 2 = some economic benefits achieved but identifiable direct beneficiaries significantly less than assessed at appraisal; 5.2 Degree of macroeconomic impact 3 = generally meets appraisal estimates in terms of economic benefits and number of beneficiaries; 4 = project/program has significant impact at the national level. 5.3 Degree of poverty alleviation impact 1 = adversely affects poor, 2 = no poverty impact, 3 = design incorporates measures to improve well-being of poor, 4 = project poverty impact extends well beyond original project area or target group. 5.4 Degree of gender equity impact 1 = negative impacts reported or likely; 2 = gender neutral; 3 = project contains measures to enhance gender equity; 4 = project proactively focuses on gender equity with reported successful achievements 5.5 Degree of environmental impact 1 = negative impacts reported or likely; 2 = environmentally neutral; 3 = project design contains environmental protection measures which are being implemented; 4 = project works proactively for environmental improvement. D. INSTITUTIONAL DEVELOPMENT IMPACT 6.1 Legal and regulatory environment 1 = project includes institutional measures which perpetuate undesirable institutions/institutional structures; 2 = project includes 6.2 Institutional strengthening institutional arrangements which are beyond realistic capacity of 6.3 Participatory attitudes of society government; 3 = project includes realistic/implementable institutional arrangements; 4 = project actively designed to improve institutions and succeeds. 6.4 Macroeconomic or sector policy framework ADB = Asian Development Bank, EIRR = economic internal rate of return. Source: Operations Evaluation Mission.

B. 4.1

94

Appendix 4

Table A4.4: Asian Development Bank Lending: Outcome Assessments Relevancea Efficacyb Efficiencyc Loan No. Title Agriculture and Natural Resources 2.6 2.0 2.0 1. 740(SF) Chirang Hill Irrigation 2.3 1.0 1.0 2. 808(SF) Highland Livestock Development 3.0 3.0 3.0 Energy 3.4 3.7 2.8 3. 1375(SF) Rural Electrification 3.4 3.7 2.5 4. 1712(SF) Sustainable Rural Electrification 3.4 3.7 3.0 5. 2009(SF) Rural Electrification and Network Expansion Finance 2.6 2.7 2.2 6. 934(SF) Bhutan Development Finance 1.9 2.3 1.5 Corporation 7. 1565(SF) Financial Sector Intermediation 3.0 2.7 2.0 Facility 8. 1566(SF) Financial Sector Intermediation 3.0 3.0 3.0 Policy Industry and Nonfuel Minerals 9. 900(SF) Industrial Estates Social Infrastructure 3.1 3.0 2.5 10. 1035(SF) Technical and Vocational 3.0 3.0 2.5 Education/Training 11. 1625(SF) Urban Infrastructure Improvement 2.9 3.0 3.0 12. 1762(SF) Health Care Reform Program 3.0 3.0 2.0 13. 1830(SF) Basic Skills Development 3.4 3.0 Transport and Communications 2.7 2.2 1.5 14. 790(SF) Roadworks Mechanization 2.9 3.0 2.0 15. 1265(SF) East-West Highway Maintenance 2.3 1.7 1.0 16. 1763(SF) Road Improvement 2.8 2.0 Multisector 2.6 2.5 2.3 17. 637(SF) Multiproject 2.6 2.0 2.0 18. 722(SF) Second Multiproject 2.6 3.0 2.5 = not applicable.
a b

Overalld 2.2 1.4 3.0 3.3 3.2 3.4 2.5 1.9 2.6 3.0 2.9 2.8 3.0 2.7 3.2 2.1 2.6 1.7 2.4 2.4 2.2 2.7

Relevance ratings are: 4.0 (highly relevant), 3.0 (relevant), 2.0 (partly relevant), 1.0 (irrelevant), and (not applicable). Efficacy ratings are: 4.0 (highly efficacious), 3.0 (efficacious), 2.0 (partly efficacious), 1.0 (inefficacious), and (not applicable). c Efficiency ratings are: 4.0 (highly efficient), 3.0 (efficient), 2.0 (partly efficient), 1.0 (inefficient), and (not applicable). d For the overall assessment, highly successful (HS) is >3.5; successful (S) is between 2.8< S <3.5; partly successful (PS) is between 1.6< PS <2.5; and unsuccessful (US) is <1.6. Source: Asian Development Bank loan and technical assistance documents.

Appendix 4

95

Table 4.5: Asian Development Bank ADTAs: Outcome Assessments

TA No. Title Agriculture and Natural Resources 1. 598 Agriculture and Irrigation Planning 2. 706 Manpower Development and Training 3. 719 Planning and Development of Integrated Rural Services Centers 4. 729 Food Corporation of Bhutan and Agricultural Marketing Systems 5. 795 Study of Agricultural Incentives and Subsidies 6. 825 Highland Livestock Development 7. 931 Institutional Strengthening to the Ministry of Agriculture 8. 983 Master Plan for Forestry Development 9. 1001 Agricultural Extension Course 10. 1030 Women in Development Profiles in Highland Livestock Development 11. 1485 Renewable Resources Sector Development Plan 12. 1956 Irrigation Action Plan 13. 2764 Irrigation Program Strengthening Energy 14. 1729 Power Sector Institutional and Financial Development 15. 2400 Institutional and Financial Development of Department of Power 16. 3112 Policy and Legal Framework for Power Sector Development 17. 3307 Corporatization of Division of Power 18. 4188 Capacity Building of the Bhutan Electricity Authority 19. 4189 Establishing the Druk Hydropower Corporation Finance 20. 614 Industrial Sector Study and Feasibility Study for Development Financing 21. 1022 Institutional Support to the Bhutan Development Finance Corporation 22. 1465 Institutional Strengthening of the Bhutan Development Finance Corporation 23. 2284 Conversion of the Unit Trust of Bhutan to a Commercial Bank 24. 2532 Restructuring of the Unit Trust of Bhutan to a Commercial Bank 25. 2902 Capacity Upgrading of Financial Sector Infrastructure and Entrepreneurial 26. 3111 Upgrading Royal Insurance Corporation of Bhutan, Government Employees Provident Fund 27. 3212 Strengthening the Banking Supervision Function of the Royal Monetary Authority 28 3596 Project Appraisal and Portfolio Management for Financial Institutions 29. 3687 Financial Sector Review 30. 3893 Strengthening Debt Management Capacity of the Department of Aid and Debt 31. 3905 Strengthening Capacity of the Royal Monetary Authority and Royal Securities 32. 3910 Institutional Development of the Bhutan Development Finance Corporation Relevancea 2.8 3.0 2.7 2.6 2.3 2.6 2.8 2.7 2.7 2.9 2.7 2.9 2.8 3.4 3.1 3.4 2.9 3.3 3.5 2.9 3.0 2.9 3.0 3.2 2.8 3.0 3.8 2.7 2.9 1.9 2.9 3.0 3.0 2.6 2.9 Efficacyb 2.8 3.0 2.3 2.0 2.3 3.0 3.0 3.0 2.7 3.0 3.0 2.7 4.0 3.2 3.0 3.0 3.3 4.0 3.0 3.0 2.8 3.0 1.3 3.0 2.7 4.0 3.0 2.7 2.3 3.0 3.0 3.0 3.0 2.7 Efficiencyc 3.1 3.0 4.0 2.5 4.0 3.0 2.5 4.0 2.0 3.0 2.0 4.0 3.0 3.0 3.0 2.5 3.5 3.0 3.0 2.6 3.0 2.0 3.0 3.0 3.5 2.0 2.5 2.0 3.0 3.0 3.0 2.5 1.5 Overalld 2.9 3.0 3.0 2.4 2.9 2.9 2.8 3.2 2.5 3.0 2.6 2.9 2.7 3.8 3.1 3.1 3.0 3.0 3.7 3.0 3.0 2.8 3.0 2.2 2.9 2.9 3.8 2.6 2.7 2.1 3.0 3.0 3.0 2.7 2.3

96

Appendix 4

TA No. Title Industry and Nonfuel Minerals 33. 1031 Institutional Strengthening of the Department of Trade and Industry 34. 1223 Study on Promotion of Export Oriented Industries 35. 2213 Institutional Strengthening of the Ministry of Trade and Industry Social Infrastructure 36. 861 Urban Centers Sewerage 37. 1381 Institutional Improvements in Technical and Vocational Education and Training 38. 3022 Capacity Building in the Urban Sector 39. 3525 Institutional Development of the National Technical Training Authority 40. 4042 Housing Sector Reform Transport and Communications 41. 799 Institutional Strengthening of the Public Works Department 42. 1559 Institutional Strengthening of the Department of Roads 43. 1984 Development of a Maintenance Management System 44. 1985 Construction Management 45. 3156 Capacity Building of the Construction Development Board 46. 3470 Road Planning and Management Strengthening Multisector 47. 540 Multiproject 48. 783 Tariff Study for Public Services Others 49. 572 Project Planning and Implementation 50. 970 Institutional Strengthening of Department of National Budget and Accounts Ministry of Finance 51. 1487 Institutional Strengthening of the Department of National Budget and Accts II 52. 1731 External Resource Management System 53. 1932 Strengthening the Ministry of Finance 54. 2531 Strengthening EIA Capabilities and Preparation of Environmental Guidelines 55. 2691 Further Strengthening of Ministry of Finance 56. 2802 Improvement of a Regulatory Framework for Procurement and Contracting 57. 2860 Strengthening the Central Statistical Organization 58. 3443 Poverty Assessment and Analysis 59. 3513 Public Sector Resource Management 60. 3669 Strengthening the National Statistical System 61. 3790 Institutional Development of the Department of Employment and Labor 62. 3796 Institutional Development of the National Pension and Provident Fund Bureau 63. 4120 Strengthening Environmental Sector Capacity
a

Relevancea 2.6 2.7 2.7 2.3 3.1 2.9 2.9 3.3 3.7 2.9 2.7 2.9 2.9 2.7 2.1 2.7 2.9 3.0 3.0 3.0 2.7 2.6 2.0 2.6 2.8 2.6 3.0 2.9 2.5 2.9 2.6 2.8 2.6 2.8 2.7

Efficacyb 2.4 2.7 2.3 2.3 3.1 3.0 3.0 2.7 4.0 3.0 2.9 3.0 2.7 3.0 3.0 2.7 3.0 3.0 3.0 3.0 2.7 2.0 1.7 3.0 3.0 3.0 3.0 3.0 3.0 3.0 2.0 2.7 3.0 3.0 2.7

Efficiencyc 3.0 3.0 3.0 3.0 3.2 3.0 3.0 3.0 4.0 3.0 2.8 2.5 3.0 3.0 3.0 2.0 3.0 3.0 3.0 3.0 2.6 2.5 1.0 2.5 2.5 2.5 2.5 3.0 3.0 3.0 2.5 4.0 3.0 2.5 2.0

Overalld 2.7 2.8 2.7 2.6 3.1 3.0 3.0 3.0 3.9 3.0 2.8 2.8 2.8 2.9 2.7 2.5 3.0 3.0 3.0 3.0 2.7 2.4 1.6 2.7 2.8 2.7 2.8 3.0 2.8 3.0 2.4 3.2 2.9 2.8 2.5

= not applicable. Relevance ratings are: 4.0 (highly relevant), 3.0 (relevant), 2.0 (partly relevant), 1.0 (irrelevant), and (not applicable). b Efficacy ratings are: 4.0 (highly efficacious), 3.0 (efficacious), 2.0 (partly efficacious), 1.0 (inefficacious), and (not applicable). c Efficiency ratings are: 4.0 (highly efficient), 3.0 (efficient), 2.0 (partly efficient), 1.0 (inefficient), and (not applicable). d For the overall assessment, highly successful (HS) is >3.5; successful (S) is between 2.8< S <3.5; partly successful (PS) is between 1.6< PS <2.5; and unsuccessful (US) is <1.6. Source: Asian Development Bank loan and technical assistance documents.

Appendix 4

97

Table 4.6: Asian Development Bank Lending: Impact and Sustainability Assessment
Impact SocioInstitutional Economica Developmentb 2.0 2.3 1.0 1.6 3.0 3.0 3.8 3.5 3.5 3.6 4.0 3.4 2.2 1.5 2.0 3.0 3.0 3.0 2.5 3.5 2.5 3.0 2.0 2.8 2.5 3.0 2.3 2.2 2.2 2.4 2.9 2.6 2.8 3.0 3.0 2.4 2.6 2.2 2.2 1.8 2.7

Loan No. Title Agriculture and Natural Resources 1. 740(SF) Chirang Hill Irrigation 2. 808(SF) Highland Livestock Development Energy 3. 1375(SF) Rural Electrification 4. 1712(SF) Sustainable Rural Electrification 5. 2009(SF) Rural Electrification and Network Expansion Finance 6. 934(SF) Bhutan Development Finance Corporation 7. 1565(SF) Financial Sector Intermediation Facility 8. 1566(SF) Financial Sector Intermediation Policy Industry and Nonfuel Minerals 9. 900(SF) Industrial Estates Social Infrastructure 10. 1035(SF) Technical and Vocational Education 11. 1625(SF) Urban Infrastructure Improvement 12. 1762(SF) Health Care Reform Program 13. 1830(SF) Basic Skills Development Transport and Communications 14. 790(SF) Roadworks Mechanization 15. 1265(SF) East-West Highway Maintenance 16. 1763(SF) Road Improvement Multisector 17. 637(SF) Multiproject 18. 722(SF) Second Multiproject

Sustainabilityc 3.0 3.5 2.5 2.9 2.8 3.0 2.1 2.3 1.5 2.5 2.8 2.5 3.0 2.8 3.0 2.5 2.5 2.5 2.0 2.0 2.0

Overalld 2.4 2.0 2.8 3.4 3.3 3.5 2.2 2.0 1.9 2.6 2.9 2.7 2.8 3.1 3.0 2.5 2.7 2.2 2.3 2.1 2.6

= not applicable, No. = number. a Socioeconomic ratings are: 4.0 (substantial), 3.0 (moderate), 2.0 (modest), 1.0 (negligible), and (not applicable). b Institutional ratings are: 4.0 (substantial), 3.0 (moderate), 2.0 (modest), 1.0 (negligible), and (not applicable). c Sustainability ratings are: 4.0 (very likely), 3.0 (somewhat likely), 2.0 (uncertain), 1.0 (unlikely), and (not applicable). d For the overall assessment, highly successful (HS) is >3.5; successful (S) is between 2.8< S <3.5; partly successful (PS) is between 1.6< PS <2.5; and unsuccessful (US) is <1.6. Source: Asian Development Bank loan and technical assistance documents.

98

Appendix 4

Table 4.7: Asian Development Bank ADTAs: Impact and Sustainability Assessment
Impact SocioInstitutional Economica Developmentb Sustainabilityc 3.4 2.4 2.9 2.4 3.0 4.0 3.0 3.0 3.0 4.0 3.0 3.0 4.0 3.4 4.0 3.0 3.0 4.0 3.0 2.6 3.0 1.0 3.0 3.0 3.5 2.5 3.0 2.0 3.0 3.0 3.0 1.0 1.0 2.0 1.0 2.4 2.3 4.0 2.5 2.2 2.0 3.0 4.0 2.8 2.8 2.4 3.5 3.3 2.2 2.4 2.3 2.2 1.0 2.7 3.0 2.8 2.2 2.7 2.2 2.4 2.2 2.0 1.7 4.0 2.0 3.5 2.5 3.0 2.8 3.0 2.8 3.0 2.5 2.9 3.0 2.8 2.5 3.3 2.8 3.0 2.5 2.3 2.0 2.8 2.5 3.3 2.8 2.5 2.3 2.8 3.0 2.3 2.0 1.8

TA No. Title Agriculture and Natural Resources 1. 598 Agriculture and Irrigation Planning 2. 706 Manpower Development and Training 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 719 729 795 825 931 983 1001 1030 1485 1956 2764

Overalld 2.8 2.7 3.0 2.3 2.3 2.6 2.8 3.6 2.8 2.7 2.0 3.0 3.5 3.0 3.3 2.7 3.0 3.6 2.7 2.7 2.5 2.5 1.3 2.8 2.8 3.3 2.7 2.6 2.3 2.7 2.7 2.5 2.3 1.5

Planning and Development of Integrated Rural Services Centers Food Corporation of Bhutan and Agricultural Marketing Systems Study of Agricultural Incentives and Subsidies Highland Livestock Development Institutional Strengthening to the Ministry of Agriculture and its Operational Departments Master Plan for Forestry Development Agricultural Extension Course Women in Development Profiles in Highland Livestock Development Renewable Resources Sector Development Plan Irrigation Action Plan Irrigation Program Strengthening Power Sector Institutional and Financial Development Institutional and Financial Development of Department of Power Policy and Legal Framework for Power Sector Development Corporatization of Division of Power Capacity Building of the Bhutan Electricity Authority Establishing the Druk Hydropower Corporation Industrial Sector Study for Development Financing Mechanism Institutional Support to Bhutan Development Finance Corporation Institutional Strengthening of Bhutan Development Finance Corporation Conversion of Unit Trust of Bhutan to Commercial Bank Restructuring of Unit Trust of Bhutan to Commercial Bank Capacity Upgrading of Financial Sector Infrastructure Upgrading the Royal Insurance Corporation of Bhutan, Restructuring the Employees Provident Fund Strengthening Banking Supervision Function of the Royal Monetary Authority Project Appraisal Financial Institutions Financial Sector Review Strengthening Debt Management of Department of Aid & Debt Strengthening Capacity of the Royal Monetary Authority Institutional Development of the Bhutan Development Finance Corporation

Energy 14. 1729 15. 16. 17. 18. 19. 2400 3112 3307 4188 4189

Finance 20. 614 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 1022 1465 2284 2532 2902 3111 3212 3596 3687 3893 3905 3910

Appendix 4 Impact Institutional Socioa Developmentb Sustainabilityc Economic TA No. Title Industry and Nonfuel Minerals 2.2 2.2 2.5 33. 1031 Institutional Strengthening of Department of Trade and 2.5 2.5 2.3 Industry 34. 1223 Study on Promotion of Export Oriented Industries 2.0 2.0 2.8 35. 2213 Institutional Strengthening of the Ministry of Trade and 2.0 2.0 2.3 Industry Social Infrastructure 36. 861 Urban Centers Sewerage 3.0 2.8 2.8 37. 1381 Institutional Improvement Technical Vocational Training 3.0 2.6 2.5 38. 3022 Capacity Building in the Urban Sector 3.0 2.5 3.0 Institutional Develoment of National Technical Training Authority 40. 4042 Housing Sector Reform Transport and Communications 41. 799 Institutional Strengthening of Public Works Department 42. 1559 Institutional Strengthening of the Department of Roads 43. 44. 45. 46. 1984 1985 3156 3470 Development of Maintenance Management System Construction Management Capacity Building of the Construction Development Board Road Planning and Management Strengthening Multiproject Tariff Study for Public Services Project Planning and Implementation Institutional Strengthening of Department of National Budget Strengthening of Department of National Budget and Accounts II External Resource Management System Strengthening the Ministry of Finance Strengthening Environmental Impact Assessment (EIA) Capacity of Environmental Guidelines Further Strengthening of Ministry of Finance Improvement of Procurement and Contracting Strengthening the Central Statistical Organization Poverty Assessment and Analysis Public Sector Resource Management Strengthening the National Statistical System Institutional Dev. of the Department of Employment and Labor Develoment of the National Pension and Provident Fund Bureau Strengthening Environmental Sector Capacity 39. 3525 4.0 3.0 2.9 3.0 3.0 2.5 3.0 3.0 3.0 3.0 3.0 2.9 3.0 2.0 3.0 3.0 3.0 2.5 3.0 3.0 3.0 3.0 3.5 3.0 3.0 3.0 2.8 2.8 2.3 2.5 1.8 2.6 2.4 2.5 2.2 2.3 2.4 2.2 2.4 2.0 1.6 2.7 2.3 2.7 2.3 2.2 3.0 2.8 2.0 3.5 2.4 2.3 2.5 4.0 2.5 2.5 2.5 2.5 2.5 2.0 3.0 2.8 2.6 3.0 2.3 2.5 2.0 2.0 2.3 3.0 2.3 2.8 2.8 2.0 2.3 2.0 3.0 2.5 3.0 3.0

99

Overalld 2.3 2.4 2.3 2.1

2.8 2.7 2.8 3.6 2.8 2.6 2.7 2.4 2.5 2.5 2.8 2.7 2.6 2.7 2.5 2.6 2.3 1.9 2.7 2.8 2.7 2.5 2.7 2.7 2.7 2.3 3.3 2.6 2.8 2.8

Multisector 47. 540 48. 783 Others 49. 572 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 970 1487 1731 1932 2531 2691 2802 2860 3443 3513 3669 3790 3796 4120

= not applicable, No. = number. a Socioeconomic ratings are: 4.0 (substantial), 3.0 (moderate), 2.0 (modest), 1.0 (negligible), and (not applicable). b Institutional ratings are: 4.0 (substantial), 3.0 (moderate), 2.0 (modest), 1.0 (negligible), and (not applicable). c Sustainability ratings are: 4.0 (very likely), 3.0 (somewhat likely), 2.0 (uncertain), 1.0 (unlikely), and (not applicable). d For the overall assessment, highly successful (HS) is >3.5; successful (S) is between 2.8< S <3.5; partly successful (PS) is between 1.6< PS <2.5; and unsuccessful (US) is <1.6. Source: Asian Develoment Bank loan and technical assistance documents.

100

Appendix 5

LEGISLATIVE CHANGES SUPPORTED BY ASIAN DEVELOPMENT BANK ASSISTANCE

Name and Asian Development Description of New Bank Loan or TA No. or Revised Law and Description Financial Institutions Act (FIA) 1992 TA 3212: Strengthening the Banking Supervision Function of Royal Monetary Authority (RMA) Objective of ADB Assistance for Legislation To provide RMA with assistance in conducting on-site and off site examination of banks and other Financial Intermediaries, as well as formulating regulatory policy. Training supervisors in examination technology, development of formal course materials, preparation of standardized examination results. Key components of the project: (i) On-site supervision covering report writing and modifications in the supervisory manual, revisions in prudential regulations, and suitable amendments in the Financial Institutions Act of 1982; (ii) Off-site supervision covering the formulation of various off-site ratios and modifications in reporting formats and off-site manuals; (iii) development of an automated off-site surveillance system and procurement of the associated hardware equipment; and (iv) overseas training for RMA staff on banking supervision. Strengthen institutional capabilities of financial institutions by having necessary legal and regulatory frameworks to promote foreign investment and encourage private sector development. Impact of Changes in Law on Industries, Sectors, or Economy The passage of the Financial Institutions Act has had a profound impact on the industry and the economy of the country. The Act empowers the Royal Monetary Authority to issue a license for any entity offering financial services such as banking, insurance, merchant banking, commercial or consumer finance, and leasing companies assets management. After enactment, two financial institutions were created. In 1993 The Royal Security Exchange of Bhutan (RSEB) was created followed by Bhutan National Bank and these two institutions have had a significant impact on the countrys economy. Today, seven years after establishment, Bhutan National Bank is a leading financial institutions providing comprehensive financial services such as personal, retail, business, industrial banking, broking services, letters of credit and investments with assets of over Nu5,500 million as of December 2003. The RSEB plays an important role in capital market development for mobilizing savings for the promotion of private sector industrial development. When it first started there were only four companies with their total market capitalization of Nu393 million being listed on the Exchange and these four companies altogether had only a few hundred shareholders. Today the Exchange has 15 listed companies with a total market capitalization of Nu3,533.99 million as at December 2003. The number of shareholder has grown significantly to 15,000 investors, including not only both male and female adults but also children. Initially, the RSEB provided facilities to trade only equities, but today trades bills and bonds and has increased the investment scope of the public. The creation of a Financial Institutions Supervision Division in RMA to supervise and monitor the health of financial institutions was made possible under the Act. As a result of this they are now able to carry out on- and off-site supervision activities.

Moveable and TA 2902: Capacity Immoveable Upgrading of Financial Property Act (1999) Sector Infrastructure and Entrepreneurial Development

The Moveable and the Immovable Property Act relates to loans, mortgages, and other security interests. It emphasizes the protection of the defaulter by providing legal remedies to the financial institutions for recovery of the loans and also protects the debtor by limiting the possibilities of encroachment by the creditor. In essence, the Act defines the legal regime regulating the relationship with debtors and creditors and with the taking and enforcement of security over moveable and immoveable property. It gives substantial freedom of movement to parties to agree

Appendix 5

101

Name and Asian Development Description of New Bank Loan or TA No. or Revised Law and Description

Objective of ADB Assistance for Legislation

Impact of Changes in Law on Industries, Sectors, or Economy the terms of contracts reflecting their relationship. At the heart of the statue is a registration system. The main purpose of the registration system is to provide the public a means of determining whether particular assets or persons are involved in a financial arrangement that should be taken into account when considering doing business in some way with the asset or with the person. Secured creditors must follow the registration provisions in order to perfect their security interest in an asset provided by the debtor to secure payment as against third parties who might have subsequent financial dealings with the debtor or with the particular asset. Perhaps the impact of the Act has been felt in the banking system, as reflected through a private sector credit increase by 172%. The legislation has helped to create a more conducive environment for credit growth.

Amendment to Companies Act (2000)

TA 2902: Capacity Upgrading of Financial Sector Infrastructure and Entrepreneurial Development

Strengthen institutional capabilities of financial institutions by having necessary legal and regulatory frameworks to promote foreign investment and encourage private sector development.

The Company Act sets out the manner in which companies are established, deals with these statutes as a separate legal entity, and sets out a host of provisions dealing with various aspects of their operation and regulation. It also deals with public companies and the offering of securities (shares and debentures) to the public. Since the Act makes it mandatory for every company to keep in one or more books a register of its shareholders and a register of debenture holders, maintained in any manner (including electronically), potential investors are gaining confidence in the system and the market. The TA reviewed the law with a view to removing obstacles to book-entry securities and depository operations, international standards, and best practices. The TA uncovered a series of deficiencies in the existing Companies Act. For instance, it was pointed out that since the law was enacted prior to advent of securities depository; many of its provisions were inconsistent with modern securities transfers. Section 16 of the Act allowed shares to be issued without being fully paid. The TA recommended this to be changed as it leads to abuses. For instance, there is a chance of shareholders not making good the payment if the value of the shares drops or if the investor becomes insolvent. The Negotiable Instruments Act relates to promissory notes, bills of exchange, checks, and other negotiable instruments that facilitate commercial transactions. It streamlines policies, procedures, and practices in line with international practices. Prior to the ADB intervention (Negotiable Instruments Act) there was no law to protect debtors/creditors. The Act has generated confidence among the business community and traders as the Act provides protection to all those carrying out financial transactions. Business transactions become much more efficient as transactions move faster. Now that the check-clearing facilities and system are in place, payment systems and settlement speeds are quicker, thereby saving the time and resources of the business community.

Negotiable Instruments Act (2000)

TA 2902: Capacity Upgrading of Financial Sector Infrastructure and Entrepreneurial Development

Strengthen institutional capabilities of Financial Institutions by having necessary legal and regulatory frameworks to promote foreign investment and encourage private sector development.

102

Appendix 5

Name and Asian Development Description of New Bank Loan or TA No. or Revised Law and Description

Objective of ADB Assistance for Legislation

Impact of Changes in Law on Industries, Sectors, or Economy The Act has also facilitated international trade as overseas traders will not hesitate to deal with Bhutanese traders as they know that in the event of dispute their interests are protected by law in Bhutan. It also creates transparency within the financial system, which in turn benefits the business community as they feel safe due to legal protection of their interest. Sections 128130 deal with principles of private international law (the treatment of foreign law in Bhutan) which would have an impact on foreign direct investment (FDI).

Bankruptcy Act (1999)

TA 2902: Capacity Upgrading of Financial Sector Infrastructure and Entrepreneurial Development

Strengthen institutional capabilities of Financial Institutions by having necessary legal and regulatory frameworks to promote foreign investment and encourage private sector development. Strengthen institutional capabilities of financial institutions by having necessary legal and regulatory frameworks to promote foreign investment and encourage private sector development.

The Bankruptcy Act deals with the acts of bankruptcy by a debtor, petitions and adjudication, and the condition on which creditors or debtors may petition. Even though it is of fundamental importance in a modern economy, it would appear that its need or use in Bhutan at this time is limited. During the Country Assistance Program Evaluation surveys, one of the bankers indicated that recourse to the courts to deal with a nonperforming loan was of limited value, in the absence of weak enforcement. This FDI policy was not enacted, but pending legislation, an executive order was passed in December 2002 to implement the new FDI regulations. The new regulations clearly addressed one of the critical policy impediments that had hindered private sector development. It is expected to facilitate foreign investment by using a very simple, transparent registration system. As a result of FDI regulations, it has already started impacting on the economy in terms of additional inflows into the capital account due to investments in the tourism hotel industry by two major international hotel chains. This has further created not only employment opportunities for many Bhutanese men and women but also contributed toward human resource development in terms of many Bhutanese being sent overseas for professional training. In addition, they have also created opportunities to farmers to supply fresh vegetables and fruits. Legislation is yet to take place and its impact on the industry, sector, or economy cannot be assessed. However, given the fact that the FSA covers such a wide area of banking or other finance businesssuch as commercial or consumer finance, depository banking, development or merchant or investment banking, insurance business including the business of insurers, the business of insurance broking, securities business including securities broking, securities markets services such as securities exchange, securities clearing house, depository, etc.it is expected to have a significant impact on the industry, sector, and economy as a whole in time.

Foreign Direct Investment Policy (2002)

TA 2902: Capacity Upgrading of Financial Sector Infrastructure and Entrepreneurial Development

Financial Services Act 2004 (draft)

TA 3905: Strengthening the Capacity of RMA and Royal Securities Exchange of Bhutan

(i) To strengthen the autonomy and supervisory function of RMA; (ii) to provide the required legal and regulatory framework for the development of insurance and capital markets as well as RMAs supervision of the overall financial sector; and (iii) to build capacity within RMA and RSEB for good governance.

Appendix 5

103

Name and Asian Development Description of New Bank Loan or TA No. or Revised Law and Description The Royal Monetary Authority of Bhutan Act 2004 (draft) TA 3905: Strengthening the Capacity of RMA and Royal Securities Exchange of Bhutan

Objective of ADB Assistance for Legislation (i) To strengthen the autonomy and supervisory function of RMA; (ii) to provide the required legal and regulatory framework for the development of insurance and capital markets as well as RMA's supervision of the overall financial sector; and (iii) to build capacity within RMA and RSEB for good governance.

Impact of Changes in Law on Industries, Sectors, or Economy The revised RMA Act is yet to be passed. Then it will certainly have a profound impact on the countrys macroeconomic policy as under the revised Act RMA is going to be independent of, and not subject to, any directives of the Government, clearly reflecting the merits of the recommendations under TA 3905, which had emphasized autonomy for RMA both for its monetary operations and for efficient supervision.

Insurance Regulations 2004 (draft)

TA 3905: Strengthening the Capacity of RMA and Royal Securities Exchange of Bhutan

(i) To strengthen the Regulations would come in force only on passage of autonomy and the Financial Services Act. supervisory function of RMA; (ii) to provide the required legal and regulatory framework for the development of insurance and capital markets as well as RMA's supervision of the overall financial sector; and (iii) to build capacity within RMA and RSEB for good governance. (i) Improve the urban environment through appropriate urban infrastructure development; (ii) promote the development of effective and sustainable management of urban services; (iii) further human development through physical improvements; and (iv) support economic growth through the development and management of sustainable and wellplanned infrastructure and through provision of urban services. The project promotes the Bhutan Municipal Act, which enables the establishment of municipal corporations as legal entities with perpetual succession and confers on them powers to forge partnerships for effective development and governance of urban communities. It also supports the enactment of the Urban Land Administration Act as it will provide the much-needed enabling legislation for the administration of urban lands. The Act has provided a legal authority to the city corporations as autonomous bodies. As mandated, a city corporation can elect members, committees are formed, and developments are based on collective decisions made by the members who represent the public. The Act has also enabled the framing of Building Rules and Regulations 2002 and Urban Property Rules 2002, thereby creating much transparency in the system, which is required for facilitating the implementation of development activities. A draft Municipal Finance Policy for Thimphu City Corporation was completed with support from ADB; this policy will be the basis for fiscal policy reform for revenue enhancement in Thimphu City Corporation.

Bhutan Municipal Act (1999)

Loan 1625: Urban Infrastructure Improvement Project

104

Appendix 5

Name and Asian Development Description of New Bank Loan or TA No. or Revised Law and Description The Road Act (2004) TA 3470: Road Planning and Management Strengthening

Objective of ADB Assistance for Legislation The objectives of the TA were to (i) prepare a Road Sector Master Plan; (ii) improve the capacity of the Policy and Planning Division of the Ministry of Communication and the Department of Roads (DOR) in planning and securing sustainable financing for the national road network and road maintenance programs, including a comprehensive road asset inventory database; (iii) train PPD and DOR staff in appropriate planning tools; and (iv) prepare draft legislation on the proposed road act.

Impact of Changes in Law on Industries, Sectors, or Economy The enactment of the Road Act has just taken place in the recently concluded session of the National Assembly (August 2004); the real impact will be felt only over a period of time. The Act will definitely have profound impact on the economy as the Act clearly defines the responsibilities and rights of the provider (the Government), road users, and affected communities; addresses the construction, rehabilitation, maintenance, and use of the road while safeguarding or mitigating the adverse environmental impacts on users and the community at large; spells out the compensation to be paid in accordance with existing legislation in the acquisition of land, including rights-of-way, for road construction; determines the feasibility of levying user charges to recover the cost of maintaining the national road network; and specifies the agencies responsible for monitoring and enforcing the provisions of the legislation. The legislation is expected to have a major impact as it does not permit any construction of houses or facilities within 50 feet of either side of national highways. This will not only prevent DOR from carrying out future expansion of the road network as needed, but also helps ensure road safety. One of the most important aspects is that the Act has empowered DOR to be the national authority for providing technical and design standards for any kind of road constructionwhether feeder roads, rural access roads or farm roads.

Source: Operations Evaluation Mission.

Appendix 6

105

COMPLEMENTARITY OF FUNDING AGENCY STRATEGIES AND ASSISTANCE PROGRAMS 1. Development partner assistance to Bhutan equaled $103 million in 2002, about the same as in the previous year but nearly 20% higher than in 19992000.1 Of the 31 development partners reported in Table A6.1, $77 million was in the form of grants and $26 million was in the form of loans from the Asian Development Bank (ADB), the World Bank, Government of Austria, and International Fund for Agricultural Development (IFAD). Bilateral assistance was dominated by India, while ADB was the leading multilateral agency, followed by the World Bank and the United Nations (UN) system. ADB accounted for 42% of multilateral development assistance to Bhutan and 13.8% of development assistance from all sources. The combined disbursements of all UN agencies nearly equaled that of India. Table A6.1: Development Assistance Trends 19992002 ($)
Item Multilateral United Nations System Economic and Social Commission for Asia and the Pacific Food and Agriculture Organization International Fund for Agricultural Development United Nations Development Programme1 United Nations Childrens Fund United Nations Population Fund United Nations Educational, Scientific and Cultural Organization World Food Programme World Health Organization Asian Development Bank World Bank European Union Bilateral India Japan Denmark Switzerland2 Austria Netherlands3 Norway Germany4 Canada Sweden Australia 1999 21,232,400 14,003,027 39,958 2000 24,142,156 10,927,350 14,302 2001 27,353,602 10,654,102 84,024 2002 40,311,855 16,285,750 56,050

42,000 513,583 5,250,504 4,826,700 1,171,399 19,300

8,816 497,462 4,433,806 2,318,802 1,459,052

137,000 1,500,000 3,119,078 1,823,772 460,531 13,798

286,347 5,134,580 4,514,761 1,465,370 642,814 49,000

1,544,083 595,500 4,043,006 900,000 2,286,367 60,239,741 29,866,516 3,068,092 14,233,856 2,756,800 5,936,669 1,544,083 594,118 692,900 452,419 212,015 882,273

1,282,566 912,544 10,102,446 2,100,000 1,012,360 57,619,857 29,093,659 3,875,165 8,268,333 3,924,555 7,084,570 1,282,566 236,969 1,490,566 591,395 296,550 1,475,529

2,611,029 904,870 9,074,868 6,295,581 1,329,051 75,218,828 40,665,290 8,210,842 10,415,190 3,782,800 4,721,391 3,243,629 651,368 1,031,000 630,718 123,000 1,713,600

2,328,770 1,808,058 15,694,969 5,470,806 2,860,330 59,879,618 22,465,621 14,086,258 10,167,089 3,647,370 3,234,995 2,488,253 1,317,200 1,161,097 686,072 438,487 95,914

The material in this appendix is taken from UNDP. 2003. Development Cooperation Bhutan. Thimphu.

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Item 1999 2000 2001 2002 France 30,000 91,262 Nongovernment 5,435,855 3,137,806 2,909,981 2,975,774 organizations (NGOs) Netherlands Development 4,826,700 2,318,802 1,749,976 1,532,809 Organization (SNV) World Wide Fund for Nature 513,155 699,004 658,645 772,874 Save the Children 421,360 417,716 Volunteer Service Abroad 96,000 120000 80,000 140,000 (New Zealand) German-Bhutan Health 112,375 Friends Association ICIMOD Total 86,907,996 84,899,819 105,482,411 103,167,247 = not available, ESCAP = Economic and Social Commission for Asia and the Pacific 1 UNDP figures comprise UNCDF ($2,374, 980) and UNV ($23,500). 2 Includes SDC and Helvetas, a Swiss nongovernment organization (NGO) that manages the entire Swiss Contribution to Bhutan. 3 The Republic of the Netherlands funds its own activities in Bhutan through the Sustainable Development Agreement. SNV, a Dutch NGO, also receives its funds from the Netherlands. 4 The German contribution comprises financial resources from the German government, managed in Bhutan by GTZ, plus GTZs own resources. The German-Bhutan Health Friends Association is reported separately in the NGO section. Source: United Nations Development Programme. 2003. Development Cooperation Bhutan. Thimphu.

2. Table A6.2 shows total 2002 disbursements by sector, based on the classification system from the Development Assistance Committee of the Organisation for Economic Cooperation and Development (OECD). The top sectors were energy generation and supply; agriculture, forestry and fishing; multisector aid; health; and transport and storage. Together these five sectors represented near 70% of all assistance. Table A6.2: Disbursements by Sector, 2002
Item Energy Generation and Supply 18,993,288 Agriculture Forestry and Fishing 16,849,479 Other Multisector 14,020,048 Health 11,130,180 Transport and Storage 11,062,840 Education 5,436,277 Urban Development and 5,190,599 Management Government and Civil Society 4,558,746 Environmental Protection 4,047,467 Banking and Financial Services 3,955,965 Food Aid 2,328,770 Other Social Services 1,721,544 Population, Rep. Health Care 808,302 Industry, Mining and Construction 740,699 Rural Development 714,541 Unallocated / Unspecified 608,199 Water Supply and Sanitation 359,989 Communications 359,763 Trade and Tourism 268,444 Women in Development 12,107 Total 103,167,247 Source: United Nations Development Programme. 2003. Development Cooperation Bhutan. Thimphu.

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3. The following is a brief description of the major bilateral, multilateral, and nongovernment organization development partners. A. Bilateral Assistance

4. India. India committed around Nu7,330 million (about $162 million) as project-related assistance to Bhutans during its Ninth Five-Year Plan. The assistance is being channeled through 47 projects, primarily related to infrastructure development in power, health, roads, and education. Some of the major projects include a feasibility study for three hydropower projects, a project proposal for the Punatsangchu hydroelectric power station, referral hospitals in Thimphu and Mongar, a youth centre at Thimphu, an Institute of Language and Cultural Studies, TingtibiTrongsa-Bumthang and other transmission lines, and construction of about 10 new schools and human resources development centers. 5. Japan. Japan initiated support for Bhutan in 1964 opened an office for the Japan International Cooperation Agency (JICA) and Japan Overseas Cooperation Volunteers (JOCV) in 1988. Assistance has been provided in the form of grants for large infrastructural projects, the dispatch of JOCVs, senior volunteers and JICA experts, as well as equipment supply and acceptance of technical training in Japan. Existing projects cover the agriculture, telecommunications, and transport sectors. 6. Denmark. Denmark began its support for Bhutan in 1978. Initially it provided most of its assistance through multilateral agencies such as United Nations Childrens Fund (UNICEF) and World Health Organization (WHO). The first direct bilateral assistance was given in 1985 for an urban drinking water and sewerage project jointly financed with the ADB. Denmarks overall development policy objective is the reduction of poverty through long-term and binding partnerships with countries such as Bhutan. Its major areas of activity include health, environment and natural resources management, and urban development, as well as crosscutting issues of gender, environment, and democratization and human rights. Denmark has also provided technical assistance and fellowships funded out of the Danish International Development Assistance (DANIDA) global funds. 7. Austria. Austria initiated assistance to Bhutan in the early 1990s in its areas of expertise in energy, tourism, preservation of cultural heritage, and mountain ecology. In energy it has focused on hydropower, rural energy, training, and capacity building. In addition to the construction of two hydropower plants, namely Rangjung and Basochhu, the Government has provided training activities and measures to directly reduce poverty in rural areas. Bilateral cooperation in tourism concentrated on the transfer of technology and Austrias expertise in the field. Some of the main activities have included strengthening the Department of Tourism in the formulation of a sustainable tourism strategy and cooperation towards the establishment of a Hotel and Tourism Management Training Institution. In cultural heritage preservation, the Government has provided technical and financial assistance for the restoration of the Trongsa Dzong. In the field of mountain ecology, a four-year scientific program has been funded on the causes of glacial lake outbursts in the Lunana region. 8. Netherlands. The Netherlands initiated assistance to Bhutan in the late 1980s and formalized its commitment to the countrys development in 1994 with the signing of the Sustainable Development Agreement. In 2001 responsibility for assessing and monitoring activities in the areas of biodiversity, rural electrification, human resource development, institutional capacity building, and culture was transferred to the Bhutanese authorities, which is

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made up by the Sustainable Development Secretariat and the Board of Sustainable Development, and is chaired by the minister of finance. 9. Norway. The major areas of Norwegian support in Bhutan have been for the institutional strengthening of the energy sector, protection of the environment, especially preventive measures for landslide hazards, and health issues. Although in 2003 Bhutan was omitted from Norways list of partner countries that are eligible for development assistance from the regional allocation, several global mechanisms under the development budget are still accessible for Bhutan. In that same year a country agreement was signed for Phase II of a project for Institutional Strengthening of the Energy Sector. 10. Germany. The Deutsche Gesellschaft fr Technische Zusammenarbeit (GTZ) is the main implementing agency for technical cooperation projects in Bhutan. The following projects are being implemented in support of the Ninth Five-Year Plan: (i) Bhutan-German Advisory Services for Promotion of the Vocational Education and Training System in Bhutan. The newly established Ministry of Labor and Human Resources is implementing the project, together with other stakeholders from the government and private/corporate sector, assisted by GTZ; (ii) Bhutan-German Sustainable Natural Resources Management in the districts of Punakha and Wangdue; and (iii) promotion of Seed Production, which is implemented by the Druk Seed Corporation and supported by GTZ. In addition to these bilateral projects, GTZ has granted 85,000 to support the School for Disabled Children project. 11. European Union. The European Commission (EC) has allocated 15 million to the National Indicative Program for Bhutan in 20022006. Priority has been given to renewable natural resources (64% of the budget), consisting mainly of livestock production and integrated pest management. The other assistance areas are health and traditional medicine and trade development and export diversification. Since 2002 the EC has provided 9.2 million for the Wang Watershed Management Project to develop, test and institutionalize practical watershed, land and farm management techniques and procedures within the Wang watershed, as well as the Medicinal Plants Project Phase II, which began operation at the end of 2003 with a budget of 4.2 million. It is designed to help in the conservation of natural resources, alleviation of poverty, improvements in health and creation of economic opportunity through the sustainable development of the medicinal plants sector. The Renewable Natural Resources Extension Support project is an institutional strengthening project to improve the efficiency of the extension services and make them more responsive to the needs of rural people. B. Multilateral Agencies

12. Asian Development Bank. Bhutan became a member of ADB in 1982. ADBs main priority is to achieve poverty reduction by promoting economic growth and social inclusiveness through the funding of physical and social infrastructure, private sector development, employment creation, and improved economic management. The strategic thrust of ADBs Country Strategy and Program Update (CSPU) for 20042006 is geared to assist the Royal Government in the development of road infrastructure, rural electrification and the promotion of the private sector. Details of the ADBs activities in the country are given elsewhere in this study. 13. World Bank/International Development Association (IDA). Bhutan became a member of the World Bank in 1981. Cumulative lending through the World Banks concessionary lending arm, IDA, amounted to $64 million at the end of 2003. In September 2003 the Bank approved the Education Development Project of $31 million in support of the Ninth Five-Year Plan.

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Projects under preparation include HIV/AIDS2 prevention, decentralization and rural development, as well as possible support for private sector and infrastructure, particularly roads. C. United Nations System

14. Economic and Social Commission for Asia and the Pacific (ESCAP). The Government participates in a large variety of regional technical cooperation activities implemented by ESCAP under the thematic areas of poverty reduction, management, globalization and addressing emerging social issues. These emphasize regional policy advocacy and dialogue, knowledge networking, training, advisory services, and technical assistance. Specific activities include the promotion of information and communications technology, facilitation of transport networks, assistance in multilateral trade negotiations, promotion of rights-based approaches to the needs of people living with disabilities, and sustainable tourism. 15. Food and Agriculture Organization. The Government and the FAO of the United Nations first commenced their long-standing partnership in 1973, before Bhutan obtained FAO membership in 1981. FAO has three priority technical cooperation pipeline projects, the most important of which is the setting up of a Bhutanese version of Virtual Extension-Research Communication Network. Others consist of strengthening National Capacities for Successful Foot and Mouth Disease Control and the control of Citrus Greening and Citrus Tristeza Virus. A new regional project on Medicinal, Aromatic and Dye Plants has been approved as an International Fund for Agricultural Development Technical Assistance Grant in mid-2003. The project includes Bhutan, which in many ways is an ideal candidate for expansion in this area, especially in organic production. Joint activities with WFP were recently initiated on vulnerability assessment and mapping. 16. International Fund for Agricultural Development (IFAD). The mandate of IFAD is to enable the rural poor to overcome their poverty and therefore IFAD supports the Government of Bhutan in reaching its goals of improved food security, increased incomes and environmental sustainability. To date, IFAD has financed five projects in the country through loans under highly concessional terms amounting to $40 million. The projects aim to provide for the intensification and diversification of agricultural production, based on renewable natural resource use and management. 17. United Nations Development Programme (UNDP). UNDP began operations in Bhutan in 1971 and currently supports the Government in five main areas: poverty reduction and the Millennium Development Goals, energy and environment, good governance, information technology, and HIV/AIDS. UNDP also administers Global Environment Facility projects and supports the Government in assessing and reporting for international conventions. In 2002 UNDP supported the Government to report on Convention on the Elimination of all forms of Discrimination Against Women (CEDAW). The UN Capital Development Fund (UNCDF) is represented by the UNDP now concentrates on support for decentralization. In addition, UNDP is responsible for United Nations Volunteers (UNV) which, since 1980, has brought more than 350 specialists to Bhutan. Current areas of UNV activity include information technology and rural enterprise. 18. United Nations Educational, Scientific and Cultural Organization (UNESCO). The UNESCO New Delhi Office, the organizations first decentralized office in Asia, was established in 1948. In 2001 it was designated as a cluster office for six countries in South Asia
2

Human immunodeficiency virus/acquired immunodeficiency syndrome.

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(Bangladesh, Bhutan, India, Maldives, Nepal, and Sri Lanka). The office is a platform for delivery of UNESCOs activities in all its fields of competence, namely, education, science, culture, communication and information. The Asia-Pacific Regional Bureau for Communication and Information is an advisory body to the Asia Pacific Member States. It plans and implements regional Program activities in cooperation with other UNESCO clusters/national offices as well as with its partners in the region to promote the use of information and communication technology to support peace and development. 19. United Nations Population Fund (UNFPA). UNFPA assistance in Bhutan began in 1981 and, since then, it has supported the Governments in helping women, men and young people to plan their families and avoid unwanted pregnancies, undergo pregnancy and childbirth safely, avoid sexually transmitted infections, including HIV/AIDS, and combat violence against women. UNFPA also helps to formulate population policies and strategies in support of sustainable development. All UNFPA-funded programs promote womens equality. 20. UNICEF. UNICEF began its assistance to Bhutan in 1974 and has assisted in the establishment of an infrastructure to deliver childhood immunization. The network of the primary health care system in Bhutan developed around this infrastructure. Bhutan achieved universal childhood immunization by 1990. In addition, UNICEF cooperates with the Government in achieving maternal mortality reduction and universal primary education, both of which are priorities in the Ninth Five-Year Plan. UNICEF also provides assistance in the rapid improvement of rural water supply coverage and in sanitation facilities, particularly in schools. Bhutan was one of the first countries to ratify the Convention on the Rights of the Child and is spearheading improvements in child protection. In 2003, Bhutan became the first country in South Asia to eliminate iodine deficiency disorders with UNICEF assistance. 21. WHO. The WHO country office in Bhutan was established in 1984. Its work essentially covers seven main areas, ranging from communicable disease prevention, eradication, and control to mental health and substance abuse surveillance. WHO work has encompassed access to essential medicines, traditional medicine, and immunization. Support is also given to promoting awareness on HIV/AIDS, reproductive and child health, and focusing on the role of nutrition and food safety. Moreover, WHO has also provided technical assistance from the regional office and headquarters in response to any other specific requests such as the prevention of severe acute respiratory syndrome (SARS).

MANAGEMENT RESPONSE ON THE COUNTRY ASSISTANCE PROGRAM EVALUATION FOR BHUTAN

On 3 June 2005, the Director General, Operations Evaluation Department, received the following response from the Managing Director General on behalf of Management:

1. Management acknowledges the consultative approach adopted by the Operations Evaluation Department (OED) in the preparation of the Bhutan Country Assistance Program Evaluation (CAPE). The CAPE was prepared by OED a few months ahead of the submission of the Bhutan Country Strategy and Program (CSP) by the South Asia Regional Department (SARD) for Board consideration. The frequent interaction between SARD and OED was helpful in refining the draft CAPE and provided some advance guidance on the scope of the CAPE recommendations to the Bhutan Country Team. Thus, the process has been mutually reinforcing and beneficial for OEDs preparation of CAPE and for the Country Teams development of the CSP. 2. Management concurs with several important lessons learned and recommendations for future strategy as detailed in the CAPE. For example, regarding CAPEs recommendation of increased assistance to Bhutan, it is noted that under the performance-based allocation (PBA) and the ADF IX framework, Bhutans average annual allocation for the period 20052008 has already been increased to $32 million per annum. This will allow ADB to design and implement a few but large, high priority Government projects which maximize development impact while minimizing transactions costs, both for the Government and ADB. 3. Management endorses the CAPEs recommendation on sharper sectoral focus and greater selectivity. Consistent with the recommendations, the Program for 20062008 has been developed to reflect this recommendation, with full commitment of the Government. The proposed CSP is primarily anchored in the Governments National Poverty Reduction Strategy (NPRS), and supports Governments priorities listed therein. As such, ADBs proposed strategic focus will help alleviate poverty and contribute towards the achievement of the Millennium Development Goals. Furthermore, the CSP is being prepared with greater coordination with Bhutans development partners. Though the opportunities for cofinancing are limited given the Governments choice of sector demarcation among donors and its preference between the use of grant and loan funds, development cooperation with strategic development partner is being demonstrated in several key areas of ADB intervention. For example, the World Bank would use the findings of ADBs feasibility study for Urban Municipal Development in its designated area in the capital city of Thimphu. On the expiry of the SNV (Netherlands Development Organization)-financed consultant working on microcredit, ADB will support the placement of the consultant to carry forward the policy and capacity building work at the Bhutan Development Finance Corporation. Similarly, Japan International Cooperation Agency (JICA) plans to support ADBs capacity building assistance to the Department of Roads, and United Nations Development Programme (UNDP) plans to build on ADBs work

on the Bhutan Living Standards Survey to develop a Geog profile information system. 4. With respect to the CAPEs recommendation of preparing the next CSP under a managing for development results framework, Management is pleased to inform that the new CSP being prepared is indeed going to be results-based with associated targets and indicators for each of the sectors covered under the CSP. 5. The Governments NPRS acknowledges that the private sector would be the engine of growth, and under the new CSP, ADB would provide assistance for a sustained and level-playing field enabling environment for private sector development. Consistent with the CAPEs recommendation, the new CSP plans to provide assistance for deepening ADBs assistance for financial sector competitiveness and private sector development. As a direct result of recent consultations with the Government, the new CSP indeed plans to cover these areas with emphasis on enhancing financial sector competitiveness, greater access for micro enterprises to formal credit and marketing mechanisms. Once the private sector demonstrates its strength as the engine of growth, Management may consider provision of direct assistance for the private sector. 6. Regarding the CAPE recommendation of establishing a Resident Mission in Bhutan, given Bhutans strong portfolio performance (as acknowledged in the CAPE), the availability of electronic communication facilities with development partners in Bhutan, and the increasing frequency of interaction among them, Management presently does not see this as an area of high priority. During the mid-term review of the CSP 20062010, Management may revisit this topic. 7. While Management appreciates the comprehensive analytical work in the preparation of the CAPE, it wishes to reiterate that a single CAPE, covering a time span of over two decades during which ADB as well as Governments development policies and priorities were evolving, is not the best way of judging ADBs performance with respect to Country Strategy. As the CAPE acknowledges that ADBs Poverty Reduction Strategy had not yet been enunciated, and therefore to employ the methodology on the number of projects having poverty intervention as its principal objective is misleading. Management is hopeful that in the future, more frequent evaluations of Country Assistance Programs would be conducted by OED.

BOARD OF DIRECTORS DEVELOPMENT EFFECTIVENESS COMMITTEE

CHAIRPERSONS SUMMARY OF THE COMMITTEES DISCUSSION ON 9 JUNE 2005 OF THE COUNTRY ASSISTANCE PROGRAM EVALUATION FOR BHUTAN

1. The Country Assistance Program Evaluation (CAPE) for Bhutan is the ninth CAPE completed by the Operations Evaluation Department (OED) and the seventh discussed by the Development Effectiveness Committee (DEC) to date. This indicates that ADBs experience in CAPEs is still on its initial round and continuing to build up. The DEC was informed by OED at the meeting that formal guidelines for the preparation of CAPEs are being initiated, with a goal of harmonization with the evaluation departments of other multilaterals participating in the Evaluation Cooperation Group. This introductory point is relevant in considering the concern expressed by Management in its response regarding the adequacy of a single CAPE in evaluating two decades of assistance in Bhutan. That concern should be alleviated when the initial round of CAPEs is completed, the guidelines are completed, and the next round starts. 2. In 2004, a consensus arose in the Board, and was vetted and articulated in the DEC, on rationalizing the timeframe for the feedback process between a CAPE and the corresponding new country strategy and program (CSP) for a country. In its September 2004 meeting at which the CAPE for Nepal was discussed, the DEC concluded that sufficient time should be allowed between the DECs discussion of a CAPE and the Board consideration of the countrys new CSP to enable the DECs review of the CAPE to become a key reference for Board consideration of the new CSP. The DECs objective is to ensure that the CAPEs conclusions and recommendations are taken into account in the new CSP. 3. The Committee generally appreciates the key lessons drawn by the CAPE for Bhutan. DEC members discussed a range of views at the meeting and the full Board will be duly informed of these views so that Board members can benefit from them as they consider the upcoming CSP for Bhutan. 4. A big lesson from this CAPE is that even though the initial ADB strategy was formalized only in 1991, ADB assistance to Bhutan had already been found effective because the Governments own development strategy was the driver. The quality of ADB assistance was also demonstrated in strong portfolio performance. Thus, continuing to make the Governments strategy the driver in ADBs program is a key to effectiveness. This is also consistent with the partnership commitment to Alignment in the recent high-level Paris Declaration on Aid Effectiveness, by which donors will base their overall support on partner countries (respective) national development strategies, institutions and procedures. 5. It is in the latter context that most, if not all, DEC members could agree that as long as the operational strategy for a country, particularly the poverty reduction strategy, is adequately articulated in a CSP - annual country strategy and program updates (CSPUs) should generally not be required for all CSPs, as is the current practice; only an annual program update should normally be necessary. A CSPU would be expected only in exceptional circumstances that require a substantive change in the strategy. The DEC would like to suggest such a revised norm to the Board; it would also imply savings in staff and budget resources that could be more efficiently reallocated to higher priority requirements.

2 6. DEC members sought a more specific and time-bound response from Management on the CAPEs recommendation of establishing a resident mission in Bhutan. Some members suggested that the objective of a resident mission would be to assist in avoiding a slide back in heretofore successful ADB operations in Bhutan. In response to a similar concern of some DEC members that Managements response on the provision of direct support for private sector enterprise in Bhutan was open ended, the Committee was reassured by staff that private sector development is presently the subject of intense dialogue. 7. Regarding the coverage of the CAPE, a view was expressed at the discussion that any positive or negative trends in governance could have been examined in greater depth, with closer attention given to capacity development. Further explanation would also have been appreciated on why, despite the shortcomings in ADB interventions identified in the CAPE, the overall portfolio performance was considered good. 8. Regarding the CAPE/CPS process, the DEC members are also concerned whether the question of increasing ADBs assistance to Bhutan - or any other DMC - is one that the CAPE should address. It can be justifiably argued that this is a strategic issue to be addressed by the CSP and that the CAPE should focus on lessons learned.

Agus Haryanto Chairperson Development Effectiveness Committee 23 June 2005