bhutan - country assistance program evaluation (2005)

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ASIAN DEVELOPMENT BANKOperations Evaluation Department

COUNTRY ASSISTANCE PROGRAM EVALUATION

FOR

BHUTAN

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


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Country Assistance Program Evaluation

CAP: BHU 2005-03(Final)

Country Assistance ProgramEvaluation for Bhutan

May 2005

Operations Evaluation Department

Asian Development Bank


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CURRENCY EQUIVALENTS

Currency Unit ngultrum (Nu)

Year 1985 1990 1995 2000 2004 (JanAug)Nu1.00 = 0.081 0.057 0.031 0.022 0.022$1.00 = Nu12.4 Nu17.5 Nu32.4 Nu44.9 Nu45.3

ABBREVIATIONS

ADB Asian Development BankADF Asian Development FundADTA advisory technical assistanceBDFC Bhutan Development Finance CorporationCAP country assistance programCAPE Country Assistance Program EvaluationCOS country operational strategyCSP country strategy and programCSPU country strategy and program updateDADM Department of Aid and Debt ManagementDOP Department of PowerDOR Department of RoadsGDP gross domestic productGEPF Government Employees Provident FundHIES Household Income and Expenditure SurveyIMF International Monetary FundMOF Ministry of FinanceMTEF Medium-Term Expenditure FrameworkMTSF Medium-Term Strategic FrameworkMW megawattNBC National Bank of BhutanNTTA National Technical Training AuthorityPPTA project preparatory technical assistanceRETA regional technical assistanceRMA Royal Monetary AuthoritySASEC South Asia Subregional Economic CooperationSDR Special Drawing RightsSME small and medium enterpriseTA technical assistanceTVET technical and vocational education and trainingUN United NationsUNHCR UN High Commissioner for Refugees


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NOTES

(i) The fiscal year (FY) of the Government ends on 30 June. FY before acalendar year denotes the year in which the fiscal year ends, e.g.,FY2004 ends 30 June 2004.

(ii) In this report, $ refers to US dollars.

Director General, Operations Evaluation Department : Bruce MurrayDirector, Operations Evaluation Division 1 : R. Keith LeonardEvaluation Team Leader : Carl Amerling

Operations Evaluation Department, CE-9


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CONTENTS

Page

EXECUTIVE SUMMARY iiiMAPS vii

I. INTRODUCTION 1II. COUNTRY BACKGROUND AND EVALUATION FRAMEWORK 3

A. Socioeconomic Context of Asian Development Bank Operations 3B. Methodology and Analytical Limitations 11

III. PROGRAM ADMINISTRATION, COORDINATION, AND PERFORMANCE 11A. Program Administration 11B. Aid Coordination 12C. Portfolio Performance 14

IV. PROGRAM RESPONSIVENESS AND OUTCOMES 18A. Responsiveness of Country Operational Strategy 18B. Responsiveness of Country Assistance Programs 20C. Project Relevance, Efficacy, and Efficiency Evaluation Results 24

V. PROGRAM IMPACT, SUSTAINABILITY, AND ATTRIBUTIONS 37A. National-Level Impacts of Lending and Nonlending Programs 37B. Sector-Level Impacts of Lending and Nonlending Programs 44C. Evaluation of Institutional Capacity Building in Country Assistance Programs

53

VI. EVALUATION SYNTHESIS 54A. Key Strengths of the Program 54

B. Key Weaknesses of the Program 56C.D.

Crosscutting IssuesLessons Learned

5860

E. Implications and Recommendations for the Future Strategy and Program 61

Carl Amerling, principal evaluation specialist (team leader), who was responsible for thepreparation of this report, led an Operations Evaluation Mission to Bhutan and conducteddocument reviews and key informant interviews. He also guided the fieldwork undertaken byMontague Lord and Bindhya Jha, international consultants, and Yogesh Tamang, Dawa Sherpa, and Kunzang Yonten, local consultants. Ma. Rosa Ortega, evaluation officer, supported theteam with research assistance from Manila.

The guidelines formally adopted by the Operations Evaluation Department (OED) on avoidingconflict 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 personspreparing, reviewing, or approving this report.


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APPENDIXES Page

1. Bhutans National Development Strategies and Asian Development BankStrategies

65

2. Description of Country Strategy and Assistance Programs for Bhutan 72

3. Portfolio Performance of Lending Program 854. Matrix for Assessing Effectiveness of Lending and Nonlending Operations 905. Legislative Changes Supported by Asian Development Bank Assistance 1006. Complementarity of Funding Agency Strategies and Assistance Programs 105 SUPPLEMENTARY APPENDIX (available upon request)

A. Sector Reviews

Attachments: 1. Management Response on the Country Assistance Program Evaluation forBhutan

2. Development Effectiveness CommitteeChairpersons Summary of the Committees Discussion on 9 June 2005


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EXECUTIVE SUMMARY

Bhutan is a landlocked country with rugged terrain on the southern slopes of theeastern Himalayas. The emergence of Bhutan from its self-imposed isolation in the 1960s ledto a dramatic improvement in the countrys economic situation. Real economic growthaveraged over 7% a year in the 1980s, 1990s, and is expected to continue up to 2007. Theresult was an improvement in per capita gross domestic product (GDP) from $239 to $741between 1980 and 2003. The production base has been diversified away from agriculturetoward services and industry sector activities. Electricity is the most important export productof the country. Since 2000, the hydropower sector has been earning 45% of governmentrevenue 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 raisethe living standards of the population without undermining the countrys unique natural andcultural heritage. Bhutan has one of the worlds few remaining biologically diverse systems.The major challenge the Government faces is the conservation of Bhutans unique ecologicalsystem and cultural heritage while responsibly using these resources and their revenues tomeet the economic and social needs of the population. Rather than focusing on economicdevelopment, the Government aims to maximize gross national happiness, which is basedon 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 andthe operations began in October that year. From 1983 to 2003, ADB approved 18 loanstotaling $107.86 million and 85 technical assistance (TA) grants (63 advisory and 22 projectpreparatory) amounting to $32.03 million.

The objective of this Country Assistance Program Evaluation (CAPE) study is toassess the performance of ADBs country operational strategies (COSs) and countryassistance programs (CAPs) for Bhutan during 19832003, and to derive lessons and make

recommendations for more effective future operations. The CAPE adopts the standardevaluation framework used by ADBs Operations Evaluation Department to assess theperformance of CAPs, as well as individual projects, programs, and TA grants aftercompletion. It uses six evaluation criteria. The first three, assessing project outcomes in theCAPs, refer to relevance, efficacy, and efficiency. The other three assess project impact interms of socioeconomic impact, institutional development impact, and sustainability. Thestudy identified the key strengths and opportunities, as well as lessons derived from ADBsoperations in the last 20 years, with a view to assessing implications for the future strategyand programs. These lessons will be used to support the formulation of the new countrystrategy 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 COSwas the only formal strategy prepared during the 18 year period from 1982 to 2000. Duringthis period, ADB operations were guided more by pragmatic country programming missionsand generally clearly articulated Government priorities. Since 2000, ADB has placed moreemphasis on developing formal country strategies for Bhutan. A CSP was approved in 2000and a new CSP is under formulation.

A synthesis of findings indicates that during the period under evaluation, ADBoperations shared a common set of priority areas that encompass institutional capacity


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building, private sector development, physical and social infrastructure development,environmental protection, and human resource development. The lending and nonlendingprograms during the period were dominated by social infrastructure, energy, agriculture andnatural resources, and finance. The lending program can generally be regarded asresponsive/relevant to the Governments development priorities during the period. Althoughthe program was relatively balanced, it did not support the oft-cited strategic objective ofsupporting private sector development through nontraditional activities designed to diversifythe economic base of the country and diversify its exports.

Poverty reduction became the overarching goal of ADB in 1999 when the PovertyReduction Strategy was approved, and was one of the five strategic thrusts under ADBsMedium-Term Strategic Framework in the 1990s. In 19832003, 43% of ADBs projects inBhutan 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% hadpoverty reduction as a secondary objective. The primary focus of the majority of loans wasdirected at economic growth (48%) or human development (35%). The secondary focus ofthe loans was similarly concentrated, albeit somewhat less, on these two objectives, but alsoincluded environmental protection (14%), private sector development (10%), and goodgovernance (9%). The focus on poverty reduction projects evolved somewhat with ADBsshift toward poverty reduction as its overarching objective. Given the moderate/significantshift in project design toward the poverty reduction focus of ADB in the latter part of thereview period, the lending program is regarded as responsive/relevant to the changes inADBs strategic thrusts.

About one third of the advisory TA (ADTA) grants had as their primary objectivehuman development, measured in terms of both the combined value of the ADTAs and theirnumber. Other important objectives were economic growth (29% of the combined value ofADTAs), followed by private sector development (17%) and governance (16%). Only one TAduring 19832003 had poverty reduction as its primary objective. The modest povertyreduction 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 theGovernments development strategy. Since the beginning of operations in 1983, ADBsactivities in Bhutan have been guided by the Governments 5-year plans. This hasstrengthened Government ownership, contributed to generally good portfolio performance,and to positive on-the-ground results. Lending and nonlending programs have been gearedtoward assisting the Government in meeting its priority development objectives by continuedinterventions to strengthen infrastructure, improve the quality of social services, ensure goodgovernance, promote private sector development, generate employment, and preserve andpromote 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 todiversifying the economy under the Sixth Five-Year Plan (19861991) and thecommissioning of the Chhukha hydropower plant in 1986 paved the way for ADBs importantcontributions toward supporting increased exports of surplus energy and larger governmentrevenues in the years that followed. ADB has continued to support this strategy under thesubsequent three 5-year plans, as the Government has sought to encourage: greaternational self-reliance; the preservation of cultural heritage; the promotion of spiritual andnonmaterial human progress; the equitable distribution of the benefits of socioeconomicprogress; and economic, environmental, and social sustainability.


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project performance rating. Project monitoring, supervision, and review by ADB, especiallyfor ADTAs, need to be based on measurable performance indicators adopted, to monitor theprogress and results of both lending and nonlending assistance. These reviews areparticularly important in cases where there are several stakeholders such as ADB, theGovernment, the implementing team, and possibly other development partners undercofinancing arrangements. ADBs experience in the Asia Pacific Region is that residentmissions (RMs) contribute to improved project implementation. Establishing an RM wouldallow ADB to play a more active role in the local donor community and respond more rapidlyto 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 theoperational benefits and the costs related to the establishment of an RM in Bhutan.

CSP Targets and Indicators . A set of measurable output and outcome targetindicators for each sector should be established in the next CSP to ensure that the CSP isresults based, can be monitored through the CSP updates, and adjustments can be madewhen conditions require. Such indicators would also help to improve the evaluation of theCSP, both self evaluation by the concerned operational department and independentevaluation by the Operations Evaluation Department.

Financial Sector Competitiveness . ADB will need to expand its interventions in theregulatory framework of the financial sector if sector is to achieve optimal results from futureprojects based on lines of credit or other forms of loan finance. Notwithstanding someliberalization of interest rates in the past two years, with only two banks in the country, thereis 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 investorsin the form of higher deposit interest rates.

Private Sector Development. Promotion of the private sector needs to adopt a morepractical approach than in the past. The formulation of the next CSP should consider whetherpart 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 informalenterprises and small formal sector enterprises. This development will necessitate greatersupport for target groups and participating financial institutions through giving broad-basedsupport in the form of both financial and nonfinancial services; building good-practicefinancial delivery systems adapted to small business capabilities; generating businessdevelopment services that provide skills, appropriate business training, information, andmarket and credit access; and making regulatory and institutional changes to reduce barriersto entry by microenterprises. These types of interventions have significant implications forpoverty reduction. Although both ADB and the Government included development of theprivate sector in strategy and planning papers, insufficient specific interventions were actuallyimplemented to support such development. Focused interventions are required in sectorswith 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 thatinterventions are made in those areas that potentially have the greatest impact on enterprisedevelopment.

Bruce MurrayDirector GeneralOperations Evaluation Department


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I. INTRODUCTION

1. The overall objective of this Country Assistance Program Evaluation (CAPE) study is toassess the performance of the country operational strategies (COSs) and country assistanceprograms (CAPs) of the Asian Development Bank (ADB) for Bhutan during 19832003, and toderive 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 COSsand 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. Afull 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 RoyalGovernment of Bhutan to diversify the economy by (i) strengthening the capacity for economicmanagement and development administration, (ii) improving physical and social infrastructure,(iii) promoting private sector development, and (iv) protecting the environment. With loanassistance limited to relatively small magnitudes, a key feature of the operational strategy wasthe 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 foradvisory and operational purposes and were used to support the institutional strengthening of anumber of agencies, to prepare action plans, and to address financial and capital marketdevelopment.

3. The 2000 COS was finalized following close consultation with the Government. TheCOS aimed to support poverty reduction in Bhutan by promoting economic growth and socialinclusiveness. It targeted the income and employment generation impact of private sector-leddevelopment through improved policy formulation and greater efficiency of financialintermediaries in an effort to address ADBs overarching objective of poverty reduction. 2 Themain focus of poverty reduction efforts under the COS was to enable the Governmentscommitment 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 operationsin Bhutan. The result of that strategy was the Poverty Reduction Partnership Agreementbetween 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 ofADBs resources and future interventions.

4. Recent CSPUs have adapted ADBs operations in Bhutan to the decentralized approachtaken by the Government under its Ninth Five-Year Plan, and required that ADB intensify itsdialogue with stakeholders both at national and local levels in setting project priorities and thepolicy reform agenda. CSPUs now reflect ADBs new performance-based allocation system toallocate 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

1 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 andstrategy specialist; Bindhya N. Jha, institutional development evaluation specialist; Yogesh Tamang, domesticmultisector project evaluation specialist; Dawa Sherpa, domestic financial specialist; and Kunzang Yonten,domestic institutional development specialist.

2 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 ADBsoverarching objective.


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base-case allocation of ADF was set at $10 million, which has recently been substantiallyincreased to $20 million because of Bhutans good performance. 3

5. The CAPE study follows the standard evaluation framework used by ADBs OperationsEvaluation Department to assess the performance of CAPs, as well as individual projects andTAs 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 assessproject impact in terms of socioeconomic impact, institutional development impact, andsustainability. The performance of the COS can only be assessed in terms of relevance. Fromthese results, the study derives the key strengths and opportunities, as well as lessons fromADBs operations in the last 20 years, with a view to drawing implications for the future strategyand programs, including the CSP scheduled for 2005.

6. Because of the large concentration of TAs in capacity building, the CAPE study focuseson the impact of the grants extended for institutional development and the related performanceof the sector thereafter. These capacity-building grants were provided for several ministries andgovernments 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 existingpolicies in the sectors in terms of fiscal management, governance, and human resourcedevelopment. Lessons were identified on how capacity could be enhanced, as well as theprocess of institutional change. Recommendations are formulated in terms of their sustainabilityand scope for further capacity development.

7. The report is divided into six chapters. Following this introductory chapter, Chapter IIdescribes the socioeconomic situation of Bhutan during the review period and presents theevaluation framework and methodology used in this study. Chapter III evaluates ADBs countrystrategies from the perspective of their responsiveness to ADBs overall strategy and the overallprogram balance and coherence. Chapters IV and V evaluate the CAPs in terms of theiroutcomes and impacts, respectively, following the assessment criteria described above.

Chapter VI presents the overall evaluation results and rating for the COSs and CAPs, and thekey strengths, opportunities, lessons learned, and recommendations for ADB and theGovernment. Six appendixes are attached: Appendix 1 provides background information on thecountrys national development strategies and those of ADB; Appendix 2 provides backgroundinformation on the COS priority areas and the CAP structure by sector; Appendix 3 summarizesthe portfolio performance of the lending program; Appendix 4 summarizes the outcome andimpact assessments of the projects; Appendix 5 reviews the legislative changes supported byADB-related assistance; and Appendix 6 summarizes the complementarity of strategies andassistance programs of other funding agencies.

3 The performance criteria were (i) prudence in macroeconomic management; (ii) progress in improving theeffectiveness of the regulation and supervision of the financial system and of the legislative and regulatoryframework to underpin private sector development; (iii) efforts to improve quantity and quality of expenditure onsocial services; (iv) efforts to improve policies, regulations, and institutions in support of the environment; and (v) arating of at least satisfactory during reviews of all ongoing ADB projects. Satisfactory scores on these criteria wererequired for the base case. Actual lending levels also depended on progress made on key issues of the sectors inwhich ADBs lending was being programmed and the level of ADBs ADF resource availability.

4 For details, see ADB. 2000. Guidelines for the Preparation of Project Performance Audit Reports . Manila.


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II. COUNTRY BACKGROUND AND EVALUATION FRAMEWORK

A. Socioeconomic Context of Asian Development Bank Operations

8. Bhutan became a member of ADB in April 1982 and ADB operations began in Octoberthat year. In February 1983, the Government requested assistance to finance several high-

priority public sector projects that were grouped under a multiproject loan5

and a TA project.6

Aspart 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 approved18 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, sharesboundaries with India to the south and the Tibet region of the Peoples Republic of China to thenorth. It has a total land area of 47,000 square kilometers. The terrain is rugged and the altituderanges from 200 to over 7,500 meters above sea level. The emergence of Bhutan from its self-

imposed isolation in the 1960s led to a dramatic improvement in the economic situation of thecountry. Real economic growth averaged over 7% a year in both the 1980s and 1990s, andmaintained that rate of expansion in 20012003. The result has been a tripling of per capitagross domestic product (GDP) from $239 to $741 between 1980 and 2003. 7 The productionbase of the economy has also diversified. Agriculture contributed about one half of the countrystotal output in the mid-1980s, while services represented 30% of GDP and industry accountedfor 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 virtuallyunchanged from two decades ago.

10. Despite the strong economic progress that has been made since the opening up of theeconomy, 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, roadaccess 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 squarekilometers. There is one international airport at Paro, west of the capital, Thimphu, from whichtwo 80-seat jets fly to Bangladesh, India, Myanmar, Nepal, and Thailand. The service has beenupgraded with the purchase of two Airbus 120-seater aircrafts.

11. Electricity remains the most important export product of the country. Of the estimatedpotential of 30,000 megawatts (MW) of hydropower, Bhutan had an installed capacity of about460 MW by March 2005. The Chhukha hydropower project produces 336 MW, the Kurichuproject produces 60 MW, and the Basochu project 60 MW. The Tala hydropower project, whichwill 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 withan estimated capacity of 870 MW. The national demand for power is estimated to be around90 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, approved22 September 1983).

6 ADB. 1983. Technical Assistance to the Kingdom of Bhutan for Multiproject . Manila (for $75,000, approved22 September 1983).

7 International Monetary Fund. 2004. World Development Outlook Database . New York.


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45% of government revenue through electricity exports. This is expected to rise to 90% by theend of 2006. Rural electrification is a priority and the Government plans to spend Nu15 billion ontransmission in rural areas.

12. The agriculture sector absorbs about three fourths of all workers and is gradually shiftingfrom 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 hasdecreed that 60% of Bhutans area will remain forested. Environmental protection is animportant aspect of the Bhutanese national goal of gross national happiness (paras. 23 and133), in part stemming from the countrys Buddhist values. In 1992 the Bhutan Trust Fund forEnvironmental Protection was established with contributions from other countries and fromfunding agencies. The fund has around $30 million and uses its income to financeenvironmentally useful projects. The National Environment Commission is currently drafting anenvironment protection bill as umbrella legislation for all existing acts related to the environment.

13. In the past, Bhutans manufacturing sector was small, technologically backward, andstate dominated. Most private enterprises were involved in cottage industries. The number ofindustrial 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 morepower-intensive industries such as calcium carbide, cement, and ferro-alloys. The growth ofconstruction is also related to the development of hydropower projects. The energy sectorscontribution to total GDP rose from 12% in 1985 to 18% in 2002, largely as a result of theBasochu, Kurichu, and Tala hydropower projects. The importance of hydropower projects isevident in the financial turnover of the Penden Cement Authority, which almost tripled between1996 and 1998. The construction of the Punatsangchu project, expected to start after the Talaproject 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 thelast Shangri-La and the Government has adopted a low-volume, high-value strategy to managethe 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 theSeptember 11, 2001 terrorist attacks in the United States, tourism arrivals into the countryrecovered to 9,249 in 2004.

2. Social Issues

15. Considerable progress has been made in Bhutans human development indicators fromthe initial measures of the 1960s. The latest 2004 Human Development Report of the UnitedNations Development Programme (UNDP) classifies Bhutan at the lower end of the mediumdevelopment countries, with a ranking of 136 out of 175 countries on the human developmentindex, up from 142 in 1998 and 159 in 1990. 8 Life expectancy has increased dramatically, from35 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 to74 per 1,000 live births and from 1,710 to 420 per 1,000 live births, respectively. 9 Basic healthcare is free, and Bhutan has invested large resources into ensuring universal primary healthcare. 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 aUN estimate of Bhutans population of 2.1 million, rather than the Governments official estimate of 650,000, whichwould suggest a substantial upward revision in Bhutans human development index ranking.

9 Human development indicators are from UNDP. 2004. Bhutan: Socio-Economic Indicators . New York, andAppendix 2, table A2.2.


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65% in 1987. Similarly, 58% of the rural population and 70% of the urban population had accessto safe water supplies, compared with combined 31% in 1987. Piped sanitation systems haveeither been completed or are under construction in the two largest cities of Thimphu andPhuentsholing and four other towns. Major advances in immunization to 90% of children havevirtually eliminated neonatal tetanus, polio, and diphtheria. Malaria and leprosy have beenbrought 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 commonremaining 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. Between1961 and 1998 the number of hospitals increased from four to 28, including 145 basic healthunits, one indigenous hospital, and 11 indigenous units. The main issues facing the countryshealth authorities are (i) the scarcity of skilled personnel for service delivery and for healthpromotion and disease prevention programs, and (ii) the financial support needed for a highlydispersed and expanding health care system. These difficulties are compounded by populationgrowth, although it decelerated from 3.1% per year in 1994 to 2.5% in 2001. The Governmentaims 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) expandingeducation 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 aneconomy where large families are often popularly seen as a solution to perennial domestic laborshortages.

17. Considerable progress has also been made in education over the past 30 years. Theadult literacy rate has risen from an estimated 10% in 1970 to 54% in 2001. Considering thatfewer than 450 children attended secular primary schools in the late 1950s and that the countryhad no secondary schools at that time, educational achievements in Bhutan have beenimpressive. By early 2004, 85% of children of primary school age were enrolled in school. Thetotal 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 trainedteachers). The Government is committed to providing 10 years of education for all children bythe year 2015, to meet the UN goal of education for all.

18. The education system consists of 253 primary and community schools, 51 junior highschools, 21 high schools, 7 private schools, and 10 other institutions providing specializededucation as well as tertiary and vocational training (including one degree college). Freeeducation is provided from the primary to the tertiary level. Besides free tuition, this includesfree textbooks and, in some places, meals and boarding facilities. The educational structureconsists of 1 year preprimary, 6 years of primary, 4 years of secondary, 2 years of juniorcollege, and 3 years of a degree program. Since 1961, the medium of instruction has beenEnglish. 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 hasenabled Bhutanese students to gain access to opportunities for international-standard educationat 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 withinthe 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 toemployment promotion services. The ministry has been organizing a job fair as an annual event


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since 2002 to introduce youth to a diversifying job market in the hope of encouraging them totake blue-collar jobs. Notwithstanding the major improvements in basic education facilities, thecountry 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 oftraining 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 theGovernment, with the assistance of ADB and other aid agencies. While technical skills remaininadequate, this weakness will continue to be a major barrier to reduced dependence onexpatriate labor; to industrial growth; and to the local, productive absorption of a growing laborforce. Rural-urban migration is not a major source of urban unemployment since most of therural population remains in rural areas. The situation is, however, likely to change, andincreased urbanization is likely to be a major trend in Bhutan.

20. Bhutanese women do not suffer from significant gender discrimination. They have equalstatus with men and enjoy the same level of freedom under the law. Property inheritance lawsare favorable to women, and most households are headed by women. Women's participation indecision 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 atthose levels and is increasing. Representation in the National Assembly and employment ingovernment service are heavily biased in favor of men, though this bias has shown some signsof weakening in recent years. Some gender imbalance exists in the primary and secondaryschool enrollment rates, but it is not marked, and the situation improved in the 1990s. In termsof 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 andimproving balance found in many areas of social life, a number of issues impact adversely onwomen. These include the high fertility rate, high maternal mortality ratio, high infant and childmortality rates, and the gender gap in the adult literacy rate. These have improved enormouslysince 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 anextra dimension to the difficulty of resolving them.

22. Poverty remains a major concern of the Government. About one out of four personssuffers from food poverty, while more than one in three suffers from income poverty. 10 Althoughthe incidence of poverty in rural areas is five times greater than in urban areas, rural-urbanmigration has risen by about twice the rate of population growth in the last decade. There isgrowing concern about the potential rise of urban migrant households living in hutments orshanties. The relatively high per capita income of the country and incidence of poverty suggestthat income inequality is high. Gini coefficient estimates, nevertheless, indicate only moderateinequality 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 theminimum food requirements, estimated at Nu612.10 ($13.5) per capita a month. The income poverty line is basedon the expenditure of households whose food expenditure is adequate to meet the minimum food requirementsand 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.


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Government envisages that sustainable poverty reduction will be achieved through rapid andequitable 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. Bhutanhas one of the worlds few remaining biologically diverse systems. A major challenge that theGovernment faces is the conservation of the countrys unique ecological system whileresponsibly using these resources and their revenues to meet the economic and social needs ofthe population. The Governments aim is to maximize gross national happiness rather thanfocus exclusively on economic development. Gross national happiness is based on indicatorssuch as culture, education enrollment, environmental protection, governance, health coverage,and income.

24. Policy and program priorities to increase gross national happiness are outlined in theGovernments 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 thehead of government and devolved executive power to the Council of Ministers, which is headedby the prime minister. A hereditary monarchy since 1907, Bhutan started drafting a constitutionin November 2001, which is expected to be promulgated within 3 years. Legislation, policies,and institutions are being established in anticipation of the constitutions ratification. Legislativepower rests with the National Assembly, which is composed of 154 members, of whom 100represent the 20 districts and business community. In recent years, numerous acts have beenadopted, modernizing the Bhutanese legal system, based on Buddhist and Indian laws and onEnglish common law, to strengthen the rule of law in the countrys changing politicalenvironment. The Governments authority has been decentralized from the central Governmentto 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 isheaded by an elected district officer ( dzongda ), under whom are 201 elected gups . In 2002, theNational Assembly created a new structure for local governance at the block level. Each localarea is responsible for creating and implementing its own development plan, in coordination withthe district.

25. Prior to joining ADB in April 1982, Bhutan had completed four development plansbetween 1962 and 1981. The fifth plan, covering FY19821987, aimed to increase Bhutanseconomic self-reliance and to ensure that by the end of that period recurrent expenditure wouldbe met from internal resources. While the first five plans established the basis for subsequentdevelopments, 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 ofthe economy continued under the subsequent three 5-year plans, as the Government sought toencourage greater national self-reliance. Those plans also focused on preserving the culturalheritage; promoting spiritual and nonmaterial human progress; ensuring stability and economic,environmental, and social sustainability; and dispersing the benefits of socioeconomic progresswidely and equitably. Table 1 provides a summary of the aims and strategies of the nine 5-yearplans.

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


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

Plan and Period Goals StrategyFirst PlanFY19621966

Create basic infrastructural facilitiescovering roads, power,communications system, transport,agriculture, and animal husbandry.

Created a technical and administrative framework forgovernance that helped provide for the development ofprojects in roads, education, transport, health, forestry,agriculture, power, animal husbandry, and industries.

Second PlanFY19671971

(i) Improve agricultural and horticulturaloutput; (ii) improve the level ofeducation with greater emphasis onquality rather than quantity; (iii) improveand upgrade cattle, pigs, and poultry;(iv) establish an adequate network ofcommunications to provide economicoutlets for surplus produce to the plainsof India; (v) restock depleted forestreserves in southern Bhutan;(vi) explore the possibility of exploitingthe gypsum and limestone depositsand the establishing a cement factoryto augment the revenues of the state;

and (vii) explore the possibility ofstarting a tea plantation and forest-based industries.

Continued focus on construction of roads and the creationof a technical and administrative framework forgovernance. Specifically: (i) improved agricultural andhorticultural output by introduction of improved methodsand better seeds with a view to obtaining adequate surplusfor providing a boost to the economy of the country;(ii) improved the level of education with greater emphasison quality rather than quantity, to create cadres of qualifiedtechnical personnel at all levels for staffing the variousservices; (iii) improved and upgraded cattle, pigs, andpoultry by cross-breeding, both to improve the availablesources of protein diet for the local population as well as toprovide a marketable surplus; (iv) established an adequatenetwork of communications to provide economic outlets for

the surplus produce to the plains of India by constructionand improvement of existing roads and the establishmentof proper transport services and facilities; and (v) restockeddepleted forest reserves in southern Bhutan by a properforestation program and explored the possibility ofexploiting the forests in northern Bhutan initially to meet theconstruction needs of the Government by the establishmentof logging activities and a sawmill near Thimphu.

Third PlanFY19721976

(i) Expansion of agricultural production,(ii) set up cooperative marketingsocieties, (iii) coordination andconcerted development of selectedareas, (iv) improvement and upgradingof the local livestock, (v) continueddevelopment of infrastructure facilities,(vi) accelerated pace of industrialdevelopment, (vii) improvement ofeducation facilities, (viii) provision ofmedical and health services,(ix) provision of special amenities inThimphu and its development in aplanned integrated manner, and(x) protection and preservation ofancient monuments.

Sector developments directed at agriculture, forestry,electricity, mining, and public health, specifically by(i) expanding agricultural production through intensivemethods of cultivation, use of high yielding varieties ofseeds, and improved irrigation facilities; (ii) setting upcooperative marketing societies to eliminate middlemenand ensure fair prices to the farmers for their produce;(iii) coordinating development of selected areas so thatpeople feel the necessary impact of planning anddevelopment and thereby also rectifying existing regionalimbalances to the extent possible; (iv) improving andupgrading the local livestock by distributing good breeds ofcattle, pigs, birds and to extend veterinary facilities all overthe country; (v) continuing development of infrastructurefacilities such as construction of roads, bridges, and powersupply for rapid economic growth; (vi) accelerating the paceof industrial development through setting up small andmedium industries, industrial estates, and providingincentives to private parties for establishing demand/ resource-based industries; (vii) improving educationfacilities with emphasis on quality rather than on quantity;

(viii) providing medical and health services with a view toextending them to more people, especially those living ininterior regions; (ix) providing special amenities in Thimphuand developing it in a planned integrated manner; and(x) protecting and preserving ancient monuments.

Fourth PlanFY19771981

Develop sector-specific activities inareas identified as having priority forthe country, namely agriculture,forestry, electricity, mining, and publichealth.

Continued sector developments directed at agriculture,forestry, electricity, mining, and public health.


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Plan and Period Goals StrategyFifth PlanFY19821987

(i) Achieve an acceptable andsustainable rate of growth of theeconomy; (ii) attain over time economicself-reliance and specifically in the fifthplan, to attain a level of internalresources generation adequate to

cover the normal maintenanceexpenditure of Government;(iii) achieve greater distributional equityamong various sections and regions;and (iv) involve the people directly inthe planning and execution ofdevelopment programs.

Strategies to be followed in the formulation andimplementation consisted of (i) development of dzongkhag self-reliance, (ii) decentralization of developmentadministration, (iii) increase in people's participation,(iv) control of maintenance expenditure, and(v) mobilization of internal resources.

Sixth PlanFY19881992

(i) Strengthen the developmentadministration of the Government;(ii) preserve and promote nationalidentity; (iii) mobilize internal resources;(iv) enhance rural development;(v) improve rural housing andresettlement; (vi) consolidate andimprove development services;(vii) develop human resources;(viii) promote peoples participation;and (ix) promote national self-reliance.

Strategy focused on diversification of the economy largelybased on the exploitation of the countrys naturalresources.

Seventh PlanFY19931997

Strengthen developmentadministration, promote nationalidentity, mobilize internal resources,enhance rural incomes, improve ruralhousing, consolidate developmentservices, develop human resources,and promote peoples self-reliance.

Strategy focused on (i) strengthening the developmentadministration, (ii) preserving and promoting nationalidentity, (iii) mobilizing internal resources, (iv) enhancingrural incomes, (v) improving rural housing and resettlement,(vi) consolidating and improving development services,(vi) developing human resources, and (vii) promotingpeoples participation and self-reliance.

Eighth PlanFY19982002

Collective pursuit of gross nationalhappiness.

Addressed key policy issues related to (i) achievingnational self-reliance, (ii) ensuring sustained growth,(iii) strengthening national security, (iv) preserving andpromoting cultural and traditional values, (v) promotingregional balanced development, (vi) improving the quality oflife, (vii) developing human resources, (viii) decentralizing,(ix) privatizing, and (x) developing the private sector.

Ninth PlanFY20032007

(i) Improve the quality of life andincome, especially of the poor;(ii) ensure good governance;(iii) promote private sector growth andemployment generation; (iv) preserveand promote cultural heritage andenvironment conservation; and(v) achieve rapid economic growth andtransformation.

Strategy focused on increasing domestic revenue byimproving tax collection and administration mechanism andby enhancing the tax base; implementing rural accessprogram to improve quality of life and income of the people;investing in areas where employment generation can bemaximized; initiating a planning approach that addressesthe decentralization process; consolidating existinginfrastructure and services; developing human andinstitutional capacity; enhancing private sectordevelopment; managing external assistance effectively;and granting autonomy to the dzongkhags for use of tax

collected at the dzongkhag level to finance developmentprograms.

Source: Ministry of Finance.

26. Notwithstanding the general prudence of the Government, fiscal management risksremain. These risks are associated with (i) the narrowly based dependence of governmentrevenues 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 aslowdown of further inflows of aid or terms closer to commercial rates. The proportion of loans in


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official development assistance has increased steadily. According to the UNDP estimates fortotal 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, partlybecause international financial institutions continue to offer the Government loans onconcessional terms. In the near future those types of loans may no longer be available toBhutan. 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 offoreign direct investment. Foreign companies will now receive national treatment on theirinvestments and have access to many sectors, including mineral processing, agriculture andpostharvest production, animal husbandry, light industry, electrical and energy-intensiveindustries, tourism, transport, road and bridge construction, education, information technology,finance, and housing. The following limitations in the enabling environment for the privatesector, however, exist: (i) the new policy restricts investments to a minimum of $1 million formanufacturing 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 limitednumber of foreign workers; and (iv) foreign companies must report a net convertible currencyprofit when repatriating profits. International joint ventures in Bhutan are guaranteed balancedtreatment under the law with domestic enterprises. While limitations exist , full compensation isguaranteed in the case of nationalization of joint ventures.

28. The Government faces problems associated with illegal immigration. Its magnitude wasfirst reported to the National Assembly in 1987 by one of the peoples representatives fromsouthern 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 ofvillage 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 unnaturalpopulation growth in the southern districts. On realizing the gravity of the situation, theGovernment instituted a mechanism to identify illegal immigrants. Between 1991 and 1993,thousands of Nepali-speakers, including poor Nepali-speakers from India and Nepal, claiming tobe Bhutanese refugees congregated in refugee camps run by the UN High Commissioner forRefugees (UNHCR) in Nepal. By 1995, the camps were home to 85,000 refugees. There arenow 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 whileconducting a briefing on the terms and procedures for those eligible to return. Since then, therehas been further deterioration in the general security situation in Nepal, making repatriationprocess difficult. After peaceful negotiations conducted by the Government of Bhutan over

several years failed, the Royal Bhutan Army conducted military operations in December 2003 toevict an estimated 3,000 Indian militants belonging to three insurgent groups from the Indianstates of Assam and West Bengal, from the forests of southern Bhutan. During the operation, allthe militants were removed from the country.

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


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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 comprehensivedesk 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 agencieswere also reviewed, and interviews were conducted among ADB staff with past and presentinvolvement in Bhutan projects. The Operations Evaluation Mission (OEM) met with relevantstakeholders, such as representatives of the Government, funding community, nongovernmentorganizations, and beneficiaries in Bhutan. The views of all stakeholders were documented toform a picture of ADBs activities, their effects, and their results. Field visits were undertaken toseveral project sites to hold discussions and interviews with executing and implementingagencies (EAs/IAs) for past and present projects. The study team conducted semistructuredsurveys to determine perceptions of the strengths and weaknesses of ADBs strategy andoverall assistance. Case studies were undertaken, following the standard evaluation frameworkdescribed 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 inBhutan. 15 ADB has provided some support to DADM through the $116,000 Strengthening theDebt Management Capacity of the Department of Aid and Debt Management, 16 approved inJuly 2002. The project examined the needs for effectively monitoring loans and was followed upby another ADTA in 2004. DADM currently lacks the capacity to monitor disbursements andother information about TAs once they have been implemented.

32. With regard to loans, DADM also lacks information on interest servicing, particularlydenominated in SDR, for both capitalized and government-paid portions. ADF loans from ADBvis--vis the loans from the World Bank and the International Fund for Agricultural Developmentare denominated in various currencies. Accordingly, the currency of disbursements andrepayments are at ADBs discretion. With the growing loan portfolio of the country and takinginto account the need to strengthen debt management capacity, DADM requested that ADBconsider amending its policy on the repayment side. DADM also requested that the summarystatement of amounts (ID LAR801 in ADBs loan financial information system) should have acolumn 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, andtheir effects on portfolio performance. The issue involves both the need for greaterharmonization of funding agency strategies, programs, and projects; and the need for improvedimplementation procedures by the Government for those programs and projects. To helpaddress 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 tocoordinate 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).


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Bank (International Development Association), the Government of Austria, and the InternationalFund for Agricultural Development. India is the largest bilateral development partner, followedby the governments of Japan, Denmark, Switzerland, Austria, and Netherlands. Among themultilateral institutions, ADB is the largest development partner, followed by the UN agenciesand the World Bank. In 2002, the last year for which comparative data are available, 19 ADBaccounted 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 classificationunder multisector aid. Together these sectors absorb about 70% of all assistance. Appendix 6provides details on the distribution of assistance from the development partners and details ofthe principal activities.

39. Development partners are coordinated by means of a variety of formal and informalchannels. At the informal level there is considerable interaction among development partnerswith representative offices in Bhutan. The relatively small size of the community in Thimphu andnumber of representative offices there encourages interagency dialog and, at times, closecollaboration and information sharing. Because it does not have a resident mission (RM), ADBis not as actively involved in local donor coordination as some other donors.

40. At the more formal level, recurrent discussions have taken place through roundtablemeetings, where development partners have an opportunity to exchange plans and discusspolicy issues, and coordinate funding for priority sectors. The roundtable meetings usually takeplace at the beginning and middle of each 5-year development plan. The seventh roundtablemeeting took place in 2000 to address the Ninth Five-Year Plan, which relies on externalassistance for as much as 45% of its funding. The eighth roundtable meeting was held inGeneva in February 2003 and was attended by high-level representatives from 18 bilateral and27 multilateral and other agencies. It focused on three thematic issues: the Ninth Five-Year Planand resource mobilization; poverty reduction; and decentralization and the management oflocal-level development, as well as the Nu13,500 million (about $294 million) resource gapneeded to finance projects under that 5-year plan.

41. Mobilizing grant cofinancing was an important element of the first decade of ADBsoperations in Bhutan. Two of ADBs loans to Bhutan have been cofinanced with the DanishInternational Development Agency (DANIDA): the Second Multiproject project of 1984, and theUrban 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 withUNDPs Global Environment Facility to support a mini-hydropower component for ADBsSustainable Rural Electrification project 20 but the project failed to materialize due to processingdelays on the part of the Global Environment Facility.

42. There has not been any cofinancing in the last 10 years. The reduction in cofinancingreflects, in part, the Governments clear identification of areas for different donors to avoidduplication 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 byADB. For instance, Norway has recently signed a second phase to its institution-building

19 OECD. 2004. Geographical Distribution of Financial Flows to Aid Recipients 19982002 . France.20 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).


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activities in the energy sector, and support to the sector is also being provided by Austria.Germanys Gesellschaft fr Technische Zusammenarbeit and the Canadian InternationalDevelopment Agency both have activities in the education sector, most recently in vocationaltraining. Denmarks DANIDA portfolio covers health, urban development, and environment andnatural resource management. There have been some examples of successful donorcoordination 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 workingwith UNDP for the Bhutan Living Standard Survey). However, the need for more donorcoordination was repeatedly mentioned during OEMs field work by other agencies, includingUNDP. UNDP has been active in poverty monitoring, and proposed modifications to ADBsactivities in this area that were never taken up. The lack of coordination with other developmentpartners in strengthening research and diagnostic work in some instances limited theeffectiveness and ultimate impact of ADBs assistance (Chapter V, Section A.2). Aidcoordination remains weak and only partly satisfactory, despite the existence of formal andinformal arrangements for monitoring and coordinating existing and programmed activitiesamong 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, amountingto $111.16 million, including one loan for urban centers sewerage that was canceled and neverutilized. 21 Eighty-five TAs (63 ADTAs and 22 PPTAs) amounting to $32.03 million wereapproved between 1983 and 2003. Sector-wise, social infrastructure had the highest share inloans, both in terms of amount (28%) and number of projects (22%), followed by energy (25% inamount and 17% in number of projects), and transport and communications (18% in amountand 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 ofprojects), and others (16% in amount and 24% in number of projects). For the PPTAs, transportand communications had the highest share in terms of amount (25%), followed by energy andsocial infrastructure (both at 23%).

44. The number of active loans for any given year peaked in 1990, when nine loans wereongoing. 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), wascanceled before implementation at the request of the Government. The loan was approved in May 1987 fromADBs 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 ofextensive use of septic tanks rather than construction of piped sewage systems, which was counter to theGovernments priority of rural development and making only essential investments in urban areas. The project wassubstantially modified at the recommendation of both the Government and ADB, but cost overruns appeared duringthe tendering for civil works in the Thimphu component. The Government was not in a position to increase itscontribution to the project and believed the project was no longer financially viable with the loan financing. The loanwas canceled in April 1991.

22 ADB. 2004. Annual Report on Loans and Technical Assistance Portfolio Performance for the Period Ending 31 December 2003 . Manila.


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the completed PPTAs, four did not lead to loans due to the Governments financial and resourceconstraints and borrowing priorities. As a result, PPTA resources can be assessed as havingbeen moderately utilized.

Table 2: Approved Technical Assistance Outstanding, by Sector

Approval Amount ($'000) TA No. Title Type Date TASF JSF TotalAgriculture and Natural Resources1. 6131 South Asia Subregional Economic

Cooperation Tourism Development PlanRETA Nov-03 450 0 450

2. 6159 Regional Air Quality Management RETA Dec-03 0 400 400Energy3. 4188 Capacity Building of the Bhutan

Electricity AuthorityADTA Sep-03 400 0 400

4. 4189 Establishing the Druk HydropowerCorporation

ADTA Sep-03 500 0 500

Finance5. 3687 Financial Sector Review ADTA Jul-01 300 0 3006. 3905 Strengthening the Capacity of the Royal

Monetary Authority and RoyalSecurities

ADTA Aug-02 0 334 334

7. 4386 Strengthening of the Payment andSettlement System

ADTA Sep-04 275 0 275

8. 4398 Strengthening the Debt Management ofthe Department of Aid and DebtManagement

ADTA Sep-04 225 0 225

9. 6087 Small- and Medium-Sized EnterpriseGrowth and Development in the South

Asia Region

RETA Dec-02 750 0 750

Social Infrastructure10. 4019 Industrial Estate and Dry Port PPTA Dec-02 700 0 70011. 4042 Housing Sector Reform ADTA Dec-02 500 500Transport and Communications12. 4138 Road Network Expansion PPTA Jul-03 0 500 500Others13. 3513 Public Sector Resource Management ADTA Oct-00 0 300 30014. 3669 Strengthening the National Statistical

SystemADTA Jun-01 600 0 600

15. 4120 Strengthening Environmental SectorCapacity

ADTA May-03 150 0 150

16. 6010 South Asia Subregional EconomicCooperation (SASEC) II

RETA Dec-01 500 0 500

17. 6090 Private Sector Cooperation in theSASEC Subregion

RETA Dec-02 150 0 150

18. 6156 Subregional Economic Cooperation inSouth and Central Asia

RETA Dec-03 600 0 600

Total 6,100 1,534 7,634ADTA = advisory technical assistance, JSF = Japan Special Fund, No. = number, PPTA = project preparatorytechnical assistance, RETA = regional technical assistance, TA = technical assistance, TASF = technical assistancespecial fund.Source: Technical Assistance Information System.


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45. For 20042006, ADB programmed an indicative lending level of $28.2 million, or anaverage of $9.4 million per year. The proposed ADF lending levels are, however, subject to theoutcome 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 scenarioseach year. The ADB allocation process consists of two steps based on common countryperformance assessment criteria, on the one hand, and country-specific criteria, on the other. Inthe former category, Bhutan has performed well and has been ranked in the first quintile of ADFrecipient countries. In the latter category however, the overall assessment, based on country-specific performance triggers contained in the 2001 CSPU, indicated a base-case scenario inpart reflecting less than optimal portfolio management of ADB projects and delays inprivatization. In the 20042006 CSPU, a new set of country-specific criteria was included, whichformed 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 inimplementation. The delays were mainly caused by a shortage of qualified and experiencedproject implementation staff and unfamiliarity of the EAs and IAs with ADB procedures. Overtime, portfolio performance improved and by 2003, no loans in the Bhutan portfolio werereported to be in the at-risk category. Since 1995, overall performance of the Bhutan portfoliohas been rated satisfactory. Of the five ongoing loans, one was rated highly satisfactory whilethe remaining four were rated satisfactory in both implementation progress and developmentobjectives. While one problem loan 23 was noted during 20012002, there were no potentialproblems or problem loans in the portfolio by 2003. The portfolio performance in terms of projectperformance ratings of ongoing loans as of 31 December 2003 was better than the regional andADB-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, approved23 October 1997). The loan account was closed on 23 December 2002.

Table 3: Approved Loans Outstanding, by Sector

Loan AmountApproved Actual Approval Closing

Loan No. Title ($ million) ($ million) Date DateEnergy1. 1712(SF) Sustainable Rural Electrification 10.000 9.462 Nov-99 Mar-052. 2009(SF) Rural Electrification and Network

Expansion9.400 9.886 Sep-03 Mar-07

Social Infrastructure3. 1625(SF) Urban Infrastructure Improvement 5.700 5.902 Jul-98 Jun-054. 1830(SF) Basic Skills Development 7.000 8.002 Jun-01 Mar-07Transport and Communication5. 1763(SF) Road Improvement 9.600 10.428 Oct-00 Jun-05

Total Lending 41.700 43.680No. = number.Source: Loan Financial Information System.


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current high-level forum for resolution of interministerial issues, especially those related toproject implementation, should be more frequently used. Other issues included the importanceof adequate staffing with the correct skills mix in the establishment of project implementationunits (PIUs) and that frequent turnover of project managers adversely affected projectimplementation. TA implementation has been adversely affected by the lack of adequatecounterpart 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 ofcontracts; (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 in2002, 13 actions were identified. Of these, nine were fully complied with, while three were inpartial compliance and one was ongoing. Overall, the CPRs were useful and contributed toimproving portfolio performance.

51. OEMs assessment of past portfolio performance offers the following lessons for futureCSPs: (i) adequate staffing with the correct skills mix is just as important as the establishment ofPIUs; (ii) frequent turnover of project managers adversely affects project implementation; and(iii) despite the improvements that have been made with ADB support (a) governmentprocurement procedures remain cumbersome and financial authority of project managers is low,

and (b) financial and technical capacity of local contractors remains weak. Recommendationsinclude the need to (i) enhance capacity of project implementation staff, especially with respectto ADB procedures and policies; (ii) enhance technical capacity of EA staff regarding sectorknowledge, especially in the financial and energy sectors; (iii) better assessment of existingpolicy framework with implications for phasing and sequencing of sector reforms; (iv) adaptationto local conditions (road maintenance and management system); (v) improve coordination forcofinancing operations; (vi) ensure adequate financial resources for operations andmaintenance, especially in the roads sector; (vii) address institutional weaknesses and buildcapacity thru long-term TA commitment; and (viii) actively engage high-level governmentofficials to ensure ownership and government commitment.

IV. PROGRAM RESPONSIVENESS AND OUTCOMES

A. Responsiveness of Country Operational Strategy

1. Country Operational Strategy 1991

52. ADBs initial program in Bhutan was undertaken independently of any operationalstrategy. As a result, the initial operational focus was fairly wide ranging, with assistance beingprovided in a variety of sectors. The first multisector loan consisted of a set of six public sectorsubprojects in agriculture, forestry, transport, communications, and water supply andsanitation. 24 The second multisector loan addressed the Governments emphasis on buildingbasic physical infrastructure and improving the socioeconomic conditions of the people bysupporting 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 expandingphysical and social infrastructure.

24 See footnote 5. The six subprojects comprised improvements to an existing agricultural workshop, provision offorest 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, andprovision 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 twosubprojects comprised the Urban Centers Water Supply and Sanitation subproject, and the Royal Institute ofManagement subproject.


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53. After nearly a decade of experience, the first COS was prepared in 1991 to assistBhutans efforts to diversify the economy. It emphasized (i) strengthening the capacity foreconomic management and development administration; (ii) improving physical and socialinfrastructure; (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 roleby using TA preparing development projects and mobilizing cofinancing, particularly grants.

Consequently, the focus of operations became the provision of TA for project preparation, policyresearch and development, and institution strengthening.

54. The 1991 COS preceded ADBs first Medium-Term Strategic Framework (MTSF) for19921995 and 19951998, but incorporated some of its specific thematic priorities to guideoperations in the medium term, such as encouragement of private sector development,strengthening public sector management capacity, human resource development, and naturalresources management. These thematic priorities were generally consistent with ADBssubsequent MTSF objectives of economic growth, poverty reduction, improving the status ofwomen, human development, and environmental protection. 26 The 1991 COS did not, however,explicitly address poverty reduction or gender-related issues. Poverty was generally recognizedas 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 featureprominently in the COS. The 1991 COS is considered responsive to ADBs strategic thrusts atthat 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 thecountry by promoting economic growth and social inclusiveness and by supporting theGovernments 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 andemployment generation impact of private sector-led development brought about by an improved

policy setting and more efficient financial intermediation. ADBs specific interventions have beendirected toward reducing physical infrastructure constraints, developing the domestic skillsbase, improving the urban environment, and supporting sustainable provision of high-qualitysocial services.

56. The 2000 COS is consistent with ADBs 1999 Poverty Reduction and Private SectorDevelopment Strategies, which together form the building blocks for the 20012015 Long-TermStrategic Framework (LTSF). 27 The Poverty Reduction Strategy identifies the three pillars ofpro-poor, sustainable economic growth; good governance; and social development to guide thepreparation of COSs and CAPs for developing member countries. The LTSF identifies threecore areas for ADB operations: (i) sustainable, broad-based economic growth, includinginvestments both in physical and social infrastructure, with environmentally sound development;

(ii) inclusive social development, including investments in social support programs to improveequity and empowerment of women and disadvantaged groups; and (iii) governance foreffective 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, whilethe 19951998 MTSF specified human development (including population planning). The term humandevelopment 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.


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judicial reforms. 28 These three core areas are complemented by three crosscutting themesaimed at promoting private sector development, regional cooperation and integration, andenvironmental sustainability. Implementation of the LTSF through three medium-term strategiesand the Poverty Reduction Strategy support ADBs operational goals established under theMillennium Development Goals (MDGs). 29 The 2000 COS is responsive to ADBs thematic andstrategic thrusts for the period.

B. Responsiveness of Country Assistance Programs

1. Program Support by Sector

57. Sector-based lending activities favoredsocial infrastructure and energy during theperiod, with one half of the value of projectcommitments going to these two sectors(Figure 2). The focus was in line with the COS tostrengthen the countrys physical and socialinfrastructure. Relatively large support was also

provided to transport and, to a lesser extent,agriculture and natural resources, and finance.In contrast, little support was given to theindustry and nonfuel minerals sector, despite the1991 COS strategic objective of diversifying theeconomy, particularly in terms of fosteringprivate sector-led growth that would be capableof promoting exports to countries other thanIndia. Nor was much emphasis given to the encouragement of the private sector, despite ADBsoverall strategy to promote its development and its emphasis in the 1991 COS.

58. For nonlending activities, the sector-based allocation of ADTAs favored agriculture andnatural resources, and finance. Together these two sectors received 45% of the total value ofADTAs in the period under review. Two other sectors favored by ADTA-based support weretransport, and energy. Social infrastructure received fairly limited ADTA support (9.4% of thetotal), though there was fairly large program lending to that sector. In the environment, ADB hascontributed to the formulation and improvement of environmental assessment guidelines, aswell 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 capacitybuilding, private sector development, physical and social infrastructure development,environmental protection, and human resource development. Table 4 summarizes thedistribution of lending and nonlending activities in terms of number and value of projects in eachpriority area. In line with COS objectives during the review period, lending activities focused onphysical and social infrastructure development, whereas nonlending activities were largelydirected toward institutional capacity building. Both infrastructure development and capacitybuilding had a roughly similar number of projects, but two thirds of ADBs financing was directedto infrastructure development, compared with only one eighth directed toward capacity building.

28 ADB. 1999. Fighting Poverty in Asia and the Pacific: The Poverty Reduction Strategy . Manila.29 For details, see Appendix 2.

17.4%

12.5%

24.1%

1.6%11.0%

22.4%

11.1%

Figure 2: Distribution of Assistance,

by Sector

Agriculture EnergyFinance IndustrySocial Infrastructure Transportation and

Communications MultisectorSource: Loan and technical assistance documents.


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Table 4: Compositi

bhutan - country assistance program evaluation (2005)

Documents