Document of The World Bank FOR OFFICIAL USE ONLY Report No: 70588 v1 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF THE BHUTAN PRIVATE SECTOR DEVELOPMENT PROJECT June 20, 2007 TO THE 1 KINGDOM OF BHUTAN JUNE 21, 2012 2 ABBREVIATIONS AND ACRONYMS ATM Automated Teller Machines AWP Annual Work Plans BoB Bank of Bhutan BT Bhutan DITT Department of Information Technology & Telecom DPA Department of Public Accounts EA Environmental Assessment EFTCS Electronic Fund Transfer Clearing System EIA Environmental Impact Asessment EMP Environment Management Plan FA Financing Agreement FIP Financial Inclusion Policy FRSD Financial Regulation and Supervision Department FY Fiscal Year HV High Voltage IA Implementing Agency IDA International Development Association IPO Initial Public Offering IT Information Technology IT/ITES IT/Information Technology Enabled Services M&E Monitoring and Evaluation MOF Ministry of Finance 3 MOIC Ministry of Information and Communications MOLHR Ministry of Labour and Human Resources PAD Project Appraisal Document PDO Project Development Objective PSC Program Steering Committee PSD Private Sector Development RGOB Royal Government of Bhutan RMA Royal Monetary Authority of Bhutan RSEBL Royal Securities Exchange of Bhutan Limited RUB Royal University of Bhutan TA Technical Assistance WB World Bank Vice President : Isabel M. Guerrero Country Director : Robert Saum Sector Director : Sujata Lamba Sector Manager : Ivan Rossignol Task Team Leader : Cecile Thioro Niang BHUTAN Restructuring Status: Draft Restructuring Type: CD Approval Last modified on date : 6/15/2012 4 1. Basic Information Project ID & Name P073458: BT – Bhutan Private Sector Development (PSD) Project Country Bhutan Task Team Leader Cecile Thioro Niang Sector Manager/Director Ivan Rossignol Sector Director Sujata Lamba Country Director Robert Saum Original Board Approval Date 06/20/2007 Current Closing Date 06/30/2012 Proposed Closing Date [if applicable] 06/30/2013 EA Category B- Project based Revised EA Category na EA Completion Date 25 February, 2010 Revised EA Completion Date na 2. Revised Financing Plan (US$) Source Original Revised RECIPIENT 0.00 0.0 IDA GRANT 8.00 8.0 Total 8.00 8.0 5 3. Borrower Organization Department Location Ministry of Finance Department of Public Accounts Bhutan (DPA) 4. Implementing Agency Organization Department Location Ministry of Information and Department of Information Bhutan Communications Technology & Telecom (DITT) 5. Disbursement Estimates (US$m) (both credit and grant) Actual amount disbursed as of 09/30/2010, IDAH 307-BHU: 32%[Grant] Fiscal Year Annual Cumulative 2008 0.50 0.50 2009 1.00 1.50 2010 1.50 3.00 2011 2.50 5.50 2012 2.50 8.00 Total 8.00 6 6. Policy Exceptions and Safeguard Policies Does the restructured project require any exceptions to Bank policies? No Does the scale-up of restructured projects trigger any new safeguard policies? If yes, please select No from the checklist below. 7a. Project Development Objectives/Outcomes Original/Current Project Development Objectives/Outcomes The objective of the project is to increase productive employment in Bhutan through promotion of enterprise development in the IT/ITES sector, enhanced IT skills, and improved access to finance. 7b. Revised Project Development Objectives/Outcomes [if applicable] na 7 BHUTAN PRIVATE SECTOR DEVELOPMENT (PSD) PROJECT RESTRUCTURING PAPER 1. The closing date for Bhutan, Bhutan Private SECTOR DEVELOPMENT, [Grant No H307- BHU], P073458 will be extended from June 30, 2012 until June 30, 2013, as per the Kingdom of Bhutan’s request. 2. Implementation Progress and Achievement of Project Development Objective. The Bhutan PSD Project achieved its project development objective (PDO) in March 2012. Project implementation has been satisfactory since effectiveness, except for a one time downgrade to moderately satisfactory due to a disbursement lag in June 2011, now resolved. The project has been given considerable due importance by the implementation agencies1 within their portfolio. Annex 1 presents more detail on implementation status, based on the Project’s Tenth Implementation Support Mission conducted from May 28 to June 8, 2012. Except for the undergrounding works of high voltage power lines over the IT Park under Component 1 and a financial literacy campaign under Component 3 of the Project, all activities are expected to be concluded by June 30, 2012. 3. Relevance and Achievement of Project Development Objective (PDO). The project has achieved, and in some cases, exceeded its implementation targets, which confirms a satisfactory progress towards achieving the development objectives. Progress against the June 2012 outcome indicator was reached in March 2012 and is now exceeding its final target: the number of Bhutanese graduates hired under the Project is now 778. Most Bhutanese employed with support from the Project are between 19 and 24 years old, with equal representation between young men and women from across Bhutan’s 20 districts. The cost to RGOB per job created under the Project has been estimated by the Royal Government in the range of US$900, which is highly satisfactory as per regional and global standards. Annex 1 depicts the status of all indicators of the Monitoring and Evaluation Framework against targets. 4. The proposed extension is necessary to complete the undergrounding of a high voltage transmission line in the IT Park, implemented by the Bhutan Power Corporation (BPC). Background. This activity has been under implementation since August 2011, as part of the enabling works provided by RGOB to build infrastructure for the IT Park (Component 1). During the Project’s 2010 restructuring, a fund reallocation of USD 450,000 from Component 3 to Component 1 was approved to support the undergrounding of a 1-km high voltage power transmission line above the IT Park, as part of government support to enabling infrastructure works of the Park. The power line had been identified as a hazard. In addition, rerouting was necessary as the overhead line passed at the edge of the IT building, 1 Project implementation is led by the Ministry of Information and Communications. Other implementation agencies include the Royal University of Bhutan, Ministry of Labour and Human Resources, Royal Monetary Authority and Bank of Bhutan. 8 when Bhutanese regulations do not allow any residential or commercial buildings in an 18-meter wide right of way below the lines. Options considered to reroute the transmission line included the undergrounding and the overhead line re-alignment and re-routing of the line. The undergrounding was favored as it remained on government land. Works started following the clearance by the World Bank of the amendment to the Project’s Environmental and Social Impact Assessment to include the impact of the transmission line. Reasons for Delay. BPC committed to complete the undergrounding by end May 2012 but, due to technical issues and coordination challenges, works have been delayed. These have included:  Technical issues. The undergrounding of the 66kV high voltage power line is the first undergrounding undertaken by BPC. As implementation progressed, BPC was challenged by technical complexities including meeting additional safety and safeguard measures as per international norms.  Coordination issues. An unforeseen landslide occurred in early 2012 along a portion of the cable trenching works being undertaken by BPC between towers CT188-CT190 in Babesa, due to a site excavation work being undertaken by a private individual for construction of his building beside the cable trenching right of way. Thimphu Thromde had issued clearance for the cable trenching work as well as the private building construction. A meeting was held on Jan 18, 2012, to resolve this issue. It was agreed that a retaining wall would be constructed along the affected area. BPC highlighted the impacts of the incident on the overall work progress and implementation timelines. In addition, the implementation of this activity faced challenges arising from parallel road expansion works including a series of retaining walls that needed to be constructed along certain segments of the cable trenching right of way (road expansion along with retaining walls were financed with RGOB funding). While a number of deliverables have been completed, completion of the remaining works is not expected before end November 2012. Annex 3 presents the revised implementation schedule for the works. 9 Annex 1: Project Status The Bhutan PSD Project achieved its project development objective (PDO) in March 2012. It is currently rated as Satisfactory in terms of both progress toward the Project Development Objective and Implementation Progress. The Project’s Tenth Implementation Support Mission conducted from May 28 to June 8, 2012 concluded the following: Project Performance. The project has been under implementation for almost five years and is scheduled to close on June 30, 2012. Project implementation has been satisfactory since effectiveness, except for a one time downgrade to moderately satisfactory due to a disbursement lag in June 2011, now resolved. The project has been given considerable due importance by the implementation agencies2 within their portfolio. Relevance and Achievement of Project Development Objective (PDO). The project has achieved, and in some cases, exceeded its implementation targets, which confirms a satisfactory progress towards achieving the development objectives. Progress against the June 2012 outcome indicator was reached in March 2012 and is now exceeding its final target: the number of Bhutanese graduates hired under the Project is now 778. Most Bhutanese employed with support from the Project are between 19 and 24 years old, with equal representation between young men and women from across Bhutan’s 20 districts. The cost to RGOB per job created under the Project has been estimated by the Royal Government in the range of US$900, which is highly satisfactory as per regional and global standards. Annex 2 depicts the status of all indicators of the Monitoring and Evaluation Framework against targets. Relevance of Project Design. The institutional and implementation arrangements; social and environment safeguards arrangements, M&E and reporting; funds flow and; disbursement methods are all relevant and do not require any changes. Grant Covenants. The project is in compliance with all grant covenants included in the Financing Agreement. Progress of implementation and Achievement of Outputs Indicators. Except for the undergrounding works of high voltage power lines over the IT Park under Component 1 and a financial literacy campaign under Component 3 of the Project, all activities are expected to be concluded by June 30, 2012. 2 Project implementation is led by the Ministry of Information and Communications. Other implementation agencies include the Royal University of Bhutan, Ministry of Labour and Human Resources, Royal Monetary Authority and Bank of Bhutan. 10 Component 1. Development of IT/ITES Sector ($5.30m). The disbursement rate for this component at the implementation agency’s level was 92%, as of June 7, 2012. The IT Park was inaugurated on November 1, 2011. While Progress on Component 1 activities has been satisfactory, the overall progress of Component 1 has been rated by the task team as moderately satisfactory, since no tenancy agreements have been signed to date in the IT Park. Progress on the implementation of the Bhutan Innovation and Technology Center (BITC) is satisfactory with the signing up of 9 incubatees (and 7 already set up) and progress on the Data center. The Data centre is ready to commence operations with their initial clientele including the DRC business of BoB. Progress on IT Park construction is satisfactory but some internal finishes, roof level mechanical equipment and external works including the landscaping remain to be completed. Commercial tenancy negotiations with a major international tenant have taken place. However, formal tenancy contract signing is subject to the company securing a BPO contract in the TechPark, in the context of worldwide pressure on BPO activities due to the global economic slowdownThis includes a Government contribution for the IT Park of US$2 million paid in Oct. 2011 to Thimphu TechPark Ltd (TTPL)3, the Park Developer for the 10,000 sq ft of leased space, allocated for the BITC. As of June 1, 2012, RGOB has also paid a further US$950,000 to TTPL towards the initial set up cost, management of the BITC ($100,000) and the seed fund for the BITC incubator ($100,000). Progress against output indicators under Component 1 is as follows:  Cumulative leads generated for new investments in the IT Park - progress as of 31 May 2012: 201, equivalent to the 200 June 2012 target (see Annex II).  Number of companies incubated in the IT Park is 7, above the contractual target of 5. This was achieved by May 2012 with the launch of BITC operations on May 7, 2012. MOUs have been signed with 9 potential incubatee companies. (see Annex II).  Percentage of lettable commercial space leased out again will remain at zero, while two international companies (Wipro, NIIT) and a local company (Green Dragon Media) are in discussion with TTPL on space commitments and tenancy agreements. Component 2. Development of an IT Skills Program (US$2.00m). The progress of Component 2 is satisfactory. The Component’s disbursement at the implementation agency’s level stood at 78% as of June 7, 2012. As of early June 2012, the Component had trained 1030 secondary education (Class XII) graduates and college graduates and employment of 778 candidates - 389 male and 389 female – in global ITES companies4 and in various sectors of the Bhutanese economy. The Ministry of Labour and Human Resources (MOLHR) has launched several skills development programs: i) a graduate training program (GTP) aimed at incentivizing local training firms selected competitively to train tertiary graduates, and ii) an employment training program (ETP) aimed at supporting in-house training and employment of class XII students. In both programs, firms are responsible for mobilizing candidates and 3 TTPL is a joint venture between Assetz Property Group, a global economic zone developer located in Singapore, and Druk Holding and Investments, the national holding company managing 16 of the 20 state-owned enterprises in Bhutan. 4 These include Infosys, Genpact and Wipro. 11 required to employ at least 50% of the trained individuals, while being provided a larger matching grant for higher employment rates. The private sector-led skills development programs have been highly successful, both in terms of percentage of trainees employed (74%) and cost per job created. In the case of linkages with global IT/ITES companies, Project funds were leveraged to raise additional investments by leading private sector companies covering tuition and accommodation of the trainees. Additional activities under Component 2 implemented by the Royal University of Bhutan include the introduction of new curriculum developed with feedback from the industry. These include (i) an analytical skills, (ii) language enhancement course and (iii) entrepreneurship development course. The Project also supported the launch of a Virtual Learning Environment across RUB colleges. Progress against output indicators under Component 2 is as follows:  Per cent of students clearing ITES industry competency assessment that is widely recognized (Progress as of May 31, 2012: 55% against a target of 35% by June 2012)  Per cent of students trained successfully employed by private sector (Status: 78% against a target of 50% by June 2012). 200 191 50 46 39 41 150 40 30 25 100 36 20 14 50 20 10 8 7 8 16 5 10 5 3 3 0 0 Employment sector wise: ETP Employment sector wise: GTP 12 Wangdiphodrang 13 Wangdue phodrang 10 Tsirang 30 Tsirang 22 Trongsa 18 Trongsa 13 Thimphu 13 Thimphu 28 Trashigang 53 Trashigang 24 Tashi Yangtse 21 Tashi Yangtse 7 Zhemgang 22 Zhemgang 9 Sarpang 30 Sarpang 30 Samtse 32 Samtse 23 Samdrup Jongkhar 27 Samdrup Jongkhar 10 Punakha 19 Punakha 10 Pema Gatshel 36 Pema Gatshel 18 Paro 21 Paro 20 Mongar 34 Mongar 18 Lhuntse 20 Lhuntse 13 Haa 4 Haa 1 Gelephu 3 Gasa 2 Gasa 0 Dagana 24 Dagana 12 Chhukha 20 Chhukha 8 Bumthang 11 Bumthang 6 0 20 40 60 0 10 20 30 40 ETP: Student representation by Districts GTP: Student representation by Districts Component 3. Strengthening the Financial Sector through IT Use (US$.7m). The overall disbursement rate of this component was 95% at the implementation agency’s level as of June 7, 2012. Progress on this component has been satisfactory, though one activity – the last part of the financial literacy campaign - is at high risk of non completion by the end of June 2012. The Component was restructured in December 2010, to reflect evolving priorities within the Royal Government and include financial inclusion in the Project’s scope. The IT system upgrade in the Bank of Bhutan (BoB) has been highly satisfactory and the sub-component has been fully disbursed since 2011. BoB’s procedures are modernized and positioned BoB to benefit from the inter-bank Electronic Fund Transfer and Clearing System (EFTCS). Other activities implemented by RMA under this component include: financial inclusion, financial literacy and the IT upgradation of the Royal Securities Exchange of Bhutan Limited (RSEBL). RSEBL’s new IT System was launched on April 23, 2012. The final draft of the Financial Inclusion Policy (FIP) is ready and under screening by GNHC and the Cabinet for endorsement and implementation. Several regulations were also drafted in order to create an enabling regulatory and supervisory framework for MFIs and branchless banking. Finally, several programs were launched under the Financial Literacy Program (FLP), including mass media communications. However, one activity under implementation - the broadcast of TV soap operas and reality shows - may face a delay, and may not be completed by end-June 2012, mainly due to implementation issues. The activity has been procured but 13 the drafting of the script for the media programs took longer than expected. Progress against output indicators is as follows: 1. Percentage of district coverage for financial literacy campaign (Progress: 100%, meeting the June 2012 target) 2. Percentage automation of stock exchange trading, settlement, and delivery with straight through processing (Progress: 100%, against a June 2012 target of 100%) 3. Number of financial transactions by using ATMs at BOB per year (Progress: 1.1m as of December 2011, against a June 2012 target of 900,000) Compliance with Environmental and Social Safeguards. This is a category B project due to the triggering of the Environmental Assessment OP/BP/GP 4.01. The Environmental Assessment (EA) and Environmental Management Plan (EMP) were completed and disclosed to the public by the Royal Government of Bhutan (RGOB) on February 25, 2010. The Project’s safeguards category remains B under the proposed closing date extension. Construction of the 1 kilometer underground electric power transmission line under Component 1 (see Section C) is not expected to cause any significant environmental and/or social impacts. Before work on the under-grounding of the HV transmission lines commenced, a baseline environmental impact assessment (EIA) along with public consultations was carried out, and an Environmental Management Plan (EMP) was prepared. The EIA/EMP was cleared by the National Environment Commission in June 2011 and by the World Bank in November 2011. Implementation of the EMP for the underground transmission lines would be monitored during construction. Any adverse impacts identified during construction would be mitigated in accordance with Bank’s environment and social safeguard policies. Disbursement and Financial Management. Financial management performance of the Project has been Satisfactory. Against the original grant allocation of SDR 5.3 million (equivalent of USD 8million), IDA disbursements as of 4-Jun-2012 stand at SDR 4.948 million (equivalent to USD 7.75 million), reflecting approximately 93.38% disbursement. Excluding the DA advance, the disbursement percentage is currently approximately 91%5. The audit report of the Royal Audit Authority (RAA) included an observation with regard to the open advances of Nu. 65.725. Substantial part of these advances related to undergrounding works for the HV transmission lines over the IT Park, most of which were adjusted in early June 2012. Procurement. The Project’s procurement rating has been satisfactory. There is no procurement pending under the existing activities. 5 Percentage calculated on the basis of expenditure recoded in the books of the accounts of the project. Will reflect in the client connection once the IUFR for the quarter ending June 2012 is recorded by the Loan Department. 14 Annex 2: Arrangements for Results Monitoring [Achieved]/Target Values Data Collection and Reporting Project Outcome Indicators Baseline YR1 YR2 YR3 YR4 YR5 Frequency Data Collection Responsibility for Data and Reports Instruments Collection Cumulative job creation in the 0 0 0 175 [269]/350 [778]/700 Annual MIS reports of PIA PIA IT/ITES sector in the IT Park or related activities Output Indicators Component 1 - Development of the IT/ITES Sector 1. Cumulative leads generated 0 25 50 100 [140]/150 [201]/200 Annual MIS reports of PIA PIA for new investments in the IT Park 2. Number of companies 0 0 0 0 [0]/5 [7]/5 Annual MIS reports of PIA PIA incubated in the IT Park 3. Percentage of lettable space 0 0 0 25% [0%]/50% [0]/50% Annual MIS reports of PIA PIA leased out Component 2 - Development of IT Skills Program 1. Per cent of students clearing 0 10% 20% 25% [61%]/35 [55.5%]/3 Annual NAC results RUB ITES industry competency % 5% assessment that is widely recognized 2. Per cent of students trained 0 <5% 10% 25% [78%]/40 [74.8%]/5 Annual Trace study RUB are successfully employed by % 0% the private sector. Component 2 - Strengthening Financial Sector through IT Use 15 1. Number of financial 40,000 42,000 44,000 467,430/4 [871,247]/ [1,100,00 Annual Report sent to RMA RMA transactions at BOB by using 6,000 600,000 0]/900,00 statements by commercial banks ATMs per year 0 provided by RMA 2. % of district coverage for 0% - - - Annual Report sent to RMA RMA financial literacy campaign [30%]/50 [100%]/10 statements by commercial banks % 0% provided by RMA 3. % automation of stock 25% - - - [25%]/75 [100%]/10 Annual RMA internal report RMA exchange trading, settlement, % 0% statements on the payment and delivery with straight provided by system through processing. RMA 16 Annex 3: Construction Schedule of Undergrounding of HV Power Transmission Line Construction milestones Initial Initial Revised Deposit Work Expenditure Completed Start Completion Completion Advance (Nu) Till Date (Nu) Y/N Dates Dates Dates Cable trenching civil and associated 1-Aug-11 31-Mar-12 30-Sep-12 N (ongoing) works (1.015km) Laying of HV lines along the cable trench and associated works 1-Apr-12 15-May-12 15-Nov-12 N (1.015km) 27,115,735.39 16,408,257.56 Construction of retaining wall along a segment of the cable trenching route 7-Feb-12 31-Mar-12 30-Sep-12 N (approx 30 m) 16-May- Testing and commissioning 31-May-12 30-Nov-12 N 12 17