Page 1 1 Document of The World Bank FOR OFFICIAL USE ONLY Report No: 58427-BT RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF THE BHUTAN PRIVATE SECTOR DEVELOPMENT PROJECT June 20, 2007 TO THE KINGDOM OF BHUTAN DECEMBER 21, 2010 Page 2 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 EFT Electronic Fund Transfer EFTCS Electronic Fund Transfer Clearing System EMP Environment Management Plan FA Financing Agreement FIP FRSD Financial Inclusion Policy 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 MOIC MOLHR Ministry of Information and Communications Ministry of Labour and Human Resources MTR Midterm Review PAD Project Appraisal Document PDO PSC Project Development Objective Program Steering Committee PSD Private Sector Development RGOB Royal Government of Bhutan RMA Royal Monetary Authority of Bhutan RSEBL RUB Royal Securities Exchange of Bhutan Limited Royal University of Bhutan TA Technical Assistance WB World Bank Vice President : Isabel M. Guerrero Country Director : Nicholas Krafft Sector Director : Ernesto May Sector Manager : Ivan Rossignol Task Team Leader : Cecile Thioro Niang Page 3 3 BHUTAN Private Sector Development Project Contents A.   Summary...........................................................................................................................6   B.   Project Status....................................................................................................................6   C.   Proposed Changes ............................................................................................................7   D.   Appraisal summary.........................................................................................................11   Annex 1: Arrangements for Results Monitoring...........................................................................12   Page 4 4 Restructuring Status: Draft Restructuring Type: CD Approval Last modified on date : 12/21/2010 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 Ernesto May Country Director Nicholas Krafft Original Board Approval Date 06/20/2007 Current Closing Date 06/30/2012 Proposed Closing Date [if applicable] na 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$) Source Original Revised RECIPIENT 0.00 0.0 IDA GRANT 8.00 8.0 Total 8.00 8.0 3. Borrower Organization Department Location Ministry of Finance Department of Public Accounts (DPA) Bhutan 4. Implementing Agency Organization Department Location Ministry of Information and Communications Department of Information Technology & Telecom (DITT) Bhutan Page 5 5 5. Disbursement Estimates (US$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. 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 from the checklist below. No 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 Page 6 6 BHUTAN PRIVATE SECTOR DEVELOPMENT (PSD) PROJECT RESTRUCTURING PAPER A. Summary The proposed restructuring reflects the Kingdom of Bhutan’s request to revise the scope of the financial sector component (Component 3: Strengthening the Financial Sector through IT use) and reallocate some of Component 3’s funds to Component 1 (Development of the IT/ITES Sector), while leaving the overall Grant Allocation unchanged (see Annex 1). Project Development Objectives, disbursement, financial management and procurement arrangements, safeguards, the closing date and implementation schedule remain unchanged. B. Project Status The Bhutan PSD Project is making progress towards achieving the project development objective (PDO). It is currently rated as Satisfactory in terms of both progress toward the Project Development Objective and Implementation Progress. A Midterm Review (MTR) mission conducted in October-November 2010 and Interim Status Report approved in November 2010 concluded the following: Project Performance. The project has completed about three years of implementation, and is scheduled to be closed on June 30, 2012. Project implementation has been satisfactory since effectiveness. The project has been given considerable due importance by the Ministries and institutions in charge of its implementation. Relevance and Achievement of Project Development Objective (PDO). TheMTR assessment was that the PDO, “number of jobs created in the IT/ITES sector”, continues to be relevant and achievable. The project has achieved, and in some cases, exceeded its mid-term review targets, which confirms a satisfactory progress towards achieving the development objectives. Progress against the outcome indicator is slightly under the initial target: 133 Bhutanese graduates had been hired through the project as of the Midterm Review (MTR), against an initial target of 175 at the end of the third year of implementation. The MTR however projected that the targets of 350 jobs and 700 jobs by the end of the fourth and fifth year of implementation would be attained. Relevance of Project Design. As per the MTR assessment, 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. The design of the component 3 led to an anticipated slow disbursement curve, while effective commitments under the project show a good implementation progress. The proposed level-two restructuring is required due to the reallocation of project funds between components and the revised scope of the financial sector development component as explained in Section C. Page 7 7 Implementation of Component 2, Development of IT Skills Development Program. While the Royal University of Bhutan (RUB) remains the implementation agency of Component 2, the component is now jointly implemented by RUB and the Ministry of Labour and Human Resources (MOLHR). Since training of the out of school and college youth certificate programs is within the mandate of the MOLHR, and to avoid duplication of resources and effort, RUB and MOLHR signed a Memorandum of Understanding in October 2009, establishing that the generic skills development of Component 2 would be implemented by the MOLHR. Fiduciary arrangements of the project have remained unchanged and are routed through the RUB, therefore this project remains implemented by RUB from a fiduciary perspective. Grant Covenants. The project is in compliance with all grant covenants included in the Financing Agreement. 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 25 February, 2010. The Project’s safeguards category remains B under the proposed changes. New enabling works due to the inclusion of the undergrounding of a high voltage transmission line above the IT Park, under Component 1 (see Section C), are not expected to cause environmental or social impacts and are expected to be below ground and along existing rights of way. Before work on the under-grounding of the HV transmission lines commences, a baseline environmental and social assessment, consultations with IT Park neighbors and development of a suitable Environmental and Social Management Plan will be conducted. C. Proposed Changes · Project Components Component 1 and 3, Strengthening the Financial Sector through IT Use, would be revised as described below. Component 2 remains unchanged. Annex 2 displays the proposed revised costs by components and activities. 1. Component 1. Development of IT/ITES Sector ($5.30m). The scope of Component 1 remains unchanged. A reallocation of $300,000 from Component 3 to Component 1 has been requested. The reallocation would contribute to funding the $450,000 undergrounding of a high voltage transmission line over the IT Park has been requested. The difference in funds will be matched within Component 1. No safeguards are being triggered by the funding of the undergrounding. 2. Component 2. Development of an IT Skills Program ($2.00m). Unchanged 3. Component 3. Strengthening the Financial Sector through IT Use ($.7m and $3.11m in counterpart funds). The modernization of BoB through an IT system program (Component 3a) remains unchanged and is nearing completion. The TA to develop a Financial sector IT development strategic plan (Component 3b) is completed. The establishment of an inter-bank electronic fund transfer clearing system (EFTCS - Component 3c) is being implemented separately from the project after bilateral assistance from the Reserve Bank of India was secured earlier this year. As such, Component 3c would be replaced with two new sub-components, described below. The Ministry of Finance has formally requested the re-allocation of USD Page 8 8 500,000 of available Component 3 funds initially allocated to the EFTCS to the following priority activities. RMA’s counterpart funding of $450,000 remains unchanged. New Component 3c. Upgradation of the IT infrastructure of the Royal Security Exchange of Bhutan (estimated cost: USD 253,000) The estimated project completion date for upgrading the IT infrastructure of the Royal Security Exchange is 30 th June 2012, within the project implementation period. Recent Initial Public Offerings (IPOs) have resulted in a large increase in the number of shareholders, from 17,654 in 2009 to 41,734 as of September 2010. This number is likely to increase as the new banking licenses are requiring banks to divest up to 30% of their assets. There are serious process and internal control weaknesses in RSEBL’s current systems. The technology investment for capital market development to manage risk is linked to the third area of the PDO, namely “strengthening the financial sector through the deployment of technology”. New Component 3d. Financial inclusion (estimated cost: USD 247,000). RMA has requested support from the project in (i) assisting in the establishment and drafting of the Financial Inclusion Policy (FIP); (ii) creating an enabling regulatory and supervisory framework for MFIs and branchless banking; (iii) organizing an outreach mission in selected neighboring countries to meet with regulators and practitioners; (iv) promoting financial literacy throughout the country through workshops, education, and the media; and (v) providing training to RMA supervisors and other stakeholders on microfinance and financial inclusion. The estimated cost of these activities is USD 247,000. The planned activities directly support improved access to finance as per the Project Development Objective. Completion date of all activities is within the project implementation period. · Results Monitoring Arrangements Outcome Indicator . The MTR concluded that the Project has generated jobs across sectors. It is therefore proposed to modify the scope of the outcome indicator to include the cumulative job creation in the IT/ITES sector, as initially planned, as well as jobs created in other sectors directly as a result of training supported through the Project. The Project Outcome indicator “Cumulative job creation in the IT/ITES Sector in the IT Park” would now read “Cumulative job creation in the IT/ITES Sector in the IT Park and related activities ”. The target values would remain unchanged. Output indicators. 1. Component 1 Output indicators. Indicators and targets remain unchanged. 2. Component 2 Output indicators. Indicators and targets remain unchanged. 3. Component 3 Output indicators. Component 3 output indicators would be revised to account for the new scope of the financial sector component. Component 3a’s output indicator “Number of financial transactions by using ATMs per year” would now focus on Bank of Bhutan’s transactions only and now read “Number of financial transactions by using ATMs at BoB per year”. The following two other indicators would be removed, since the implementation of a national payment systems is now conducted outside the Project: · Value of financial transactions by using ATMs per year Page 9 9 · Volume of fund transfer transactions among banks channeled through the EFT system per year They would be replaced with the following output indicators, for which baselines were established during the October 2010 Mid-term Review (see Annex 3): · Percentage of district coverage for financial literacy campaign · Percentage automation of stock exchange trading, settlement, and delivery with straight through processing Key Performance Indicators. Key performance indicators would be modified accordingly. “Volume of fund transfer transactions among banks channeled through the EFT system per year” would be removed, while “Number of financial transactions by using ATMs per year” would focus on BoB transactions. · Increased job creation in the IT/ITES sector supported by the project; · Number of companies successfully incubated in the IT Park; · Percent of students trained are successfully employed by the private sector; · Number of financial transactions by using ATMs at BoB per year · Institutional Arrangements Project Covenants. Due to changes in the scope of the financial sector component, it is proposed that the operation of the Financial Sector IT Task Force and IT Technical Working Group are removed as a covenant under the Financing Agreement. While these two committees have been active, the Mission and RGOB agreed that the implementation of revised project activities does not warrant their inclusion as covenant. In addition, it is proposed to remove the covenant requiring that the Task Force on IT Skills Development is maintained at all times of implementation. It is preferable to merge this Task Force – currently active - under the Program Steering Committee, since the members of this Task Force are also members of the PSC. While no changes in institutional structure are proposed, the composition of Project Implementation staff of the RMA has changed (See Annex 4). RMA is the Implementation Agency for Component 3 since it has primary responsibility for ensuring the development of a sound financial system. The staffing of the RMA Implementation team has been revised to reflect the change in the component’s scope. The team consists of eight RMA staff: a Project Director (Director Financial Regulation and Supervision Department, (FRSD)), the former Project Director of the previous RMA sub-component ; a Project Manager (FRSD); two IT technical staff, one procurement officer, one finance officer, one Project Coordinator and one project secretary. The team will be responsible for overall project implementation and coordination with related organizations with regard to the RSEBL and financial inclusion sub- components, under the project PIA. The newly appointed Project Director, RMA’s Director of Financial Regulation and Supervision Department was the initial Project Director at Project effectiveness until a new team was appointed in June 2009. Private-public stakeholder committees and working groups 1 have been established to guide overall policy formulation and 1 Financial Inclusion Executive Committee and Working Group and the Capital Market Working Group. Page 10 10 implementation of the FIP and capital market IT projects, and RMA will work closely with these committees. · Financing and reallocation Counterpart funding. Counterpart funding has increased from an initial amount of USD 2.43m to USD 4.78m, as a result of an increased investment from the Bank of Bhutan on the implementation of their Core Banking Solution (Component 3a). Project Costs Project Cost By Component and/or Activity Initial IDA US $000 Initial Counter Part funds US $000 Initia l Total US $000 Revise d MTR IDA US $000 Revised MTR Counter Part funds Revise d MTR Total US $000 A. Development of the IT/ITES Sector – From $5,000,000 IDA to $5,300,000 IDA (i) IT Park Ancillary infrastructure 670 0 670 970 0 970 Rental for space 2000 0 2000 2000 0 2000 Shared technology center 700 0 700 400 0 400 Data Center 300 0 300 300 0 300 Incubation center 330 0 330 330 0 330 (ii) IT Promotion IT Promotion and Project administration 1000 0 1000 1300 0 1300 Sub total 5000 0 5000 5300 0 5300 B. Development of the Skills Development Program - Unchanged (i) General preparatory work including Technical Assistance (TA), M&E and Advocacy 50 0 50 84 0 84 (ii) Generic skills Skills Training o Graduate Training Program o Employment Training Program o Train the Trainer Program o Ad-hoc Training o Skills Integration program o Faculty training o Curriculum development o Industry Linkages 980 0 980 1112 0 1112 (iii) IT skills Videoconferencing 200 0 200 294 0 294 RUB VLE/CMS o System Study o Design & Implementation& Training o Purchase of VLE Servers & UPS 125 0 125 373 0 373 Page 11 11 (i) IT Entrepreneurship Development Faculty & Entrepreneur training 645 0 645 137 0 137 Sub total 2000 0 2000 2000 0 2000 C. Strengthening Financial development through IT use – From $1,000,000 IDA to $700,000 IDA (i) Modernization of Bank of Bhutan through IT system upgrade 200 1800 (BoB) 2000 200 4171 4371 Bilateral TA and capacity building program for IT system upgrade in the BOB 0 80(40- IFC & 40-BoB) 80 0 80(40- IFC & 40-BoB) 80 (ii)Developing ‘Financial sector IT development strategic plan’ 50 100 (IFC/SE DF) 150 0 75 (IFC/ SEDF) 75 (iii)Establishing an Inter-bank Electronic Fund Transfer Clearing System 750 450 (RMA) 1200 0 0 0 (iv) Developing ‘Financial sector IT development at Stock Exchange’ 250 450 (RMA) 700 (v) Financial Inclusion 250 0 250 Subtotal 1000 2430 3430 700 4776 5476 Original Revised Total Project Costs(Original) 10,430 12,776 O IFC SEDF    C RMA    C BOB    T S Note: Currency Exchange Rate:1USD=Nu.44.45 as of November 3, 2010 D. Appraisal summary There are no changes to the appraisal summary as a consequence of this restructuring. Page 12 1 2 A n n e x 1 : A r r a n g e m e n t s f o r R e s u l t s M o n i t o r i n g B H U T A N : P r i v a t e S e c t o r D e v e l o p m e n t P r o j e c t P r o p o s e d C h a n g e s a r e h i g h l i g h t e d . A r r a n g e m e n t s f o r r e s u l t s m o n i t o r i n g T a r g e t V a l u e s D a t a C o l l e c t i o n a n d R e p o r t i n g P r o j e c t O u t c o m e I n d i c a t o r s B a s e l i n e Y R 1 Y R 2 Y R 3 Y R 4 Y R 5 F r e q u e n c y a n d R e p o r t s D a t a C o l l e c t i o n I n s t r u m e n t s R e s p o n s i b i l i t y f o r D a t a C o l l e c t i o n C u m u l a t i v e j o b c r e a t i o n i n t h e I T / I T E S s e c t o r i n t h e I T P a r k o r r e l a t e d a c t i v i t i e s 0 0 0 1 7 5 3 5 0 7 0 0 A n n u a l M I S r e p o r t s o f P I A P I A O u t p u t I n d i c a t o r s C o m p o n e n t 1 - D e v e l o p m e n t o f t h e I T / I T E S S e c t o r 1 . 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