Bringing the Private Sector back on tracks

Representatives of the sector call for restructuring SDF, lower lending rates and others

While the private sector, severely affected by the COVID 19 pandemic reels under pressures like high interest rates for borrowing, changes in policy and a real dearth of skilled work force, there are still opportunities that the private sector can take to boost innovation and change. This was discussed during an online panel discussion last week amongst representatives of Bhutan’s private sector, in a forum organized by Friedrich Naumann Foundation for Freedom South Asia.

Underlining the recent change in Bhutan’s Tourism policy, whereby, the sustainable development fee (SDF) has been increased by USD 65 to USD 200 per tourist, per day, one of the participant’s of the forum, Chencho Tshering, Managing Director (MD) of Wangchuk Group of Companies Ltd said that though she supports sustainable development in tourism, there are serious issues requiring focus. She added that it is time for policy makers and stakeholders of the industry to clearly study and understand the cost at which Bhutan is pursuing and practicing sustainable tourism policy.

Chencho, who has more than two decades of experience in the services industry- as a tour operator and hotelier – said the hospitality industry is bearing “a heavy load of the policy change”. She underscored that the hotel industry’s occupancy average is very low. It has decreased to 40 to 50 percent juxtaposed to the 60 to 65 percent occupancy that is required for a healthy hotel industry. She said that with the change in the tourism policy as of September 2022, and the increase in the SDF, “the number of tourists have drastically reduced.”

She informed that as per records with the Tourism Council of Bhutan’s (TCB, now the Department of Tourism) Tourism Monitor, in October 2022, only 12 percent of tourists arrived as compared to 2019. In 2019, in total, 315,600 tourists visited the country.

Referring to the Department of Tourism’s census of 2021, she said that there are 1.2 million rooms available in the market and that if the current scenario is considered, only about 37,000 tourists would arrive in 2024. “This does not sound good,” Chencho remarked, adding that if the 37,000 tourists on an average spends one week (seven nights), the average occupancy would be only 23 percent. She further highlighted that the calculation has been done for the peak season of October. “We have to keep in mind that this has been calculated for the peak season arrival of this October; if you average out the low seasons and high seasons this is going to drop further,” she added. The low average occupancy rate is caused mainly because of the less number of tourists that come, compared to the number of hotels that exist. A solution for this could be managing the supply or availability of rooms based on industry averages.  

Speaking about solutions to these challenges, she called for a solution to increase the number of tourist arrivals by restructuring the SDF.

Underlining that hoteliers are faced by huge financial challenges firstly in the construction phase and then the operating costs, she pointed out that the costs of borrowing are very high. She informed that most hotels in Bhutan are heavily debt-financed with more than Nu 13 billion in debts accounted for the hotel industry alone.

She mentioned that hotels in Bhutan today would not be standing if not for the generous support received from His Majesty the King. “All these hotels would not be standing and if not for the generous support received from His Majesty the King by way of interest waivers and salaries for our workforce. We are ever grateful,” she said.

The government and banks have collectively given the hospitality sector a two-year deferment period for their loans. However, in a rhetoric question Chencho said, “The big question to ask is, is this deferment enough to save our industry?” Instead, she said that reducing the lending rates could be a long-term solution to the issue that exists. Another suggestion to help hotels that do not meet the criteria for services to tourists was low-interest grants, which would help “transition of these hotels from one business to another.”

Moving on to the Manufacturing Industry, Joint MD of RSA Pvt Limited, Singye Namgyal said that despite the importance of the sector, its share has remained stagnant for about 25 years, coupled by a declining export-to-GDP ratio. Speaking about the potentials of the Manufacturing Sector, Singye Namgyal said that it can generate immense employment within a short span of time and lift productivity. The role of the sector in sustaining economic growth was elaborated. Drawing an analogy, he said that empirical studies reveal that almost no country, except Arabic nations have achieved the status of high-income, without the manufacturing sector accounting for at least 18 percent of the GDP.

Moving to hydropower manufacturing linkages, he said that it has determined the success and position of the sector. “Currently, our competitiveness is based largely on the availability of cheap energy, which is about two or three cents per kilowatt hour. This is the lowest in the world,” he added.

 Further, he maintained that in the future or the longer term, Bhutan’s competitiveness much depend on human capital. He surmised that as manufacturing is a capital intensive sector, it would be logical to pursue and promote large scale units.

Drawing attention to the 18 percent share that manufacturing units need to attain, he said that if the share of manufacturing to GDP is to increase to 18percent, “productivity will also require a quantum leap.” “And this will require investments in more productive capital and therefore a more credible and dynamic credit regime,” he said.

Similarly, Chief Executive Officer (CEO) of the Cottage and Small Industries (CSI), Sonam Chophel spoke about the daunting challenges faced by the CSIs. He attributed to the low scale of economics, supply chain challenges, competition from imported goods, excessive imports and low adoption of technology as factors impeding the sector.

He underlined that as most businesses in Bhutan relied on imported materials, it created unfavorable balance of trade in the country and ultimately a surge in the number of those unemployed, which is making young Bhutanese look for opportunities abroad.

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Reinhard Wolf, President of the German-Bhutan Himalaya Society, who was a guest speaker commented that Bhutan cannot compete with India and other countries in mass production. Having worked in the Renewable Natural Resources (RNR) sector of Bhutan for five years, he said, “Therefore, the slogan ‘low volume, high value,’ which was used for the tourism sector can also be applied to other sectors. He suggested that Bhutan could use its low-price energy as a competitive advantage when considering revival of the private sector. He also said that Bhutan could establish energy intensive industries.

According to him, Bhutan needs diversification and innovation and not probably more of the same. “This may also be true for agriculture which employs a considerable part of the work-force,” he added.

Meanwhile, Chencho Tshering said that the only solution is to increase the number of guests to Bhutan, through restructuring of the SDF. She reiterated that reducing the lending rates for the industry is a long-term solution and added that policy interventions to increase the wages the national minimum wage could be a solution to the shortage of skills in Bhutan.

She called for innovation in the way products are developed, priced and marketed in the world.

Speaking about the Manufacturing Industry’s current constrains, Singye Namgyal spoke about the lack of a robust value chain, access to convertible currency for procuring raw materials from outside, high costs for logistics and lack of skilled human resources. His proposals comprised easy access to convertible currency for importing raw materials required, extending income-tax holidays to industries that export to India, projecting electricity tariff for a longer duration and permitting banks to implement cash-flow based financing for projects.

CEO, CSI said that several activities and initiatives are occurring in the CSI Sector and that the government places high priority on it. “We need some strategic reforms in regulations which sometimes may challenge the very economic, political and social status quo but doing is essential to unlock our full potential of the private sector,” he added.

He further mentioned that these measures would open new market opportunities, while encouraging young people to look for opportunities. Other recommendations included better framework to improve the ease of doing business, skilling workers, promoting international trade and removing non-tariff barriers. 

Ugyen Tenzin from Thimphu