Private sector beset with challenges

Development of private sector has been constrained by factors such as skills shortage, small size of the domestic market along with limited access to foreign markets, and lack of competition. Access to finance is also one of the repeated challenges voiced by the private sector.

 A World Bank report ‘Bhutan development report; a path to inclusive and sustainable development; macroeconomics, trade, and investment global practice’ states that skills shortages are caused by low levels of education across the population, uneven recruitment of skilled workers into the public sector, and immigration restrictions on the employment of foreign workers.

It also highlighted on the country not being an attractive destination as a manufacturing or services hub due to logistical challenges in accessing external markets (including India), poor internet connectivity, and an appreciated exchange rate.

In addition, the existence of large State owned Enterprises (SOEs) in commercial sectors with preferential access to policy makers distorts the market.

The Opposition Leader (OL), DrPemaJamtsho (PhD) during the opposition’s first press conference held on Thursday said that during the previous tenure, the opposition had clearly stated that initiation of SOEs would be wasteful expenditure and that these SOEs would hamper the country’s economy; however the then government continued with it. “The SOEs have actually hindered the economy significantly as per the interim government’s report.”

In addition, the OL said that what private sectors are doing should not have to be duplicated by the government. “Establishment of SOEs is a liability to the present government,” said the OL. 

   In addition, the report spotted that state dominance of the economy has led to a lack of competition. Currently, the SOEs operate in commercial sectors such as manufacturing, energy, natural resources, financial, communication, aviation, trading, and real estate sectors. The strong linkages that exist between policy makers and managers of SOEs may discourage private investment. The large size of some SOEs and the extent to which affiliates of such enterprises enjoy access to policy makers potentially discourages private investments and thereby limits competition.

The World Bank report states the example of the mandated role of DHI in providing feedback to the Ministry of Finance creating a de jure conflict of interest that may discourage private investment.

Bhutan’s long-term planning document, Bhutan 2020: A Vision for Peace, Prosperity and Happiness—emphasizes the importance of private sector development while in recent years, key reforms such as the new licensing policy approved by the Cabinet, digitization efforts to simplify the process of registering properties and ongoing revisions of FDI rules and regulations have improved the regulatory environment governing business entry and operations.

Meanwhile, dependence on state-led hydropower and Bhutan’s unique geography has resulted in a weak private sector. Bhutan’s history of isolation born of the country’s geography and topography has also inhibited the incorporation of local producers into global value chains and resulted in minimal flows of non-hydro foreign direct investment (FDI). “Net FDI inflows to Bhutan fluctuated because of the large size of the hydro projects compared with the economy,” added the report.

However, the government has also implemented reforms in several areas to improve access to finance, especially for cottage and small industries (CSIs). Proposed reforms include improving the usage of movable assets as collateral, revision of the Bankruptcy Act to strengthen legal rights for creditors and borrowers, and improvements in the existing financial infrastructure such as the Credit Information Bureau (CIB).

Bhutan is ranked 81 among 190 economies in the ease of doing business 2019, and 82 among 137 economies in the 2017–18 competitiveness report.

Additionally, the economic affairs minister, Loknath Sharma in an earlier interview with Business Bhutan said that the ministry will emphasize on Public-Private partnership (PPP) model. “Private sector development committee will be established to cater to the challenges.”  

Meanwhile, one of DNT’s 120 days pledges is also to establish a private sector development committee led by the Finance Minister in partnership with BCCI and jointly implement Private Sector Development the Way Forward, 2016 recommendations.

However, the Economic Affairs Minister said that discussions will be carried on who will lead the committee, while the end goal will remain the same that is mounting the private sectors.

While the report supplemented that Bhutanese traders enjoy low tariff barriers and increasingly efficient customs facilities, the costs of transporting goods to and from external markets are increased by deficiencies in infrastructure quality and logistics performance both domestically and along transit corridors.

Inefficiencies at the Port of Kolkata (in India) hinder the access of Bhutanese producers to third-country markets. There is no railway network and there are only three domestic airports in Bhutan. Air connectivity is subject to frequent delays and cancellation.

In addition, internet connectivity comes at high cost and with low speed. Finally, inflows of foreign investment—which can enable access to external markets, technologies, and managerial processes—are hampered by sectoral restrictions, and shortages of skilled labor. “The limited use of quality certification by Bhutanese firms also inhibits access to external markets, particularly for high-value products,” states the report.

Phub Dem from Thimphu