ADB commits loans and grants worth USD 1.1bn to Bhutan

Revival of PPP key for growth, says ADB

The ADB Country Director said it is not the amount but the in which the Nu 15 billion stimulus package is used, which will make the difference

To overcome the 13th Five Year Plan’s (FYP) resource gap, Bhutan needs to adopt an innovative financing strategy involving all stakeholders, including private sectors. To achieve the goal of transforming Bhutan into a high-income economy by 2034, with an estimated 9% Gross Domestic Product (GDP), the Asian Development Bank (ADB) said that the country requires massive capital injection.

The latest edition of the Asian Development Outlook highlights limited progress in public-private partnership (PPP) implementation in Bhutan, despite the country’s political commitment and favorable legal framework. Challenges hindering PPP projects in Bhutan include complex institutional settings, centralized approval procedures, a small market with a developing private sector, dominant state-owned enterprises, and a lack of successful examples and awareness of PPPs.

Bhutan’s sole PPP project, the Multi-Level Car Park in Thimphu, has not led to further development in PPPs due to these challenges. A revised PPP policy, pending cabinet approval, aims to overcome these obstacles and create a conducive environment for successful PPP project implementation. The updated policy aims to simplify the approval process, categorize projects based on size for quicker approval, integrate PPP into sectoral plans, allow unsolicited project proposals, and implement other improvements.

The economic officer of Bhutan Resident Mission, ADB, Sonam Lhendup pointed out that Bhutan provides more loans to non-enterprise sectors, for instance on education. There are policy challenges, which require changes.

Enhanced capacity to structure and negotiate contracts is crucial for achieving success in Public-Private Partnerships (PPPs) in Bhutan. The country needs a risk-sharing formula and a robust mechanism for assessing and mitigating risks. Given Bhutan’s small market and developing private sector, the government must actively promote a PPP agenda to attract private sector participation. It is important to build the capacity to assess and ensure the financial viability of PPP deals.

Implementing PPP projects requires a strong regulatory and institutional framework, a favorable business environment, prudent fiscal management, and government commitment to reducing contingent liabilities. Increasing access to long-term finance through domestic markets is vital. Capacity building, consensus-building, and sector-wide support are essential at all levels of implementation to oversee, select, monitor, and implement PPPs.

Complex contract structuring, negotiation, and follow-up with potential budgetary costs are involved in implementing PPPs. To manage these costs, the PPP program should be incorporated into a medium-term fiscal framework. Reforming state-owned enterprises and selectively privatizing them are also necessary steps.

The outlook says that the 13th FYP acknowledges the importance of public–private partnership (PPP) to finance infrastructure development and service delivery. To overcome the plan’s resource gap, estimated at 9% of GDP, and to achieve the goal of transforming Bhutan into a high-income economy by 2034, Bhutan needs to adopt an innovative financing strategy involving all stakeholders, including the private sector.

Globally, PPPs have proven vital for leveraging private finance and addressing financing gaps. The World Bank’s Private Participation in Infrastructure Report 2023 highlights that PPPs mobilized USD 36.4 billion across 44 economies in the first half of 2023, covering energy, health care, transport, waste, sewerage, and greenfield projects. In South Asia, PPPs attracted USD 1.8 billion, with India leading in implementing PPP projects. By leveraging the potential of PPPs and attracting private sector participation, Bhutan can bridge the fiscal gap for sustainable development, generate employment, and foster partnerships.

Bhutan’s Gross Domestic Product is expected to increase by 7% next year, as per the latest edition of the Asian Development Outlook released on April 11th 2024. The growth is anticipated to be led by the service and energy sectors. Additionally, the report predicts a GDP growth rate of 4.4% for this year.

Is politically committed Nu 15bn Economic Stimulus Plan enough for capital injection?

Prioritizing to revitalize economy immediately, the new government will procure Nu 15 billion(bn) stimulus fund soon. The People’s Democratic Party (PDP), during the election campaign as effort to rebuild the economy pledged to establish a stimulus plan fund of Nu 15bn. During the Indian Prime Minister, Shri Narendra Modi’s visit earlier, he pledged Nu 100 billion (B) as Indian support for the 13th FYP.  From the Nu 100B, Nu 15B is for the stimulus plan.

The Country Director (CD) of ADB, Shamit Chakravati said that Nu 15bn is a huge amount. However, the CD said that rather than amount, what matters is “how it is used.”

The CD said that government should spend in priority areas like the private sectors, for youth employment and others. For this, “the government needs to catalyze certain sectors,” the CD said, adding that there should be policy reforms while financial institutions lack evaluation prospects.

By Sangay Rabten, Thimphu