The Bhutanese has found that the cabinet has not implemented most reform measures that were proposed by the Ministry of Economic Affairs (MoEA) to the cabinet about a year ago on May 4th 2012, to deal with the rupee crisis.
The report was titled ‘Report on Enhancing Productive Capacity to Increase Exports and Reduce Imports’ had been prepared by the MoEA on the orders of the cabinet.
The report’s recommendations ranged from regulatory reforms to development of the service sector and promoting of industries for exports and import substitution.
In an appalling case of government lethargy many ministries and agencies who on the instructions of the cabinet were supposed to respond to the proposal by 31st May 2012 did so only over a period of an entire year. In some cases there were differences but these too took a long time to resolve.
As a result it was only on 8th April 2013 that the MoEA could present the report to the cabinet more than 11 months after the initial presentation.
Of around 32 recommendations in the report only three have been completely done while only six have been partly done.
A Bhutan Chambers of Commerce and Industry (BCCI) member said, “The government has kept saying that it takes the rupee shortage seriously and is taking measures, but the delay of around a year in implementing even some basic measures shows how serious the government is.”
Lyonpo Yeshey Zimba said, ““We felt that this is a decision that the new government should take. It’s a major change from the existing policy and so it is a major decision. While the intention is good, we have to look at so many things such as the modalities and the rules and regulations to ensure that works are done properly.”
He also said, “We would have passed the decision and wouldn’t be there to see or monitor it being implemented. The government’s term is now coming to an end.” “It is a well thought out set of recommendations but it wouldn’t be very easy to implement,” he added.
The minister said the next government will have the time to ensure that whatever decisions are taken is implemented properly.
The reforms are divided into short term measures which are to be implemented within 18 months and medium term measures beyond 18 months. The report also recommends measures on major constraints facing industries and other measures.
Short term measures like prioritization of imports has been done while liberalization of the Tourism Industry is mainly done, and the monitoring of export industries are at an early stage.
Medium term measures that have been only partially done are import substitution and enhancing value of hydro power investments. What has been done is the conclusion of a Double Taxation Avoidance Agreement with India.
Other measures like start up support and review of External Commercial Borrowings are done while fast track issuance of environmental clearance has only been partly done.
Reforms not done or implemented
Of the MoEA’s 32 or so listed reform measures around 23 were not done or implemented. These included important regulatory, taxation, industrial, mining, hydropower, trade and other reforms.
The MoEA Secretary Dasho Sonam Tshering said, “There are no major obstacles or problems as such in implementing the recommendations. It is just that some things are within the purview of other agencies. Some consultative processes have to be carried out. Like for instance, we discussed it with the private sector during Lyonchhen’s meeting with the business community last year.”
He said the only way out to abate the rupee shortfall is by increasing exports and that’s the reason a host of recommendations were made.
Short term measures which are yet to be implemented are regulatory reforms, taxation reforms, buy Bhutan programme giving preference to Bhutanese goods and services, auctioning of stone quarries and dolomite mines, streamlining distribution of goods and services, establishing educational institutes and foreign currency accounts for expatriates at concessional rates.
Medium term measures which are yet to be done are promoting energy intensive industries, promoting investments in the mineral sector, excise duty exemption, enhancing electricity exports by reducing demand in Bhutan, allowing investments outside Bhutan, encouraging industries to move up the value chain, demand management during hydropower construction, and mechanization of the construction industry. Also not done are bilateral agreements with India in services and another one on bilateral investment promotion and protection agreement. Commercial farming has also not been done.
Major constrains or issues facing industries like manpower shortage, low awareness amongst customers, resource constrains of land space and power supply, raw materials shortage and access to finance and tax issues have also not been addressed.
Given below are lists of key reforms which have still failed to see the light of day.
This is an example of a reform which should have been implemented earlier under the Economic Development Policy 2010 where it was stated that a 45 day time limit be there for project approval or denial.
The report says that the rupee crunch calls for an immediate review of regulations governing business starts ups so that people can start new export businesses or expand their businesses to boost exports.
It recommends providing timely and reliable information on procedures and requirements to the public, avoid collection of redundant information and duplication of activities and improving coordination and data exchange between issuing authorities.
However, even today businessmen find that it takes up to six months to even process simple licenses.
Buy Bhutan Programme
Bhutanese products and services under the EDP already enjoy a five percent preference giving them a slight edge over foreign companies during the tendering process. The report recommends increasing this to 10 percent, reviewing procurement rules to encourage material services from domestic companies, encourage Bhutanese products in Request for proposals and introduce non tariff measures to promote Bhutanese industries.
Auctioning of Stone Quarries and Dolomite Mines
The report recommends auctioning of stone for exports and reverse auctioning for domestic supply, auction of dolomite mines for exports, immediate study of feasibility of opening five new dolomite mines, make a five year exception to value addition and fast tracking clearances for quarries.
Streamlining distribution of goods and services
This ambitious proposal aims to facilitate direct contact between Bhutanese companies and principal companies in India and other countries or main regional dealers to organize the retail sector. Diplomatic missions are to also facilitate establishment of contacts and promote wholesale business in Bhutan. Rules for Imports from Third countries 2002 are to be reviewed to allow third country wholesale operations.
The recommendations here include targeted taxes through imposition of taxes on luxury goods and services, exempt income taxes on savings invested for more than three years in deposits or equity and impose taxes on import of construction materials that are available locally. It also recommends the establishment of an Economic Intelligence Committee to research and make policy recommendations on revenue, taxes, economic malpractices, monitoring of exports and imports and other economic matters.
Establish Educational Institutes
The recommendation with an eye on preventing students from taking rupee in the form of fees to India says that approvals of new colleges and schools need to be expedited and provide expedited clearance of government land for investment in educational institutes. However, as highlighted in a recent story three Bhutanese colleges are still tied up in red tape in the Education Ministry.
Foreign Currency Accounts
It says that while RMA has allowed foreign currency accounts to be maintained by people working abroad, there are no reported transfers through the banking channel. It is recommended that RMA ease and encourage opening of such accounts by offering incentives in terms of exchange rates and access to foreign currency from their accounts.
Value Addition in industries
As per the EDP 2010 value addition of 40 percent is already there. However, the report says that industries such as copper, steel, silicon carbide, gypsum etc should be encouraged to value add in Bhutan and so have higher export earnings. It says that Bhutanese Gypsum can be used to make Plaster of Paris and copper industry should be encouraged to produce final products rather than re-exporting after simple drawing.
Energy Intensive Industries
In a 2012 road show by the MoEA major interest was shown in development of power intensive industries. It recommends exploring technical collaboration with established foreign companies, promoting larger intensive industries of at least 50 MW, capacity expansion by domestic companies to be given priority over new FDI applications and MoEA expediting energy import arrangement to support industries. It says capacity expansion must be conditional on producing higher value products.
Promoting investment in mineral sector
The report says that providing long-term lease will encourage capital-intensive investments and such investments will also require tax incentives. It recommends conduct of feasibility studies for dolomite calcinations, production of magnesium, metal, cement and others and facilitating establishment of downstream industries.
Mechanization of Construction Industry
The report says that there is a large potential to mechanize the construction industry to reduce the demand for expatriates as well as outflow of money. It recommends providing financing for skilled construction workers to purchase construction machinery, encourage establishment of companies specialized in hiring construction equipment, training VTI student to use construction machinery and review list of machinery in addition to heavy earthmoving equipments to be used in construction and make it mandatory for contractors tow own in order to qualify for public works.
Import substitution apart from vegetables and dairy products
Though the Ministry of Agriculture and Forests had some success in vegetable production, livestock, eggs and milk production increases Bhutan still remains a net importer of these items. The report lists 10 items like meat and dairy products, vegetables and fruit, rice, wood charcoal, wood products, paper products, beer packaged food and beverages, textiles and furniture which in 2010 resulted in Nu 5 bn in imports. The report says that these products can be produced locally. It recommends a host of measures like mechanized weaving, promote use of locally available construction material through trade fairs, encourage low labor intensive crop, provide transportation subsidy, provide tax credits for farming businesses, establish small scale food processing units and etc.
The report recommends facilitating commercial management of orchards and other agricultural land, providing long term technical assistance for farming, providing machinery for developing land for commercial farming, facilitate expedited access to government land. It mandates MoAF and DHI to take lead role in commercial management of orchards and farms.
Bilateral Investment Promotion and Protection Agreement
The report says that such an agreement is to protect foreign investments against discriminatory measures by the host state. It says such agreements promote FDI and suggests that such an agreement be signed with India since it is the main investor in Bhutan.
Agreement on Services to avoid tax
The report says that the recent directive by the RMA to route all rupee payments through the banking channel would lead to levy of service tax as high as 14 percent on services availed from India making Indian services expensive. It says that an agreement with India would reduce difficulties in getting services and also exempt the service tax.
Excise Duty Exemption
A recent presentation by the BCCI on redoing the Excise Duty to make Bhutanese industries more competitive and also not affect government revenue saw no commitment or decision from the government. The report recommends that all goods manufactured in Bhutan with raw materials from India should be exempted from excise duty.
Reducing power demand through CFL bulbs
The report says that the country can earn an additional Nu 180 mn every year from hydropower exports if domestic consumers use 14 W CFL bulbs. It recommends that DGPC should invest Nu 150 mn to supply these bulbs at a low cost and recover it by deducting it gradually from the electric bill.
Use of domestic goods and services
It says that wherever possible the government should use domestic goods and services for hydro power construction. The main recommendation is to direct hydropower construction companies to use domestically produced goods and services.
The Ministry of Finance’s rules restrict establishment of businesses abroad though some business houses want to invest abroad. It says that since business opportunities within Bhutan are limited regulations should be reviewed to allow individuals to invest abroad. It says as an immediate step the government should develops rules for Bhutanese investing overseas.
Major constraints facing industries
The report highlights some major problems facing industries and gives recommendations. For manpower shortage it recommends allowing expatriate employment where there is shortage of nationals, simplifying procedures to obtain permits and allowing free movement of workers.
To deal with land, space and power supply constraints the report recommends that until industrial estates are completed works like drainage system, watery supply, waste disposal and road connection should be carried out on current industrial estates.
To address the shortage of wood for wood based products the MoAF is to asses timber demand by wood based industries and undertake sustainable harvest of timber and review current logging operations.
To help steel industries the government in addition to excise duty exemption also says that duties and taxes could be exempted on spare parts and machineries for the plants.
- Regulatory Reforms to reduce red tape
- Giving 10% preference to Bhutanese goods and services
- Auctioning of Stone Quarries and Dolomite Mines
- Taxation reforms
- Mechanization of Construction Industry
- Promoting investment in mineral sector
- Import substitution apart from vegetables and dairy products
- Use of domestic goods and services in hydro projects
- Investing outside Bhutan
- Addressing manpower, land, power and raw materials shortage for Industries
- Fast tracking Educational Institutes
- Excise Duty reforms
- Commercial Farming