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Annexures to the
Main Document
 (Sub Committee Reports)
      (Edited and compiled)
                                Annexures to the Strategy for Gross National Happiness ( SGNH)

                                                   Table of Contents

Part I. Innovation, Creativity and Enterprise (ICE 2008)............................................... 3
    Track 1: High Value Manufacturing and Service Industries ..................................3
    Organic food and beverages/ products ................................................................................3
    Floriculture industry ...........................................................................................................11
    Water based industry .........................................................................................................19
    Non-Timber Forest Products ............................................................................................23
    Arts and Crafts Industries ..................................................................................................30
    ICT and Media ....................................................................................................................34
    Track 2: Revitalization of Agriculture, Forestry and Construction Industries 60
    Governance framework for optimizing agricultural land use ............................................60
    Enhancing national food security........................................................................................67
    Revitalization of field crop enterprises ..............................................................................75
    Revitalization of horticultural enterprises..........................................................................83
    Revitalization of livestock enterprises................................................................................95
    Revitalizing RNR Research and Extension Services .........................................................104
    Revitalization of Agro Based Industries ...........................................................................113
    Revitalization of Wood-Based Industries .........................................................................117
    Revitalization of the Construction Industry.....................................................................123
    Track 3: Hydropower ..................................................................................................145
Part II. National Spatial Policy (NSP 2008) ................................................................... 204
Part III. Strategic Infrastructure (SI 2008) .................................................................... 222
    Surface Transport .............................................................................................................222
    Air Transport....................................................................................................................241
Part IV. Care and Relief for Everyone (CARE 2008) ................................................... 254
    Health ...............................................................................................................................254
Part V. Enabling Environment (EE 2008) ....................................................................... 265
    Civil Service Reforms .......................................................................................................265
    Security, Immigration and Labour ....................................................................................273

                              Annexures to the Strategy for Gross National Happiness ( SGNH)

Part I. Innovation, Creativity and Enterprise (ICE 2008)
Track 1: High Value Manufacturing and Service Industries

Organic food and beverages/products
There is an increased awareness globally of health and environmental issues, and the
sustainability of general agricultural practices adopted worldwide. These issues are of high
importance especially in developing countries where there is huge potential of either having
well balanced development plans based on sustainable farming and healthy economic growth,
or of trading the natural resources for hastened economic growth. The global trend of
increasing organic farming is a result of international communities becoming more conscious
of these issues, and many government policies being formulated to support the growth of the
organic sector and sustainable agriculture. More importantly, organic agriculture offers trade
opportunities for farmers in the developing countries.

Market Analysis
Globally, the markets for organic products are growing rapidly and it is estimated at US$ 25
billion - US$ 30 billion annually. The biggest markets are the USA, followed by Germany, UK,
France, Japan and Italy. In developed countries, the share of the organic products in total food
sales exceeds 4% and in many of the bigger markets, the organic foods sales share is about 2-
3%. In developing countries, this share is small but growing rapidly. The US and EU make up
95% of the world‘s retail sales of organic food products. The growth in some market
segments were as follows:

                  Natural products                                          9.1%
                  Organic food                                             15.7%
                  Organic fresh meat and seafood                           67.4%
                  Organic nutrition bars, beers, wines, and food service     30%
                  Organic pet food                                         37.4%

Scope for organic farming in Bhutan
Bhutan has a large rural population still practicing traditional farming due to the lack of access
to facilities and technology. Farmers have been producing food crops simply using forest litter
and farmyard manure (FYM). There is potential to increase productivity of these traditional
farming systems by adopting organic farming, which include: development of farming systems
applicable to the local soil, agro-climatic conditions and local crop species; crop rotation and
intercropping; efficient production of vermi-compost and FYM from farm wastes and organic
farming plant materials; and pest management with improved farming systems and the use of
botanical and other natural formulations. Such practices could change farming from
subsistence to sustainable, providing safe and quality nutrition and ensuring food security.
Value could be added to surplus production to meet market requirements.

India, which is the closest market for Bhutan, has huge potential for organic production as
well as a decent domestic market. The upper-middle and upper class Indians with disposable
income will be the main consumers to be targeted. The Indian organic market segment to
watch out by importance would be as below1 :

    Garibay and Jyoti, 2003

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

                       Products                     Importance
                       Vegetables                            70%
                       Fruits                                52%
                       Spices                                27%
                       Rice                                  24%
                       Pulses                                16%
                       Tea                                   11%
                       Wheat                                   8%
                       Baby food                               8%
                       Herbal extracts                         2%
                       Edible oil                              2%

There is good potential to develop the organic fresh fruit and vegetable market as the market
segment seems wider with 400 tons traded in 2002, but by premium indication, tea is the
most important product for which Bhutan has no comparative advantage over India currently.
However, the development of organic specialty teas could have potential. Pulses and minor
cereals may be the other option. With the volumes Bhutan will be producing initial ly and the
poor logistic organizations, regional markets like India, Bangladesh, Thailand and Singapore
may be the potential markets to start. The Singapore and Thailand markets demand closer
study as Singapore has an import based food industry with a population with high disposable
incomes and a strong food culture with diversity in menu. Singapore is also a trade centre
where many products are imported to be re-exported.

The Japanese market is very lucrative and is the biggest Asian organic market with high
demand and strong purchasing power combined with low domestic supply, reflecting a
growth rate of 20% annually. The most commonly imported organic products are soy bean,
frozen vegetables, herbal teas and bananas. Japanese organic food and beverage re tail sales
were estimated at US$ 2.5-3 billion in 2001 with US$ 360 million worth being imported in
2000. The Japanese Integrated Market Institute predicts that imports of organic products will
grow by 40%.

Future of Bhutanese organic farming
Bhutan‘s less than 7.8% arable land, low technology and skill levels and inadequate human
resources make farming to optimum capacity of the land unlikely. Further, with rural - urban
migration taking place, the farming population will continue to reduce thus making farming a
greater challenge. With Bhutan soon to become a member of WTO, farming may no longer
be economical and the flooding of markets with cheap imports will further discourage farming.
Besides, the high labour costs in Bhutan constrain us from competing with our neighbours.
The only way Bhutan can continue to farm economically then will be to distinguish Bhutanese
products from others and market the uniqueness of the production systems and market high
value low volume products where Bhutan has an advantage.

There may be concerns that converting to organic farming results in reduced yields and
quality. From research in the west which has optimized inputs and yields, there are reports of
up to 40% reduction. However, in countries like Bhutan, where there is little or no external
inputs such as agrochemicals, there is little difference in yield in most crops except for a few
cash crops like apple, citrus and potato. Assuming that there is 20% yield reduction during the
conversion period from conventional to organic practices, the benefits from organic farming,

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

if export markets can be linked to producers, will offset any yield reduction and increased
production costs due to intensive management.

Organic markets and products for Bhutan
Based on a prescribed set of criteria (current husbandry practices, logistics, post harvest
preservation need, and price and premium), the following crops have been selected for
organic development:

      Some vegetables
      Culinary herbs
      Medicinal, aromatic and dye plants
      Honey
      Buckwheat
      Red rice

Enabling environment for the growth of organic industry
For any industry to start, grow and take root, the basic infrastructure to support that
industry needs to be in place supported by enabling policies that promote that industry. For
the organic industry, one can look at it from two angles: firstly, from the health, environment
and sustainability angle; and secondly, from the market angle to achieve economic growth and
revenue earnings for the country. While both are important, the approach to achieve the goal
and the path one chooses will be different if an overarching priority is not clear.

With Bhutan‘s natural potential and the growing global demand for organic food, it is a great
opportunity to invest in the development of organics in the country in a phase-wise manner
starting from easily produced products that have high market value and eventually convert all
possible areas by proactively linking production to market. While a market led development
is very important to kick-start the export oriented industry for organic food and beverages,
one should not underestimate the need for a government-led holistic integrated development
of the industry as the nature of farming system in Bhutan is such that crops, animals, forests,
etc. cannot be separated.

Private sector involvement
Private sector should be involved from the start to build a network of operators who can
immediately pick up the trading between the producer groups and the markets. They should
have the opportunity to avail of required exposure and participation through trade fairs,
expos, study tours and also training in business management. The government should facilitate
the operation of innovative businesses that venture into organic production, processing and
trading through technical and policy support.

Organic standards and certification
If export markets are to be targeted and production initiated based on market linkages,
certification will be a requirement. Bhutan should develop a National Organic Standard based
on the Codex Alimentarius minimum requirements and institute a system of regulation that
covers certification issues including the operation of external certifiers in Bhutan. The
standards could be voluntary to start with and made mandatory when the time and industry is

As it can take anywhere from one year (for wild collected) to five years (conventional soil)
with an average of three years to get a certificate, it is recommended that as soon as a
market lead is found and it has indications for organic certification requirements, conversion

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

to such certification should be started. In the meantime, Bhutan should sell the clean green
image and build a brand for organic produce from Bhutan based on the origin of the material.
This should be backed by the government not only through legislation but also in its
marketing and promotion.

In the short term, to cut certification costs, a team of inspectors from BAFRA should be
trained as qualified organic inspectors for foreign certifying agencies.

Limitations to production
 The overarching issue is the loss of crops to wild life. If the issue of wild life crop
   depredation is not addressed, all efforts to assist farming will be in vain and resources
   might as well be diverted elsewhere. Licensed gaming might be an option here.

   Any industry should have the backing and support with strong research and development
    programmes institutionalized in the system. Organic farming will also require it, more so
    as the technical skills, knowledge and information relevant to Bhutan is almost non-
    existent. There is need for a well-structured, well equipped and adequate number of well
    trained staff to carry out the research and develop technology in production, processing,
    packaging, etc. Technical experts should be brought in immediately to train and build
    capacity within the Bhutanese. The extension staffs currently posted around the country
    are all trained to deliver services according to conventional farming. They will need to be
    retrained to offer organic advisory as well and to guide farmers in a positive manner.

   The small, fragmented and unproductive holdings are a challenge for economic production
    in most areas in Bhutan. This condition coupled with low availability of working population
    in the far-flung rural regions poses an up hill task for any market-oriented production.
    Poor road network and transport facilities add to the hardship of bringing produce to the
    market. If less than 8% of the land has to provide employment to 70% of the population
    and feed the nation, there is the need to reassess current land classification and capacity
    and to consider reallocation of productive land to farmers considering the need to
    conserve the agricultural landscape which is very important for tourism as well.

   Keeping in mind that organic farming will be competing for the same area of arable land as
    that for the conventional production of food, only selected niche crops that have low
    volume and high market value will have potential for export.

   Marketing in any form in Bhutan is very weak and especially for agricultural produce.
    Organic produce needs active and aggressive promotion along with quality and reliable
    marketing system. Market research and marketing efforts in MoA targeted to promote
    organic production needs to be stepped up.

Policy issues that need to be addressed in regard to land for any farming

     Lack of legal framework on land
    The revised Land Act will have to be reinforced through a national policy on land that
    provides broad guidelines along which Acts, rules and regulation are made. Usually Acts
    legalize guidelines but in this case there is no framework on land to be legalized so the
    Act may cause more confusion and uncoordinated development in the country, which the
    proposed National Spatial Act will hopefully address.

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

    Excess horticultural land
   With most households in Bhutan owning less than 2 acres, there is the issue of equitable
   land distribution which enables the people to engage in some productive income
   generation of food producing work. While a small minority own land in huge excess of the
   land ceiling through innovative management, there is a large number of population who
   have land especially in horticultural production which are in excess of their ownership but
   by marginal areas. In such cases, the farmers should be allowed to buy excess land to be
   used productively but with a ceiling on the total land owned.

    Land with overgrown trees
   Many people have lost land to the forest due to overgrown trees. A survey by DoA found
   that a total of around 11,000 acres of agricultural land is lost as forest land according to
   the Forest Rules. There are cases where paddy fields are included in the forest land under
   this rule and reverted back to national forest. The farmers are being penalized under this
   legislation instead of being rewarded for their conservation efforts.

    Illegal orchards in national forests, cardamom and citrus
   There is considerable area of land under citrus and cardamom cultivation in national
   forest land in the warm temperate and sub-tropical areas of Bhutan. Due to legal land title
   issues, many orchards are abandoned or not managed and are acting as sources of disease
   and pests. These are very important cash crops that earn the first and third position by
   value from exports. There is immense potential to improve and manage the production,
   and in the case of cardamom, expand production in other possible areas as this is a high
   value niche crop that Bhutan has potential to develop without too much competition.
   Since cardamom is mostly grown organically, this is a very important crop that needs
   immediate attention. A study needs to be conducted to validate the situation of

Policy specific to organic agriculture
MoA has decided that organic farming will be the way all farming systems should be adopted
and has developed and endorsed a National Framework for Organic Farming in Bhutan. Such
a move was taken considering the potential of the country, the nature of farming practices
and farming population, the growing global market for organic food and environmental
benefits that can result from agrochemical free farming. The vision stated in the document
now needs to be adopted at the national level in order to reach the goal and realize the end
result. After adoption at the national level, all of MoA‘s plans should be developed in order to
achieve the common goal of moving towards making the country organic.


“To be an internationally recognized producer of organic foods by 2028”.

      Becoming a net exporter of quality organic products
      Ensuring sustainable domestic market

Given below is an extract from the document, National Framework for Organic Farming in
Bhutan by DoA, stating the vision and broad strategies. To start development of the organic
production for this project which needs an economically lucrative angle, focus could be given
to the strategies numbers 2 and 3 which are market and profit driven and which also roughly
matches with the economic hubs and growth centers where most market opportunities will

                        Annexures to the Strategy for Gross National Happiness ( SGNH)


In the long term Bhutan strives to develop and promote organic farming as a way of life among
Bhutanese farmers and trade in organic food items, to enhance nutrition, health and farm household
income, and to become a net exporter of organic agricultural products. Bhutan envisions to become
‗Organic‘ before 2020.


To develop and promote Organic Farming and environmentally friendly farming systems and
programmes that will enable Bhutanese farmers and traders to provide safe, quality food, produce and
products for Bhutanese consumers and other markets.

                                          Broad Strategy

A three pronged strategic approach will be adopted to cover potential development areas.

1. Subsistence farming for sustainable poverty alleviation strategy in rural areas which are un touched
   by agrochemicals to be self sufficient for their needs. Market and price will not be a priority and
   conditions for this group.
 Food security
 Nutrition
 Food diversity
 Income generation
 Improving productivity

2. Land use & existing farming practices for development which have need for environmental
   protection, and appropriate farming systems supporting conservation. Market and prices will be
 Harness the natural potential
 Attention given to environmental conditions and resource management
 Improve and develop production for requirement and potential market- possibility of branding and
   marketing the locality
 Specific selected areas which have natural potential

3. Commodity approach for niche products mainly targeted for local and international market. This
   section will be open to any selected potential production areas where market prices can
   economically cover related costs. Foreign investments and contract growing for assured markets.
   Market and prices will lead this section.
 Production of high value low volume crops
 Contract growing with requirement of certification in selected suitable areas

What to grow
If selected niche products are picked with assured market linkage such as contract growing,
the potential is huge to kick start the organic industry. This would be best taken up by the
private sector but assisted by the government with technical backstopping and necessary
market information. The organic production should start with easy-to-grow crops that are
grown with natural traditional practices or with very little agrochemicals.

The short list of potential crops is given according to its cost of production following organic
and non-organic practices where possible. While there may be potential to produce all
products, one has to bear in mind that limitations to production be they technical, financial,

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

organizational and above all, market information for an established or assured market will be
key to the growth of organic production in the country.

As much as possible, it is desirable to allow FDI in this sector as the interest, responsibility
and accountability of success is shared and the risk factor to farmers involved is reduced. If
this is not permitted, then the possibility of using contract production, whereby the importer
pays for the certification if required, should be explored.

A suggestion of how production clusters could start based on production capacity of the
Dzongkhags and how infrastructure developments could be prioritized is given below.

Organic Crop Cluster
                                                        Produce/products for       Processing/
      Regional                           Potential
S/                                                              export                value
      Cluster       Dzongkhags           Organic
N                                                      10th Plan Subsequent         addition
       Centre                             Crops
                                                       period     FYP period
1     Paro        Ha                  Asparagus        Asparagus Vegetables;       Buckwheat
                  Paro (Lingzhi)      Beans            Beans      Value added      Barley;
                                      Buckwheat                   products.        Medicinal
                                      Barley                                       plants.
2     Paro        Gasa                Asparagus        Asparagus   Onion;
                  Wangdue             Carrots          Carrots,    Vegetables;
                  Punakha             Garlic           Garlic.     Value added
                                      Onion                        products.
3     Sarpang     Tsirang             Cardamom         Ginger      Cardamom;       Buckwheat;
      (Gelephu)   Dagana              Ginger                       Citrus;         Barley
                  Zhemgang            Buckwheat                    Value added
                  Bumthang            Barley                       products.
                  Trongsa             Citrus
4     Mongar      Mongar              Maize                        Vegetables;     Maize;
                  Lhuentse            Garlic                       Garlic;         Oats
                  Trashigang          Onion                        Onion;
                  Trashiyangtse       Oats                         Value added
                  Samdrupjongkhar     Vegetables                   products.
                  Pema Gatshel
5     Sarpang     Chhukha             Ginger           Ginger;     Citrus;         Wheat;
      (Gelephu)   Samtse              Cardamom         Cardamo     Value added     Millets
                                      Wheat            m           products.

Supply chain management
Major players in the supply chain management include producers, processors, traders, and the
government. The farmers will be the primary producers of organic foods with each
Dzongkhag specializing in specific crop production. Considering the small landholdings of the
farmers, farmer cooperatives will be formed to make up the volume and to maximize
economic returns of the crop growers. To facilitate farmers to market their products, three
Regional Cluster Centres (RCCs) supported by 19 Dzongkhag Cluster Centres (DCCs) will
be established for collection/distribution of organic produce from the nearby areas. The

                       Annexures to the Strategy for Gross National Happiness ( SGNH)

proposed locations of the RCC are Paro for the western region, Sarpang (Gelephu) for the
central region, and Mongar for the eastern region. As far as possible, the locations of the
RCC and DCC are being proposed based either on their close proximity to already
earmarked urban hubs or on the ongoing programme on integrated food processing plant
(IFPP) of the MoA. In addition to providing essential services required by farmers for organic
farming, each cluster centre is expected to serve as a commercial hub for the organic food
industry at both Dzongkhag and regional levels. A range of micro and small scale businesses
including ICT kiosk, retailing shops, agro processing, packaging, transportation, and other
service related centres will be housed in each centre generating ample employment
opportunities in the community.

The DCC will be the collection point for all organic produce from various gewogs at the
Dzongkhag level, which will be transported to the RCC. Each DCC must have the following

       General storage/cold storage for farmers to store their produce;
       Grading and packing facilities;
       Refrigerated vans
       Transport coordinator;
       Dealer/cooperative office, Post office;
       Banking facilities where farmers and traders can easily transact their money
       Information centre with internet, fax, and telephone facilities where farmers can have
       access to essential information such as market situation, prices of their products,
       weather information, etc.
       Extension of regional technical advisory service centre for soil and plant analysis,
       certification of produce, etc;
       Retail shop.

Basic facilities to be established at each Regional Cluster Centre include:

       Cold storage/general storage facilities for farmers to store perishable organic goods.
       Refrigerated vans.
       Information centre with internet, fax, and telephone facilities where farmers can have
       access to essential information such as market situation, prices of their products,
       weather information, etc.
       Banking facilities where farmers and traders can easily transact their money.
       Logistical service centre that arranges supplies of organic farm inputs, hiring of farm
       tools/equipment, transport coordination, etc.
       Technical advisory service centre for soil and plant analysis, certification of produce,
       Post offices, fuel station, parking space, dealer‘s office.
       Processing/value addition industries.
       Place for farmers to sell their products and buy households essentials.

The bulk of the produce collected at the regional level will be transported to the nearest
airport for export to the designated countries. Till the second airport is built, goods from all
three regions will have to be routed through the Paro Airport.

The RCCs and the DCCs will also serve as central agents for supplying organic foods to the
hotels, hospitals, schools, and training institutes within the respective regions and the

                       Annexures to the Strategy for Gross National Happiness ( SGNH)

Floriculture industry

The mountainous ecosystem of Bhutan has bestowed it with great diversity in ecological
conditions which have led to the great diversity in both flora and fauna that Bhutan is known
for. In terms of floricultural production, it means an ideal opportunity for harnessing the
unique environmental production potentials for specialized floricultural crops under specific
ecological conditions. This will mean sourcing, through research and development,
appropriate floricultural crops (in terms of market opportunities of the floriculture crop
under development and production potential of the crop in terms of altitudinal range that the
crop can be cultivated without compromising the total yield and quality) for specific ecological
zones and also looking into the potential and possibilities of developing our native floriculture
crop for specific markets.

Thus far, the floriculture potential in Bhutan is untapped and under developed. However, the
market for floricultural crops outside Bhutan is insatiable. Global and regional demand for
specialized flowers like cut flowers and ornamental plants is ever growing. This implies that
market penetration, both in international and regional markets, through strategic planning will
be imperative. For instance, promoting Foreign Direct Investment (FDI) and commercial
floriculture combined with small-scale production will enhance the market penetration.

The domestic market for many flowers is growing and this trend could be expected to grow
as our economy progresses and as multinational companies begin to invest in Bhutan. Besides
the economic benefit, promotion of floriculture industry in Bhutan will contribute immensely
to our goals of environmental conservation and providing employment. The Buddhist values
of conservation and protection must be embedded into the program of floriculture industry
promotion so as to promote the culture of respect for our environment. The proper
promotion and establishment of floriculture in the country will not only contribute to the
aesthetic value of the country but will also support, in terms of species conservation and
diversification, employment generation and earnings through export.

Situation Analysis
Increasing productivity of agriculture through diversification and increased market access to
raise the living standards of the rural people is a growing concern in Bhutan. Encouraging
floriculture could be one of the ways to diversify agriculture as floriculture in most parts of
the world is a thriving and dynamic part of production agriculture. It can be characterized as a
sector experiencing rapid changes.

In Bhutan, the idea of floriculture as an industry has just begun and a few nurseries have
sprung up in Thimphu and Phuentsholing. Floriculture, as an industry, is yet to take off but
considering the favourable climate and the abundance of native and rare flowers, it can be
assumed without doubt that floriculture in Bhutan can be viewed as a high growth industry.
Commercial floriculture can become important from the export angle. However, the
government intervention in this area thus far has been gray and neither strategies nor
developmental plans have been drawn up to initiate floriculture as an industry. There exist
also no specific regulations or Acts covering this industry, though certain regulations do apply
to imports. No quarantine requirements have been developed for export. With regards to
research and development of the industry, no priority has been accorded to the industry
though one researcher has been stationed at RNR-RC Yusipang. Annual planning workshops
on horticulture are held every year, but floriculture, as a subject, is yet to gain any attention.

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

Market perspectives
All over the world, the floricultural sector is experiencing rapid changes. With globalization
(WTO) and its effect on income development in the different regions of the world, there is a
growing per capita consumption in most countries. At the same time competition is

a.        World market
The world export market for flowers is valued at US$10 billion per annum and is growing at
6% - 9% each year. The Netherlands is the world‘s largest exporter of flowers, accounting for
60% of international trade. The most important flower traded in the international market is
still the Rose. However, other flowers like Chrysanthemum, Carnation, Gerbera, Dahlia,
Poinsettia, Orchids, Lily, etc. are also marketed in large quantities in the major markets of the

b.          Regional market
In the region, India is the largest flower market. The domestic market value for cut flowers in
India stands at about Rs. 300 crore and its export value is about Rs. 100 crore. Cut flowers
still dominate the world as well as regional markets and rose is the most traded flower.

c.          Local market
The coming up of few nurseries clearly indicates that there does exist a domestic market for
floriculture in Bhutan. More and more people are getting interested in setting up gardens and
decorating the interiors of their houses to give a green touch. Besides the local nurseries,
consumers often bring in ornamental plants from the neighbouring town of Jaigaon and there
are also instances of people importing flowers all the way from Bangkok. The use of cut
flowers and ornamental plants has also gained a place in landscaping and interior decorations
during government functions, weddings and promotions. Though the value of flowers in the
domestic market is not known, it can be assumed that there is a growing demand for flowers
in the country.

Floriculture potential of Bhutan
The diverse agro-ecological conditions in Bhutan make the country suitable for the cultivation
of a wide variety of flowers, which have market potential. Some of the flowers that can be
promoted and cultivated for export are listed in the following table.

    Flower Types             Bulb/Seed    Cut       Ornamental/    Ornamental/    Dried
                                          flower    Pot            Foliage
    Roses (long stemmed)

The prospects for some of the important group of floriculture products in the order of
market potentials and importance are as mentioned below:

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

Flower seeds: Seasonal flowers are in demand all over the world and the climatic conditions
do favour seed production in Bhutan. Micro-propagation could be a useful technique in large-
scale production of flower seeds/seedlings and as we do not have expertise in micro-
propagation, collaboration with international renowned institutes/ companies should be
encouraged. Some of the promising planting materials for export would be gladioli, liliums,
tulips, liatris, etc. and even blue poppy.

Dried flowers and plants: The most promising area in floriculture is in dried flowers.
Dried flower technology is still an unknown art. In the world flower industry, cut flower
business, dried flower technology and rare pot plants are the driving force, and it is growing
each day. The export value of dried flowers from India is about Rs 100 crore per year. Dried
flower and plants are popular due to the non-perishability of the produce and are in high
demand in the US and UK markets. All kinds of flowers and plants can be dried and preserved
in various forms. This is one area that Bhutan should focus on as wild flowers are bountiful
and materials can be collected from the natural forests, dried and marketed. Higher income
can be generated through value added products like potpourris, collages, cards, decorations,
etc. There may not be domestic market for dried flowers and plants but there definitely is
market for such produce in Japan, Germany, USA, Netherlands, UK and Italy.

Floral extracts: There is a growing demand for natural extracts in the world market.
Though a wide range of synthetic aroma chemicals and reconstituted essential oils are
available in the market, the demand is more for the expensive natural products. Floral
extracts could also pave its way in the domestic market with bigger hotels and spas catering
to tourists. Bhutan could be made known for the use of natural extracts in the spas that are
to come up in the future. Another area for floral extracts is the cultivation of saffron which is
widely used as a food colouring agent and aromatic plant in India and most countries in Asia.
This is a low volume high value flower.

Other floriculture related services: With the Bhutanese society already developing a
taste for flowers, as is evident from the imports from Thailand and India, there could be a
new dimension to the use of ornamental plants in Bhutan. Hiring out and rental for interior
decoration of homes and offices especially during promotions, weddings, banquets and other
governmental functions could create a good domestic market.

Ornamental trees: Christmas celebration is becoming an important festival even in non-
Christian countries and the demand for Christmas trees is on the increase. There should be a
large population of high and middle income Christians in Kolkata and it would be worth
investing in Christmas trees as such tree species are fast growing.

Ornamental plants: refer mostly to potted plants used for a ―touch of green‖ in places
where they have little or no open space for gardening. The plants used as ornaments are
foliage plants or green plants where the leaves provide the decorative value. Cultivars of ficus,
dracaena, dieffenbachia, aglanomea, philodendron, monstera, calathea, cordyline, aralia, etc.
are the popular ornamental plants.

Cut flowers: The modern day cut flowers refer to the stem used for decoration purposes in
arrangements, bouquets, etc. Bhutan, at the present moment, may not be able to compete
with other countries but can make a small beginning. With increasing incomes, one has
noticed a definite change in consumer behaviour in the country. The small florists in Thimphu
say that there is a growing demand for flowers and definitely a scope for a thriving domestic

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

market. Laying of khadar as a wreath is an age old tradition in Bhutan and there can definitely
be a paradigm shift from the ―khadar‖ culture to a flower culture.

Enabling conditions
 The regional market is enormous and Bhutan is well connected to these markets through
   Druk Air and can deliver flowers there in the shortest possible time.
 Tissue culture forms an important part in floriculture and for that, the country already has
   tissue culture laboratories at Druk Seed Corporation (DSC) in Paro and at RNR -RC
   Yusipang. These facilities can be used for research and micro propagation of certain
   flowers and orchids. However, the lab at Yusipang would require up-gradation.
 Owing to the vast flora that the country is endowed with, there are opportunities for the
   development of native flora for domestic and export markets.
 Good road linkage exists between Phuentsholing and Kolkata for surface transportation
   and flowers can still be delivered in their fresh form provided refrigerated vans are made
 Free trade between Bhutan and India.
 Interest of foreign companies to invest in the field of floriculture in Bhutan.

Despite a bright future in floriculture, there are a number of challenges which, if not
addressed, can hinder the promotion of a floriculture industry in the country. Some of the
challenges that the country faces are:

          Institutional strength – HRD, Infrastructure facilities and linkages
          Underdeveloped certification system
          Underdeveloped domestic market
          High labour cost and unavailability
          High interest rate of loans
          Need for development of transportation and storage system to cater to
           floriculture industry
          Competition (Bhutan will face high competition from West Bengal where about
           58,000 tonnes of flowers are grown in about 10,000 hectares of land).
          Increasing national coordination in the industry to maximize the effectiveness of
           marketing promotion in export markets.
          Ensuring the availability of skilled labour during harvesting. Processing is labour
           intensive and vital for product quality.

Strategies for the establishment of a Floriculture Industry
Floriculture can be expected to thrive in Bhutan and be one of the major important export
commodities. Besides the international and regional markets, there is also a growing demand
for flowers and other decorative plants in the domestic market with increase in income and
change in taste. Bhutan too can take active part as a supplier of flowers through active
participation in the world market. The cost benefit analysis for a small-scale floriculture with
one green house shows positive cash benefits from the second year onwards and with
increasing net profit cash ratio from the second year onwards. This is, however, based on the
assumption that our growers have the required skills and technology. In order to generate
such profits and overcome the constraints in the setting up and smooth functioning of
floriculture industry, the following strategies would have to be followed to begin with:

                       Annexures to the Strategy for Gross National Happiness ( SGNH)

Floriculture promotion
Floriculture can be promoted as a business enterprise and not necessarily connected to
agriculture. When it comes to the actual promotion of floriculture, small, medium and
commercial growers should be encouraged in parallel. Large scale or commercial growers
should be encouraged amongst the business corporations, as it can be capital intensive. FDI
must be invited to invest and work in collaboration with the large-scale growers. Encouraging
FDI would assist in keeping up with the need for modern technologies, the skills required,
post harvest technologies, infrastructure requirement and a ready market. However, the
minimum investment required for FDI under the current FDI Policy is US$1 million and if FDI
is to be invited for floriculture then this needs to be reviewed. The small and medium scale
growers can serve as satellite farms for the large-scale growers to ease marketing, through a
strong legal contract to ensure the smooth flow of business.

a. Institutional development and policy support
As floriculture is a new industry in the country, there would initially be plenty of hurdles
especially in the form of technical skill and investment. The first and the foremost
requirement would be developing an institutional set up that would be responsible for
research, development and technological backstopping. Floriculture and landscaping can be
instituted as a division under the DoA to carry out the research and developmental activities
related to floriculture. Human Resource Development would be a key component. A subject
matter specialist has to be put in place to coordinate the floriculture activities at the national
level followed by lead researchers in each of the growing zones. Floriculture should be
included in the curriculum and taught as a core subject in the Natural Resources College at
Lobesa and should also be featured as an alternative course in the Rural Development
Training Institute (RDTI) where school dropouts are trained in the field of agriculture and
livestock. The existing School Agriculture Programme (SAP) should also incorporate
floriculture as one of the sub-programmes to inculcate and develop a culture for flowers in
the country.

Government support would be needed for the establishment of modern floriculture
demonstration plots at the existing RNR-RCs and Sub-centres. These plots can serve as the
focal units for regional development of floriculture. This means that a floriculture programme
should be established in each of the research centres and their mandate should be the
transfer of technologies through on farm/on-station demonstration and training.

b. Institutional support for infrastructure development
Floriculture can only be started with heavy investment in production infrastructure including
green houses, net houses, good irrigation and drainage, post harvest infrastructure incl uding
pre-cooling and cold storage, and refrigerated vans. Upon investment on these, the turnover
is not immediate as there is a gestation period and the risks involved are high. The
government could consider some subsidy for investment in floriculture development.

The existing tissue culture laboratories with DSC and RNR-RC Yusipang should be upgraded
to support the floriculture industry. This would help in seedling production required by the
growers while at the same time promote the efficient use of the laboratories.

Another area for infrastructure development is the establishment of flower gardens
showcasing both endemic and exotic flower and ornamental tree species. Such a venture
would create a flower consumption culture and thereby lead to a domestic market in the
country. With the country promoting tourism, these gardens could also be a tourist
attraction. The gardens should have controlled atmosphere growing conditions such as glass

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

and poly houses to have flowers and foliage throughout the year. Such activities should be
taken up by the Department of Tourism (DoT) in collaboration with City Corporation and
Ministry of Agriculture.

c. Market development
The Post Harvest Unit and the Agricultural Marketing Section (AMS) of the MoA must play an
important role in the floriculture industry of Bhutan. The basic requirement for market
includes sustainable and regular product availability with consistent quality and adequate
quantity. To improve market conduct and performance we should assure the provision of
improved information to participants on market prices and other market information through
newspapers, radio or television. The second is the regulatory function of setting and enforcing
quality standards, weights and measures, and hygiene regulations. The third is the provision of
marketing facilities such as collection centres equipped with cold storage, cooling room,
certification, etc. Besides the collection centers, the other marketing environment to be
created are:

          Cold storage facilities at the airport
          Facilities for custom check, cold storage and phyto-sanitary checks
          Providing access for local growers to outside markets where they can get suitable
           returns on the flowers/planting materials etc.

Co-operatives should be encouraged amongst the small and medium growers to enhance
volume and economies of scale. This would also ensure group pressure on the quality and
quantity of produce. The Co-operatives Act is already in place and is favourable for the
establishment of small co-operatives. Only the rules and regulations of the Act have not been
drawn up as yet and should be done immediately.

The AMS of MoA needs to include, in its mandates, support to farmer group
organizations/associations/co-operatives. The Department of Trade, MEA, also has export
marketing section under their Trade Development Office. Greater coordination between
these two organizations is required so as to avoid duplication of work and waste of resources.

Delhi is the largest flower market in Asia and the major supply comes from Kolkata.
Therefore, prior to the establishment of the floriculture industry, AMS must study the
regional market demand for cut flowers, ornamental plants, seeds and bulbs, dry flowers,
quality and the standard required. At the same time the Marketing Liaison Officer based in
Dhaka should also explore the possibilities of expanding our flower markets in Bangladesh.
The information then should be disseminated to the interested growers for proper planning
of production.

d. Inventory of potential flower and ornamental tree species
It would be necessary to identify exotic flower species as well as native (endemic) species that
are suitable for commercial production in the country. An inventory of the different flower
species available in the country that can be domesticated as well as exotic flowers that can be
grown for export in the country needs to be carried out. The floriculture researchers in RC
Yusipang should start this activity immediately as it would facilitate the starting up of the

Native or wild flowers is another area that has potential in the world market. Native wild
flowers can be included in many planting schemes as a way of increasing biodiversity.
Considering the vast flora available in the country, possibilities of domesticating wild flowers

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

for export must be looked into. Domestication involving genetic improvement and intensive
cultural practices can improve efficiency in production. It has been the experience in many
parts of the world that once a product achieves commercial importance, its supply from wild
sources tends to be replaced by cultivated sources with a view to bringing production, quality
and costs under control. Blue poppy, the national flower of Bhutan, though conserved in
Bhutan, is available in the world market. Therefore, possibilities of collecting blue poppy seeds
from the wild and domesticating for export must be looked into. The Forestry Rules may not
allow plants to be removed from the wild but obtaining of seeds and bulbs from the wild
should be allowed in a sustainable manner. When domesticating, the selection of species
should provide site-specific solutions or advantages, e.g. the plant should be able to produce
high unit value product.

e. Zoning of production areas for sustainable economic development
The natural conditions vary significantly across the country and various flower production
types and ecosystems can be developed in different regions. The zone of flower production
agro-ecosystem is a multiple component complex that consists of the environment, flora and
fauna, social and economic systems in a geographical area and functions as an ordered and
structured integration. The growing areas would have to be concentrated in and around the
growth center/economic hubs and for each hub, the flower crops suitable for that particular
area must be identified.

Zoning of production areas
 Best locations
                      Size of Potential               Available Infrastructure
 For Investments
 High altitude        -Suitable climate for seed      The distance from airports would not make a
 (Haa, Bumthang)      and bulb production             big difference as seed and bulb have longer
                                                      shelf life. Certification can be done in the
                                                      production areas as all Dzongkhags have
                                                      BAFRA officials posted.
 Paro                   - Suitable climate for        Easy access to export routes by air through
                        commercial seasonal           the Paro International Airport. Existing
                        flower, seed and bulb         infrastructure for post harvest in Paro.
                        production.                   Support from Druk Seed Corporation.
                        - Has great potential for
                        the establishment of
                        commercial farms
                        - Ideal climate for the
                        domestication of wild
 Thimphu                Suitable climate for          Only 1.5 hours drive to Paro International
                        commercial seasonal           Airport. Has potential for both fresh and dry
                        flower production             flower production
                        Ideal climate for the
                        domestication of wild
 Southern belt                                        Large arable lands suitable for sub- tropical
                        The climate of southern
                                                      and tropical flower production. Will have
                        belt provide ideal
                                                      easy access to routes by Air once the
                        conditions for sub-tropical
                                                      International Airport at Gelephu comes
                        commercial flower
                                                      through. Closer to markets in Siliguri and

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f. Quality control and certification
Setting up quality standards is very important to position products in the market. The
produce should be able to satisfy the conditions of the market for which it is destined. This
implies the necessity to establish, as a matter of policy, the grade and quality from the onset.
Strict compliance to grading standards is in the mutual interest of the industry and to
individual growers. Reliability and consistency in quality standards are essential to a good
reputation and ability to secure premium prices. Therefore, right from the outset, growers
must be conscious about the quality of the produce so that we can set a good image of our
flowers in the market and thus create a demand for our flowers in the international market.
Some of the requirements for export of floriculture are:

          Phyto-sanitary certificate
          CITES convention documents for orchids and wild plants

BAFRA should be the lead agency in setting the standards and certification procedures.

                             Annexures to the Strategy for Gross National Happiness ( SGNH)

Water based industry

Water sources
The snow capped mountains in the north and sub surface water flow collected from seasonal
rainfall are two major sources of water for the river systems in Bhutan. There are four major
river basins that drain their water into the Indian plains: the Amo Chhu that drains out as the
Toorsa river originates in the southern part of the Tibetan Plateau while the Haa Chhu, the
Pa Chhu and the Thim Chhu originate in the high glacial mountains of the western region and
drains into the Wang Chhu providing water for the Chhukha and Tala Hydropower plants.
The Wang Chhu basin lies between Tego La range in the west and Dochu La range in the east.
Between Dochu La and Pele La ranges lies the Punatsangchhu Chhu basin. This river has the
highest probability of increasing its volume through the outburst of glacial lakes like the Lugi
Tsho, Thorthomi Tsho and Rapten Tsho in the higher reaches of Lunana. The Mangde Chhu,
Chamkhar Chhu, Kuri and Drangmeri all drain into the Manas and are separated by Yotong
La, Thrumshing La and Kori La respectively. Kuri and Drangmeri have their origins in the
Tibetan plateau.

Current utilization
The volume of water in these rivers fluctuates with the peak flow being during the monsoon
season from July through September. Most of these rivers flow through deep and narrow
valleys making it difficult to tap them for uses other than hydropower. It is only in the Wang
Chhu and the Punatsang Chhu basins where a small portion of the water is being tapped for
agricultural purposes, before reaching the major knick points. Irrigation for rice is the main
need that competes with water requirement of hydropower generation. This is not a big
problem in Bhutan since maximum water requirement for paddy coincides with the peak
monsoon season. A small fraction of fresh water is bottled by the Bhutan Agro Industries in
Thimphu2 . An initiative has been also taken to bottle the clean spring water at Thinleygang
under Thimphu Dzongkhag. Aside from this minor utilization in agriculture and hydropower
generation, the value of the fresh water for social recreation, hydrotherapy, and big industrial
uses are not tapped as yet for economic gains.

Numerous springs, streams and rivers provide water for irrigation, human consumption,
hydropower generation and in some areas, for industrial use before it drains out into the
Indian plains. The country is also known for its hot springs (tshachhus), hot stone baths
(menchhus) and clean spring water (drupchhus) for consumption. The local residents use these
hot springs as part of their traditional treatment for diseases and physical ailments. The well
known hot springs in high demand are found in Gasa, Punakha, Lunana, Bumthang, Gelephu,
Zhemgang and Trongsa (not functional) Dzongkhags. There are also a number of hot stone
baths using spring water in various places that are popularly used by the locals for healing
purposes including rest and restoration. This brief information suggests that the utilization of
these water sites is only known to local residents and no government initiatives have been
taken to maximize its use for commercial purposes thus far.

Priority areas of investment in the Water Industry
 A number of economic investment areas can be suggested ranging from social recreation
(white water rafting/kayaking), hydrotherapy (developing Tshachhus and Menchhus), bottling
spring water to exploration of geothermal energy from hot springs and hydrogen fuel from

    Production increased fro m 846,724 in 2004 to 1,466,676 liters in 2006

                            Annexures to the Strategy for Gross National Happiness ( SGNH)

water molecules. The immediate area of investment is focused on bottling of clean spring
water that is available in abundance across the country although there is a potential of
developing rivers/lakes for social recreation and the local tshachhus and menchhus for
hydrotherapy. The local people believe these clean spring waters have medicinal values. The
chemical analysis of this water from selected sites indicates that the mineral compositions are
comparable to the bottled water sold in developed countries.

Global market trends
Bottled water has been one of the most dynamic beverage categories over the last five to ten
years. Global bottled water consumption is estimated to have approached 41.1 billion gallons
in 20043 . The global rate of consumption is estimated to have grown by 6.5% in 2004. Per
capita consumption was 6.4 gallons, up three-tenths of a gallon from 2003‘s 6.1 gallons.
Several Western European countries have per capita consumption levels of well over 25
gallons, but much of the developing world, where the bulk of the world‘s population lies, finds
its per capita consumption figures still in the low single-digit range. The sales for bottled
water are estimated to be between US$ 50 and US$ 100 billion and increasing 7 to 10
percent annually. In 2004, total sales were approximately 154 billion liters.

Fastest growing industry
In developed countries, bottled water has become the fastest growing and most dynamic
major beverage category due to growing health and well-being consciousness among
consumers. This increased health awareness has helped position bottled water as an
alternative not only to tap water but as an alternative to carbonated soft drinks and juice
drinks, in the multiple beverage marketplace. In developing countries, demand is driven by
factors including the lack of potable groundwater in many areas, the lack of reliable or safe
municipal water in urban areas, chemical and organic pollution of ground and well water, and
convenience relative to boiling or otherwise treating accessible but potentially contaminated

Market trends in India
India‘s consumption figure for 2004 is estimated at 5.1 billion liters (2004). The Indian bottled
water market is said to be growing at 55% annually fuelled by factors like growing populati on,
rapid urbanization, income growth, increased health consciousness, deteriorating water
quality, pollution, etc. A large number of players including Coke, Pepsi and Evian are already in
the market. Recent controversy over pesticide content in some of the beverages has hit Coke
and Pepsi hard, in some manner opening up opportunities for water from non-polluted

Spring water or mineral water bottled from the Kingdom of Bhutan.
A wide variety of different bottled water types are developed with different methods and
levels of treatment. Bhutan has to choose what type of bottled water to produce, and where
to produce it, given its clean environment, difficult terrain and immense opportunity offered
by the local and regional markets. The most widely accepted definitions of different bottled
water types and the standards of bottled quality are provided by the US Food and Drug
Administration (FDA) in the Final Rule on a standard of identity for bottled water.

The list includes Artesian (water tapped from confined aquifer), Mineral Water (TDS less
than or equal to 250 mg/l and no minerals are added), Spring Water (tapping from naturally
flowing water from under ground to surface) Sparkling Water (carbonated), and Purified

    Source: Global Bottled Water Report

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

Water (water produced by distillation) bottled. Although there are a number of clean water
bodies like high altitude lakes in high mountains of Bhutan, it would be an advantage to tap
spring water for technical, economic and social reasons. A proposed course of strategic
actions is discussed below that includes enabling policy environment, physical environment of
water sources (identification sites, analysis of water samples from sites, management of water
sources), production environment (identification of equipment for processing and packaging)
and marketing strategies.

Enabling policy environment
Bhutan Water Policy adopted in 2006 lays out a favorable environment for the development
of water industries in Bhutan. The best available water sources for clean and safe drinking
water, like mountain spring water, would be allocated for the production of environmentally
clean products for human consumption. The hot springs that have medicinal, cultural as well
as recreational values are identified as an area for private investments such as by tourism
industries. The requirements such as adoption of the principles of payment for environmental
services (to encourage plough back mechanism) and integrated watershed conservation and
management approach are also clearly defined. What is missing at this stage is a Water Act
that makes these policy provisions legally binding. Another missing element in this policy
document is an institution that would be the custodian of water resources in the country.

Physical environment
Identification of sites: There is a need to undertake an inventory of all spring water and
groundwater sources in Bhutan. This would be done firstly, by seeking the support of local
residents and secondly, by physical visits to each site to take the GPS readings, water samples
and study catchments/watershed. This information would allow the assessment of local values,
quality of water and map the sites using the GPS readings. A step has been taken by the
Department of Industry to identify sites and assess the quality of these waters sources. This
effort may not be adequate to identify all sites across the country. The well known clean
sources of spring water are in Paro, Chhukha, Thimphu, Trongsa, Bumthang, and Trashigang.
The output of this activity would be a map showing the location of spring water across the

Analysis of water sample: The mineral composition of spring water and groundwater would
vary from one location to another. The type of rocks, soils, vegetation covers and recharge
sources will influence these properties. Water samples collected in clean bottles sealed with
no air spaces remaining in the bottle could be sent to reputed laboratories (like the Delhi
Test House Laboratory used by the Agro-Industry) for standard analysis. This would include
characterization of the physio-chemical and microbiological characteristics of water. A
comprehensive database of clean water sources including these said properties would be built.

Water source management: A natural mineral water source must provide a steady supply of
pure water of constant composition. As the naturally flowing spring water cannot be
increased, it is important to measure the natural flows accurately to determine the maximum
yield available and its variability through out the year. As indicated in the water policy
document, identified water sources will be protected from any possible source of pollution
through adoption of best-integrated watershed management practices. Conventional
agriculture practices, acid rain generated from industrial areas and leakages from sewage
system are widely known polluters of sub-surface water. A feasibility study would provide
more detailed information on this activity.

                       Annexures to the Strategy for Gross National Happiness ( SGNH)

Production environment
Processing plant: It is proposed that a plant with a capacity of 16,000 to 20,000 liters of bottled
water per day at an estimated cost of Nu. 10 million be established. The water would be
bottled in Polyethylene Terephthalate (PET) material that is very light, re -sealable,
unbreakable and recyclable.

Quality management: The regular monitoring of water composition at various points of
processing is crucial to maintain constant composition supply of the bottled water. Having the
laboratory facilities at the site would be ideal in the long run to monitor the composition and
quality of bottled water that is marketed. Until such facilities are established, the laboratories
within the region would be requested to provide the needed information.

Marketing Strategies
Bhutan has a number of clean spring and groundwater sources for bottling. What is required
is to create an enabling environment to produce bottled water and compete in this fast
growing industry. A local firm may not be adequate to set a landmark in this industry,
particularly when there is no proper legal protection against cheap backyard manufacturers
and counterfeits in the regional markets. A possible solution is to tie up with well -known
international and regional investors like TATA, Nestle, etc. to tap these clean water sources
for regional and global bottled water market. This would necessitate a shift in the current FDI
policy (reduce minimum investment limits, allow investment in Indian rupees, etc.).

Environment/social cost
Unlike other industries, this plant would generate limited waste products that w ould have a
negative impact on the local environment. PET will be used as a material for bottling water.
This material is reusable, and recyclable. A strategy will be developed to collect these used
bottles either for reuse or for recycling. An attempt will be made to establish the processing
plant where minimum disturbance is caused to the local community and the environment. A
concern may rise when it comes to the transportation of bottled water, carbon emission in

                        Annexures to the Strategy for Gross National Happiness ( SGNH)

Non-Timber Forest Products

Around the globe, Non Timber Forest Products (NTFPs) play a significant role in the
economy by sustaining livelihoods and contributing significantly to income generation.
Current estimates put the value of total global trade in NTFPs at US$ 10 – 12 billion per year.
Despite the significance of this trade, NTFPs as a driver of major economic development have
been impeded for various reasons ranging from lack of proper institutions to deficiencies in
technology and knowledge at both producer and user ends. However, there is still continued
interest in NTFPs. It is argued and supported by many case studies that NTFPs have the
potential to improve subsistence for rural farmers and also contribute significantly to the
economy by promoting commercialization, tapping niche markets and ensuring quality.

In Bhutan, NTFPs have always played an important role in the rural areas. To a limited extent,
NTFPs have been commercialized. Similar to developments around the world, the use of
NTFPs in Bhutan is rapidly evolving from one of subsistence consumption to being
increasingly commercialized. As elsewhere, the dominant factors impeding commercialization
in Bhutan appear to be: inadequate legislation; poor understanding of resources and
associated value-chains; lack of access to markets and information; and limited technology in
terms of harvesting and post harvesting practices. The government has tried to facilitate
development of NTFP resource use and markets. However, progress has been limited.

Non Timber Forest Products and Significance in Bhutan
NTFPs are considered as those products derived from the forests other than timber and
firewood. Within this purview, products range from herbs to exudates from trees.
Classification of NTFPs and provision of adequate legislation have been confounded by the
diverse range of products. Phylogenetic groupings and classification based on functional
groupings have helped organize ecological understanding, but these are not adequate enough
for understanding development implications.

 List of Non-Timber Forest Product Groups
 Sl.      Potential Non Timber Forest Product Groups
 1        Bamboo and cane
 2        High value and wild mushrooms (Cordycep sinensis, Tricholoma matsutake, Morchella
          esculenta, Cantharellus cibarius, etc)
 3        Essential oil species (e.g. Lemon grass)
 4        Medicinal herbs and plant species with nutraceutical value (e.g. barks and leaves of taxus
 5        Aromatic species (e.g. Agarwood)
 6        Resin and its derivates
 7        Wild edible fruits, nuts, potatoes – with possible nutraceutical value
 8        Wild spices (e.g. Illicium griffithi)

While significantly contributing to rural dietary requirements, cash incomes from sale of
NTFPs have been viewed as crucial in supporting better livelihoods. As of today, the most
high profile NTFPs to have been commercialized in Bhutan are the matsutake mushroom and
cordyceps. Matsutakes have been traded for the last 10 years while cordyceps have only been
allowed for commercial harvesting 2 years ago. Commercialization of these two NTFPs has
significantly contributed to raising income levels of NTFP collectors. What has become
evident during the experience of commercialization is the weakness of existing institutions to

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

regulate marketing and development of these products. Most NTFPs in Bhutan have not been
explored in terms of their potential for commercialization.

Lack of Information
For almost all NTFPs, there is very little economic and ecological information. In terms of
economics, basic information on yield per given area, total production and amount traded are
not available. Such lack of information deprives formulation of effective production and
marketing strategies.

Information on habitat correlates/site requirements, interdependence on coexi sting species
and rates of turnover are also not available. Such information is sine-qua-non for determination
of sustainable harvesting rates, anticipating ecological challenges and thereby ensuring
sustainability. Lack of such basic information has also contributed to the formulation of
inappropriate legislation.

Lack of technology and know-how
Lack of technology for proper harvesting, processing and packaging hampers development of
NTFPs. Such lack of technology and know-how has also resulted in no new and innovative
products being developed. Left unattended, such shortcomings will impinge on the success of
NTFP commercialization.

Inadequate policies, laws and institutions
Current policies and laws consider NTFPs under the overall framework of forests. This has
led to less attention and consideration being provided to NTFPs. As such, this has resulted in
inadequate management of NTFPs and stymied growth within the NTFP sector. An example
of how the lack of adequate policies hampers effective management is the inability of the
government to determine how much fees should be charged for the collection of different

Current legislation also fails to provide adequately for the commercial harvesting of NTFPs.
Nor does it provide mechanisms whereby communities/user groups can harvest outside the
framework of collection of permits being issued by the government.

At the moment, the Department of Forests (DoF) is the sole custodian of all forests and
resources within it including NTFPs. However, the responsibility of guiding the development
of NTFPs is shouldered by one Section within the Forest Resources Development Division
(FRDD). As of now, it is manned by a single staff. Such an arrangement – given the diverse
nature of NTFPs – does not result in proper understanding of the resource, associated
markets needs and anticipating future challenges.

Existing Institutions, Capacities and Synergies Therein
The DoF and the RNRRCs have the capacity to conduct resource assessment for a few
selected NTFPs. There are also clear linkages – wherein RNRRCs provide the scientific
information and the DoF translates those into management principles and provides relevant
guidelines. But this is happening only for cordyceps at the moment. This existing linkage
should be strengthened and capacity to carry out research and exchange information

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The National Mushroom Center (NMC) is responsible for the development of mushroom
resources. However, arranging suitable management regimes requires the consensus of the
DoF. At the moment, there are no clear linkages between these agencies.

The National Institute for Traditional Medicine (NITM) and the Institute for Traditional
Medicine Services (ITMS) deal with collection of herbs with medicinal properties. There are
no linkages between the DoF and the NITM and ITMS. Capacity to test for bio-active
chemicals is available with the NITM. Establishment of proper linkages can lead to facilities at
NITM being used for testing other potential NTFPs. The following table provides a synopsis
of existing government related institutions which deal with NTFPs and their respective roles.

 Situation Analysis of Existing Institutions dealing with NTFPs
 Institution   Current Role and Efforts               Situation                        Next Steps
 FRDD, DoF            Resource Inventory             Limited in                       Tackle policy and
              on availability and use.        scope due to shortage            legal issues within the
                      Draft management       of man-power.                    NTFP sector.
              guidelines on selected                                                    Foster linkages
              NTFPs.                                                           between various actors
                      Survey conducted in                                     and provide a
              almost 12 Dzongkhags.                                            comprehensive overview
                      Studies and on-going                                    of the NTFP sector.
              inventory on resin tapping.
 RNRRC                Studies on cordyceps           Research has                    Improve human
              and Medicinal plants            led to determination of          resources and capacity
              programme at Yusipang.          appropriate times for            for research and
                      Efforts at             collection of                    dissemination of results.
              domestication of medicinal      cordyceps. The results                   Make finance
              plants.                         are implemented and              available for research.
                      Studies on cane and    monitored by the DoF.
              bamboo propagation, lemon               Limited human
              grass and chirata at            and technical resources
 NMC                  Inventory of                   Weak linkages                   Improve linkages
              mushrooms.                      with DoF.                        with DoF.
                      Ecological studies on          Limited in                      While overall
              matsutake.                      scope due                        programming can be
                      Harvesting,            centralization of                handled by NMC, field
              processing, storage and         activities.                      activities could be
              packaging of mushrooms.                                          decentralized to regional
                                                                               MoA offices.
 NITM                    Collection of                   Dissemination               Improve
                medicinal herbs and other          of knowledge on             information dissemination
                plants with medicinal value.       different plants is poor.   and linkages with other
                         Testing for bio-active          Marketing of        stakeholders.
                molecules.                         products is limited to              Lab testing for
                         Marketing of herbal      Bhutan. Being a             potential NTFPs could be
                products such as Tsheringma        government institution      taken up on contract
                tea.                               also hampers rigorous       from clients (DoF,
                         Testing for other        marketing.                  RNRRCs, private).
                marketable products (herbal                                            Upgrade facilities
                baths, soaps, nutraceuticals                                   and develop human
                etc).                                                          resources.
 MEA                     Lemon grass oil                Dissemination                Focus on
                distillation and marketing.        of knowledge on             encouraging

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                                            experience so far to     entrepreneurs.
                                            other stakeholders has           Facilitate NTFP
                                            been limited.            sector development by
                                                                     promoting tax breaks,
                                                                     easy access to finance and
                                                                     trade licenses.
                                                                             Help in brand

Examples of a few successful entrepreneurs suggest that commercialization of NTFPs can
indeed contribute to both the rural as well as the national economy. Firms such as Bio-Bhutan
and Nado Poi Zokhang are examples. What is relevant to note is the fact that with better
policies and supportive government institutions, there is ample room for more such firms to
develop given the immense range of NTFP products.

Support from the MEA
Entrepreneurship development programmes within the MEA have proved instrumental in
promoting opportunities for start ups. There is commitment from the government and
support for entrepreneurs and development of potential firms in Bhutan.

Policies, Laws and Institutions
A separate Division for NTFPs could be created within the DoF with the mandate to look
into development of NTFPs in collaboration with existing – NITM/ITMS, RNRRCs, IHDP,
NMC, MEA, Private Sector – and upcoming agencies.

A thorough assessment and revision of the Forest Policy should be carried out. While
upholding the visionary goal of His Majesty the Fourth King enshrined as the maintenance of
60% forest cover for all times to come, sustainable harvesting, development and management
of NTFPs should be accorded priority. The policy should outline priorities in terms of
strengthening basic and applied research to inform use and positive development of NTFPs.

The Forest and Nature Conservation Rules (FNCR) should be revised to make it supportive
of enterprises while at the same time ensuring that stringent regulatory mechanisms for
ensuring sustainability are put in place. Issues related to resource extraction and tenurial
rights should be addressed carefully. The rules should encourage „community based resource
management schemes‟ wherever appropriate.

Information generation and research
Inventory and Ethno-botanical Surveys
A thorough assessment of NTFPs in terms of product types, availability, production levels and
use should be conducted. Areas of production should be mapped. Economic parameters, such
as households involved in collection, amount traded, and income generated should be
collected. Ethno-botanical surveys should be given priority to list important NTFPs in terms
of their diverse uses.

Ecological studies to determine sustainable harvest levels would be paramount to ensure
sustainability where collection takes place from the wild. Potential for domestication should
be explored. This could be undertaken for selected and prioritized species.

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

Automated mass screening techniques to check for bio-active molecules with potential
medicinal value should be initiated. Existing capacity at the NITM for laboratory testing and
related certification procedures should be strengthened. This should start immediately.
Additionally, liaising with institutes possessing state-of-the-art technology for carrying out
such work should be tried. In the longer run, technology must be acquired from countries
where they are available and human resources developed to enable usage of available

Ecological Research
Capacity for ecological research should be built to enable proper identification of potential
NTFPs and derive sound data to ensure calculation of sustainable harvest rates and re lated
threats. Human resources in terms of strength as well as ability must be strengthened.
Adequate financing for such research must be made available.

Market Identification: Local, Regional and Global
Most studies dealing with success of NTFP commercialization highlight lack of market
awareness as a major constraint. In the initial years (2008 – 2013), the Royal Government
should pursue market identification for potential NTFPs.

Research on markets and consumer demand at the local, regional and global level must be
carried out. At the outset, such research might have to carried out by the Government or be
contracted out to consultants to inform decision making of actors in the value chain of a
certain NTFP. Once the product chain and the market is established and the main actor along
the value chain (e.g. the exporter) has gained experience and built enough capital, such
research may be left up to the main actor.

Ensuring Equitable Distribution of Benefits
After product identification and development of appropriate protocols, a thorough value-
chain analysis for each product should be undertaken. Within the value-chain, profit margins
and levels of success must be computed at each stage. This will enable identification of how
benefits are spread across the value-chain. Where necessary, this will enable the government
to intervene in an informed manner. For instance, in cases where it is found that one actor
along the chain is appropriating a disproportionate size of the benefits, the government will
possess necessary information and appropriate regulatory tools to ensure equity.

Link and Synergy with Other Parallel Development
Locations of primary producers must be linked with proper transportation facilities. In cases
where products identified are perishable, proper storage facilities should be built in the
nearest urban center where facilities of storage are available. Reducing the gap between
producer, processor, trader and the final consumer should be given priority – more so where
goods are perishable (e.g. matsutake mushrooms). This entails identification of nearest export
port from the point of production.

Value Addition, Labeling and Brand Building
Value addition must be encouraged at every stage in the value chain. Wherever possible,
value addition should be promoted at the producer‘s level so that most returns flow to them.
Product development must be accorded high priority. Wherever possible, research should be
undertaken to develop innovative products (e.g. nutraceutical herbal supplements, herbal
soaps, etc).

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Brand building must be pursued ruthlessly. Media and all available outlets must be used to
promote and advertise products from Bhutan. Words which associate with positive cultural
and environmental – pristine, pure, etc. – values must be used. For products which are known
to have health benefits, their characteristic and nature of benefit must be propounded.
Labeling products as ‗eco-friendly‟ and „organically-produced‘ can help capture niche and high
value markets.

Certification of products will be essential in ensuring quality and creating credibility thereby
gaining market acceptance and trust. This will also help in establishing brand name and
sustaining it. BAFRA which is mandated to certify all agricultural and food products could
certify NTFP products as well – since they are natural products. In order to gain international
acceptance, BAFRA might have to tie up with an international standardization and quality
control organization.

Support to Primary Producers
Education of primary producers in terms of sustainable harvest rates, group formation and
legal issues should be accorded priority. Information on international sanitary and phyto-
sanitary standards and requirement should also be provided. Existing extension capacity
should be upgraded to cater to this.

The government should encourage and help in the formation of co-operatives where
appropriate in collaboration with relevant stakeholders. This will enable primary producers to
take advantage of economies of scale and improve bargaining power with buyers. Information
on markets, prices and trends must be made available to primary producers so that they can
bargain with entrepreneurs for adequate payment.

Entrepreneurial Support
The current support rendered to entrepreneurs by the MEA should be upscaled. Besides
training, it should provide services such as assistance with faster provision. Education and
information on markets should be provided. Information on international sanitary and phyto-
sanitary standards should also be provided where export conditions demand so.

Access to Technology
Access to technology is considered under the framework of having knowledge of options,
necessary skills and ability to source equipment and financing. Harvesting and post harvesting
technologies for the most promising NTFPs should be explored and standards developed.
This can be led by the DoF with technical and collaborative support from the post harvesting
unit of the MoA. This information should be made available to producers and entrepreneurs
through information portals.

Processing and packaging facilities should be developed within the country. Standards and
protocols should be monitored by BAFRA. Initially, most facilities may be on the small scale.
FDI must be encouraged to facilitate development within this sector. As such, the ceiling on
FDI should be revised to enable smaller scale entrepreneurs to avail this facility.

Stakeholder Identification and Definition of Roles
A clear understanding of the roles of different stakeholders – government, entrepreneurs,
primary producers and other interest groups – will be vital in ensuring proper communication
and delivery of services. An exercise should be carried out to define what the roles of
different stakeholders in NTFP development should be. Additionally, an assessment of how

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they should change over time will be beneficial in defining future strategies in an adaptive

There is the need for a form of single desk selling. This can take the form of either outright
government action, a governmental organization such as a corporation, a consortium of
government and the private sector, or a company of which the government is a shareholder.
Such a single desk seller would have the prime task to presenting a single face for the new
supplier. Aspects that it would cover include the need for quality control and the prevention
of fraudulent behaviour. A single desk seller would be able to provide the minimum size
parcels needed for successful marketing as well as providing enough volume to allow it to
practice market segmentation rather than the buyer. This is particularly pertinent with
regard to being able to find a dedicated outlet for the low quality product rather than
accepting a salvage price from a general buyer.

A policy of a spread of markets should be employed. Cordyceps should be sold on a graded
price approach and not as a bulk single price that allows the buyer to exercise grade-market
segmentation. Two periods for marketing should be considered. One is in July and the other
December. The 80:20 rule could be employed where 80 percent of the marketing effort
concentrates on the existing markets of Singapore and Hong Kong and the other 20 percent
goes to new markets.

Development of Human Resources
Human resources in areas such as ethnobotany, resource ecology, bio-chemistry, marketing
and economics should be developed on a priority basis.

                       Annexures to the Strategy for Gross National Happiness ( SGNH)

Arts and Crafts Industries

A.       Introduction
The founding fathers of Bhutan have always been great patrons of our arts and crafts. Right
from Zhabdrung‘s time, our leaders and rulers have preserved and promoted these arts and
crafts. As a result, a strong artisan foundation was laid in the country. To this day, in rural
communities where about 70% of Bhutanese population live, artisan activities permeate into
all areas of life – woven baskets as storage facilities, wooden bowls for dining usage, etc.
Further, the usage of our national dress and other traditional utility products by all Bhutanese
citizens has sustained this sector up to now.

Against this backdrop, it would be only rational to incorporate artisan activity into all national
strategies for sustainable and equitable growth and poverty reduction in rural areas which in
turn contributes towards the achievement of at least two of the four pillars of Gross National
Happiness: namely, promotion of culture and equitable socio-economic development.

Bhutan has a long established tradition of handicraft manufacture, which historically was
produced to satisfy local needs. Handicrafts evolved locally over many centuries and may be
considered an integral part of Bhutanese material culture. However, the handicraft industry in
Bhutan still remains largely untapped in terms of its full potential. In order to tap this potential
and become a niche market, further revitalization or refinement of traditional techniques and
translation of Bhutanese cultural knowledge into the contemporary market needs are

B. Constraints
1. Lack of coordinating/focal agency on the promotion & development of
In the past, various initiatives were taken by the government and donors to promote
handicrafts in Bhutan. Although such initiatives have had a positive impact on the development
of arts and crafts in Bhutan, sustainability has always been an issue due to the lack of
ownership. There are a number of organizations which are involved with the handicrafts
sector such as the National Institute of Zorig Chusum (NIZC), the National Women‘s
Association of Bhutan (NWAB), certain NGOs, and the Handicrafts Emporium, among others.
These organizations work in isolation and are at times more competitors than collaborators.
Having a multitude of agencies also leads to duplication of work and waste of resources.
There is a need to identify one single agency to play the lead role to organize, coordinate and
develop this sector.

2. Availability of data
Although trade in handicrafts constitutes one of the important sources of income for the
rural communities, there is a paucity of accurate data on the number of artisans, products and
product range as well as the places of production, use and availability of raw materials, skills
level, etc. While numerous studies have been conducted through various projects under many
organizations, several of these studies have not seen the light of day nor have they been
implemented. Organizations dealing with the subject matter, in this case the Handicrafts
Emporium, should have had access to those studies.

3. Product design
Artisan products are expressions of Bhutanese tradition and culture. Currently, most artisan
products are designed for traditional usage. However, in order to go beyond this current

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

realm and to tap market potential, it is important to translate traditional designs and products
into usage that is complementary to contemporary markets.

Currently, such exercises are already in practice. Walking along handicraft shops in Thimphu,
one can see traditional woven fabrics made into cushion covers, bags, etc. However, much of
these translations have not been very successful because they have not been adapted to suit
the contemporary markets. For example, colours, sizes and details are currently not suited
for non-Bhutanese customers. Concentrated efforts will be needed to facilitate this area of
product design incorporating traditional designs with that of contemporary designs.

4. Quality
Quality is an important aspect, especially when producing for new markets beyond its current
confines. The present quality of workmanship is not appropriate for such expansion. Much
training will be needed to bring the quality of products to the appropriate level for
institutional up-scale trading.

5. Costing
In order to make a product competitive, one of the important aspects of the product is the
element of costing. Generally the handicrafts products are priced very high vis-à-vis the
quality of the product. There is no system for pricing/costing and this is yet another area that
needs to be addressed.

6. Production system
Existing production systems are mostly informal and the means of production are primary and
domestic based. Although these machines are suitable for its current needs, it is not totally
appropriate for a larger scale of production. For example, the sewing machines used here are
mainly domestic sewing machines, which are not appropriate to sew new types of products
where different types of fabrics are combined in one product.

7. Marketing
There is great marketing potential for artisan goods and services. For example, besides the
tourist markets, artisan products can also penetrate into the largely untapped institutional
hospitality markets. Producers can supply in-room amenities where designs and materials are
uniquely Bhutanese. This will further enhance the experience of tourists, where local cultural
materials are used instead of imported products.

1. Handicrafts Emporium as facilitator and its organizational reform
The Handicrafts Emporium in Thimphu is currently mainly a retailer and does not play a
major role in the development of this sector. While it is a retailer, it cannot conduct its
business as would a fully private enterprise as it is a government owned corporation which
entails its own inherent problems. (To cite an example, it has been subsidizing the NWAB
since 1995 @ Nu. 50,000 per month). Its role needs to be changed from a retailer to a
developer and investor in arts and crafts, engaging in capacity building, developing SMEs in arts
and crafts, business incubation and providing start-up funds and organizing unified marketing
strategy. To this end, it should be upgraded and restructured to enable it to perform these
functions of development and investment.

2. Nationwide Survey
As a first step, the Handicrafts Emporium should compile all the studies conducted thus far on
the handicrafts sector from various organizations. Thereafter, it can conduct a nationwide

                       Annexures to the Strategy for Gross National Happiness ( SGNH)

survey to update and fill in the gaps, if any, especially with regards to the number of artisans,
their concentration, the product/product range, use and availability of raw materials,
technology, production capacity, etc.

3. Resource inventory on raw materials
Artisans in all sectors suffer from lack of access to high quality raw materials at reasonable
prices. The materials and problems for each sector differ, but it is critically important to
address these problems. In many cases, inferior and even gaudy raw materials are totally
ruining refined traditional skills.

It is expected that the national survey will indicate the type of raw materials, availability and
sources, sustainability of raw materials, recommendations for scientific harvesting, and
alternative sources for the raw materials.

4. Cooperative societies for handicrafts
The formation of artisans‘ groups (cooperative societies) based on the survey would be the
next logical step. The formation of such societies will enhance economies of scale be they in
terms of purchasing raw materials, access to markets, supply or collective bargaining strength.
It will also be much easier and cost effective to provide any required institutional intervention
such as for skills development trainings and workshops.

Cooperative societies could be formed in places such as Radi (for Bura fabrics), Lhuentse and
Khaling (Silk and cotton fabrics, such as Kishu Thara), Zhemgang, Mongar and Kangpara (for
bamboo products), Pema Gatshel (for metal crafts of religious objects such as Dung and Jaling),
Trashi Yangtse (for wooden products such as Dapa, Gophor, etc.), Thimphu (for Chaka Timi
and other metal products), Bumthang (Yathra products). In this connection, the Cooperative
Act would have to be reviewed.

5. Product design and standardization / Product quality
Based on the survey on the skills of the artisans, various trainings will then have to be initiated
in the areas of product diversification, product adaptation, creative weaving, designing etc.
Specifically pertaining to tourism, the souvenir industry can also be developed. Souvenirs,
though based on traditional art forms, are often miniaturized to suit the needs of l ong
distance, especially airborne, travellers. Sometimes a similar purpose is served by substituting
lightweight materials for heavier traditional ones. Production methods may remain largely
unchanged while the products themselves are subjected to extensive modification.

6. Assistance for technological up-gradation
One of the commonly cited problems is the inability of our handicraft producers to meet bulk
orders due to its time consuming nature. The introduction of simple machines such as
spinning wheels, broad looms, dyeing machines, wood lathe machines, tool kit for cane and
bamboo will greatly alleviate this problem. Some of the options worth exploring here include
the provision of tool kits at subsidized rates to the artisans, the institution of a Raw Material
Bank for various raw materials to save cost.

7. Product branding and certification/ Packaging and labeling
There are a lot of handicrafts of Indian and Nepalese origin being sold as Bhutanese ones. On
the one hand, such practices tantamount to willful misrepresentation (in other words
cheating) of tourists, who are the main buyers which in turn does nothing for the reputation
of Bhutan and on the other hand, they have a negative impact for our own handicrafts
development prospects. Branding and certification is required for all products produced in

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

Bhutan and hence it would seem logical that a National Institute for this purpose be
established. The same institute could do the certification for handicraft products as well. If
however, the establishment of such an institution is not feasible, the restructured Handicrafts
Emporium should be given the mandate to certify and brand all handicrafts as ―Made in
Bhutan‖. Thereafter, brochures educating all consumers/tourists of the existence and
significance of the brand would be imperative.

A common problem with the use of handicrafts in tourism and international trade is product
recognition. The interpretation of crafts that are not likely to be well understood by visitors
should also include videos, well-trained guides and informative guidebooks. Many aesthetically
satisfying traditional goods are simply too plain to arouse the interest of tourists. Surface
decoration may be applied to please the customer and add provenance, as well as raise the
value added. This kind of transformation is reported in Peru where the producers of pots for
tourists sign (like Western artists) up-market vessels, but leave cheaper versions unsigned.
People remote from markets may also produce a product that is given a finish by another
group that has greater access to the needs of customers and sometimes these ―finishers‖ are
members of the urban majority population.

Similarly, packaging and labeling of handicrafts form an integral part of its attractivity and
marketability. This activity could be undertaken by yet another group or private sector (not
by the artisans themselves) which will then lead to specialization. The use of indigenous raw
materials for packaging should be encouraged.

8. Marketing & product promotion
Artisans in all sectors suffer from a lack of direct access to markets, ad hoc and sporadic
distribution systems, and dependence on middlemen. Transportation problems also prevent
artisans in remote areas from communicating directly with their buyers. Marketing is a new
field for artisan products and hence it requires aggressive plan. Various methods such as
advertisement, exhibitions, fashion shows, certification of products, development of product
brochures and catalogues will have to be initiated to enhance the marketability of the artisan
products from Bhutan.

The Handicrafts Emporium can play a major role in drawing up and implementing the
marketing strategy for the sector. This strategy should, among others:

   Take advantage of the events in 2008 by launching new products commemorating the
    special occasion.
   Develop brochures and catalogues on the artisan products with a brief on the product,
    the artisan and the place.
   Utilize various forms of the media such as internet, news papers for marketing
   Take advantage of prominent places such as airports, museums, etc.
   Introduce SEAL of EXCELLENCE to encourage creativity of the artisans
   Establish international linkages with associations and NGOs for market penetration.
   Organize trade fairs/exhibitions such as declaring a particular day/week as the day/week of
    the Artisans.

                             Annexures to the Strategy for Gross National Happiness ( SGNH)

ICT and Media

Information and Communications Technology (ICT) is recognized as a key leveraging factor in
national development, from wealth creation to improving the quality of life for all sections of
the society. Numerous factors influence the extent and speed of social and economic
development – not least political stability, physical infrastructure, basic literacy and health
care. There is no suggestion that ICT can eliminate the need for these or offer a panacea for
all development problems. But experiences around the world reveal ample evidence that
intelligent deployment of ICT can have a dramatic impact on achieving social and economic
development goals. The real benefits lie not in the provision of technology per se, but rather
in its application to create powerful social and economic networks by dramatically improving
communication and the exchange of information.

We are now at a critical juncture of unprecedented opportunities. The global flows in
information, products, people, capital and ideas offer great potential for radical improvements
in Bhutan‘s development from improving governance and services to employment creation
and accelerating economic growth. Left unexploited, the country may fall behind the other
countries which are already making rapid strides in deploying and using ICT. This is why
decisions about the use of ICT will be critical in determining the trajectory of national
growth, to wider development or greater inequality within and with the world outside. The
old debate, about choosing between ICT and other development imperatives, has shifted
from one of trade-offs to one of complementarities.

Countries have pursued diverse strategies: some have focused on developing ICT as an
economic sector – either to boost exports or to build domestic capacity – while others are
pursuing strategies which seek to use ICT as an enabler of a wider socio-economic
development process. Countries which use ICT as an enabler may be further sub-divided into
those which have focused primarily on repositioning the country‘s economy to secure
competitive advantage in the global economy and those which explicitly focus on ICT in
pursuit of development goals such as those set forth in the UN Millennium Summit.

These varied experiences have revealed some important lessons about the role of ICT in
development4 :

            An export focus can produce significant economic benefits, such as growth and
             foreign investment, but these gains do not automatically translate into progress on
             broader development goals.

            Building domestic ICT production capacity may address local needs and help
             strengthen domestic economic linkages, but it can significantly restrict countries‘
             ability to adopt new technologies and to gain competitive advantage in the global

            It is imperative to use ICT to improve the competitive position of a developing
             country in the global economy, but this may fail to meet some development goals if
             it diverts attention from fostering local markets and businesses.

    Source: C reating a Development Dynamic – Final Report of the Dig ital Opportunity Initiative (July 2001).

                        Annexures to the Strategy for Gross National Happiness ( SGNH)

           An explicit focus on using ICT in pursuit of development goals allows countries to
            achieve a wide diffusion of benefits from ICT and contributes to both broad-based
            economic growth and specific development goals.

           A number of interrelated factors should be addressed to maximize the benefits of
            ICT for development. These include building human capacity, creating incentives for
            enterprise, developing appropriate content and increasing competition, especially
            among telecommunications and Internet-related businesses.

           Finally, the success of national ICT strategies is dependent upon the coordination
            and alignment of efforts undertaken by all actors involved, at global, local and
            national levels.

The role of ICT, both as an enabler and as an industry in itself, is identified in the 2004 Bhutan
ICT Policy and Strategies (BIPS). Because of the rapid development of the technology, it is
difficult to make any realistic detailed long-term plans for this sector. The long term objective
is to establish a robust ICT infrastructure, develop a flourishing ICT industry and deploy ICT
and media to leverage good governance, as elaborated below:

ICT infrastructure – to establish a ubiquitous network which will enable everyone to be
connected anytime from anywhere within Bhutan. In the short and medium term, the
objective is to build a reliable IP backbone and distribution network.

ICT industry – to establish a flourishing ICT industry which will employ a majority of the
youth and generate revenue not less than the tourism industry. In the short term, an enabling
environment with the required human resource base shall be created to support the
establishment of firms that can employ over 3,000 high school leavers and graduates.

Good governance –to make government services available online 24/7. This includes
clearances, approvals and other government transactions. It will also include deploying ICT to
improve the outreach and quality of essential services such as education, health, agriculture,
etc. A free and vibrant media industry will also be created to contribute to the national
development and democracy. In the short term, the government will provide 50% of its
services online and create the conditions for the growth of the media industry.

ICT Infrastructure
While Bhutan Telecom Ltd (BTL) as the incumbent telecommunication operator has an
extensive network, the strategy recognizes the value of other players in the market, both
current and in the near future. It is pragmatic to involve BTL as well as new entrants to
expand and improve ICT network coverage of the country. The plan recommends laying of
Optical Power Ground Wire (OPGW) over the main power transmission lines. The plan also
looks at how the existing ICT services charges, particularly internet services, can be made
more competitive. This entails exploring alternative gateways through India and other
countries in the region. Overall, the ICT infrastructure development is based on a study of
the existing network, identification of gaps and building a coherent network.

Specifically, the following strategic choices are available for ICT infrastructure development:

   i)        Filling in the gaps in the existing network to ensure a fully redundant network
             providing broadband connectivity.

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

     ii)    Upgrading of the national network to support triple play services (voice, data and
     iii)   Enhancing the international gateway and providing access to submarine cable
            landing stations in neighboring countries.
     iv)    Improving and establishing more community access centers.
     v)     Instituting policies towards a healthy ICT and media market based on competition
            and sustained development

The strategy is to improve the backbone network (both national and international) and
national ICT distribution system within the following timeframes:

     i)     Immediate (2007-2008)
     ii)    Short-Term (2008-2013)
     iii)   Medium-Term (2013-2018)
     iv)    Long-Term (2018-2028)

Immediate (2007-2008)
The immediate term covers the projects which are ongoing and prioritized for
implementation during 2007-2008:

a.     Wangdue-Punakha aerial fiber link
b.     Thimphu-Wangdue link
c.     East-West/North-South OPGW network
d.     Broadband internet service

Short-Term (2008-2013)
The next stage of network expansion will concentrate on laying fiber to the Dzongkhag
headquarters not covered under the above plan. This will improve the network, enhance its
reliability and also meet the demands for bandwidth in the growth centers and economic hubs
and other Dzongkhag headquarters. BPC transmission network will be utilized, where feasible.
The short-term plan will include the following:

a.    Tsirang-Sarpang-Gelephu OPGW
BPC will implement high voltage transmission line to evacuate power from Basochhu to
Tsirang-Sarpang-Gelephu and also to form the national power grid. This will remove the
bandwidth bottleneck on the Tsirang-Gelephu microwave radio link and will also increase the
reliability of the backbone network. Laying of OPGW can be simultaneously done by BPC
while building the power transmission lines.

b.   Mongar-Tangmachhu-Lhuentse OPGW/ADSS
This will provide the required bandwidth to Lhuentse Dzongkhag with a drop at Tangmachhu
and will be able to meet the demands for the Dzongkhag headquarters and surrounding areas.
Further it will provide redundancy to the existing 34Mbps PDH radio.

c.   Kanglung-Trashigang-Trashiyangtse OPGW/ADSS
This will increase the reliability of the ICT backbone and also meet the objectives of a more
robust network in these areas.

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d.   Phuentsholing-Gomtu-Samtse OPGW/ADSS
This link will increase the bandwidth capacity for the Phuentsholing-Samtse link which
currently is 34Mbps. Further, it will meet the requirements of Samtse and Gomtu industrial

e.    Paro-Haa OPGW and ADSS
This will augment the existing BTL microwave radio, meet the demand for Paro and Haa, and
also increase the reliability of the ICT backbone network.

f.   Punakha-Gasa ADSS
This will replace the existing DRMASS between Thimphu and Gasa.

g.   Wangdue-Trongsa, Bumthang-Gyalpoizhing, Kanglung-Dewathang connectivity
The proposed optical fiber on these routes will result in a nationwide IP-backbone network.
This will also augment the BTL SDH radio links. However, the installations have to be carried
out on aerial optical fiber cable as there are no plans in the short-term to build power
transmission lines on these routes.

h.   Last mile solution
The last mile access (network to the homes and offices) could be expanded using fiber and/or
wireless technologies. The present distribution systems consist of underground and aerial
copper cables and some wireless. In order to enhance network reliability and efficiency, it will
be necessary to take fiber to the nearest locality and further distribution done using copper
cables or wireless technologies.

i.   Expansion and up-gradation of mobile services
Mobile network operators/service providers need to expand and upgrade their networks to
cover the growth centers, economic hubs and interconnecting highways.

j.    Broadband services
Broadband services capable of triple play services (voice, data and video) will be made
available to all growth centers, economic hubs and Dzongkhag headquarters.

k.     Utility Ducts
It is proposed that integrated utility ducts be built along all primary and secondary national
highways for carrying power transmission lines, water, sewage, gas, fiber optic cables, etc.

Medium-Term (2013-2018)
Fiber optic cables shall be laid along the following highways to augment the national ICT
backbone infrastructure:

      Samtse-Phuentsholing-Lhamoizingkha-Gelephu-Nganlam-Samdrupjongkhar
      Ura-Gomphu-Panbang

This will provide additional redundancy and also meet the demand in the proposed hydro
power plant sites.

Communications to the proposed hydro power projects
Feasibility will largely depend on the completion of proposed primary and secondary national

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 a. Punatsangchhu I and II
ICT services can be provided as it is very close to Basochhu Generation Unit, which is
approximately 2 km from BPCL 66KV tower LB-77 and Rurichhu 220/66/11 sub-station.

b.   Chamkharchhu I and II
ICT services can be provided to the project sites subject to completion of the Ura-Gomphu-
Panbang highway. Chamkharchhu-I is about 2.5 km from Langdurbi village, Zhemgang.
Chamkharchhu-II is about 14 km from Dakpai-Buli road and 1 km from Shingkhar village,

c.   Mangdechhu
The project site is about 25 meters from the Trongsa-Zhemgang highway and about 5 km
from BPC 6.6 kV pole Q20H32. Mangdechhu can be easily covered by the planned OPGW

d.   Wangchhu
The site is about 1 km from Lammi and Lhamoizingkha villages. It is about 5 km from Monitar,
on the Kejarey-Kalikhola road. The communications to the project site will be available on
completion of the Samtse-Samdrupjongkhar highway.

e.   Bunakha
The proposed site is about 1 km from the BPC 11kV transmission pole and Chanachen village
under Geling geog.

f.   Kholongchhu
The site will be covered by the proposed Kanglung-Trashigang-Trashiyangtse OPGW project.

Long-Term (2018-2028)

a.    Fiber to all villages
By 2020, BPC envisions full rural electrification. The possibility of using the existing BPC
feeder lines to provide ICT services using ADSS fiber needs to be explored. The project can
be undertaken in phases. This will provide the platform for delivering all kinds of ICT services
to the homes.

b.    Bhutan‟s own satellite
By this time, Bhutan should be in a position to own a satellite of its own, which will cater to
the ICT backbone infrastructure needs of the ICT and ICT-enabled services industries as well
as for remote sensing facility for geological, ecological, land use-planning, weather and other
services. Additional bandwidth can be sold to the neighboring countries for similar uses.

In addition, the following strategic options need to be pursued side by side the above plans
and programmes:

Development of local content
At present, there is virtually no local electronic content available. The major use of internet is
e-mail service. Users download contents offered by the Internet mainly from USA and Europe.
This has a direct impact on the services tariff provided by the ISPs. Without enough local
traffic, there is neither a case for competition in the domestic market, nor can Bhutan bargain
with the regional telecom operators. This underscores the need for developing local content.

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Therefore, content related projects and programmes such as online banking, e-governance
applications, e-education, e-health, video conferencing, IPTV, gaming, etc. must be promoted.

Other projects that will boost local content development include the Dzongkha localization
and National Digital Library of Bhutan projects being undertaken by the DIT.

Human Resource Development
The overall objective of the ICT human capital strategy will be to build a critical mass of IT
personnel required to support the growth of this sector. This will include IT university
graduates, engineering and B.Sc graduates and IT diploma, as well as high school leavers with
requisite ICT skills.

Training employees of ICT business operations
The immediate and short-term HRD strategy should be to meet the human resource
requirements for the various ICT service industries identified for the 10th FYP. The following
industries have the potential to be established using the current human resource base:

      a.    Call centers
      b.    Medical transcription
      c.    Software development
      d.    Data processing & capturing
      e.    Data networking services
      f.    Web design/development
      g.    Animation/graphic designing

The number and capacity of potential private business ventures desiring to establish the
identified industries cannot be fully foreseen. However, each recruit may require additional
training to take up the positions in the business units. Currently, the Ministry of Labour and
Human Resources (MoLHR) provides support for these trainings and this could be continued
during the 10th FYP. But eventually, as the industry becomes more mature, all the trainings
should be borne by the private investors and by the employees themselves.

Additional Training
ICT professionals need to continually update their skills and knowledge. There are various
relevant packages being offered by reputed institutes in India. However, the costs of providing
such trainings are high. An alternative cost-saving strategy would be to invite resource
persons and provide trainings locally at RIM and private institutes which have the requisite

Certification (Professional Branding)
Professional branding may be especially important to market Bhutan as a quality BPO
destination. The cost of professional branding courses is high and therefore, the strategy
would be to conduct the courses in Bhutan by hiring resource persons from outside. In
addition to generic training, certification courses will be required to provide professional

Scholarships and related HRD support

 a)        The government could negotiate with renowned Universities such as MIT and
           Harvard or their equivalence and secure scholarship for few top Class XII Science
           graduates every year.

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   b)    In addition, the government should continue to send 10-15 students to Indian
         Universities for undergraduate and post-graduate courses. This should also cater to
         the professional development of the current ICT staff in the government and the
         private sectors.
   c)    Management of ICT Business Courses – This scheme will provide recipients with
         subsidy/scholarships towards the cost of short management courses to enhance
         skills and competencies of private sector managers. This should be aimed towards
         providing managerial skills as well as opportunities to network with prospective
         business partners.
   d)    Young ICT Professionals Awards Scheme – Promising young ICT professionals with
         the potential to make a substantial contribution to the industry should be given due
         recognition. This award scheme could be in the form of scholarships for short-term
         trainings in related fields.

In-country programme in the private institutes
The private ICT training institutes in Bhutan do not have the capacity to provide good quality
ICT education. Most of them provide basic courses for the high school students and organize
tailor-made courses for government agencies and corporations. It is proposed that the
government introduce a system of accrediting ICT training providers. The aim is to better
regulate the ICT training provider industry, specifically to provide incentives to well
resourced and well performing training providers and to gradually upgrade or to close down
training providers which are not providing quality training.

In addition, local training institutes shall form strategic alliances with reputed, international or
regional IT institutes. Many of the courses that were detailed above could be undertaken by
the private training institutes if they built themselves up to the required standards.

In-country education programme at the University and schools
In the long term, Bhutan needs to ensure that there is a programme of education and training
in the existing institutes to cater to the demand of the ICT industry. This will require
constant upgrading of existing courses in line with the growth of the ICT and ICT -enabled

Rationalizing backbone and international connectivity charges
Over the past decade, the introduction of competition in the ICT sector, particularly in
mobile cellular and broadband markets, has been one of the key factors in increasing tele -
densities. The level of competition that is autho rized by countries (based on the number of
competitive players) as well as the kinds of services open to competition is critical to
sustaining this ICT sector development strategy. Competition in international services, in
particular, the international gateway, and leased lines, is vital to ensuring low-cost Internet

It is one thing for countries to authorize competition in the provision of ICT services and
another to ensure that new market entrants are actually licensed or otherwise authorized to
provide services, and are able to compete in the market on a level playing field. One of the
key issues in ensuring a level playing field is a fair and transparent interconnection regulatory

Opening up access to the local loop for competing operators is also gaining ground as a
means to fostering competition. Local loop unbundling is increasingly recognized as being
important not only for competition in traditional telephone services but also to prevent

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incumbent‘s monopoly from spilling over into the domain of broadband Internet. Therefore,
the goal of unbundling has often been to make network components available to new market
entrants with greater commitment, expertise and incentives to improve services.

Internet Exchange Points (IXPs), also known as Network Access Points (NAPs), are a way to
maximize the existing infrastructural base for Internet service provision in developing
countries and foster competitive provision of Internet services. They allow Internet Service
Providers (ISPs) to exchange traffic between their networks through mutual peering
agreements at minimal cost, with better efficiency (in terms of bandwidth and latency) and
increased speed. Networks can interconnect directly via the exchange, rather than through
third party networks, and the cost of delivering traffic to upstream providers or to faraway
places is minimized by keeping it within and between adjacent ISPs. For many developing
countries, IXPs keep traffic local or regional, instead of routing Internet traffic to hubs like
New York or London – just to reach an e-mail account on a different ISP in the same country
or to exchange Internet traffic with a neighboring country.

Regulatory procedures should be clear, transparent and predictable. Regulators, in enforcing
these procedures, should be accountable, and should have sufficient credibility and authority
to enforce the relevant laws and regulations.

International bandwidth providers that offer global connectivity through submarine cable is a
critical input for provision of broadband and Internet services, international long-distance
voice telephony and for a number of key IT and ITES (IT-enabled services) industries such as
software exporters, Business Process Outsourcing (BPO) and Knowledge Process
Outsourcing (KPO) units, banks and other financial services companies.

Much of existing cross-border infrastructure is fiber while some are digital microwave, which
need upgradation to cater to the growing regional voice and data traffic. Cross-border
connectivity, in terms of quality, accessibility and data capability, is weak at present.

Backbone and international connectivity issues
The following are the pertinent issues:

  (a)   Existing international and Internet connectivity is very expensive compared to other
        locations, such as India, due to the huge costs involved in installing, operating and
        maintaining satellite-based international gateway and also Bhutan‘s limited market
        which does not generate much international traffic. Besides, satellite-based
        international connectivity has high latency. The international bandwidth available is
        inadequate to meet the capacity requirements of BPO operations and the proposed
        ICT Park in Wangchhutaba, Thimphu.

  (b)   No fiber optic connectivity for international and Internet connectivity except to India
        via the Phuentsholing-Hasimara OFC which is not as reliable. Existing cross-border
        connectivity among SASEC countries is weak.

  (c)   No IXP to maximize the existing infrastructural base for internet service provision
        and foster competitive provision of Internet services.

  (d)   Lack of competition in submarine cable access, at the regional level – there are only
        five international (submarine) bandwidth providers in the SASEC region, i.e. four in

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        India and one in Bangladesh. This impacts Bhutan‘s access to submarine cable landing

  (e)   Underweight national ICT backbone infrastructure (mostly owned by BTL).

Policy and Regulatory Options
For Bhutan to fully reap the benefits of ICT for development and economic growth, with the
objective of creating a knowledge-based society, the following two time-based options are

Short-Term (2008-2010)

        Connecting the Phuentsholing-Thimphu OPGW (owned by BTL and
         BPC) to the Tala-Delhi OPGW – For realization of this option, the matter
         should be taken up with the Indian Government, involving key stakeholders on both
         sides. MoIC has requested the MoFA to pursue the matter with the appropriate
         authorities in India. Overhead OPGW offers advantages over underground OFC in
         terms of robustness, vandal proof, rodent and termite proof, etc. thus offering high

Mid-to Long-Term (2010-2015)

        Access to Submarine Cable Landing Stations in India and Bangladesh –
         For redundancy and low latency of the international link:
         (a) Access to submarine cable landing station in Mumbai or Cochin, India, via an
              appropriate Indo-Bhutan fiber link; and
         (b) Access to submarine cable landing station in Chittagong, Bangladesh via either
              establishing an SDH microwave radio link or a fiber network from Bhutan to
              Bangladesh border.

        High Capacity, Low Cost Integrated Data Infrastructure – Adopted in the
         SASEC ICT Development Master Plan developed by the ADB and comprises of
         three components:
         (i) Establishment of Siliguri Exchange Hub – which will integrate networks from
               member countries and provide a peering hub;
         (ii) Establishment of Country Gateways – to efficiently link to the Siliguri Exchange
               (For Bhutan, this must be the IXP); and
         (iii) Improving Cross-border Backhaul links among SASEC countries, including
               establishing redundancy, to submarine cables for Nepal and Bhutan.

ICT Industry
For this part, the paper examines the potential of developing a viable Bhutanese ICT industry
in the short, medium and long term. There are three aspects of ICT industry requiring
different strategic interventions and plans. These are in the areas of ICT hardware, ICT
software and ICT-enabled services (ICTES).

Because of the fledgling ICT industry, everything will have to almost start from scratch. This
requires developing the human resource base, the enabling environment such as financing and
FDI policies, institution of technology parks and other supporting institutions, including R&D.
The strategy recognizes the crucial role of the private sector and FDI for the development of
this segment of the industry. A clearer definition of the responsibilities between the

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government as the enabler and the private sector as the investor needs to be established.
Governance issues related to speedy clearances is also an important feature of this plan.

Overall, the government‘s role shall be to enable, facilitate and support the start up of these
industries, and investment decisions should be left to the market.

Creating Enabling Policies
The ICT industry in Bhutan is dominated by hardware vendors. There are 49 ICT firms
providing such services. Out of these 36 are located in Thimphu, 8 in Phuentsholing, 2 in Paro
and one each in Wangdue, Gelephu and Mongar. The vendors have dealership in computers
and related hardware and mostly serve the needs of the government offices. There are also 7
firms registered to provide ICT related education and training. Out of these 4 are located in
Thimphu, and the rest are in Phuentsholing, Paro and Mongar. Most of these provide basic
training and none offer branded certificates such as CISCO, Microsoft, etc. Some of them
also provide hardware vendor services.

However, there are only 6 firms dealing with software development and solutions. None of
them possess any internationally benchmarked competencies. As a result, even for simple
application development these ICT firms have to recruit and rely on Indian firms and

Another factor that has impeded the establishment of some of the recent private sector led
initiatives on medical transcriptions and call centers is the cumbersome government
clearances. In many countries, there is a system established whereby there is a time limit
given to the government institutions to provide such clearances. In Bhutan, while there are
extensive documentation and penalty clauses for the applicants of new industries, there are
no counter deadlines and responsibilities established for the clearing agencies. This needs to
be addressed.

Licensing of ICT Facilities and Services
Licensing is one of the most important instruments regulators employ in the context of ICT
sector reform. Regulators use the licensing process to exercise control over many variables
such as market structure, the number and types of network operators or service providers,
the extent of competition, the pace of infrastructure expansion and the affordability and range
of ICT services available to consumers.

With the enactment of the converged Bhutan Information, Communications and Media Act 2006,
the licensing provisions have changed. Section 36 of the Act provides for categorization of
licenses as facilities-based or services-based licenses. An ICT Facility License authorizes the
owning or operation or provision of an ICT facility. As defined in the Act, an ―ICT Facility‖
means any facility, apparatus or other thing that is used or is capable of being used principally
for, or in connection with, the provision of ICT services, and includes a transmission facility as
well as any or all of the following facilities: fixed links and cables, computer facilities, pay -
phone/communication facilities, radio communication transmitters, receivers and links,
satellite earth stations, towers, poles, and ducts and pits used in conjunction with other
facilities. This term does not include customer equipment, but includes such other services as
may be prescribed by Rules; unless otherwise stated, ICT facility relates to public ICT facility.
Thus, BICMA must urgently establish the ICT Licensing Rules, particularly spelling out the
transitional licensing measures.

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The fast technological advancement and constant market evolution imply that ICT licensing
must also evolve to ensure that it remains relevant and beneficial. Left unchanged, the
licensing process can be an obstacle to the development of the ICT market in several ways.
Preserving unnecessary, onerous and complicated licensing requirements can act as a barrier
to market entry and hinder competition. Maintaining outdated and irrelevant licensing
classifications can also hinder technological advancement and service development. Licensing
classifications based on specific types of technologies can act as artificial barriers to the
introduction of alternative new technologies, which could be used to provide similar or even
identical services.

Recommendations for adoption of a new licensing approach to cope with the trends of
liberalization and convergence in markets and technologies are as follows:

   (1)    An individual (or operator-specific) license is useful where a scarce resource or right
          is to be licensed (e.g. spectrum) and/or the regulator has a significant interest in
          ensuring that the service is provided in a particular manner (e.g. where the operator
          has significant market power). An individual license, often containing detailed
          conditions, is issued to a single named service provider, through some form of
          competitive selection process. Examples include provision of basic ICT services,
          mobile wireless services, and any service requiring spectrum.

   (2)    A general authorization or a class license is adequate where individual licenses are
          not justified, but where there are significant regulatory objectives which can be
          achieved by establishing general conditions. A general authorization normally sets
          out the basic rights and obligations and regulatory provisions of general application
          to the class of services licensed, and often issued without a competitive selection
          process, i.e. all qualified entities are authorized to provide services or operate
          facilities. Examples include data transmission services, resale services, private
          networks, international services, VSATs, etc.

   (3)    Allow open entry, without any licensing process or qualification requirements, for
          certain services that can be governed within rules and regulations generally
          applicable to the ICT sector such as consumer protection which often come under
          general business regulation that applies to all commercial entities. Thus, registration
          requirements or other rules of general application sometimes apply. Examples
          include ISPs, value-added services, WLAN hotspots, etc.

E-Waste Management
Electronic waste includes computers, entertainment electronics, mobile phones and other
items that have been discarded by their original users. Disposed electronics are a
considerable category of secondary resource due to their significant suitability for direct
reuse (for example, many fully functional computers and components are discarded during
upgrades), refurbishing, and material recycling of its constituent raw materials. Definition of
electronic waste according to the WEEE 2002/96/EC (European Union):

        Large household appliances (ovens, refrigerators etc.)
        Small household appliances (toasters, vacuum cleaners etc.)
        Office & communication (PCs, printers, phones, faxes etc.)
        Entertainment electronics (TVs, HiFis, portable CD players etc.)
        Lighting equipment (mainly fluorescent tubes)
        E-tools (drilling machines, electric lawnmowers etc.)

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      Sports & leisure equipment (electronic toys, training machines etc.)
      Medical appliances and instruments
      Surveillance equipment
      Automatic issuing systems (ticket issuing machines etc.)

Electronic waste is of concern largely due to the toxicity of some of the substances such as
lead, mercury, cadmium and a number of other substances. To minimize e-waste, some
countries make the sellers and manufacturers of electronics responsible for recycling about
75% of products.

Although Bhutan is yet to face the problem of e-waste, the country has to be prepared to
deal with this before it becomes an issue. This is especially important considering that Bhutan
has always prided itself for its pristine environment. The country‘s environment will continue
to be a selling point when it markets itself as a special tourist destination.

For the 10th Plan, it is recommended that a study be undertaken to determine the magnitude
of the problem and suggest a course of action to be implemented during the plan period. The
scope of actions could be a combination of new regulations, public education and recycling
process. This could also be developed as a business unit for the local entrepreneurs.

ICT Growth and Enabling Centres
ICT Parks
An enabling institution for ICT industries provided in other countries is that of the ICT Park
which provides ready made spaces for ICT firms to set up shop quickly and without
harassment. The service provided includes connectivity and special concessions in the form of
tax breaks, fast track clearances, relaxed labour policies, etc. The ICT Park helps in providing
small miniscule islands of efficiency and opportunities to connect to the global ICT markets.
These Parks then can provide a catalytic impact in improving the ICT industry beyond these
islands and to other industries within the country. The proposal for Bhutan is enumerated
In the long-term, Bhutan should set up 3-4 ICT Parks, to be called the ICT Parks of Bhutan
(ICTPB). The first one can be established in Thimphu, with facilities to catalyze the small,
dynamic and largely public sector-driven ICT market to enable job creation and innovation,
recognizing the potential of Thimphu to become a national hub of ICT action in government,
education and businesses. The ICTP-Thimphu will serve as the model/pilot project for
feasibility of replicating similar facilities/services in other strategic areas such as Samtse,
Samdrupjongkhar, and Kanglung/Trashigang in the mid- to long-term.

Expected Benefits
    Addresses Bhutan‘s needs for ICT first;
    Builds ICT skills for the new economy;
    Facilitates ICT industry clustering behavior, hence cluster-based ICT markets and FDI
    Establishes RUB-public-private sector links;
    Promotes entrepreneurship and businesses as ―incubators‖ (e.g. call centers, data
        centers, medical transcription services, networking, etc.);
    Deploys ICT to employ people, create demand and generate exports;
    Connects Bhutan with the world‘s development and industry partners;
    Improves enterprise competitiveness using ICT (such as through efficiently enabling
        economic access to Bhutan‘s tourism, hydro power, cultural heritage, ecology and
        governance by the international market);

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        Links Bhutan with the global economy and Bhutanese entrepreneurs with
         international businesses.

Bhutan‘s small market size and skills base do not justify the conventional approach to
developing an ICT Park and marketing it to tenants. It is thus recommended that the
proposed ICT Park integrate other functionalities with incubation facilities and operations
that seek to link to regional and international markets through (limited) public expenditure
support. Other risks/constraints include challenging terrain, shortage of trained manpower to
sustain the industry, lack of availability of high-quality connectivity at reasonable cost, lack of a
one-stop cross-ministerial clearance mechanism, etc.

In view of the forgoing, the Government should locate ICTPs in the industrial parks or with
other initiatives identified in the SGNH, particularly in considering replication of the ICTP-

Community Information Centers
One of the windows through which communities can access information services is through
Community Information Centers (CICs). Within the immediate and medium-term, ICT
services including internet and e-governance applications in particular will not reach the
homes in the rural areas. Therefore, CICs are a logical means to provide the rural population
this opportunity. CICs will be located in population centers such as near geog headquarters
and other establishments where there is regular congregation of people. The services to be
provided in these centers include media services such as TV and print materials, internet
access, e-governance services, e-post, e-banking and electronic fund transfer services. Most of
these will be located where there is commercial power supply. But in special circumstances, a
scaled down CIC model can also be established using solar power and laptops. The Centre
can also provide training in the use of specific applications to students and communities.

Eventually the CICs should try to aim to be self sustaining. Therefore, while the initial
investment and the operating costs for the first three years shall be met by the Government,
each community has to come up with a strategy to make the centre self sustaining through
levying nominal fees for some of its services such as training, photocopying, printing and the
use of the internet. The CIC pilot projects being implemented by DIT demonstrates that a
case can be made for many of these centers to be run on a viable business model.
Nevertheless it is foreseen that this may not be the case for some centers for which,
government‘s continued support may be required. Additional benefits of CICs are in the
opportunities for local entrepreneurship and to the democratization process. CICs should be
established in all the geogs and other places where there is a demonstrated demand.

ICT Business Ideas
Because of the limited domestic market, the growth of the industry will have to depend on
catering to the regional and international markets considering both outsourcing and off-
shoring possibilities. In principle, outsourcing/off-shoring work will flow to where the
labor/talent is the cheapest. India produces 100,000 MBAs a year and 3 million graduates,
while Bhutan produces less than 1,000 graduates every year. This is expected to double by
end of the Tenth Plan.

Therefore, it is unlikely that Bhutan can aspire to be a destination for outsourcing/off-shoring
in the way that India or China can. The availability of a large talent pool that is willing to work
at minimum wages seems to be the defining characteristics of these countries. The situation in
Bhutan is quite different. The small number of its graduates that the Bhutanese education

                       Annexures to the Strategy for Gross National Happiness ( SGNH)

produces target themselves for jobs that provide greater security and higher earnings than
that normally associated with call centers.

And yet, Bhutan does provide certain characteristics that nurtured well could poise it to help
its people find gainful employment in the plug and play world. A good telecommunication
network is being developed that will provide broadband facilities in all major population
centers including the capital city and the Dzongkhags. We have a growing body of school
leavers educated though an English medium of schools. Bhutan is relatively secure and does
not suffer from the political and labor unrests associated with many of the countries in the
region. In the medium-term, there are just not enough jobs in the other core sectors such as
tourism and service industry for our people. Therefore, this will have to be taken up as a
matter of imperative. The industry will have to be nurtured and conditions created to help
attract business in niche areas. It seems that we should be focusing on areas where intellect
and high-end development tasks are involved and not the sweat shops. However, in order to
get there, we need to develop our human resources, build up the capacity of the private
sector and create the right policy environment.

Two-pronged strategy
We can start now with call centre type operations and move up the value chain. Or we can
wait till we have adequate human resources skilled to take us into higher skilled BPOs. In
reality the strategy will have to be a mixture of both. The market for outsourcing is there
already, and companies in India despite the large pool of human resources are concerned by
the high turnover of their staff and looking for alternative destinations to set up their centers.
This is an opportunity which we can exploit and set up centers employing the hundreds of
Class XII and general graduates. This will enable our private sector to get the necessary
experience and open the window of opportunities that prevail in the outsourcing world.
While doing so, it will be necessary for the government to play a key role in ensuring the
enabling environment in terms of recruitment policies, connectivity, tax policies, etc. to make
them viable and competitive. We need to work with the early starters to build up the image
of Bhutan as a possible outsourcing destination. At the same time, we need to leverage this
platform to get the expertise and input from the outsourcing firms to help us develop our
human capacity. We need to build up the right alliances now so that we create a win-win
situation for both the parties. The following have been identified as possible industries that
the government could look into.

ICT Hardware Plant
We could establish an ICT Hardware Plant, with adequate facilities to support and develop
the capabilities of ICT companies/firms to gradually upgrade from a modest low -end assembly
of computers to high-end manufacture of parts and assembly equipment of basic electronic
products for local distribution as well as for export.

The Hardware Plant will initially start its operations by focusing on assembled computers,
both branded and non-branded, for local consumption. The strategy is to move gradually into
manufacture of computer-related products, such as notebook computers, motherboards,
monitors, optical scanners, keyboards and power supplies. Production of consumer
electronics and manufacture of high-end consumables (such as printer cartridges) will also be

Expected Benefits
   Strengthening the existing weak links of local firms and global players for expanding
       the market for assembled computers beyond our borders;

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      Manufacture and mass production of consumer electronics to meet domestic needs as
       well as for export;
      Facilitates collaboration and innovation;
      Opportunity to market ―Made in Bhutan‖ ICT products and services;
      Capacity development;
      Employment and income generation;
      Space sharing with other industrial establishments;
      One national ICT manufacturing cluster.

Risks and constraints arise from issues related to raw materials, technology and marketing.
Also fierce regional and global competition in this sector could stifle its growth.

Data Disaster Recovery Center
Today most service providers like banks, BTL, BPC, government have their own system for
their services. They also have the backup of the system in the same premises. The
disadvantage of this is that if there is a disaster like fire, earthquake or a major problem in the
network, the system goes down and customer services are affected. Further, while the
services can be restored the data will be lost during the disaster. Therefore, it is very critical
to have a Data Disaster Recovery Center (DDRC) in the country to assist the service
providers. Once set up, we can also market this facility to regional and global firms requiring
such services. In the immediate term, the DDRC could be incubated at the proposed
Thimphu-ICTPB and at an appropriate time established in some other location.

Call Centre
A Call Centre combines the use of highly effective and empowered company representatives
with a service framework that relies heavily on state-of-the-art communications and
information technologies. Call Centers are sometimes defined as telephone -based shared
service centers for specific customer activities and are used for number of customer related
functions like marketing, selling, information dispensing, advice, technical support, etc. Thus, a
Call Centre is a service centre which has adequate telecommunication facilities, trained
consultants, and access to wide database, internet and other on-line information support
infrastructure to provide information and support to customers. It operates to provide round
the clock and year round service i.e. 24 x 365 services.

Besides foreign markets, government organizations, autonomous agencies, corporations, etc.
in the country can outsource some of their non-core services to the Call Centers and other
BPOs. These, amongst others, include customer services such as utilities billing, operation &
maintenance of web portals, financial transactions, data processing, GIS, mapping & data
capture, tax filling, networking administration, etc.

Medical Transcription
Medical transcribers listen to dictated recordings made by physicians and other healthcare
professionals and transcribe them into documents such as operating room notes, autopsy
reports, discharge summaries and other documents which then become part of a patient‘s
medical record.

Medical Transcription is a permanent, legal document that formally states the result of a
medical investigation. It facilitates communication and supports insurance claims. Medical
transcription business by its very nature involves transcribing medical advice of various types.
Therefore, its user base is largely confined to individual doctors, hospitals, special
test/examination clinics, state-owned medical centers, medical databases, etc.

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Software Development Unit
The explosive impact of computers and ICT on our everyday lives has generated a need to
design and develop new computer software systems and to incorporate new technologies
into a rapidly growing range of applications. Computer software engineers apply the principles
and techniques of computer science, engineering, and mathematical analysis to the design,
development, testing, and evaluation of the software and systems that enable computers to
perform their many applications.

Web Designing/Development and Multimedia
Web design combines traditional arts with technical skills. A web designer is not just a web
coder; he or she is an artist able to understand the value of image and other visual elements,
and knows what impact these might have on the viewers. The web designer works with
images and words to create the perfect web layout. To create unique websites, the kind of
websites that really add value to the World Wide Web, skilled web designers use various
tools. They might retouch pictures and graphics or create astonishing images using programs
such as Photoshop, Illustrator, Basic Paint, Photo Impact and so on. They might use 3D
software or Flash to design dramatic layouts that will transport the visitors into another

A web developer can also be a web designer, but a web developer typically has more
database, CGI, and engineering experience. The designer develops the interface between the
front and back end of a website. The same team can progress into animation and graphics
designing. This will require more advanced skills and greater creativity amongst the te am as
well as additional equipment.

Data Capturing and Processing
Data processing is a category of ICTES pertaining to capture, digitization and processing of
data emanating from various sources. Traditional data processing services comprise of
punching data from manually filled forms, images or publications; preparing databases and
integrating them. However, with the advent of multimedia and internet, sources have widened
to include manually printed documents, images, sounds and video. Equally diverse are the new
output media which include databases on servers, hard copy publications, CD-ROM authoring
and managing records emanating from internet based queries.

Data processing has acquired significance in the last decade as information has become a
critical resource for most enterprises dependent on timely, effective and judicious use of ICT.
These industries may have to make internal decisions, swiftly respond to a customer query,
present reports, or for any other use driven by information availability. Importantly, there is
an increasing comfort level with outsourcing such services and as Management Information
System (MIS) staff are deployed in more tasks requiring high skills.

The clients for data processing services are companies/organizations receiving or generating
large quantities of forms that are handwritten or typed and time sensitive. These forms can
be sent either physically or can be scanned and transmitted to vendor‘s facility. The
processing may be done using high speed, automated systems reading hand print, check-
boxes, mark sense, reader response, bar codes, and most of data slots that is variable on a
form. Forms can be processed from hard copy, fax or scanned version.

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Investments and logistics for establishing a Data Processing services are a function of the
intended services portfolio, scale of operations and size of customers‘ operations. Therefore,
initially the data processing centre could carry out data punching, editing and compilation for
an international publication. Up in the value chain the centre may process data for a large
overseas customer, offering services ranging from data entry to database maintenance to back
office operation.

Data Networking Services
Computer networks (including the internet, the biggest network of them al l) are now firmly
established as the information backbone of many organizations. Networks can vary greatly in
size and scope, from a few computers on a local network to a vast international set-up.

Network engineering has evolved to address the many aspects of designing, developing,
installing, and maintaining data networks such as LAN, MAN and WAN. Typical network
engineering services can include any aspects of networking (testing and maintenance). These
might include computer terminals, networked servers and printers, and data and voice
communications. Data networking services also include recommending a particular hardware
configuration or selecting, writing, or customizing software code to make the network

Location of the ICT Business Units
ICT service industry could be located anywhere in the growth centers and economic hubs.
These business units should be clustered together or within close proximity so as to provide
the following advantages:

      Sharing of internet connection
      Sharing of physical resources
      Sharing of utilities
      Ease of interaction among firms/companies

The clustering of ICT business units will also support collaborative skills development,
lobbying, collective selling, and collective product development. Proximity and close link age
with academic institutions could also be an important criterion for placement of the ICT
service industry clusters.

ICT and Media for Good Governance
Some initiatives have already been made in deploying ICT and media to support different
aspects of government administration. Future projects need to address a holistic framework
of Good Governance principles and objectives. This entails not just computerization of
existing systems but re-engineering the government processes to transform governance and
make it efficient and people-friendly. Another strategic approach is to ensure the
interoperability of application systems across the different agencies to capitalize on a common
database and minimize duplication of resources. The costs of systems development for e-
governance applications are usually high but can be recovered from associated efficiency gains.
But this may not necessarily be true for Bhutan where because of the small population the
transaction volume is far less. Therefore, cheaper solutions need to be explored.

E-Governance deploys ICT to promote efficiency, accountability, transparency and
professionalism in governance. The programme of activities for e-governance for Bhutan shall
be guided by the principles of making governance citizen centric, integrating related services
and enabling greater citizen participation. There are 115 websites including government,

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private sector and NGOs. Many of them are static and updates rarely done. Of these, 83 are
hosted with DrukNet. The rest are hosted either with the respective organizations or
outside the country.

The E-Governance Strategy recognizes the challenges and the opportunities that prevail
within this sector. It seeks to further capitalize on the investment that has already been made
by different agencies and aims for integration amongst existing systems and development of
new applications that can improve service delivery of agencies to make government efficient,
responsive and citizen-centric. It also builds on the expressed needs of sectors.

Government agencies are involved in wide ranging activities, and for application development
purpose, it is helpful to categorize them under two broad heads. The first category of
services relates to the internal processes that impact the overall coordination and efficiency
of governance and the second consists of services provided directly to the public. The E-
Governance Strategy seeks to improve the system in both these categories.

Category 1: Government processes (G-G)
This includes the management and administration dealing with internal clearance and
procedures, financial and human resource management, and documentation. Use of ICT in
this area will impact in standardizing procedures, automation and speed up decisions and
communications within the organizations. This will include the following features:

Personnel Mail Management System – This will provide a common platform for government
employees to communicate with each other, including directories of the contacts, common
calendar for scheduling meetings, etc.

Human Resource Management System – This will include the management of recruitment,
promotion, transfer, training and education, leave and personnel emolument. The basic
platform for this is already available within the Zhiyog (Personnel Information for Civil
Servants) system. Additional features need to be incorporated to enable agencies to submit
online requests and forms and receive online approvals. The system should also be directly
connected to security and audit clearance systems as certain decisions are contingent on such

Financial Management System – This requires the enhancement of Budgeting and Accounting
System (BAS) and new modules to enable online requests and approvals. BAS has to be also
realigned to take into consideration the three-year rolling budget system. As a further step,
this system should also facilitate the online transfer of funds to the relevant accounts in the

Stores Management System – A lot of staff time is spent in maintaining stock and issue registers
of equipment and stationery within the agencies. This could be fully automated through a
system which will include an inventory and issue system. While reducing staff time, this would
also help curb the misuses of such items.

Documentation System – As the government moves towards more e-based management and
correspondences, there is a need to establish record systems wherein relevant electronic files
will be archived. Amongst others, this includes correspondences, policy documents, circulars,
regulations, etc. Like the paper-based files, these should be available for access by authorized
personnel in the different agencies. This system will also include a system of document

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tracking for the active cases. This will include receipt and dispatch and records of file
locations etc.

GIS System – Many government agencies require spatial data to plan and monitor their
sectoral activities. A number of GIS systems have already been developed by individual
sectors to fulfill their requirement. However, this has limited capability and use. The single
GIS system will incorporate the needs of all sectors and the government.

Border Management System – Some work has already gone into this. Coordinated by the
MoHCA, this involves the integration of systems within the Department of Revenue and
Customs, Tourism Department, Ministry of Foreign Affairs (Visa), Ministry of Labour and
Human Resources (Labour Net), Ministry of Agriculture and the Royal Bhutan Police. The
system enables the sharing of information, human resources, infrastructure amongst these

The above list is not exhaustive and there could be more applications that would need to be
developed to contribute to efficient government machinery.

Category 2: Government to Citizen Services (G-C)
All government services for the general public including those doing business with the
government will be provided through the Bhutan portal which has already been created and
functional. Apart from the existing information already available in the portal the following will
be added.

Employment – All that is required is to provide a link to the Labour.net and the Job Portal of
the MoLHR.

Land Record – This is one of the basic information required to access rural credit schemes.
The land record system should be upgraded to enable online access from the Dzongkhags and
geogs and at a later date enable online transactions and approvals.

Rural Information and Services – The Bhutan Portal shall address the specific needs of the rural
population and will include the following:

      Agriculture Management Information System. This is already under development by
       the RNR sector. It will include all information about crops and animals and marketing
       of the rural products.
      Basic health and nutrition information and services.
      Basic education information and services which will include exam results, placements,
       curriculum, reading materials for formal and NFE students, question banks, online help
       on curriculum etc.
      Rural-based services: The following services could be facilitated online for the rural
       population - (i) Timber and firewood permits, (ii) Loan schemes (iii) Marriage
       certificates (iv) Death and birth registration (v) Other modules could be added as and
       when required.
      Trade licensing and handling system. This should facilitate the online processing and
       approval of licenses.

One Window Utility Billing and Payment System – Water and sewage, electricity and telephone
bills can all be paid through a one window system. The billing for all these utilities have
already been computerized and at present, electricity and telephone bills can be paid in either

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in BTL or BPC customer offices. Further integration of the billing systems may be required to
enable all bills to be paid in one counter. The next level of development should be to facilitate
online view of the bills and payment system.

Personal Income Tax Payment – The PIT system can be upgraded to enable online submission of
tax returns and payments.

Security Clearance System – This is one of the most important documents required for
obtaining other government services. The issuance is carried out manually through the
submission of paper-based forms which are validated and checked by two different
organizations – RBP and the MoHCA. Using ICT, it is possible to make the system much
more efficient and reliable. Applicants could obtain the clearance certificate from the nearest
RBP branch office.

E-Procurement System – Some agencies have already started providing tender notices online,
while others provide facility to download tender documents. However, e-procurement in its
real sense requires much more features including on-line tracking of the status of the
evaluation process, features to help shortlist the applications and automating the sorting of
specific bid items to help the evaluation processes. An essential supporting application for full
deployment of this system will be e-signature to facilitate authentication of online submission
of tender documents. A step-by-step approach would be adopted. For example, once online
payment is available, the features would also be incorporated in the system.

Health Management Information System – Some of the features of this system could include
patient record and history, tele-medicine and consultations, online booking of beds in the
wards and online appointment systems with specialists.

Education Net – Some of the features of this system will include, online curriculum and
teaching materials, audio visual aids for teaching concepts, online courses for students and
teachers, information related to career, value education, extra-curricular programs.

Online Polling on Policies – The government portal will provide features for citizens to provide
feedback on the current government policies as well polling on specific issues or policies
under consideration.

Guiding Operational Policy for Applications Development
To speed up the process of developing and deployment of e-governance applications,
wherever possible, the existing applications will form the base for future development.
Where new systems need to be deployed, possibility should be explored for off-the shelf
systems and customization. In addition, most of the tasks should be outsourced to the private

Enabling Conditions for E-Governance Applications Development
Optimizing the ICT Staff in the Government
There are less than 100 ICT professionals employed in the central Ministries and agencies,
most of them are diploma and certificate holders. Because of the less than optimal utilization
of the existing staff, and the fact that development functions would now be undertaken by a
single agency under MoIC, their deployment needs to be rationalized. The government
agencies should retain staff that are only critical to the maintenance of their systems. General
maintenance and network administration functions should be outsourced and the staff
reassigned to where they can be more productively employed.

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E-Governance Standards and Guidelines
DIT is already engaged in developing Software Development Guidelines. In addition, it should
develop and adopt open standards for interoperability of e-governance applications. It is
learnt that the National Informatics Centre (NIC) of the Department of Information
Technology in India already has developed these standards. This could be adapted for our
requirements and environment. In addition, training of personnel to implement such
standards would be vital.

Quality Management System
Central to quality software development is the establishment of quality management system
and their enforcement while developing systems. Bhutan can also adapt the systems in vogue
elsewhere, particularly that developed by NIC, India. Training is also another important
element in meeting this objective.

The Media Industry
The principle of Bhutan‘s media is best manifested in the 1992 Royal Decree de-linking
Kuensel Corporation and Bhutan Broadcasting Service (BBS) from the Government giving
them the independence on what and how to report. This independence has been further
augmented through the BICMA Act 2006 which sets out the principles and the legal
recourses to enable Bhutan‘s media to report and provide to the public domain any materials
that does not undermine the sovereignty, security, unity and integrity of the country.
Freedom of press is also enshrined under the Fundamental Rights of the Draft Constitution.

Issues on Print Media
The first issue facing the Bhutanese private media is its financial survival. And this is
inextricably linked to the revenue stream from advertisements and government notifications.
A level playing field needs to be created to enable the private newspapers to get their share
of the business from the government in form of advertisement and printing works.

The second issue relates to the professional growth of the newspapers. While Kuensel and to
some extent Bhutan Times have a head start in having qualified editors and professional
graphic and layout artists, Bhutan Observer has less qualified staff. All the papers, however,
need infusion of greater professionalism and training, particularly in the light of the role that
they are expected to play in the post-2008 constitutional democratic system. The existence
of the private newspapers may not in itself be a true reflection of an unbiased democratic
voice, but the quality of the editors and the journalists can be crucial contributing factors to

The third issue relates to the Dzongkha edition of the papers. Since the Dzongkha edition
helps serve the development and promotion of the national language, some support is
required from the government.

Government needs to treat all media firms equally in terms of awarding ads and printing

   a)    While the MoIC has circulated a letter to all government agencies to this effect, this
         is not being followed. Therefore, a government-wide system needs to be established
         which will ensure that the private print media gets a fair share of the government

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         advertisements and announcements, as an interim solution to sustaining them. The
         choice of the newspapers should be determined by the quality of service and price
         and the standing government rule requiring its agencies to procure services from the
         most competitive suppliers should be fully adhered to.

   b)    Government printing works must be based on quotations, and should not be given
         directly to one printing house (e.g. Kuensel) as is the practice adopted by many
         Government agencies. Although this is not directly linked to media per se, this is
         highly relevant as the sustenance of the print media depends on the income
         generated from their printing operations.

   c)    BBS should not be allowed to play an anti-competitive/dominant operator role with
         respect to airing of government notifications and advertisements. Currently, BBS
         charges a fraction of the costs to air government announcements. BBS should charge
         the government agencies the actual costs for airing these contents.

   d)    BICMA should enforce the prevailing rule not to allow cable operators to air
         advertisements on their local channel. This could be allowed, however, if they are
         also licensed to provide content as recommended elsewhere in this document, in
         which case the charges for the advertisements need to be regulated as
         recommended for BBS.

   Financial support
   The print media should also be allowed to access financing support under a basket media
   fund (e.g. National ICT and Media Development Fund) which can be funded by donors
   supporting the media sector or governance programmes. These funds can be used to
   provide special credits or grants for purchase of equipment, training and related projects
   within the media sector.

   HRD support
   The government should continue to provide support for long-term education, training and
   workshops for the print media personnel.

Issues on Broadcasting Media
Undoubtedly the key player for nationwide broadcasting is BBS and therefore it is crucial that
BBS be built up to meet the envisaged role as a Public Service Broadcaster (PSB). Currently,
the content of broadcasts especially for TV is limited both in scope and depth. The
information is very government-centric and is characterized by the coverage of national
workshops and events. There is very little debate, and does not take the stories beyond its
surface. BBS does very little in-depth reporting of the core issues contributing to deeper
understanding of national events; it has not contributed to exposing people, policies or social
malaise that impact the general lives of the population. The cultural programme is dominated
by the airing of popular songs and dance sequences of RAPA and clips from school variety
shows and occasional religious discourses. There is no drama, no creative programme to
excite the intellect of the Bhutanese. There is little evidence that this will change under its
current business Master Plan (2005-2010), which is focused too much on network expansion
and revenue generation through advertisements and not enough on the content development.

The second issue is BBS‘s inability to take advantage of the ICT and the telecom network.
While there is now potential for broadband connectivity to every Dzongkhag, the TV
broadcasts beyond Thimphu and Phuentsholing use satellite. The GoI is providing the

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transponders on its satellite for free till 2009. There is no certainty whether this will continue
after that. If not, BBS will have to bear the charge for the transponders of US$ 120,000 every

The third issue is related to the lack of qualified staff in BBS. BBS employs well over 160 staff
members out of which only 34 are in the Program and Production Department. 21 are in the
News and Current Affairs Department, 46 are engineers and technicians and the rest are in
the HR and Administration Department and Finance/Commercial Department. It is also
reported that there is a rather high rate of staff turnover in the BBS.

BBS to focus on content development and improvement
For the next 5 years, BBS has to focus on developing and airing quality programmes to
―educate, inform and entertain the Bhutanese public‖. Some of the suggested material s are as

       a) In-depth coverage of current issues based on well researched materials. There is a
          wealth of subject matter that one can pick from Kuensel online or public debates
          in the Dzongkhags and the National Assembly. BBS has to contribute to these
          dialogues through professionally crafted programmes which excite and help the
          audience to get a deeper understanding of the issues.

       b) Bhutanese Drama on themes that reflect the lives and tribulations of its viewers.
          These original productions should strive to be standard bearers for Bhutanese
          Films and Arts industry.

       c) Children and Youth programmes. Considering that over 50% of our population is
          under the age of 24, BBS has to focus on capturing this audience through
          programmes that appeal to this group. This is not an easy task especially when it
          has to compete with Cartoon Network, Star TV and the like. But this is necessary
          if BBS is to justify its existence as a PSB.

Staff development of BBS
BBS is already implementing its HRD Master Plan drawn up for 2005-2010. This needs to be
reviewed in the light of the above recommendation. Greater focus needs to be placed on
recruiting and retaining talent in the Programme and Production Department. BBS also needs
to build and nurture relationships with other b roadcasters in the region as well as BBC and
other PSBs. Amongst others, this could be an avenue for receiving professional and training
support for the BBS staff.

License another commercial TV service
The government should consider licensing another TV company to be run on a commercial
basis. This should provide the necessary competition to BBS while at the same time spurring
greater local content development.

License cable operators to provide content on their channels
This is already being done by some of the operators. This will ensure greater variety of
programmes and bring in greater competition to this sector. The fees from the license could
be used to build up the media fund mentioned earlier, which can be deployed for the
development of media sector.

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Audio Visual and Films
Bhutan has a rich tapestry of unique performing arts. Its oral story telling culture, lozey, ole
and tsangmo are some of the finer depictions that have survived the test of times. The annual
tshechus held in different districts, towns and villages are also live venues of performing arts.
Besides the religious rituals and dances, tshechus are tantalizing platforms to showcase the
cultural heritage of the country wherein the best of the community‘s artists perform. A study
conducted by the DoT in 2004 established that 34.4% of tourists were attracted to Bhutan
because of its ―unique culture‖.

With the advent of modern education, large immigrant population and the onslaught of Hindi
cinema in the country in the 1970s and 80s, Bhutan witnessed a distressing phase during
which our songs and dances were passed over in favor of more hip rhythms and alien forms
of sensual entertainment. However during the last decade or so, the country is seeing some
reversal of trend with new Bhutanese creativity energy not seen before. This is particularly
true in the audio-visual and film industry. The content of these production may not all reflect
the Bhutanese culture in its pure form, but nevertheless the subject and the context are
Bhutanese. More important, the productions appeal to the majority of the indigenous
Bhutanese population.

Two factors may have contributed to this. First, was the considered decision of the Royal
Government to promote the national language and culture and its expressive elements in the
schools and educational institutes. This led to an upsurge of creative experiments within the
educational institutes which has spilled to the general society. Second, was the development
of technology and the availability of low cost recording equipment, from cassette recorders
to synthesizers and video cameras.

What is rather remarkable about the development of the industry was the near absence of
any strategic government initiative or investments for development of the audio visual and
film industry per se. And yet the Bhutanese audio-video industry pioneered by a few private
companies has now reached a status where their productions are pirated and sold in
bordering towns of India and autonomous region of Tibet, China. The same holds true of the
Bhutanese films as well.

There are some factors that impede the growth of the audio visual and film industry. Because
of its higher investment, the issues are particularly more significant for the film industry. The
significant ones are detailed below.

The opportunities for truly creative film making are limited. The very taste and style of
cinema that stimulated the Bhutanese film industry is now beginning to limit the development
of the industry. This is primarily because the more educated section of Bhutanese society is
yet to be converted to Bhutanese cinema. They are easily put off by the amateurism, long and
frequent song-and-dance sequences and not so original story line. On the other hand,
Bhutanese filmmakers who invest relatively huge sums in films would not ―risk‖ deviating from
the Bollywood formula for fear of losing their money. It is here that the Government could
intervene with resources, technical assistance and facilitative roles.

2006 saw the largest number of films (22) being released. However the main screening outlet
for Bhutanese cinema currently is Thimphu which unfortunately has only one hall built in the
early 1970s. Consequently it is not able to meet the demand from the industry. It is reported
that the queue for screening these productions extends to the end of 2008. This has created

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a bottleneck in the industry, blocking up future investments and productions for the young
startup companies.

Film Industry
The film industry has come thus far with very limited support from the government. But it
needs a helping hand if it is to progress to new level of artistic creativity and sophistication
necessary to cater to the more discerning tastes of the growing educated mass. Government
support is required in two core areas. These are in the area of access to credit and insurance
schemes as well as in human resource development. Specifically, the following need to be

   a) A Films Development Board should be established. The Board should comprise of
      prominent artists and academicians and provided with an annual budget to enable
      them to co-finance 3 short film projects and documentaries and two feature films
      selected through an annual competition of the scripts. These films must depict
      faithfully Bhutanese culture and social issues in its best.

   b) Financial institutes should develop a loan package for Bhutanese film projects. Access
      to micro financing should be extended for small-scale initiatives like DVD duplication
      units, flexi printing units, cranes and tracks etc. RICB should also extend its insurance
      coverage to expensive audio-visual equipment.

   c) Training and education
      Bhutanese films today do not lack in creative decisions and story ideas. But technically
      there is much to be desired. Training can be provided for three broad categories.
       Script writing – This could be undertaken through scholarships provided to attend
          any one of the institutes in the region through the HRD programme implemented
          by MoLHR.
       Acting – A school of Drama and Acting can be set up in Bhutan. This could be
          undertaken on a public-private partnership model. The institute could offer
          diplomas or short workshops on acting. At the same time, school curriculum
          should also offer opportunities for young talents to develop their innate abilities in
          this field.
       Technicians – Currently not one of the cameramen has a light meter. Neither is
          there any lighting technician in the country. As of now all lighting equipment and
          technicians are hired from India. This needs to be included in the MoLHR‘s HRD

   d) Movie halls
      Future development of urban centers should include a movie theatre in their plan.
      This should be undertaken by the private sector where there are such interests;
      otherwise, it should be undertaken through public financing. In any case, the capital
      city requires a second movie hall and license should be provided to the promoter.

Music Industry
As of now, the industry‘s musicians are dominated by amateurs who are more skilled in the
creative use of technology such as the electronic synthesizers than true artistic mastery of
real instruments. This needs to change with the evolution of population‘s taste and discerning
power. To help support the qualitative development of the music industry, the government
should lend a hand in the establishment of music schools in its more populated urban centers.
Children can be taught Music Theory and to play both modern and Bhutanese traditional

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

instruments. These students, trained to read and write music and perform a variety of
instruments will in future fuel this industry to develop to greater level of creativity and

Institutional Arrangements
The growth of the ICT and media sector will depend upon the political will and in most
countries the success stories in this sector have been always associated with the level of
patronship it receives from key political figures.

The realization of the plans and programmes is also dependent on the institutions that are
mandated and inspired to develop the sector. For Bhutan, a key agency is the Bhutan
InfoComm and Media Authority. This body needs to be strengthened to create the enabling
framework for the development of this sector.

BICMA must encourage competition in the ICT market and at the same time provide a level
playing field for all service providers. BICMA‘s autonomy must be ascertained so that it can
independently implement regulations and policies without intervention from other parties.

It is also vital to establish BICMA‘s role and status relative to major stakeholders such as
MoIC, BTL, BBS, etc. Besides, the Government must demarcate boundaries between
BICMA‘s responsibilities and those of other Government bodies, whether those are similar
expert agencies or offices charged with particular tasks, such as competition or consumer
protection. It may be impossible to eliminate all areas of overlapping jurisdiction. Indeed, it
may be desirable to have agencies working together, lending various types of specialized
expertise to joint task forces and inter-agency committees.

Establishment of a Computer Emergency Response Team (CERT)
Computer and system breakdown are regular features in the government offices. Virus,
uncontrolled use of pirated software and lack of adequate maintenance infrastructure and
systems all contribute to this problem. While this is considered as a way of life at present, it
will be unacceptable in the future as the country begins to depend more and more on
computer systems for core government and business services. Keeping organizational
information assets secure in today's interconnected computing environment is a true
challenge that becomes more difficult with each new ICT product and each new intruder
tools. How secured the country‘s network is and the mechanism set in place when an
emergency occurs will also be a consideration that business firms will factor in while assessing
whether to invest in Bhutan.

CERT will act as a coordination centre readily available to respond to and tackle any
emergency computer (e.g. computer virus) and network security incidents. Usually the
organization handles computer security incidents and vulnerabilities, publish security alerts,
and develop information and training on information security. CERT composes a team of
people responsible for coordinating responses to viral incidents within an organization.

A CERT can be a formalized team or an ad hoc team. A formalized team performs incident
response work as its major job function. An ad hoc team is called together during an ongoing
computer security incident or to respond to an incident when the need arises.

                             Annexures to the Strategy for Gross National Happiness ( SGNH)

Track 2: Revitalization of Agriculture, Forestry and Construction

Governance framework for optimizing agricultural land use
The discussion below deals with the prospects of optimizing the agricultural land use in
Bhutan through the overall governance framework i.e. policies, legislation, land
administration, land reforms, and strategic land use planning. They are initiatives that should
be adopted early in the twenty-year plan as they form a fundamental framework for the
more practical land management options discussed later in the strategy paper. They are also
initiatives that are related to other sectors and types of land use such as urban development,
industry, mining, hydropower generation, tourism and local development, and therefore
partly need to be planned and implemented in a multi-stakeholder context.

Good governance and management of Bhutan‘s land resources are arguably the most
important precondition for sustainable economic development and poverty alleviation.
Rural poverty is largely a result of inadequate land holdings and of the lack of road and
market access that have constrained the opportunities for land use intensification, and thus
retained many farming families at a marginal near-subsistence level of production. The
serious rural poverty situation is highlighted by the 2003 poverty assessment, which showed
that 38% of the rural population lives on less than Nu 741 per month (compared to only 4%
among the urban population).

Although sparsely populated, access to agricultural land is limited by the steep topography,
the lack of infrastructure and the high priority given to conservation. Agricultural land is
confined to only 7.8% of the land but is the basis for the livelihood of the majority of the
population. Inadequate size and quality of land holdings are obviously an important – maybe
the most important – cause of rural poverty in Bhutan. Among the households owning land,
as many as 69.4% have less than 5 acres of land, which is generally considered the minimum
average holding size for economically viable farming in Bhutan. Furthermore, 34% of land
holding households have less than 3 acres, of which 14% have less than 1 acre of land 5 . The
percentage of landlessness among agricultural households was, according to recalculation of
data from the RNR Census 2000, as much as 8%, although this figure may have decreased
with the ongoing resettlement schemes.

Agricultural and forest land are under considerable pressure from urban development,
housing, industry and infrastructure. The legislation and policies have sought to diminish the
incursion of such usages to safeguard agricultural production and forest conservation, but
this has on the other hand constrained the economic utilization and optimization of the land
resources. In the larger towns, particularly Thimphu, the confined space and rapid
population increase have led to spiraling land prices beyond the means of most people and
rampant land speculation that has accentuated the gap between rich and poor. This has also
increased the pressure on the existing legislation that has sought to protect the agricultural
land in and around urban areas and made the official compensation for expropriation

A fundamental development issue is striking an appropriate balance between conservation
and production. While Bhutan is one of the leading countries in conservation, the socio-
economic conditions of Bhutanese farmers are less favourable. Although this is largely due

    PPD, M inistry of Agriculture, 2002

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

to the low productivity and limited access to land, roads and markets, it is probably fair to
say that Bhutanese farmers have been paying the costs of much of the conservation efforts
through restrictions on expanding land holdings and widespread wildlife damage to crops
and livestock.

The importance of road access to agricultural intensification is recognized in the
Government‘s considerable investment in the national road network. However, the
construction and maintenance costs are high, and with the decentralization of planning to
local level the demands for further investments are set to increase. It is therefore i mportant
that infrastructure planning is based on sound criteria and suitable structural plans that can
optimize the socio-economic benefits of the investments, including the use of land zoning
and strategic land use planning.

Resolving land governance issues is constrained by their complexity and by the multiple
stakeholders with widely varying interest and priorities. While the national policies prioritize
a balanced development philosophy aimed at maximizing the well-being of the citizens these
policies are at the more practical level pursued within sector-specific interest, which does
not always ensure the desired balance. Hence, many of the land related confl icts and
problems occur between different departments, sectors and land users and may have
remained unresolved because of a lack of communication, authority or even interest in
coordinating the legal, policy and administrative framework.

It is therefore proposed that these problems be solved by:
      Developing a comprehensive, multi-sectoral land policy.
      Revising the legislation pertaining to land governance and management.
      Strengthening the administration of, and information systems on, land resources.
      Continuation of the land reform processes to ensure that landless and marginal
       farming families have sufficient land to make a viable living.
      Improving the strategic management of land resources through land use planning at
       national and local level.
      Supporting farmers in adopting sustainable land management technologies.

These initiatives would be able to clear some of the basic constraints on optimizing
agricultural and other land usages in Bhutan on which more practical land use development
initiatives could be based.

Strengthening the land policy framework
Bhutan has a comprehensive system of policies, legislation and administrative tools to
govern the land resources. However, it has not been fully able to solve conflicts or to
balance different development priorities such as agriculture, urban development, industry,
mining, hydropower generation, recreation and tourism. It is therefore proposed that the
land policy framework be strengthened through the development of a formal, multi -sectoral
Land Policy that should provide an overall framework for a balanced socio economic
development and environmental conservation.

A formalized land policy should stipulate the goals and priorities for managing the national
land resources, overall strategies and procedures for attaining these goals and priorities
across different sectors and stakeholder interests; clarify the relationship to and between
relevant legislation, policies and strategies; clarify the institutional responsibilities and

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

authority; and outline how the policy goals are to be attained through the land
administration, land use planning, and practical land resources management. The land policy
should be appropriately linked to the overriding national policies, goals and legislation. In
this context, the GNH concept may provide a suitable inspiration as it seeks to facilitate a
balance between complex and sometimes conflicting issues. Hence, a vision for the
governance of land in Bhutan could be as follows:

The land resources of Bhutan are utilized and governed productively and equitably while
preserving the environmental and cultural heritage by:
      Aligning the governance of land resources with overall land capability and with the
       national policy, legislative and strategy framework.
      Clarifying the institutional responsibilities and authorities in the governance of land
      Enabling effective poverty reduction through socially balanced and pro-poor land
       governance and management.
      Enabling economic excellence by optimizing the use of the limited land resources.
      Facilitating an appropriate balance between economic development, environmental
       conservation, cultural preservation and national security.
      Ensuring that the tenure rights are secure and that the obligations and rights of land
       users are upheld according to the law and the overall development goals of the
      Ensuring that land administration at central and local level is rational, efficient,
       equitable and transparent.
      Providing an overall framework for development of specific legislation related to land
       resources use and management.

Formulating a land policy to improve the governance and management of land resources in
Bhutan would entail information and comprehensive analyses of the status of land
management, the current governance system, and the problems and development
opportunities that the land policy ought to address. From the comprehensive analysis of the
land use and governance, a number of critical issues are likely to emerge that would have to
be dealt with through policy resolution, e.g. related to:
      The means of balancing the economic utilisation and conservation of land resources,
       for instance related to wild life damage to crops and livestock, the access to non-
       timber forest products, and the utilisation of forest for livestock development,
       tourism, commercial and rural timber production, etc.
      The principles for a land zoning and allocation system that would clarify the
       applicable management regimes, taxation, compensation, the administrative
       authority, and legal framework.
      The principles for strategic land use planning as a tool to optimise the utilisation of
       land and the investment in land development, infrastructure construction, etc.
      The strategy for increasing the land holdings of marginal and land-less farming
      The institutional responsibilities and authority over land governance and
       management among sector institutions, central and local governments.

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

      The principles for tenure over land resources including traditional rights and
       management systems.

The GNH Commission Secretariat, as a neutral agency without any sector interest should
take the lead in formulating this policy through compilation of land use constraints and
conflicts related to each sector.

The current legislation on land and land utilization is composed of numerous Acts and
byelaws under the authority of several Ministries. This legislation contains various gaps,
contradictions or uncertainties, which needs to be sorted out e.g. related to the authority
vested with local governments and central government bodies. Such shortcomings would
become even starker if major land policy changes are being made. It is therefore
recommended that a comprehensive review and possibly amendment of rel evant acts and
their interrelationships be made once the comprehensive land policy is formalized. This
would probably include the Land Act, Forest and Nature Conservation Act, the draft Water
Act, the Municipality Act, the Mining and Mineral Exploitation Act, the Inheritance Act, and
the DYT and GYT Chathrims.

Strengthening land administration
Land administration pertains to the government systems at central and local level that deal
      Cadastral and land deed records
      Land tax and royalty system
      Land reforms, redistribution and resettlement schemes
      Land inheritance, sale and leasing regulations
      Land acquisition, expropriation, and swapping rules

 Problems relating to the tenure, ownership, taxation, acquisition and expropriation of land
 have long been a major constraint for farmers who have been subject to administrative
 decisions. In recent years the issues of excess land and land overgrown by trees have
 triggered much public debate, as they are seen by many as unfair impositions on poor
 farmers and by others as effective means to safeguard forest and other natural resources.
 Another often criticized aspect of land administration is the perceived inefficiency or
 bureaucracy involved in even simple transactions, permits, etc. With decentralization and
 further democratization it is vital that the land administration at central and local level is
 guided by strong but simple rules and procedures, and is conducted in a transparent

 It is therefore proposed that an overall strengthening of the land administration at central
 and local level be made to ensure that the administration can effectively and efficiently:
      Safeguard ownership and security of tenure
      Support land and property taxation
      Facilitate access to credit through information on security in land
      Reduce land disputes through formalized and transparent land registration
      Facilitate land use planning and infrastructure development

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      Produce statistical data and information for administration and for practical and
       strategic decision-making

The strengthening of land administration procedures and systems should be in line with the
revised Land Act.

Land reform
The insufficient landholding for most farmers is a major cause of poverty, rural -urban
migration, and low agricultural output. Land allocation aimed at landless and marginal
farmers has been practised for many years in Bhutan. This includes the major land reforms
in the 1950s, the resettlement programmes that have now included 4,071 households
through 8 phases, and the granting of Kidu by His Majesty the King.

It is therefore proposed that the land reform process be stepped up through the allocation
of suitable agricultural land to needy households whose primary livelihood is farming. It
could involve conversion of some (albeit very limited) forest in order to identify land with
suitable slopes, soil properties and proximity to infrastructure.

At present conversion of Chhuzhing to other land use is restricted and is permitted for
conversion only if a land is technically found to be unfit for further paddy cultivation. At the
strategic level, the protection of Chhuzhing has been maintained for national food security.
The definition of food security in the past has been limited to achieving national food self
sufficiency, particularly in food grains. Since rice is the most preferred staple, protection of
Chhuzhing has been identified as one of the main policy instruments to ensure food security.

However, paddy cultivation provides comparatively lower economic returns than other land
uses due to high labour inputs in the face of labour shortage among rural farms. The
situation is exacerbated by the scattered nature of land holdings which demand even more
farm labour time. It takes 205 labour days to grow one hectare of rice in Bhutan against an
Asian average of 75-100 labour days. FAO (1994) reviewed the Accelerated Food
Production Program (AFPP) and pointed out that based on the economic analysis carried
out by AFPP, the production of the import substitution crops of rice, wheat and oilseeds is
not economically viable compared to the production of horticultural crops for export. They
concluded that the promotion of cereals and oilseed crops, which compete for the same
resources as export crops, would result in lower farm incomes, lower export revenues and
less economic growth. The restriction on conversion of Chhuzhing to other categories of
land use thus constrains the economic use of such lands.

Furthermore, food security is increasingly understood as a function of physical avai lability of
food, accessibility to food by the population and proper utilization of food to enhance
nutritional intake by the population. The policy instrument of protecting Chhuzhing is
expected to contribute to food availability by increasing domestic production of rice.
Availability of food refers to the physical presence of food which need not be based on
domestic production alone. It can also be enabled through importation.

Therefore, the restriction on land use such as on land conversion should be lifted and land
use should be left free for the land owners to decide based on land capability and suitability
assessment so that limited agriculture land is used for the best economic agriculture option.
In fact the use of land for the most economic agriculture land use such as for horticulture
would provide better incomes to farmers which would contribute to enhancing accessibility
to food through enhanced purchasing capacity of the population.

                       Annexures to the Strategy for Gross National Happiness ( SGNH)

However, given that protection of land has a bearing on national food availability through
domestic production, the lifting of restriction on land use should be viewed cautiously. Even
the most developed nations like the US, Europe and Japan maintain strong positions on
agriculture protection. Ensuring availability of food through imports has its own limitations
and risks such as possible disruption in geo political conditions, risks of trans-boundary
diseases such as avian flu, limited access to markets other than that of India etc.

It is furthermore proposed that the potentials for swapping marginal agricultural land in
remote areas with more suitable land closer to roads, markets and facilities be explored.
This would obviously benefit the involved households, but could also reduce the costs of
providing social services to very remote communities, and could serve forest and
biodiversity protection by reducing human impact in priority areas.

Land use planning
There is considerable scope for improving the land management in Bhutan by adopting a
more systematic approach to land use planning as a tool to:
      Optimise land use so it contributes to poverty alleviation and socio-economic
      Ensure the use of land resources comply with national and regional strategies,
       master plans, plans for socio economic development and national security needs.
      Prevent or reduce land degradation caused by unsustainable use of the land.
      Ensure that important habitats and biodiversity resources are duly protected.
      Ensure a suitable balance between land utilisation and land resource protection.
      Support rational investments planning in roads, irrigation, market development, and
       social services.

Land use planning is choosing land use objectives and methods suitable to the environment,
the socio-economic conditions, the infrastructure and markets opportunities, the
development priorities, and to the needs, interests and capability of the land users.

Farmers have carried out land use planning since agriculture was first adopted, choosing land
and management technologies that suited their objectives and the prevailing production
condition. The absence of catastrophic degradation and the continuation of agriculture in a
fragile environment are testimonies to the Bhutanese farmers‘ capabilities as land use
planner. Nevertheless, it is believed that overall land use planning initiatives are necessary to
improve the returns from and sustainability of agriculture, to conserve the natural resources,
and to ensure that infrastructure and social services can be provided in a rational and cost
efficient manner. Also, certain traditional practices that have helped maintain fertility are no
longer considered suitable, such as shifting cultivation, extensive cattle grazing in forest areas,
which would necessitate the introduction of alternative land use plans.

It is therefore recommended that principles for strategic land use planning be developed.
Such plans may be based partly on watershed management planning principles, but it is
recommended that the existing administrative entities (Geog and Dzongkhag) be the basic
planning units, as political decision making, budgets and administration are bestowed to

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

It is recommended that different land use regulations and development strategies be applied
in areas with favourable road access and in area with difficult road access. This may even
mean the temporary continuation of traditional management methods in remote areas
although the same methods are discouraged in other areas.

Meanwhile a land capability assessment based on actual Bhutan soil reconnaissance survey
data is proposed to be carried out by the National Soil Service Center in Semtokha in
collaboration with the Departments of Survey and Land Records & Geology and Mines. It is
important for Bhutan to use the limited land available for the best option that it is capable.
The land capability assessment for the present exercise is done based on small scale soil
data from FAO which shows only an indication of the land capability.

By the 11th FYP, land use plans can be based on the actual land capability data of the country.
For specific land uses, land suitability assessment can then be used as a tool for specific
planning and management of land resources in the country.

Sustainable land use
Most of the agricultural land in Bhutan is subject to various kinds of land degradation such as
erosion, landslides, chemical and physical soil degradation, flooding etc. Without proper
remedies, these processes are likely to accelerate with the planned agricultural
intensification and the gradual abandonment of traditional practices such as shifting
cultivation, Sokshing and extensive cattle rearing. Suitable land management practices must
therefore be promoted according to the specific needs and potentials of the land, including
measures that safeguard soil fertility and prevent erosion and other land degradation. Such
work is already underway through the MoA‘s land management campaigns and the
Sustainable Land Management Project, although the extension and implementation support
must quickly be offered to all Bhutanese farmers. The land management campaigns carried
out so far have shown very good progress in terms of reclamation of degraded land,
particularly in the eastern part of the country. The remaining Dzongkhags should be covered
during the 10th FYP.

                            Annexures to the Strategy for Gross National Happiness ( SGNH)

Enhancing national food security

1. Background and dimensions of food security
1.1 Background
Bhutan does not face abject hunger and starvation. However, food insecurity, in terms of
deficit in cereals is a problem faced by a majority of rural Bhutanese households. The RNR
Census 2000 has estimated that only about 44% of the rural households were able to
produce enough food grains for their year round requirement. The rest of the households
could produce enough to last for on an average 10 months. The food insecure households
generally cope up with this situation through purchase or borrowing from neighbours,
barter with livestock products or sell labour in exchange for food.

Chronically hungry and/or malnourished people can seriously constrain building the
necessary human, physical and social capital, necessary to facilitate their exit from poverty
or for national economic advancement. Therefore, food security has consi stently been an
important part of Bhutan‘s development agenda since the 5th FYP and should continue to
remain so.

1.2 Dimensions of Food Security
The World Food Summit in 1996, recognized that ―food security exists when all people at all
times, have physical and economic access to sufficient, safe and nutritious food to meet their dietary
needs and food preferences for an active and healthy life” 6 . This definition integrates
availability of nutritionally adequate food, access to food, stability, and the biological
utilization of food. This definition implies that addressing food security requires ensuring
availability of food, access to food, ensuring proper biological utilization of food and
facilitating a stable environment for progress in all these dimensions.

2. Situation analysis
The main focus of Bhutan‘s food security agenda has however, been limited to achie ving
national food self sufficiency, particularly in food grains, rice being one of the most
prioritized cereals. The consumption patterns are changing. Although rice is consi dered as
the most important cereal, other food items are also becoming important part of Bhutanese
food basket with the changing consumption pattern (refer Table 1).

             Table 1: Structure of consumption expenditure by area (%)7
                              Items                Bhutan      Urban                Rural
              Rice                                    7.10        4.51                8.47
              Cereals, cereal preparation and         3.51        2.65                3.97
              Dairy products                          6.91        5.75                 7.52
              Fish                                    0.96        0.87                 1.01
              Meat                                    3.62        3.11                 3.90
              Fruits                                  0.99        1.19                 0.89
              Vegetables                              3.37        2.65                 3.75
              Tea and coffee                          0.84        0.64                 0.94
              Cooking oil                             1.96        1.53                 2.18
              Spices and seasonings                   2.49        1.71                 2.89
              Alcoholic beverages                     2.19        0.99                 2.82
              Non-alcoholic beverages                 0.45        0.79                 0.27
              Food taken away from home               1.54        1.70                 1.45

    FAO, 1996
    Bhutan Living Standard Survey 2004, National Statistical Bu reau

                              Annexures to the Strategy for Gross National Happiness ( SGNH)

              Tobacco and doma                           0.84       0.85        0.83
              Sub-total: (Food)                         36.77      28.93       40.90

              Clothing & footwear                        9.43      11.17        8.51
              Transport and communication                4.48       9.04        2.08
              Recreation                                 1.05       2.47        0.30
              Furnishing and equipments                  4.97       6.93        3.94
              Miscellaneous                             11.38       8.29       13.00
              Educational expenses                       1.33       2.84        0.54
              Health Expenses                            2.92       2.39        3.20
              Rental/energy/household operation         27.67      27.94       27.52
              Sub-total: (Non-food)                     63.23      71.07       59.10
              Grand Total: (Food + non-food)           100.00     100.00      100.00

Therefore, a comprehensive approach that considers all other food items as well as non
food items that relates to enhancing food security was missing all along.

Availability of food
a.    Food availability has been addressed through both domestic production and imports.
      On the production side, maintenance of a minimum of 70% self-sufficiency in food
      grain production has been a policy objective. At present domestic production is not
      adequate to provide for the total domestic requirement. The RNR Census 2000
      estimated a cereal self-sufficiency level at 65% only. Domestic production meets only
      about 25% of the requirement for edible oil and vegetable items, fruits and diary
      products which are imported heavily. With virtually no imports recorded, the
      country is self-sufficient in maize, barley, millet and buckwheat. However, import of
      rice increased from 31,200 tons in 1995 to 54,910 tons in 2003. The import of
      wheat, although not very significant, increased from 5 tons in 1997 to 12.40 tons in

b.        It has been seen through scientific studies that Bhutan does not have potential for
          export of cereals8 due to high inputs requirements, labour shortages and harsh agro-
          ecological conditions compared to such conditions in India and Bangladesh. The main
          constraints in enhancing agriculture production from farmers‘ perspective include
          depredation of crops by wild life (reported by 41.9% of farming households), lack of
          irrigation (reported by 20.6%), labour shortage (reported by 9.6%), land shortage
          (reported by 8.1%) and access to markets (5.2%)9 .

c.        Wild-life damage to crops and livestock continues to be the single greatest risk to
          crop and livestock production. 11% of maize, 8% of wheat, 7% of paddy and 6% of
          potato crops are damaged by wild animals every year. Legislative restrictions on
          killing wildlife (including non-endangered species) mean that farmers are unable to
          prevent this damage to their crops and livestock. In monetary terms, wild-boar
          damage to crops alone has been estimated to reach US$ 1.95 million per year. There
          is no provision for compensation of crops depredation by wild animals.

d.        The farm mechanization initiative has focused on provision of machines and tools for
          individual farmers. The steep terrain and small landholding of individual farmers do
          not provide for optimum use of machines. Individual allocation of farm machines also

    Dorjee, 1995; Deb, 2004
    RNR Census 2000

                            Annexures to the Strategy for Gross National Happiness ( SGNH)

           poses difficulty in supplying adequate farm machines to all farmers. Moreover, the
           supply of farm machineries has been skewed towards the western region.

Accessibility to food
 a.  There are significant differences in road access across the country. Headquarters of
     all the Dzongkhags except Gasa are connected by road. However, at the Geog level,
     disparity in road access is pronounced. One-third of the Geogs do not have feeder
     roads while another one third has only some parts connected by feeder roads
     signifying inadequate road connectivity in terms of road kilometer density. 49 Geogs
     are still more than 8 hours away from the nearest highway and for 57 other Geogs,
     the nearest highway is 3 to 8 hours away. Some of the more remote places are
     found in northern Thimphu, Gasa, Lhuentse, Trashigang, Samdrupjongkhar, Pema
     Gatshel, Mongar, Zhemgang, Trongsa, parts of Wangdue, Chhukha and Haa. In these
     remote areas, people face difficulties in accessing markets and basic services. In Gasa
     and Zhemgang, for instance, 58% and 56% of farm households are at over eight
     hour‘s walking distance from services such as a phone, hospital, bank and bus station.
     The transport difficulties also constrain the food distribution system.

     b.    Available data shows that markets play an important role in providing people with
           access to food, in both urban and rural areas. In rural areas, an average of 60% of the
           food consumed is accessed through the market. This includes rice (50% purchased)
           and dairy products (57% purchased) – which constitute the bulk of calorie
           consumption - as well as fish, meat, fruits and vegetables10 . Increasing incomes and
           access to markets, therefore, has an important role to play in increasing people‘s
           access to food in both urban and rural Bhutan. However, interventions for increasing
           income generation are not equally relevant in all parts of the country.

Utilization of food
 a.    Iron deficiency in diets has been identified as the most common and controllable
       factor for anemia in the country. Anemia, measured on the basis of haemoglobin
       levels in blood, is especially prevalent among children (81%) and women (55 %), with
       little difference between different parts of the country 11 . 60% of anemic children
       experience moderate to high severity of anemia, indicating that there is a large
       magnitude as well as high severity of anemia among children. Anemia is highest
       among children between 6 and 23 months, with no difference between females and
       males and negligible differences between urban and rural areas. Among children
       between 6 and 23 months of age, anemia can lead to permanent brain damage,
       leaving anemic children about 10 IQ points behind their counter parts with adequate
       haemoglobin values. In addition, malnutrition during pregnancy leads to inadequate
       foetal nutrition, which compromises the child‘s healthy growth and development.

     b.    The availability of nutrient-rich traditional crops, including barley and buckwheat,
           that until recently were a staple part of diets is declining. The production of barley
           and buckwheat has respectively plummeted from 4,672 MT and 3,016 MT in 1999 to
           2,190 MT and 1,015 MT in 2003. This decline can be largely explained by the
           increased availability of cheap rice imports from India which acts as a disincentive to
           the production of other cereal crops. In addition, the policy context of 70% cereal
           self-sufficiency has been interpreted as increasing rice production. RNRRC staff and

     National Statistical Bu reau 2003- Bhutan Living Standards Measurement Survey
     Ministry of Health 2004 - Annual Health Bu llet in 2003.

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

       extension workers have been encouraging farmers to cultivate high-yielding rice
       varieties. Relative to buckwheat and barley, rice is poor in proteins.

Stability of food supply
a.     Accessing food by communities during extreme climatic conditions like floods,
       landslides and drought increases poverty incidences and emergency food needs. FCB
       outlets in all Dzongkhags and 12 depots store and distribute essential food items.
       With global warming, extreme monsoon and drought conditions could be more
       severe and therefore emergency food requirement can be a serious issue. Transport
       difficulties, especially during the monsoon months, threaten the food distribution
       system and can lead to food shortages in parts of the country. To counter these
       negative fluctuations, strategic grain reserves need to be held in areas that are
       susceptible to seasonal shortfalls of food availability.

b.     Availability of cheap and poor quality rice through FCB acts as a disincentive and
       across the border competition make field crops production not economically feasible.

c.     The need to ensure environmental sustainability and the limited availability of
       agricultural land calls for the increased adoption of improved and sustainable land
       management practices. The 2004 landslides in the east of Bhutan testify to the
       importance of these.

3. Strategy: Way forward

Availability of food
a)    Laws restricting culling of non endangered species of wild animals, specifically wild
      boars, should be relaxed so that farmers can prevent crop and livestock losses
      caused by wild animals. Culling could be regulated with the intention of preventing
      distortions in the food-chain or predator-prey relationships. If these laws are relaxed,
      an additional option could be for rural communities to sell game-hunting rights,
      based on sustainable management plans, to tourists. This problem of wild boar
      depredation of crops should be converted into an economic opportunity through:

             Game hunting as a source of revenue with the wild boars so that revenue can
              be generated through hunting fees as well as through savings on crop losses.
             Rearing trapped wild boar piglets in farms specializing in producing wild boar
              meat which can be supplied to hotels as a delicacy.
             Encourage use of farm dogs to guard the crops.

b)     The availability of food at the national level need not be based on domesti c
       production alone. It can also be enhanced through importation. Therefore, it is
       proposed that land use within agriculture land should not be subjected to any form
       of restriction. For addressing food security in rural areas, the present level of efforts
       in enhancing production should continue since imported food products will continue
       to be too costly for these areas due to high transportation costs. Full
       commercialization and specialization in the remote areas should be triggered only
       after the transportation facilities are well established and connectivity to not only
       Indian roads but also to South Asian highways is secured. This will enhance national
       food security even if geo political conditions, particularly with immediate neighboring
       countries, change.

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

c)     Farm mechanization should be intensified not only to reduce farm drudgery but also
       to increase productivity of land and labour both of which are in limited supply.
            Mechanization should not be limited for specialized farm operations such as
             ploughing, rice transplanting, harvesting, threshing, but also for value addition of
             farm products such as ‗ara‟ distillery units, meat dryers, fruit processors, etc.
             Therefore use of improved technology for value addition should receive
            Machineries should be made available not only at regional centers of AMC but
             service centers should also be opened up in strategic townships and Dzongkhag
             Headquarters eventually. At the Geog level, machinery-sharing arrangements
             between groups of farmers should be developed.
            Private entrepreneurs and agents responsible for renting out machinery could
             take up specialized services in agriculture such as seedling production, pest
             management, harvesting, etc. Incentives, such as tax exemptions, could be
             introduced to encourage private entrepreneurs to provide such services. The
             machinery that is made available must be suitable for farming systems (e.g.
             paddy transplanters in Paro and Wangdue, corn-flake makers in East) that the
             poor are involved in.
            Traditional practices of labour sharing among households will be promoted
             through farmer groups and associations.
            People hired on public works schemes should receive adequate financial
             compensation and these should be timed with periods of underemployment or
             outside peak agriculture activities in rural areas.

Accessibility to food
a.   So as to ensure that roads are constructed where they are most needed, road
     construction should be based on assessments of access to markets and basic services.
     In order to optimize the provision of such services, provision of roads should also be
     based on the size of settlement. Where there are only few households, such
     settlements should be resettled to areas with bigger settlement or get more
     households to settle there, depending on feasibility, to create critical mass for
     optimum use of road connectivity.

b.     Some indications on the likely relevance of different types of interventions,
       depending on the agricultural potential and extent of market access of the area being
       targeted, are provided below:

       Areas with high agricultural potential and good market access
       In these areas, income-generating interventions focusing on private-sector
       development in on-farm and off-farm activities will be most relevant.

       Areas with high agricultural potential and poor market access
       Road development is likely to have the highest returns by enabling marketing of high-
       value commodities and inputs for producing these.

       Areas with low agricultural potential and good market access
       Extensive livestock production with marketing of livestock products is likely to be
       more successful.

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

       Areas with low agricultural potential and poor market access
       Interventions should focus more on ensuring that households meet a minimum food
       consumption threshold through subsistence production and safety nets and on
       supporting long-term human capital investments in children. The purpose of these
       human capital investment interventions is not to keep people on farms or in rural
       areas but to promote the opportunities and mobility in geographic and economic
       terms for future generations.

c.     By creating on-farm and off-farm employment opportunities in rural areas with high
       concentrations of poverty, the incomes of the poor and their access to food can be
       increased. Off-farm activities also diversify livelihood portfolios, thereby making
       people less vulnerable to risks affecting farm production, on condition that these off-
       farm activities are not vulnerable to the same risks as on-farm activities. Developing
       on-farm and off-farm employment opportunities requires interventions at different

d.     Since cereal production has lower scope of income generation, horticulture
       enterprises niche production should be promoted to generate income to the
       farmers so that their food purchasing power is enhanced. These enterprises should
       be based on highly skilled manpower and modern technology. Therefore
       improvements in services infrastructure and institutions required for high value and
       low volume exports should be put in place. Given the small population and limited
       land resources, technology intensive and skilled production is the only option for
       increasing human and land productivity in future.

e.     In addition, access to input and output markets and the food distribution system
       should be developed. The food distribution system needs to be linked with domestic
       and international suppliers. Because of the logistical constraints to distributing food
       across the country (from east to west) and the fact that more developed trading
       systems run from north to south, the focus should be on developing distribution
       channels within regions from surplus to deficit areas, rather than across the whole

Utilization of food
a.     Bhutan‘s success in eradicating iodine deficiency shows that the country is capable of
       addressing micro-nutrient deficiencies. A nation-wide anemia control programme in
       both rural and urban areas for poor and non-poor is required for all age groups with
       priority to be given to pregnant and lactating women and children of 6-23 months.
       Options for anemia eradication include iron fortification of selected food vehicles
       and iron supplementation. Previous experiences with food fortification suggest that
       salt is an appropriate food vehicle to be fortified with iron. A recent iron-
       supplementation programme targeted at pregnant women had limited success.
       Although 90% of women had received IFA tablets, the prevalence of anemia was not
       reduced. Once there is an understanding of why IFA tablets failed to reduce anemia
       an improved approach to iron supplementation can be developed.

b.     A significant percentage of children less than 5 years of age are stunted. This is an
       outcome of insufficient micro-nutrient contents of diets and inadequate caring
       practices. As a short-term measure, until access to nutritionally adequate foods and
       feeding practices are improved, children under two and their mothers should be

                       Annexures to the Strategy for Gross National Happiness ( SGNH)

       provided with micro-nutrient fortified foods, together with education for improving
       feeding practices.

c.     Nutritionally adequate foods – including cereals, pulses, roots and tubers could be
       identified and their availability increased. Farmers should be encouraged to grow the
       traditional nutrient-rich crops that they have a comparative advantage in producing.
       This could involve developing and disseminating technologies for increasing yields of
       these crops. The purchase of nutrient-rich traditional foods by school feeding
       programmes could also be used for stimulating the cultivation of these crops.
       Alternatively, and particularly for foods that the country does not have a
       comparative advantage in producing, tariffs on imports of nutrient-rich foods,
       including staple foods, vegetables and fruits could be reduced or lifted in order to
       increase the availability and reduce the prices of these foods.

d.     Processing of and value-addition to nutritionally rich crops should also be increased.

Stability of the food security dimensions
a.     In Geogs where the food distribution system is poorly developed, community and/or
       household level food storage capacities will be more effective in stabilizing food
       availability since households in these areas will not be able to rely on the food
       distribution system.

b.     A disaster management strategy should be in place, which includes a food security
       component. Transport difficulties, especially during the monsoon months, threaten
       the food distribution system and can lead to food shortages in parts of the country.
       To counter these negative fluctuations, strategic grain reserves need to be held in
       areas that are susceptible to seasonal shortfalls of food availability.

c.     A food import policy, strategy, legislation and monitoring mechanism needs to be put
       in place to aim at increasing competition between food traders. It will also have to
       specify FCB‘s role in food import, market stabilization and ways to deal with the
       import of subsidized rice, which can act as a disincentive to private sector food
       traders and to the cultivation of rice by farmers in Bhutan. In formulating the policy,
       the impacts of Bhutan‘s accession to WTO on food imports and on local producers
       should be considered.

General coordination issues in food security
The different dimensions of food security are inter-dependent. For instance, one cannot be
food secure if he/she has sufficient income to purchase food but there is no food in the
market. Likewise, if one is able to access sufficient food but is too ill to absorb it, he/she will
not be food secure. Therefore, food security is a multi-dimensional and multi-sector issue. It
has to be addressed through multi-sector coordination.

a.     To facilitate engagement and collaboration of a wide range of actors operating in
       different sectors and at different levels, a National Food Security Co-ordination
       Committee should be established, under the aegis of the GNH Commission.
       Members of the National Food Security Co-ordination Committee would include
       Ministries of Agriculture, Economic Affairs, Health, Education and Home and
       Cultural Affairs.

                   Annexures to the Strategy for Gross National Happiness ( SGNH)

b.   A similar cross-sector institution needs to be made responsible for food security
     planning and monitoring at the Dzongkhag level. An option could be to create a food
     security task force with membership of sector heads and headed by the Dzongkhag
     Planning Officer. Alternatively, the existing multi-sectoral Dzongkhag level HIV/AIDS
     Task Forces could be given responsibilities for food security co-ordination and

                          Annexures to the Strategy for Gross National Happiness ( SGNH)

Revitalization of field crop enterprises

1        Situation Analysis
The qualitative assessment of agriculture development in the past four decades reveals a
distinct path – barter system to subsistence farming and then moving into a semi-
commercial economy. While following this path, the overriding policy of the M oA has been
to achieve certain level of self-sufficiency in cereals12 and buy the rest from the revenue
generated by export of cash crops to achieve national food security. Closer examination
shows that while the food crops production remained largely subsistence in nature, there
was a steady drive on the promotion of cash crops given their comparative advantages. As a
result, the export of cash crops and the revenue thereof have been growing over the years.
The export value of the four main cash crops - oranges, potatoes, apples and cardamom -
was Nu. 522.065 million in 200513 .

In food crops, rice production has seen increases in production through yield improvements
of adopting improved varieties. About 35% of the area is under improved varieties with an
estimated annual increment in production of 5,000-10,000 MT, which is equivalent to Nu. 60
-121 million.

The present rice production in the country is estimated at 55,762 MT against the national
requirement of 94,808 MT (CCARB). In 2005, we imported 45,230 MT of rice (rice in husk
or paddy, husked brown rice, semi-milled or wholly milled, and broken rice). The total
import value for rice, edible oil (both crude and refined) and maize (as raw material) was Nu.
539.51 million 14 . The projected trend would be widening the gap between domestic
production and import. The reason would be simply because of our poor delivery of
services to attract farmers to increase their production and productivity. The declining area
for rice sends a serious signal of stiff competition from other sectors and the inherent
system deficiencies within. The farmers have no choice but to adopt an approach of growing
just enough to feed their families and look for other cash earning opportunities.

With the gradual diversification of the Bhutanese economy, the contribution of the
agriculture sector to GDP has declined over the years. It has declined from 53% in 1985 to
26.7% in 200515 . While the declining trend is normal and healthy since it indicates higher
economic growth in other competing sectors, agriculture will still play a significant role in
the future economic development of the country.

In the past, in terms of approach, the agriculture sector was engaged in general development
of agriculture in the whole country. This approach was needed to uplift the general living
condition of the people and to provide basic services. In recent years, the need to focus
more on potential areas vis-à-vis general approach has received attention in the form of
exchange of ideas, debates and certain activities. However, the idea could not be developed
into programs (except farm roads) since the fund implication was high and its allocation to
the sector has been decreasing over the plan periods. Thus, the sector was faced with the
dilemma of whether to continue with the same approach or move to potential areas. It was
realized that adopting the new approach had to be at the expense of general services since
additional fund was not forthcoming. Faced with this quandary, the Ministry‘s strategic

   70% in the 9th FYP
   Bhutan Trade Statistics 2006
   Co mparat ive Socio-Econo mic Indicators for Bhutan, NSB 2005

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

decision to open farm roads as a forerunner of development to potential areas is a move
towards the new direction. In addition, a proposal for economic feasibility study to develop
the southern belt for rice production was prepared and submitted to GoI in May 2006.

With the basic infrastructure in place, the stage is set for a paradigm shift from a ge neral
approach to a potential-driven one for commercialization of selected commodities. The
main focus of this new drive should be providing better services to the potential areas.
Besides services, the external factors (policy, across border competition, wild life damage,
competing land uses, markets, etc) that affect food production must be addressed. Better
services can be provided if all the stakeholders work closely together bound by common
objectives. The main stakeholders who need to work closely together are research,
extension, infrastructure developers, farmers, private sector, marketing, cooperatives and
even the consumers. The foundation of this new partnership must be built on research
innovations in relevant fields, aggressive extension in prompt delivery of extension support
and services, development of high quality farm infrastructures, timely delivery of demand
and price forecasts and active involvement of the private sector and cooperatives for value
addition and marketing.

The major challenges in achieving the goal of commercial production of selected
commodities lie in providing efficient services, which in turn would depend on fund and
capacity. For fund, the RGoB should explore long-term soft loans since FDI may not be
possible due to low return on investment. Capacity development at this juncture is more
urgently required for infrastructure developers since high quality infrastructure development
must precede production of commodities. As a short term measure, existing people with
background knowledge and experience must be pooled to start the work. After a careful
needs assessment, covering all disciplines, a capacity development plan must be drawn for
implementation. Capacity development will be required by the commercialization program
as we move from a general approach to a specialized one and we need more specialists in
different disciplines to lead the program.

Importance of field crops
Field crops form the main staple food. Food being the basic nourishment for a healthy and
productive life, it is the ultimate source of energy for all productive human activities.
Generally, only after the basic needs for food is fulfilled, people explore other money
making opportunities to further enhance their well being. Therefore, those crops which
constitute staple food of majority of the population are important as the basic source of
energy and they invariably carry cultural and social significance. In addition they also have
national food security and other considerations of strategic nature. However, with the
emergence of free trade driven world economy, these characteristics of food crops are
becoming less obvious.

It is generally believed that Bhutan is self-sufficient in food crops if we produce what we
consume. But, the reality is, with increase in purchasing power given by the general
development of the country, our food habits have changed. The traditional food crops like
maize, wheat, buck wheat and millets are not consumed while rice has emerged as the most
important preferred staple food. It is estimated that we produce 58% of our rice
requirement while the other 42% is imported, mainly from India.

While the policy has been to buy food from the revenue generated by export of cash crops,
this policy objective has not been achieved as the balance of trade is negative (Nu. 539.51 –
522.065 = Nu. 17.445 million). Therefore, the importance of field crops lies in saving on the

                       Annexures to the Strategy for Gross National Happiness ( SGNH)

import of rice, edible oils and maize. Plugging this drain will significantly improve the balance
of agriculture trade and make our economy more vibrant. Besides the monetary gain to the
national exchequer, field crops offer income generation, livelihood and employment
opportunities directly to our farmers and indirectly to other people who are e ngaged in

Commercialization of field crops: Constraints and opportunities
The SGNH sets strict criteria to identify field crops and products thereof (after product
development) that have potential and competitive edge in the market (local and outside) for
production on commercial scale. If we consider these criteria only from commercial
production and market angles, field crops have limited scope given the narrow production
base and the low economies of scale. In addition, across the border competition is
perceived as a serious obstacle to field crops production beyond subsistence scale.
However, giving due weight to other equally important parameters such as import
substitution, income generation, livelihood and employment opportunities, national food
security, agriculture trade balance and as staple diets, rice, oil seed crops and maize have
production potential in certain pockets in the country provided factors that affect
production efficiencies are addressed.

There are common and specific constraints that restrict field crops production beyond
subsistence nature. The common constraints are:

      Narrow land resource base with only 7.8% of the country under arable agriculture;
      Narrow land resource base does not generate the economies of scale;
      Lack of high quality farm infrastructures;
      Main production resource – water is scarce when and where it is needed;
      Field crops production is more labour intensive than other forms of farming;
      Farm labour shortage and the difficulty of mechanization make growing field crops
       beyond self-feeding the last option;
      Damage of crops by wild life acts as the proverbial last straw on the farmers‘ backs;
      Stiff competition from across the border for markets acts as deterrents;
      Absence of road access for free movements of inputs and produces restrict
       production initiatives; and
      There are production management deficiencies for field crops.

Bhutan being a mountainous country with only small strips of flat areas in certain parts of
the southern foothills, arable land is a premium. Our present rice growing areas are mainly
located in river valleys of mid and high altitude areas. This is because significant land areas in
the southern belt remain mostly uncultivated while about 50% may be under a single crop in
a year. Such a small and scattered land resource with major chunk of potential area not
being utilized has resulted in shortage of food crops, especially rice and edible oils.

Bhutan is seen as a country endowed with rich water resources. This is only true at the
national level, where the amount of water resources is calculated based on the flows in
rivers generated by precipitation. But the irony is, there is water shortage when and where
it is needed. It is because the rainy season lasts for three months and the rest of the year is
mostly dry. The rivers flow along the valley bottoms while land is situated up the slopes.
Therefore, irrigation infrastructure assumes great importance. The southern belt has no
irrigation facilities to take advantage of the potential area for rice and oil seed crops. The
main reason is that southern belt falls in the fragile foothill zones and irrigation development

                       Annexures to the Strategy for Gross National Happiness ( SGNH)

is capital intensive and there is not enough resources for investment. There have been
efforts to provide irrigation services in the mid and high altitude regions. But the quality of
irrigation system developed has been poor and characterized by frequent break downs. The
main reason is attributed to fund-strapped patch-work irrigation development rather than
quality infrastructure development. In addition, the water users‘ associations who look after
the facilities have not been effective.

The labour intensive nature of cultivating field crops, farm labour shortage and difficulty in
farm mechanization have forced the farmers to cling to subsistence farming. To worsen the
situation, the costs related to crop guarding comes to as high as 30% of the total production
cost. Absence of road access, stiff across the border competition, deficiencies in crop
production management and poor marketing support have forced the farmers to remain
subsistence in their efforts rather than produce for the markets.

Coming to specific constraints, the rice production in the southern belt did not take place
since there was no infrastructure development due to security reasons. During the
seventies and eighties, Taklai Irrigation Project, the only big irrigation project in the country
was implemented. Right after the project was commissioned in 1988-89, the southern
problem did not allow reaping benefits from the investment. In addition, development of
infrastructure in the southern belt is investment intensive and to make the situation worse,
the heavy monsoon wreaks havoc to the developed infrastructures.

In terms of suitable rice varieties, only a few rice varieties are available for the southern belt
and research needs to develop varieties (in terms of quality and yield) along with
management packages. Rice production in the altitude of 1,600-2,600 m faces constraints
related to water and temperature. The latest transplanting must be done by mid July as
there is drastic yield decrease after this date. On the other hand, water shortage due to the
existing rainfall pattern pushes the date of transplanting. Therefore, screening and identifying
varieties for August transplant with a respectable yield potential may solve the problem of
water shortage due to delayed rainfall. With imminent climate change, change in rainfall
pattern is expected which may throw our farming system out of gear.

Maize production in Eastern Bhutan needs to be looked at from product development and
value addition point of view. Value addition and marketing have not received adequate
attention though there have been reports of su rpluses. Surpluses have been scattered and it
has been difficult to collect them for value addition or marketing.

Oil seed crops have been cultivated only at subsistence level. It is due to the absence of
assured irrigation. Without assured irrigation and suitable varieties, yield has been low at
the national average of less than 400 Kg per acre.

The southern belt has a projected command area of 15,090 ha, 40% of the total area under
rice in the country. With assured irrigation, double cropping of rice is technically feasible.
With 100% of the area under two crops of rice at a modest yield level of 2 MT/ha, the
estimated production is more than 60,000 MT. With assured water and good production
management, experts comfortably put the yield level at 3 MT/ha. Therefore, there is
potential to grow rice and reduce the imports to a minimum level and subsequently go for
total import substitution.

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

Mid and high altitude areas spreading into five Dzongkhags (Paro, Punakha, Wangdue,
Tsirang and Dagana) have 8,230 ha of land under rice cultivation. By creating conducive
environment, there is potential for production increase through increase in yields. Experts
believe that yield have not reached the optimum level. The yield increase would come from
adopting high yielding varieties, through better water, nutrient and pest management
practices. Creating efficient marketing channels would lure the farmers to increase their
production for the markets. In addition, these prime rice producing areas have potential to
produce natural red rice for the western markets fetching premium prices.

The oil seed crops fit well with the rice-based system, both in the southern belt and in
higher rice growing areas. Right mix of rice and oil seed crops would enhance the economic
feasibility of each other. In terms of production potential, with assured irrigation and the
readily available technology (varieties and management package with ICAR) yield of
rapeseed-mustard can be increased from the present national average of less than 400 MT/
acre to 800-1,000 MT acre. Depending on the acreage we devote to oil seed crops, there is
potential to decrease import of edible oils at least by half.

Maize production in Eastern Dzongkhags is more than 90,000 MT. There is potential to
increase further through adoption of improved varieties and management packages and
most importantly by creating a sustained demand. The demand has to be created by
innovations in product development and value addition. There is substantial import of maize
from India mostly as a raw material for the animal feed industries. With efforts on value
addition and creating the markets for the products, total import substitution of maize as a
raw material can be achieved.

Way forward: Policies and strategies
Policy changes/implications
In order to bring efficiencies in the overall system, land uses must be determined by land
capabilities and the competing economic benefits. The best way to rationalize the land use
will be to separate 60% as forest for all times. Since the main function of this land use
category is for environmental services, steep areas (above 51 degrees), core protected areas
and biological corridors, scattered and small settlements with steep agriculture land should
fall under this category. In addition, good forest for timber production through dynamic
management may be included under this category. After keeping aside the 60%, the
remaining areas must come as a common kitty to be divided among different land use
categories based on land capabilities and competing economic benefits.

Water is another productive asset that needs rational sharing among competing uses. The
Bhutan Water Policy (draft Dec 2006) sets general guidelines on water resources
management. However, legislation to support the policy is not in place. There are traditional
water sharing and management practices which need to change in order to do away with
the inherent inefficiencies. A national Water Act needs to be enacted to regulate water uses
among the different sectors to bring efficiencies. Related to the Water Act is the legislation
on Water Users Associations to give legal framework to the associations to play an
important role in sharing and managing water at on-farm level. The water users‘ associations
have not been effective at solving conflicts and disputes on water since these organizations
are not recognized as legal entities. As water will become an important resource for crop
production, water storage to bridge the seasonal gaps may need to be explored. Tying this
up with storages for hydropower will give multi-purpose dimension and may add value to
each other.

                            Annexures to the Strategy for Gross National Happiness ( SGNH)

Crop damage by wild life has acted as the proverbial straw on farmers‘ back. Though there
has been much discussions and studies, nothing concrete has come out. Therefore, the issue
of crop damage by wild life must be addressed if we want our farmers to produce for
themselves and for the markets.

In area of subsidies, food crops have received minimum subsidy. The present scale of
subsidy16 to the agriculture sector is spread too thinly across a wide range of basic services.
Subsidy on food crops is limited to transportation of inputs like fertilizers, weedicides, and
plant protection chemicals to the road head. Agriculture development, especially the food
crops sector, needs support and the government must rationalize application of subsidies
across sectors. Power/energy and natural resources subsidies to industries raise the whole
question of equity in subsidy application. The government must come out with a policy on
subsidy to provide a level playing ground across sectors so that subsidies are given where
absolutely necessary. In the agriculture sector, providing services (irrigation, farm road,
research, extension, marketing) to the farmers must be seen as a subsidy package. The
change in approach must be that we provide these services in an effective manner so that
farmers are able to capitalize on them. On top of providing these services, a dynamic
minimum price support for their produces will go a long way in attracting farmers to
produce surpluses.

Implementation Strategies
The main strategies must revolve around providing effective services and creating the
conducive environment required to increase production and productivity. The areas that
need focus are:

(i)      Infrastructure
The southern belt needs assured irrigation water as the first priority for production of rice
and oil seed crops. Therefore, investment is needed to develop high quality infrastructure. In
order to make good investment, feasibility study for rice and oil seed crops production with
the development of high quality irrigation and allied infrastructures needs to be done. As the
belt falls under a fragile foot hill zone, irrigation development with buried hume pipes as the
main conveyance structure seems to be more appropriate and therefore will be e xplored.
Experience indicates that such a system will be more economical in the long term though
the cost of construction will be higher in the short term. Since the command areas are
bigger, the volume of construction will be higher and must be mechanized to speed up the
progress of the work. To aid mechanization, hume pipe spinning units will be set up to
reduce the cost of construction and to bring standardized quality of construction. In mid
and high altitude regions, the quality of irrigation canals will be improved by using
prefabricated canal sections. Prefabricated canal sections of portable sizes will be produced
by batching plants set up at strategic locations.

A project approach to develop the farm infrastructure and area based program or
commodity approach to intensify food production will be adopted. In order to do this,
pooling of existing manpower may be necessary. Such an approach in the short term will
gain time in terms of starting the work such as, survey, feasibility study and design which
take a lot of time. It is proposed that intensification of rice and oil seed crops production
activity be started in the command area of the Taklai Irrigation Project, where there is
assured water.

     Nu.12 million p.a. which is 0.15% of Agri. GDP - Agri-Horti Po licy review

                       Annexures to the Strategy for Gross National Happiness ( SGNH)

(ii)    Research
There is need to conduct need-based research related to field crops production. For the
southern belt, suitable rice varieties (quality and yield) is limited, though work is going on
for about fifteen lines to screen them for suitable varieties. Research will focus more on this
area. In addition, there is a need to develop production management packages for rice,
covering soil/nutrient, pest and water management. In high altitude areas, cold tolerant short
duration rice varieties to fit into the rainfall pattern needs to be developed.

(iii)   Extension
An aggressive extension approach will be adopted. Extension is mainly involved in
communication of information on available technologies. There is a need to go beyond
dissemination through proactive mobilization of farmers to achieve targets in production.
For this to happen, there is need to change the extension deployment system. Therefore, in
potential areas more extension personnel will be deployed and will be backed up by subject
matter specialists to plan and work together in a result oriented manner. In the present
system, extension lack supervision and guidance from Dzongkhag, regional and the central
agencies. Also there is conflict or mis-match between the objectives of different agencies
who push work to the extension. The extension will focus more on issues of production
management. Their skills will be developed through training on the commodity he/she is
responsible to promote. Private sector and cooperatives must be encouraged to deal with
supply of production inputs, while the government may take regulatory roles.

(iv)     Marketing
Full marketing support will be provided to the producers. Besides creating marketing
facilities, market information on prices and demand of produces will be given to the farmers
on timely manner. In order to plan production by farmers, price forecasts generated
through market intelligence will be made for important commodities. The marketing agency
will assume facilitating role while the actual market transactions will be encouraged to be
done by the private sector and cooperatives.

(v)     Product development and value addition
Product development and value addition are needed. Maize as a raw material to animal feed
industry and conversion of maize to kharang to capture the school feeding program of WFP
will be explored. Other areas of product development from maize like breakfast cereals, sip,
high quality ara and singchang need to be studied in terms of quality of the products vis-à-vis
markets. For rice, one-stop units in rice growing areas that deal in collection, milling, grading,
bagging, branding and marketing will result in economy of scale and create confidence both
in growers and consumers and should be encouraged to be done by cooperatives or the
private sector. The oilseed crops will be extracted into edible oils of various qualities. The
technology and the equipment of various performance levels are available.

(vi)   Capacity development
A need-based capacity development plan will address capacity requirements for enhanced
services delivery to commercial scale production. Capacity development is expected to be
required in special areas like building high quality irrigation systems, research into product
development or value addition etc.

(vii) Farm mechanization, land pooling and lease farming
In order to offset the impact of labour shortage, farm mechanization in the southern belt
will be encouraged. To bring the economies of scale, land pooling will also be encouraged. If

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

a large tract of forest land is converted to agriculture, lease farming by private firms will be
allowed and encouraged. As farm mechanization is capital intensive, hiring of farm
equipment is seen as a better option to start with. Farm machineries like tractor,
transplanter, harvester, winnower, rotary weeder will be made available to the farmers on
hiring basis. Private sector involvement to provide the hiring services will be encouraged.

(viii) Other approaches
The above strategies are to support production and productivity increase through the
efforts of individual farmers. If effective services are provided coupled with sustained
demand, farmers will grow for the market. As a safety net, ensuring minimum price support
for their produces in the initial years will be very helpful.

Going beyond individual farmers as a production unit, cooperative farming comes to mind.
This can happen at two levels. In level one, farmers from nearby areas can form part of a
cooperative (private enterprise) to produce for it. In this arrangement, the cooperative will
provide all the necessary inputs to production, like hiring of farm machineries, seeds,
fertilizers and plant protection chemicals. The farmers will focus on production without
hassles on production inputs. The produce will be sold to the cooperative. In level two,
cooperatives or private sector will lease contiguous land from farmers or government on
long term basis. The cooperatives will produce on commercial scale on their own.

The above production models will definitely bring efficiencies in the production system.
However, there are certain risks involved when we shift the production system from
individual farmers to cooperative farming. The skill levels of farmers may not be adequate to
get jobs in other trades. In addition, being driven solely by commercial nature of the
enterprise, the cost to the environment may be significant. Pollution of land and water from
high use of fertilizers and plant protection chemicals cannot be ruled out. This may have
implication on the quality of life of the Bhutanese people.

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

Revitalization of horticultural enterprises

1. Situation analysis
1.1 Background
Among various horticultural crops grown in the country, some like apple, mandarin,
cardamom and potato have gained considerable commercial importance. There is a growing
trend to cultivate more vegetables adopting systematic crop rotations and as inter-crops in
the orchards. However, production is seasonal thus domestic demand is met by imports
particularly in the winter. Among temperate fruit crops, apple is an important cash crop in
Thimphu, Paro, Haa, Bumthang and Chhukha Dzongkhags that have assured climatic and
commercial viability. The production area plateau in the case of apple production is likely to
have been reached as per the current land use status. The productivity per unit area will
need to be the focus of attention as far as apple is concerned.

Other temperate fruits constituting a wide assortment of stone-fruits, walnuts, pears,
apricots, peaches, plums, etc. are grown on a limited scale, and most of these have not
gained commercial significance. With improved market infrastructure and the development
of reliable transportation system, more perishable crops like apricots and peaches may have
the potential to be cultivated on commercial scale.

Mandarin orange is the most important fruit in terms of the area under cultivation and total
tonnage of export. Grown extensively in the humid sub-tropical regions, it has contributed
greatly to the cash income of the people in these regions. However, there is much room for
improvement, both quantitatively and qualitatively. Under the present management
conditions, the yields are very low; production increase through the improvement of
orchard management practices will need to receive attention. Improvement in the quality of
planting material and introduction of exotic varieties suitable in the target markets need to
be focused.

Other produces like ginger, cardamom and areca nut are also popular in the southern
regions where the environment is favourable for their cultivation. During the past, mango
production picked up in the eastern Dzongkhags, particularly in Mongar. Proper
management guides will need to be issued until the growers are confident in the techniques.
Processing and value addition of mangoes that cannot find an export market could be tried.

The main export horticulture commodities continue to be apple, potato, orange, cardamom,
and ginger. This list can be expanded to include substantial volume of asparagus, mushroom,
strawberry, cabbage, cauliflower, carrots, peas and other vegetables. Value added products
from the processing industries are other important items of export, generating substantial
foreign earnings. India and Bangladesh are the current export markets for the horticultural

1.2 Comparative advantage and choice of commodities
The choice to grow a particular cash crop is dependent on many factors. Topping the list is
the market and the market price for the produce. So long as there is market, production to
suit the market will be possible by the farmers now that they have been exposed to market
oriented growing of produce. The comparative advantages have to be exploited if the
horticulture industry is to pick up. As far as apple production is concerned, special focus will
be given to rectifying the orchard management practices in the existing orchards. The
market requirements on the type of varieties, shape, size, colour, taste, etc. need to be
assessed to plan top working and plant replacement in the existing orchards. The

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

production of quality apples will need to be given top priority in the apple growing areas,
while screening of new, better varieties will have to be continued at the research stations to
catch up with trends in the markets. The environment is congenial for other temperate
fruits and nuts as well.

Sub-tropical horticultural commodities will be grown in the humid valleys of the interior
region and in the southern Dzongkhags. Vegetable crops exhibit comparatively less disparity
in land cover between different regions; however, commercial production is primarily
dictated by the existence and prospects of market outlets. The choice of commodities can
be influenced by various factors, the most important being market and transport cost
considerations. Thus, the process of horticulture development on regional basis involve
horticulture ingenuity and market information before matching crop to land in the most
appropriate manner.

1.3 Market situation analysis
Small volumes of produce, seasonality and inconsistent supply are the characteristics of the
horticulture industry of Bhutan. Large-scale mechanization is not possible to relieve the
labour constraints faced in the production of horticulture commodities. Further, the
relatively poor road network and the difficulties posed by the mountainous terrain presents
communication constraints. In addition Bhutan lacks market infrastructure and market
information system. Labour costs are higher than those of the neighbouring countries,
technologies like protected and controlled environment cultivation, storage concepts and
techniques, and preservation process for prolonged utility is not easily adopted by the
farmers in most cases.

Domestic markets
The domestic market can be divided into 2 categories such as rural markets, offering few
opportunities and urban markets which are small, fast growing and open to cheaper food
imports. The internal market is mainly urban and likely to see continuous growth over the
next decades. The major domestic markets for fruits and vegetables include weekend
markets in the urban centres, wholesale auctions, direct sales especially to institutions, e.g.
schools, hospitals, hydro-schemes, hotels, shops, etc.

A study conducted in 2006 revealed that in most urban markets, less than 80% of all traders
interviewed said they buy mostly locally produced asparagus, beans, cabbage, carrots, chilli,
potatoes, radish and sag. Approximately 45-50% of all cauliflower, mushroom, green peas
and tomatoes traders said their stocks were also locally produced. Nearly 100% of all lady
finger and onions are imported. In boarding institutions, almost all the fruits served are
sought from local markets, while majority of the vegetables are imported from India. In the
hotels, most of the fruits and vegetables are locally purchased. Small quantities are imported
from India, mostly during the tourist season.

The concern is that the Bhutanese market is small, easily prone to oversupply and price falls.
This will disappoint existing suppliers and especially those producers bought into market
access by the new farm road construction.

Export markets
The main export markets for Bhutanese agricultural products are India and Bangladesh,
apart from specialized markets in third countries like USA, Europe and Japan. Exports, in
terms of volume, have grown slowly (1.5% p.a.), with potatoes fastest at 4.5% p.a.

                       Annexures to the Strategy for Gross National Happiness ( SGNH)

Export values have increased at 4.6% p.a., with fastest growth in potatoes (14.5% p.a.),
mandarins have grown (3%) while apples have declined (-8.5%). The total value is US$ 13
million. Export Market can be divided into 3 categories. The characteristics of these export
markets are as follows:

Indian market
Indian market: mainly for potatoes, cardamom & small volumes of vegetables such as ginger
and beans, mainly supplied through FCB auctions; BAFRA inspection is not required. The
Indian market is worth about US$ 4.2 million.

Bangladesh market
Bangladesh market: mainly mandarin oranges & apples, sold C&F at Bangladesh border
through Bhutanese exporters; BAFRA inspection is required. The Bangladeshi market is
worth about US$ 7.3 million.

Extra regional markets
Extra regional markets: tiny volumes of extremely high value products e.g. Cordyceps,
Matsutake & red rice – these markets are small total impact, small volumes, highly
demanding. Auction sales of Cordyceps is a significant issue. The extra regional markets
comprising of third countries like Singapore, Japan, USA, etc. are worth approximately
US$ 0.5 million.

2.     Way forward: Development strategies
In order for the Bhutanese horticulture industry to function as a commercial enterprise, aim
must be to work with the market to develop profitable opportunities for our farmers to
increase their cash income.

If the industry is not profitable for all stakeholders involved, it will not be sustai nable. This
can be achieved through three strategies – lower costs, higher prices & larger volumes. In
Bhutan the focus needs to be on lowering costs, especially transport & increasing volumes.
Larger volumes provide greater opportunity for a larger numbers of growers, especially
those with road access.

2.1     Northern Areas
The areas above 3,000 masl where minimum mainstream development is to take place (as
per the NSP) also has a high horticultural potential in terms of wild harvesting of natural and
medicinal plants. Most of the naturally grown medicinal plants like the Cordyceps are used
in traditional medicines and recently exported to third countries.

Strategies for development of horticulture (high altitude medicinal plants) in this area will be:

      Formation of collectors groups amongst the communities in different villages and
       development of sustainable harvesting procedures and regulations
      Constitute a quality standard system for cordyceps as per the requirements of the
       export markets
      Improvement of the current marketing/auctioning system (invitation of international
       buyers to the auctioning may increase sales and rural incomes)
      Provision of market information on prices, quality requirements, standards to the
      Training of the communities on group dynamics, sustainable harvesting techniques,
       proper sorting/ grading and marketing of cordyceps

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

The products from here will be collected, sorted and packed in Thimphu, Bumthang and
exported via Paro International Airport. The export reject products could be uti lized in the
Institute of Traditional Medicines for formulation, as is already being done.

2.2     Hinterland
A multi-pronged strategy that combines improved pre and post-harvest technologies with a
marketing strategy in the long run will help transform Bhutan‘s subsistence horticultural sub-
sector into a highly competitive market oriented sub-sector.

MoA is currently concentrating on efforts to deliver effective extension services. What
would be required for extension workers and for MoA employees in general is to start
viewing horticultural production as a resultant of market forces. Demand-led production
instead of production-led production is the shift needed within rural areas. The strategies
proposed herein are therefore market oriented, mostly based on the co mmodities that have
already gained commercial importance as well as market demand.

2.3     Spatial suitability of land for agriculture/ orchards
According to the land suitability mapping done based on soil and slope capability, about
19.6% of country is potentially suitable to produce any arable crop, 21.6 % is potentially
suitable for perennials (orchards, etc.) and 16.8% for improved pasture under rain fed
conditions with the application of appropriate management techniques like erosion control,
terracing, drainage, soil amelioration, fertilization, etc. We have utilized only about 15% of
the actual and potential resources of the land for agriculture development. There is an
enormous scope for further expansion and intensification to produce more food for
consumption, more cash crops for export earning, and raise more livestock to reduce
import of animal products. Most of the horticulture crops are financially viable. The internal
rate of returns is positive.

 Table: Dzongkhag wise suitability of fruits and vegetables (based on current
                                              Potential Crops
  Dzongkhag               Tree Crops                                 Vegetables
 Bumthang                                               Potato, Cauliflower
 Chhukha        Mandarin Citrus                         Potato, Cabbage, Carrot, Chili & Pea
 Dagana         Mandarin Citrus, Banana, Guava          Radish, Beans, Broccoli & GLV
 Gasa           Organic red rice, potato, beans, asparagus
                                                        Potato, Radish, Turnip, Pea & Cole
 Haa                                                    Crops
 Lhuentse       Peach, Pear, Plum & Walnut              Broccoli & Chili
 Mongar         Walnut, Mango & Persimmon               Potato, Beans, Cauliflower & Chili
 Paro           Apple & Apricot                         Turnip, Cabbage, Pea, Carrot & Chili
 Gatshel        Mandarin Citrus                         Potato, Radish & Chili
                Persimmon, Guava &
 Punakha        Pomegranate                             Chili, Pea & Beans
                Mandarin Citrus, Guava, Banana &
 S/Jongkhar     Mango                                   Ginger
                Mandarin Citrus, Areca nut &
 Samtse         Banana                                  Ginger & GLV
                Mandarin Citrus, Banana, Areca
 Sarpang        nut & Mango                             Ginger
 Thimphu        Apple, Peaches, Plum                    Turnip, Carrot & Cole crops

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

                                                  Potential Crops
    Dzongkhag                 Tree Crops                              Vegetables
    Yangtse         Walnut                                Potato & Chili
                                                          Potato, Radish, Beans, Chili & Cole
    Trashigang      Peach, Pear, Plum & Walnut            crops
    Trongsa                                               Chili & Cole crops
    Tsirang         Pear, Citrus & Banana                 Bean, Ginger & GLV
                    Pomegranate, Persimmon &              Potato, Turnip, Beans, Carrot &
    Wangdue         Guava                                 Cole Crops
    Zhemgang        Guava & Mango, Mandarin Citrus        Cole Crops

2.4      Strategies for horticulture development for the domestic markets
The aim must be to supply all major urban towns, schools & institutions, hotels and mega h ydro
project sites with “Bhutan grown” fruits and vegetables.

       This market may not be as big as the export markets but is quite substantial to
        improve the cash income of farmers. The quality standard requirements need not be
        as high as the requirements for export and can be easily complied with.
       The major crops that can be focused for the domestic markets like urban towns,
        hydro project sites, schools & institutions and hotels are apples, peaches, pears,
        banana, mandarin, potato, chilli, cabbage, brinjal, asparagus and beans.
       Detailed market requirements (monthly requirements per product) need to be
        established per market/institution, hydro project site, hotel to plan the production.
       The emphasis should be on organizing the producers into groups, getting contract
        agreement between institutions and the producers, agreeing on the products and
        prices and delivery mechanisms.
       The production areas around the urban development centres of Thimphu,
        Phuentsholing, Paro, Bumthang, Mongar and Kanglung need to be assessed and
        production capacity determined.
       Collection centres / depots need to be set up in Thimphu, Bumthang and Mongar,
        from where the produce will be sorted, graded and packed and transported to the
        different locations.
       Winter vegetable production for domestic market:
        o       Production of vegetables in the warmer regions of Punakha, Wangdue,
                Tsirang, and Sarpang for supply to urban towns like Thimphu, Paro, and
                Bumthang and as an import substitution strategy.
        o       Vegetables like cauliflower, cabbage, broccoli and saag can be produced
                during this season.

2.5    Strategies for horticulture development for the Indian market
The major focus for this segment of the market will be Potatoes (Table, Seed and
Processing), off season vegetables (summer), Cardamom and Ginger.

Potato is the most important cash crop for mid to high altitude Bhutanese farmers covering
about 22% of the population. Because of the high yield potential, its affordability, high
nutritional qualities and high consumer preferences, potato is expected to have far higher
growth rates than cereals.

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

Although potato produced in Bhutan may be rather expensive, it will be through the
production of comparatively cheap seed that the Bhutanese potato producers will
contribute towards the production of high quantities of cheap yet high quality potato in the
neighbouring Indian states of West Bengal and Assam. The main opportunities for potato
production are:

    Expansion of potato production area and yield: High altitude with temperate climatic
     condition offers favourable environment to produce potato. There is substantial scope
     for increasing the potato area in Bumthang (all geogs), Wangdue (Sephu), Mongar,
     Chhukha and Dagana. As such, there is high potential to increase the quantity of
     production through expansion of production area and increase yield through effective
     professional interventions.
    Production of quality seed potato for domestic and export market: There is a big
     opportunity for the production of high quality seeds. The higher elevations of Bhutan
     provide excellent environment for potato seed production with almost complete
     absence of virus problems. Replicated studies evaluating seed maintained by farmers
     over periods of up to 20 years showed no sign of degeneration.
    Seed demand projected for West Bengal & Assam is 700,000 MT (just meeting 1% of
     this demand 7,000 MT per year would entail a lot of effort for Bhutan. 1,200 acres of
     land are required to produce 7,000 MT). The domestic seed requirement projection is
     about 4,000 MT if farmers follow the seed replacement recommendation (about 700
     acres are required to produce this amount).
    Introduction of contract farming: There is great opportunity to build farmers and
     private sector partnership through contract farming, which will also assist in effective
     technology transfer.
    Formation of Potato Producers Groups and Associations: Farmers‘ bargaining power
     in the procurement of inputs and marketing their produce could be enhanced through
     collective action. In so doing, the unit cost of production could be reduced through
     procurement of inputs on time and at a cheaper price. The Nu. share of the farmers
     could be increased through group marketing.
    Market Diversification: Develop niche markets in the larger Indian cities like Kolkata
     and Gauhati for fresh potato. Potatoes sold in these markets during the months of
     August – September are mostly cold stored potatoes, thus we have an advantage of
    Promote household level potato processing units: There is a good opportunity for
     setting up household level potato processing units that will produce potato chips,
     potato strips, potato flakes and other potato snacks.
    Improved Infrastructure: Possibility of increasing product recovery or minimizing
     losses through better or more investment in market infrastructure (transportation,
     storage, communication) and organization of training for farmers in product handling.
     Further, post harvest losses could be reduced through cleaning and curing before
    Possibility of introducing potato varieties for processing is currently being studied and
     by five years time varieties could be released in Bhutan for commercial production to
     supply the demand for processing potatoes in the Indian market.

Off season vegetables (summer)
    Emphasis on production of off-season vegetables both by utilization of regional
     variability & use of greenhouse techniques.
    Summer vegetable production for export market

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    Production of summer vegetables in Paro, Haa, Thimphu, Chhukha, Punakha, and
     Wangdue for supply/export to India (mainly Kolkata) and Bangladesh (supply to begin
     from May till August).
    Main summer vegetables to be produced need to be assessed after working out
     requirements in these markets, with complete details of type, size, quality, etc. of the
     requirements from the markets. (French beans, carrots, chili, tomatoes, radish, bri njal,
     etc. can be produced)
    The AMS needs to play a proactive role in making contacts with the importers,
     negotiating prices, getting the right quality standards and quantity requirements. These
     can then determine the area required for production, crops to be produced and the
     interested growers can be contracted for production for the specific market.
     Bhutanese fresh produce exporters need to be involved and take a lead in preparing
     the exporting logistics and procedures.
    All the post harvest requirements and handling techniques for each crop from the time
     the vegetables are ready for harvesting till they reach the market need to be
     determined by the National Post Harvest Centre and proper training to the growers
     should be provided during the growing season.

Cardamom (large cardamom)
Samtse, Chhukha, Dagana and lower Haa are the potential areas for cardamom which is the
3rd most valuable agricultural export commodity. It is currently being grown in about 4,000
acres in the humid sub-tropical areas of the country, with 68% of the area being in Samtse
Dzongkhag alone.

The increase in acreage under cardamom and improvement of production practices to
capitalize on the economic gains hinges on clear-cut directive from the government on the
implementation of the various land use policies and conservation acts in place. Studies
conducted in Nepal and Sikkim have shown that leasing of forest area for the cultivation of
cardamom to communities has improved the forest cover. The problem with cardamom
production is the general decline in production due to the viral diseases and non availability
of improved planting materials to replace the diseased plantations. The post harvest aspects
of drying/curing the pods also need improvement for product quality. Therefore, cardamom
production intensification strategies should be:

      The identified areas suitable for cardamom production need to be physically verified
       and if in forest land, long term leasing mechanisms needs to be worked out for
       immediate plantations.
      Assessment of number of seedling required for re-planting of the diseased
       plantations in the current area of 4,000 acres.
      Source improved seedlings from neighbouring areas of Sikkim, W. Bengal and import
       for re-planting.
      Encourage the establishment of at least 2 large cardamom seedling nurseries in
       Samtse and Chhukha by interested private operators.
      The National Post Harvest Centre in collaboration with RNR Research centre, work
       on the improvement of the drying / curing system using the gasifier-based drier to
       improve the product quality (appearance as well as volatile oil content)and the
       efficiency of drying.
      Cardamom Marketing groups need to be formed in Samtse and Dagana to organize

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

Ginger is one of the crops gaining substantial export potential. It is currently being grown in
Samdrup Jongkhar, Samtse, Sarpang and Tsirang in large quantities (the total production
from these Dzongkhags in 2004 was 5,574 MT, out of which 474 MT was exported with a
value of US$ 117,000). Ginger production needs to be up scaled in the more suitable areas.
The areas needed for focus to develop ginger as a commercial product are:

      Introduction of improved varieties (fiber less) and multiplication of planting materials
       (possibly by private nursery operators in S/Jongkhar and Tsirang)
      Research external world markets for processed ginger (organic ginger, sliced and
       dried, powdered ginger etc) and the quality requirements
      Undertake trials by National Post Harvest Centre on processing the ginger into
       forms (powdered, sliced and dried) other than fresh to reduce volume and expand
       market share
      Contact interested buyers and establish production/ processing arrangements and
       organize growers into groups to produce, process and market the produce

2.6     Strategies for horticulture development for the Bangladesh market
The Bangladeshi market is worth about US$ 7.3 million, with major part of the market being
for apples, mandarin and a small opportunity for the off season vegetables.

The value of apple export has not increased since 1997. In 2004, the value of apple e xport
was US$ 989,000. Although efforts to improve the production management and quality of
apples have been one of the major focuses of the MoA, the export earnings have not
improved. A market study by the MoA indicates that, despite its proximity to the
Bangladeshi market, Bhutan is losing its apple market share. The period of supply for
Bhutanese apples in the Dhaka market is August – October when it is competing against
cold-storage southern hemisphere supplies from New Zealand, Australia and South Africa.
This should favour Bhutanese products. Against this is the fact that it is competing with fresh
Chinese products. Bhutan is less competitive for reasons related to the likes of pricing,
variety, packaging, entry point into the marketing chain, etc. The strategy to revitalize the
apple industry should therefore be:

      Apple industry needs an overhaul. The current system of managing apple orchards,
       choice of varieties, etc. is outdated. The current yield of 2.5-4.5 MT/ acre is far
       below the international yield of 20-25 MT/acre. This has to be achieved by following
       high intensive production techniques maximizing the returns per acre.
      Utilization of dwarfing/ semi dwarfing root stocks on new varieties of demand in the
       market need to be planted in high density orchards. Current production technique
       recommends about 109-120 trees per acre, whereas major apple production areas in
       Australia and New Zealand are even growing 3,000-5,000 trees in one hectare.
      Replanting and rejuvenation of old unproductive apple trees (trees older than 35
       years) with new popular varieties in demand in the markets
      Undertake mass campaigns in all major production areas to improve current
       production practices
      Improvement in the grading, packing and quality standards to improve the
       presentation in the target markets (use of fiber board boxes with fillers)
      Remedial actions recommended to improve the Bhutanese apples in the Bangl adeshi
       market include:

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       a)   Reducing the marketing chain so as to protect the product against undue
            perishability and thus remain competitive against the cold stored products.
       b)   Being price competitive.
       c)   Improving packaging and final product presentation through the likes of waxing
            and socks.
       d)   Making more frequent smaller loads so as to assist the final seller with lower
            storage costs.
       e)   Working higher up the marketing chain, this is more directly with end retailers.
       f)   Adjusting varieties, especially towards the red elongated types related to the
            Red Delicious.
       g)   Internal efforts within Bhutan to boost production by addressing local
            production problems.

Mandarin is among the top ten export commodities till date and generates about Nu. 200
million annually. Total annual production is declining due to citrus greening di sease, and
other pests and diseases, and poor orchard management practices. The industry is export-
oriented as more than 62% of the total production is exported. However, this scenario
could be different if all the citrus production areas are easily accessible by road and

On an average, about 18,000 MT is exported annually with 85% of the export going to
Bangladesh. The cases of abandoned orchards and absentee orchard owners pose a
constraint to instituting improved orchard management procedures. Access to mandarin
production provides best opportunities for lifting Bhutanese farmers‘ incomes – if the road
access to major production areas are improved, post harvest losses are reduced, and
marketing channels are organized. The strategy to revitalize the mandarin industry should
therefore be:

      Improved orchard management practices need to be advocated in all the major
       mandarin growing areas by mass campaigns
      Establishment of large demonstration orchards to showcase the improved
       management techniques like proper training methods, irrigation (S/Jongkhar,
       Chhukha, Sarpang & Tsirang)
      The citrus industry is currently functioning on one single variety (local mandarin).
       This has a lot of disadvantage in terms of susceptibility to pests and di seases.
       Therefore, new varieties depending on the demand from the market need to be
       introduced and grown in large scale.
      Setting up of collection depots and packing areas besides the border towns need to
       be identified and established
      Redistribute the abandoned orchards to the landless or poor farmers under the
       resettlement programme
      Institute legislative or regulatory measures for the absentee orchard owners to
       comply with the Ministry of Agriculture‘s recommendations on land management
      Utilize mechanized sorting and packing facilities established at FCB P/ling for all
       exported produce to improve efficiency and presentation of the produce.
      Growers group marketing efforts like the ones initiated in Panbang and Dagapela for
       Mandarin export should be encouraged in other major production areas to increase
       benefits and reduce costs. These will not only improve the ba rgaining capacity of the

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

       growers but also be used to impart other production management skills and input
       delivery mechanisms.

Off-season vegetables
In July 2004 and 2005, AMS undertook trial shipments of summer vegetables and fruits from
Bhutan to Dhaka in Bangladesh. Taking all the costs and factors into account, in the opinion
of the Ministry and Embassy specialists, the identified Bhutanese vegetables and fruits can be
successfully marketed in Dhaka from the end of May to the end of August each year. The
vegetables for which the demand is the highest are asparagus, French beans, broccoli, the
Bhutanese chilli, cauliflower, ginger, and tomato. The fruits that are in demand at time of the
year are peaches and plums. These products are not readily available during the hot summer
months in Bangladesh. However, Bangladesh is increasing the range of products that it
imports and these products are well known in the market. Bhutanese farmers must be made
aware that in order to compete with these off-season imports and some local products,
they must supply products of the highest quality that have been harvested at the correct
degree of maturity, have the most careful attention paid to post harvest preservation, are
properly graded, very carefully packed, and then transported to the market in a refrigerated
vehicle or container.

Bangladesh is a huge market with strong middle and upper income groups that are willing to
pay good money for their products but demand very high quality. Therefore, the strategy to
supply the Bangladesh market with summer vegetables must focus on:

      Detailed price profiles to be developed as a basis for negotiation with the importers
       in Dhaka
      FCB may be made the export agent and commence the preparation of the
       appropriate paperwork.
      A detailed production availability profile to be established for the crops targeted for
       export. ( this information is available)
      National Post Harvest Centre must advise the growers on:
       o      Optimum maturity for harvest
       o      On-farm methods of reducing field heat.
       o      Preferred temperature and humidity storage conditions.
      Grading standards must be established for the vegetables (mostly quality and grading
       requirements be provided by the importer).
      Appropriate transport / preferably cool chain are arranged for the movement of the
      The Bangladeshi Ministry of Finance to be requested duty-free entrance status for
       the vegetables.

2.7    Strategies for horticulture development for the extra regional market
These markets characterizes tiny volumes of extremely high value products e.g. Cordyceps,
Matsutake & red rice.

Matsutake Mushrooms
Bhutan has exported matsutake since 1991. Destinations for Bhutanese matsutake are
Thailand, Singapore, India, Nepal, Korea, and Malaysia. It is high priced - low volume and
thus well equipped to sustain the high costs associated with air transport. This recognizes
that for Bhutan as well as a large number of less developed countries, logi stics are a major
issue. Road transport may be cheaper compared with air but for the cool chain critical for
products such as fresh matsutake, road transport presents a number of critical areas where

                       Annexures to the Strategy for Gross National Happiness ( SGNH)

the cool chain can be stretched to the point of breaking. Collection occurs in the rural
sector, which is the focus of the Government‘s rural enterprise development program.

Of all the mushrooms, matsutake is the only one that parasitizes off a living substrate and
not an artificial one. Thus its production cannot be manipulated. As a naturally occurring
product, matsutake must be collected with extreme awareness of the dangers of over-
exploitation. Even well intentioned but enthusiastic harvesting can result in damage to the
resource. It is for this reason that matsutake lends itself to community based natural
resource management.

A detailed analysis of the import and wholesale market data for matsutake showed that
Bhutan‘s market share had declined dramatically over the thirteen years that it has been
exporting matsutake to Japan. Concern is expressed about the image of Bhutan‘s matsutake
in Japan. There has been a number of reported near-fraudulent behaviour by Bhutanese
exporters. Based on trade interviews, it is clear that this has seriously harmed the country‘s

The Bhutan Fresh concept should be introduced as a voluntary scheme that has precise
grades and packaging standards. Products that meet these standards are entitled to affix the
Bhutan Fresh logo. The government then assists the promotion of the Bhutan Fresh logo as
a quality marquee. Exporters who choose not to enter the fee-paying scheme are still
entitled to export but the Government does not support them, and, critically, makes no
statement regarding quality assurance.

Another area where improvements could be made relate to the physical conditions
surrounding the actual process of exporting. If exporters could be more precise in their
timing of exports it would facilitate the definite allocation of freight space on the country‘s
only airline – Druk Air. At the same time, precise advanced advice as to the timing of
exports would enable prior inspection by the appropriate quarantine and associated
authorities. Possible problems could be identified and remedial action instituted without the
need for outright rejection.

2.8      Strategies for development of new crops into new markets
Fruit crops like passion fruits, guava, peaches, pears, persimmon, and vegetable crops like
chilli, tomato, cabbages, cauliflowers, broccoli, peas & beans, asparagus, etc. have also been
promoted to a large extent by the MoA, mostly as a crop diversification measure to
enhance the income and nutritional intake of the Bhutanese people. Therefore, efforts to
continue developing these crops in terms of improved varieties, production management
techniques, post harvest and processing capacities and collection of market information will
be required to have commercial impact in the long term.

Initiation of development of new crops like culinary herbs (Basil, oregano, sage, dill, lettuce,
rosemary, thyme, lavender, etc.) also needs to be undertaken. These speciality crops have
great potential of being value added (dried, or distillation of essential oils). High end resorts
and speciality restaurants serving exotic dishes like pasta and pizzas generally need these as
ingredients and spas and aromatherapy joints need specialised oils.

2.9    Strategies for enabling environment
      The horticulture research and extension efforts need to be streamlined and given
       more impetus with the setting up of commodity development groups for the major
       commodities like citrus, potato, apple, vegetables, medicinal & aromatic plants, herbs

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

       & spices ( to cover crops like ginger and cardamoms, herbs, etc.), consisting of crop
       specialists, economists, marketing experts, etc. Horticulture research should be
       demand driven and therefore should form a part of the development and marketing
      Marketing efforts need to be streamlined within the commodity development groups.
       The marketing division has the overall mandate of development of the agricultural
       marketing efforts, however, due to the organizational differences, there is no
       coherent approach to the marketing requirements of the commodities pursued by
       the different departments.
      Excess land under horticulture – people who have already invested in orchards and
       have been found to have excess land should be allowed to buy these lands within a
       prescribed ceiling, instead of eliminating the already invested orchards.
      Provide funding assistance to growers to expand areas, improve productivity, utilize
       high tech methods of commercializing horticulture like use of large green houses, net
       houses, drip/ sprinkler irrigation, production of new crops, construction of post
       harvest and packaging facilities on farm, improved transportation and marketing
       systems, etc. (e.g. subsidize investments on alternative irrigation systems for
       horticulture : Govt. provides 40% of the investment cost per acre of horticultural
       land under improved irrigation).

2.10   Reforms recommended in the delivery of horticulture services
      Ensure availability of inputs like seeds, fertilizers, plant protection chemicals, etc. at
       the right time by setting up groups/ associations for input delivery at the production
       sites at least one in each Dzongkhag.
      Encourage private entrepreneurs to take up specialized services in horticulture like
       seed & seedling production, pest management, pruning, training, harvesting, packing,
       grading, transportation etc. by providing incentives like tax exemptions.
      Strengthen the capacity of the Dzongkhags through appointment of horticulture
       specialists (subject matter specialists) and plant protection supervisors at the
       Dzongkhag and Geog levels
      NRTI should introduce diploma in horticulture, or undergraduate programme in
       specialized horticulture skills development subjects rather than focusing on general
       agriculture extension methods, etc.

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

Revitalization of livestock enterprises

1. Situation analysis
1.1 Background
As Bhutan enters the next two decades the livestock sub-sector has the challenge to
enhance livestock production capacities to meet the increasing demand of quality and safe
livestock products and to enhance income of the small scale farmers. It therefore becomes
essential that livestock development in Bhutan undergoes a metamorphosis to meet these
challenges. It is estimated that 90% of the rural households own livestock in one form or the
other. Livestock therefore forms a vital component of the RNR sector for the enhancement
of the rural economy and in alleviating poverty. The 2003 national statistics indicate that
livestock contribution is about 8.1% of the total GDP17 ; however, the intangible benefits
derived from livestock which is not accounted are manifold and very significant.

Organized livestock development began in late 1960‘s within the broad frame work of the
programmes like breed improvement, dairy development, animal health coverage, fodder
development, sheep & fisheries development, establishment of animal husbandry cum
farmers training centers, research & extension, human resource development. These
programmes have been pursued in successive development plans. There is now a need to be
more responsive to increasing demand of livestock products in a sustainable manner which
is coherent with the concept of GNH. In order to combat the problems of possible
environmental degradation, more effective strategies are required to increase animal feed
resources and a more strategic genetic upgrading exercise, to improve animal productivity.
Contrary to the species-specific development programmes of the past, the Livestock sub-
sector now envisages the need to transform the subsistence type of farming to market and
impact-oriented activities which will actually bring about a difference in the life of our

1.2 Livestock dynamics: population and production
The number of cattle per rural household in 2005 was 4.2 and poultry 1.9. The other
categories of animals per rural household ranged from 0.2 to 0.5. Cattle is by far the most
important livestock in Bhutan. While there has been a 15% increase in the number of cattle
over the last five years, crossbred cattle increased by about 50%. Similarly crossbred pig and
poultry population increased by about 3 times and 2.5 times respectively. These indicate the
impact of crossbreeding interventions in Bhutan which will be catalytic for sustainable
intensification of livestock in the country.

For livestock products, the quantity of liquid milk increased by about 70%, while the amount
of cheese doubled in 2005 compared to 2000. The increase in crossbred pig and poultry
population resulted in increase in pork production by 69%, chicken meat and eggs by about
3 times in 2005 compared to 2000. There were small increases in beef and yak meat
production by 23% and 18% respectively in 2005. In spite of these increases in local livestock
product production there was increases in imports as well with the exception of eggs.

2. Why a need for livestock revolution…2008 to 2028
2.1 Increasing demand for livestock products
The need for a livestock revolution is straightforward. Bhutan‘s rapid population growth,
income rise and urbanization are fuelling an increase in demand for food of animal origin.
Between 2000 and 2005, there was increase in per capita consumption of all livestock

     NSB 2004

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

products. Milk consumption doubled, cheese and fresh fish consumption increased by about
2.5 times. The highest increase was seen in pork (about 3.5 times) and chicken (about 3
times). Eggs consumption increased by about 33% in 2005 compared to 2000. The per capita
consumption is projected to grow even faster through 2028. Such changes can create new
opportunities for livestock producers in Bhutan to enhance local production in a
competitive manner and gradually reduce imports.

2.2 Need for integrating smallholders with commercial processing & marketing
As livestock products demand increases it is important to have mechanisms on how the
poor farmers can retain their market share of livestock production. Addressing the
increased demand for livestock products provides an avenue for sustainable intensification of
smallholder livestock production systems.

3. Broad policy pillars for livestock development
The inherent complexity of livestock production imposes constraints that have to be
addressed and which pose particular challenges not normally faced by the agricultural
planner. Yet it is the very complexity of animal production systems that also offers some of
the greatest opportunities for development. Livestock, because of their linkages with the
overall farming system, make valuable entry points for wider agricultural development
programmes. To exploit these opportunities, an integrated approach that combines both
technical and institutional interventions is required. Rather than emphasizing only on output
maximization, polices are required for a dynamic livestock sub-sector to improve food
security and alleviate poverty and at the same time minimize adverse effects on public health
and the environment. Some of the broad policy pillars proposed for livestock development
in the future are:

      Enhancing the production in areas where there is sufficient demand and resources
       can be utilized at reasonable cost to the environment
      Building and strengthening participatory approaches for collective action of small
       scale farmers which will enable them to vertically integrate with livestock processors
       and marketing institutions
      Creating an enabling environment (e.g. access to capital, land and support services) in
       which farmers will increase investment in a way to improve productivity in the
       livestock sector
      Enhancing promotional livestock programmes by providing some free inputs (pullets,
       piglets) in the remote and vulnerable areas to alleviate poverty
      Instituting effective regulatory mechanism to deal with threats of environmental and
       health crises stemming from livestock

4. Prescription/Strategy: Way forward
The strategies are based on a result of the situational analysis and the broad policies of the
livestock sub-sector for the next 20 years, which of course must be revisited from time to

4.1 General livestock development strategies
The livestock revolution could provide an engine for sustainable intensification of small-scale
farming and marketing. A development strategy needs to anticipate and identify those forces
that drive a particular livestock production system and the sub -sector as a whole. These can
include population growth, market development (urbanization and income growth),
technological change and a changing resource base. An understanding of the direction and
speed with which these factors may change, both at the sectoral and farm levels, is

                       Annexures to the Strategy for Gross National Happiness ( SGNH)

necessary so that future programmes can respond accordingly. Some of the general
livestock development strategies are included under the following broad classifications:

On-farm interventions
All farm interventions should be adapted to specific agro-ecological conditions and
production systems. The availability or utilization of local feeds can be increased through
establishment of feed mills at strategic locations in the identified potential areas of livestock

Feed resources
Feed and fodder development will continue to be an important element in livestock
development programmes. These interventions should aim at increasing the avai lability or
utilization of local feeds through establishment of feed mills at strategic l ocations in the
identified potential areas of livestock development. Animal feeding needs special atte ntion
and the need to make better use of traditional feed resources is a must to raise ruminant
livestock productivity. Feeding of cereal straws alone result in perpetual poor productivity.
The majority of farm households rely on grazing in the forests, and crop residues, which are
low in nutrient contents. Feed shortages occur especially during winter. Improving poor
quality feeds such as straw with urea has been tried in the past, but has had low adoption
rates18 . Promoting crossbreeding requires improved feeding practices, and supply of higher
quality feed such as concentrates and leguminous tree leaves. Growing legume fodder trees,
oats, fodder conservation, diet supplementation with balanced high energy feeds
(urea/molasses blocks) are interventions that farmers are gradually taking up to address
these constraints in Bhutan. Enhancing cash output from the mixed farm is therefore
essential to enable farmers invest in good quality feed for their animals.

Stall feeding
Stall feeding of cattle must be promoted. It is essential that farmers gradually consider stall
feeding, in order to use the available feed resources effectively and maximize manure
production. Wastage of valuable manure can be reduced by stall feeding and utilized by
improving drainage and constructing a simple pit at the animal shed. Losses of manure due
to rain and sun cold can be minimized by providing simple roofing over the compost heaps
or pits. However, socio-economic constraints need to be evaluated before recommending
these changes to farmers on a wide scale, especially because of the extra labour and costs

Genetic improvement programmes aimed at improving the livestock resource base
Options include within-breed selection of adapted indigenous breeds, substitution with
exotic breeds or cross-breeding. Such choice should depend on the production system, its
objectives and the resources at its disposal. Experience has shown serious misjudgment with
policies aimed at importing exotic breeds with a corresponding neglect of indigenous breeds
in many developing countries. Dissemination concerns the institutional aspects as well as the
choice of biotechnology such as artificial insemination, embryo transfer and progeny testing
programmes. The artificial insemination programmes must be strengthened and mobile AI
programmes promoted. The current practice of supplying a breeding bull to a community
and managed by a community should be changed, since community owned breeding bulls
have not received appropriate attention and care. Such breeding bulls should be given to
contract bull breeder who will take care of the bulls and charge some amounts for services
performed by the breeding bulls.

     DA LSS, 2002

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

Conservation of local genetic resources
Dairy intensification is measured as the shift from ―low-producing‖ animals to ―high-
producing‖ animals. Crossbreeding does provide short term economic benefits; however, it is
being debated, because if it is often done haphazardly it contributes to the genetic erosion of
well-adapted local breeds. Exotic crossbreds are also more susceptible to diseases and high
mortality rates which require better feeds, more veterinary care and better management.
The potential to increase production by introduction of high genetic level animals with high
production potential is a promising method to alleviate poverty and therefore subject of
many developing projects. Yet in the context of sustainability, to meet the requirements of
future production systems, efforts must be made to conserve genes of locally adapted
animals, since genetic biodiversity is the base for every breeding programme and an
invaluable resource. Conservation of local genetic resources is vital due to the ability to
respond to changing production systems. Adapted animals are more resistant to diseases
and environmental challenges. Strengthening the conservation of local animal genetic
diversity through ex-situ conservation and promoting selection within the local breeds in
the government farms (located at Trashiyangphu, east Bhutan) and in areas where farmers
prefer the local breeds should be promoted because of their specific characteristics, such as
disease resistance and adaptability to harsh environmental conditions. Cryo-preservation of
the Siri semen is an ongoing activity in Bhutan and this could be one way of preserving the
local genetic resources for use in the future.

Addressing animal health constraints
In the animal health scenario, some of the strategies to be advocated are: the strategic
animal health delivery approach, expansion of cost participation mechanism for curative
veterinary services in the urban areas, the promotion of village/community participation in
the animal health programmes and strengthening the livestock sub-sectors efforts alleviating
zoonotic diseases. Catering to the needs of the farmers through an effective delivery of the
extension service, strengthening and advocating an effective monitoring and evaluation of
the livestock services and bringing about a horizontal integration of the technical
programmes are areas of priority. Strategic animal health delivery based on epidemiological
findings should be continued. Control of economically important production diseases
(internal and external parasites) and zoonotic diseases will be emphasized upon.

Finding a balance between livestock and the environment
In the smallholder mixed farming systems of Bhutan, the most important i nteraction
between livestock and the environment is cattle grazing in the forests. Farmers have user
rights for grazing in many of the forest areas. The intensity of cattle grazing in the forests
differs between regions. It must be emphasized that uncontrolled grazing with high animal
densities is harmful to both forests and grassland eco-systems. At the same time judicious
grazing is an effective management tool for reducing competition of tree seedlings by
eliminating unwanted shrubs and grasses. For sustainable development of smallholder
farming systems, it is vital that a symbiotic relationship occurs between cattle grazing in the
forest and forest management. Forest grazing and silvopastoral systems are widely accepted
as modern forest management tools. Silvopastoral systems can particularly be useful for
mountainous environment and they perhaps offer the best economic and ecological option
for many livestock farmers in Bhutan. An example of the synergy between forests, crops and
livestock is the promotion of crossbred cattle to increase milk production especially in areas
with taboos on culling and so that fewer animals are kept to conserve forests. There is also
a need to maintain nutrient balance in nutrient deficit mixed farming and to enhance crop

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

livestock integration. To reduce nutrient surpluses, regulations to control animal densities
and waste discharge and incentive for waste reduction are required.

Veterinary public health
With livestock production becoming more intensive, stringent regulations should be in place
for environmental sustainability and to safeguard public health concerns. Meat, milk and
dairy products hygiene should be better enforced. This should be done through
establishment of adequate standards for livestock products and hygienic standards for the
entire production chain. Urban dairies and piggery should adequately dispose waste
materials. Strict vigilance of livestock products for possible zoonosis should be done.

Efficient and professional delivery of services
Technical backstopping and professional advisory services to the farmers should be
strengthened. Extension agents should take a more proactive role in the rural development
activities for which appropriate facilities (two wheelers, basic office set up and up gradation
of their skills) should also be provided to these people.

4.2 Focused livestock development strategies
In the past, efforts to bring about livestock development have been made at various levels,
wherein the inputs made were highly diversified resulting in a very small output across a
wide arena. Latent development strategies were in vogue which cannot adequately address
our current and future needs of livestock products. Bhutan‘s development policies of
poverty alleviation requires strategies that will help the rural poor and at the same time
ensure that they have the opportunity to participate in the growth made possible by
livestock revolution.

For Bhutan livestock development patterns such as high cost and highly capitalized industrial
milk, pig and poultry production can be inappropriate policies because these only promote
large livestock industries (dominated by a few large producers), with few opportunities for
poor farmers. The small scale poor farmers should not be driven out by industrial livestock
producers. Instead small scale farmers should be given the opportunity to integrate vertically
with livestock food processors. Current focused strategies aim to reduce import of
livestock products by enhancing local production. Exports of some niche products like
exotic cheese (from cattle and yak) and also honey will be explored. Some of the
alternatives to large industrial productions systems wherein small scale farmers can benefit
could be developed through:

      Vertical coordination of specialized crop and livestock activities in high potential
      Use of labour and quality control of many small farmers in production, but also
       benefit from the expertise, technologies and assets of larger scale companies that are
       under contract for input provision, processing and marketing.
      Strong emphasis in the area of technology development for production and
       processing of livestock products, potential benefits from new technologies, and at
       the same time have appropriate mechanism for environmental conservation and
       protection of public health.

Assessment of potential products and potential areas
The vision of the livestock sub-sector in the next 20 years should envisage contributing to
achieving economical, social and environmental sustainability, which is coherent with
Bhutan‘s policy of self-reliance. To have a desirable impact on the rural economy and to

                      Annexures to the Strategy for Gross National Happiness ( SGNH)

cater to the increasing demand of livestock products, a focused programmed commodity
approach in the potential areas of the country is essential. This would have a big economic
impact for the rural and peri-urban farmers, generate employment opportunities, bring
about a reduction in import of livestock products and also contribute to food self sufficiency
and food security at the national level. Based on parameters such as livestock population,
livestock production, agro-ecological zones, environmental conditions such as access to
grazing areas, crop residues, market opportunities, prevailing social beliefs, a list of the
various important livestock products which has potential to be pursued as a semi-
commercial or commercial enterprises in the next 20 years is given in the table below.

                                                              Annexures to the Strategy for Gross National Happiness ( SGNH)

      Potential livestock products and potential areas

                Milk and products                          Meat Enterprises                                        Others
                Liq     Local                        c                                    Yak                               Horse
                uid    Butter    Yo      Exotic    chees           Chi                   meat       Beef                    & Yak
                mil       &      ghu    cheese       e             cke                  (Proces   (Proces   Chev    Ho      (pack
 Dzongkhag       k     Cheese     rt    (cattle)   (Yak)   Pork     n     Eggs   Fish     sed)      sed)     on     ney       )
Pema Gatshel

                               Annexures to the Strategy for Gross National Happiness

Farmer groups
Generally individual entrepreneurs or small companies make simple, informal production
contract with farmers on a seasonal basis. Such contact with farmer groups enhances the
volume of the product and a more reliable source of raw material. Such mechanism is
usually an alternative to corporate approach in smallholder farming system. These informal
initiatives depend on the efficiency of technical support services by the government.

The concept of farmers working in groups is still in its infancy. Bhutanese by and large
though individualistic in nature, such a concept is nonetheless slowly emerging. Farmers
working in groups have the benefits of a large volume of production, lower cost of overhead
expenditures and a stronger marketing edge. Some of the notable farmers groups which are
operating currently include the Thimphu Peri-urban group (fresh milk), Sha Gogona group
(exotic cheese), Shari Om Luethen Tshogpa at Paro (fresh milk), Choekhor Gonor
Gongphel Tshogpa (butter & cheese), Deothang farmer group (fresh milk), Tangsibji farmer
group at Trongsa (butter & cheese), Doban farmer group in Sarpang (butter & cheese), Soi -
Yaksa farmers group (yak butter & cheese) and several poultry and pig farmers groups in
Tsirang and Sarpang. The economic gains have been good from such enterprises, but
production of the products in larger quantities has resulted in marketing problems.

In the 10th Plan, all the existing farmers groups will be further strengthened in terms of
functioning as a group, training on various aspects of product processing and marketing. In
the potential areas more farmer groups will be formed. The peri-urban dairy/pig/poultry
programmes will receive a major thrust in potential pockets of the country in the coming
years. Farmer‘s involvement on the development programmes, such as the formation of
Contract Bull Breeder Programmes, Contract Pig Production Programmes will continue. By
the end of the 10th Plan, efforts will be made to form farmers‘ association (a conglomeration
of several farmers groups) in the potential areas of Bhutan.

Nucleus estate model of contract farming
As the informal type of contract farming (farmers groups/ association) continues in the 10th
plan, the concept of more organized type of contract farming will have to be initiated to
facilitate sustainable and market oriented livestock production by small producers. Such
organized contract farming will provide a proper linkage between the farm and the markets.
Arrangements are required to be made to obtain commitment of the producer (farmers,
farmer groups) to provide a certain type and quality of livestock product at a time and price
and the quantity (minimum/maximum) agreed upon by a known and committed buyer.

Efforts will therefore have to be made to induce private parties to establish moderate sized
pig and poultry processing plants. In case there are no takers, then public intervention is
required to establish a few processing plants in potential areas. In such a scheme the public
sector will also maintain a production unit to guarantee throughput for the processing plant
and may be used for breeding and research purposes, but farmers and farmer groups will be
under contract to produce the inputs. The public sector will commence the processing plant
on a trail basis. After a trial period the processing technology can then be introduced to the
farmer groups and leased. Some examples include milk processing plants, vacuum packed
yak meat, poultry and pig meat products.

Gradual privatization of government cattle farms
The government livestock farms need to be retained for the moment since they are still the
most important source of genetic material (breeding bulls, horses and pigs). Until the
farmers/farmers groups are in a position to take over these responsibilities completely, the
government farms are still required. In the past, privatisation of some of the government

                                Annexures to the Strategy for Gross National Happiness

livestock production units failed due to operational difficulties e.g. the Milk Processing Plant
at Phuentsholing and the Pork Processing plant at Wangchutaba which is now closed. Major
reasons for their failure were the lack of raw materials. Contract farming is therefore
essential for the sustainability of such enterprises. In the future special emphasis should be
made at enhancing the efficiency of the government farms, and bringing them to a stage of
financial viability. Semi-commercialization, entrepreneurship development and attainment of
some level of financial viability are required before embarking upon complete privatisation.

During the 10th and 11th Plans, the Brown Swiss farm at Bumthang and National Jersey
Breeding Centre at Samtse should focus on milk production and if required processing of
milk products so that they reach a certain level of financial viability. These units will also
continue to focus on production of breeding bulls and by the 12 th Plan, these two farms may
be leased to contracted farmer groups to take up the entire operation. The government pig
and poultry farms should continue to increase the production of piglets and pullets, to assist
the farmers/farmers groups or private entrepreneurs undertaking pig and poultry processing
enterprises. When the government pig and poultry farms demonstrate financial viability,
these also could be leased out to farmer groups or interested entrepreneurs.

Cost sharing of animal health service delivery
Animal health programmes are essentially aimed at limiting the impact of disease on animal
production. Policy issues concern as to who will provide and pay for such services.
Foremost is the need to control and protect (quarantine) the national livestock resource
from major epizootic diseases, such as Rinderpest, Avian flu, etc. Disease monitoring,
veterinary investigation and legislation (public health and meat inspection) also fall within the
public domain. It is proposed that in the urban areas of Thimphu, Phuentsholing, Gelephu
and Samdrup Jongkhar, the clients owning pet animals should pay animal service charge and
the full costs of medicines prescribed.

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Revitalizing RNR Research and Extension Services

1.      Introduction
The dependency on the agricultural sector is expected to continue as long as a sizeable
portion of the work force depends on it, a substantial part of consumers' expenditure is
accounted for by food and other agricultural products and foreign exchange earnings are
provided by agricultural exports. With almost 70% of the population living in the rural areas,
economic growth or regression cannot be divorced from the performance of agricultural
sector. That situation is unlikely to change for some time given the fact that growth engines
such as physical infrastructure, human and institutional resources remain largely
underdeveloped. These long-term constraints require long-term strategic investments. It is
essential to immediately begin sorting out priorities and plan appropriate sequence of
investment and policy interventions that can create conditions for sustainable economic

The carrying capacity of the land can be understood in terms of input use and technology
adoption. Agricultural practices are still predominantly at low input level, while there are
some areas that have moved to an intermediate level characterized by certain level of
mechanization, use of synthetic fertilizers and chemicals and soil conservation technologies.
With the policy objective of maintaining 60% forest cover at all times, access to these
reserves will be limited. Of late, the proposed spatial development initiatives will further
curtail the scope for areal expansion of agriculture. The viable options are then to develop
and adopt local-specific technologies, and embark upon intensification of land-based
production systems (greenhouse production), move to artificial medium (hydroponics), or
venture into non-agriculture based rural enterprises (agro-tourism). A strong, sensitive and
responsive public sector research and extension institution can offer technological options
and expand opportunities to maximize economic benefits from our limited resources.

2.       Situation Analysis
The agriculture research and extension system requires immediate lease of new life if it is to
sustain its role as the primary agent of positive changes in the RNR sector. The government
will find no reason to continue with services that cannot deliver with measurable i mpact on
improving the rural economy largely based on agrarian ventures. An entirely new
perspective is emerging within the context of a proposed SGNH that is poised to chart out
an era of new-age economic activism in Bhutan. The pathway to economic justice and
common-sense approaches captured within its framework strategy encompasses spatial
optimization, knowledge-intensive program of action and policies to create an enabling
environment to fast-track economic aspirations. The manner in which agricultural research
and extension interventions are currently formulated and organized does not fit the purpose
of this new vision. Research into technology generation may have to shift its focus from
perpetuating subsistence agriculture to being more responsive to money-making enterprises.
Priorities have to be realigned to appreciate the total factor productivity in valuing farm
outputs as the direct benefit of new or improved technologies, instead of simply evaluating
the volumetric aspects of economic yield.

The extension system too will have to adapt to the ideals and standards of SGNH to justify
its relevance in the new economic order. The exclusions and inclusions, the entry points
and areas of hegemony for rural progress vis-à-vis strategic hubs and growth centers need
to be carefully analyzed to operate as effective and efficient agents of change. The
ramifications for agricultural extension services are obvious. It may not be necessary to have
full complements of extension outreaches in all the Dzongkhags, more so at the geog level
where quite a number of them can actually do away with most of the e xtension

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representatives. The service placements amongst and within Dzongkhags can be rationalized
based on the needs assessed as vital for the livelihood of resident communities and the
agrarian enterprises with significant contribution to the local economy and employment.

3.      The Way Forward
The RNRRCs should continue not as some exclusive research centers for prolonging
subsistence agriculture. There is no case for exclusive reliance on agricultural development
to improve the quality of life in rural areas. It is necessary to locate research and extension
support to agriculture in the wider context of rural development, and so adopt a more
balanced set of roles and responsibilities. On the other hand, the promotion of rural non-
agricultural employment and income cannot be made at the cost of shifting resources from
the agricultural sector. The fact of the matter is, for some time to come, Bhutan cannot
expect to grow mercantile centers without considering the growth in arable agriculture,
livestock and forestry. Rural communities will continue to maintain agricultural assets
whether their household income is reliant on it or not. The promotion of commercial,
market-oriented agriculture production systems will increase the prospects of other
associated enterprises becoming economically viable. A strong public sector research and
extension establishment will set the context for a vibrant rural economy characterized by a
diversity of highly productive farms, and serviced by full complements of input suppliers,
processing and value-adding plants, credit and finance firms, marketing and transport
services, knowledge and information centers.

3.1. Organizational Reform
In the longer term, all RNR functionaries under the same jurisdiction/zone can be either
merged or professionally affiliated to the RNRRCs. CoRRB, the current manager of
RNRRCs can reorient its functions consistent with the general appreciation for what an
agricultural research council is expected to perform. It should then maintain its apex status
as the national instrument of overseeing the scientific and technical conduct of agricultural
research system. It should relinquish its administrative accountability for RNRRCs and
assume an independent position to be able to objectively monitor and evaluate the
performances of the RNRRCs. Its position can be substantiated further by functioning as an
interface between the national agricultural research system and others at the regional and
international level advancing intergovernmental and multilateral exchanges, cooperation and
joint initiatives.

The RNR extension contraption seems to have overgrown its relevance if we submit to a
layman‘s perspective. The need for extension capacity must have been an overstatement,
because a comprehensive network of extension service covering all twenty Dzongkhags and
most of the 205 geogs does not equate well with 7-8% arable land where all the agricultural
production activities are bound to be based. Looking at the land use map, there are few
Dzongkhags and many geogs with hardly any arable land, and yet we have extensionists
based in those areas.

Road accessibility and communication facilities have redefined our perception of remoteness.
For extension to be effective, physical proximity is no longer a plausible excuse for more
agents and more travel time. Where communication has been enabled, it may be more cost-
effective to explore alternative extension packages. Further, it may no longer be necessary
to have extensionists at the Dzongkhag HQs, but only in the prospective geogs.
Nonetheless, a comprehensive review of the RNR extension services will be very useful, and
the recommendations then will chart the course of action for reform. It may be noteworthy
to bear in mind some of the changes that will affect public sector extension services:

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        decreasing overall public investments
        increasing criticisms of poor performance
        emergence of other actors and service providers that can disseminate agricultural
         knowledge and information
        revolution in information and communication technologies which provides new
         vehicles for supplying information
        changes in agriculture and, therefore, in the information needs of farmers

3.2. Reforming institutional mandate and operational strategy
Research and Extension services need to move toward fostering a culture of knowledge -
intensive agriculture and agribusiness. The RNRRCs and the consortium of client
enterprises may be viewed as the ―Greenports‖ of GCs and EHs. Other i mportant
knowledge and innovation clusters targeting natural resources conservation and use can
rally around the RNRRCs and broaden their area of interventions in technology generation
and dissemination. The main strength in the concept of greenport is that functions and links
are coordinated, for example including options for using each others‘ waste products. It is
also compatible with the schemes to concentrate capital-intensive and non-land-based
agriculture in sustainably organized agricultural development areas that have been
incorporated effectively into the landscape. The Dzongkhags and Geogs should designate
such areas and define their boundaries in their development plans, at the same time limiting
the development of these forms of agriculture outside these areas. The spatial policy is
aimed at reinforcing the strength of the existing agricultural development areas and
preserving the space they need.

Rather than tinkering with RCs‘ so called ―national and regional mandates‖ that are vague
and impractical, their full potential can be exploited with maximum impact by reconciling
their visions and missions with the mainstream development pathway embraced by the
stakeholding communities. Almost all instances of development trajectory are towards
urbanization, following the ―farmers should leave the earth but not the countryside‖ trend
of pursuing economic betterment and prosperity. The higher economic return of non-
agricultural over agricultural activities is a universal phenomenon, irrespective of whether
the price system is distorted or not. Unless the RNRRCs lead the campaign of stimulating
development of agriculture-based rural industrialization and SMEs in the countryside, non-
agrarian domination of rural economy can become very costly and destructive to the
sustainability of both rural economy and natural environment. Doing so will require a
paradigm shift in strategic visioning and tactical conduct of stimulating agricultural growth
within the scope of their respective mandates, geographically and operationally. Bearing in
mind the prerogatives of SGNH, research and extension must collectively aspire for
concrete domino effects in the following areas:

a.       Develop and propagate technologies for capital-intensive forms of agriculture,
         including horticultural production systems that are not land-based e.g. greenhouse
         horticulture, cultivation in pots and containers, in-vitro mass production,
         hydroponics, etc. With less than 8% of the country area under agriculture, land is a
         scarce resource. Maximizing the use of available land must be reinforced at all times.
         Stall-fed and shed-bound types of animal production as opposed to free-ranging will
         improve productivity per unit of space by several folds. By concentrating these
         intensive activities in ―greenports‖, it is possible to achieve economies of scale and
         promote efficiency in transport and logistics.

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b.   Agri-tourism has increasingly been proposed as a means for economic diversification
     and landscape preservation in agricultural regions undergoing restructuring as well as
     a means to satisfy increased demand for amenity countryside uses. Locally adapted
     technologies and sufficient knowledge pool is required to facilitate informed
     decision-making in promoting alternative uses of farmland with minimal
     environmental and ecological disturbances.

c.   The potential for practicing ―civic agriculture‖ within the limits of GCs and EHs must
     be assessed carefully. This approach will lend shape and legitimacy to a diverse and
     growing body of creative, socioeconomic relationships – farmer‘s markets, producer
     and service associations, co-operatives, community parks and botanic gardens, etc.
     As a conceptual tool, civic agriculture has the power to focus public attention on the
     contradictions within our industrially-modeled and corporately controlled agriculture,
     as well as on the potential of ―relocalized‖ food systems. Civic agriculture moves
     away from a strictly mechanistic focus on production and economic efficiency and
     toward food and farming systems responsive to particular ecological and
     socioeconomic contexts. It is not only an alternative strategy for food production,
     distribution, and consumption but also a tool and a venue for ―grounding people in
     common purpose‖ – for nurturing a sense of belonging to a place and an organic
     sense of citizenship.

d.   Contract farming is advocated as one solution to small land holdings, land
     fragmentation, and sub-optimal land utilization by presenting small farmers with an
     opportunity to participate in the broader market economy. Contract farming is
     initiated by private agri-business entities to secure access to smallholder produce.
     They provide services to farmers and in return receive access to some or all of the
     farmers‘ produce. Schemes typically involve the provision of inputs (seed, fertilizers,
     and pesticides) on credit, often with extension advice, but may also include a range
     of other services such as ploughing and crop spraying. Costs are recouped when the
     produce is sold. Some variations of contract farming are practiced, but the farmers‘
     equity position and the effect on the long term quality of working assets and
     sustainability of land have never been investigated scientifically and economically. The
     research and extension effort in this area will help to address constraints and issues.

e.   Farmer Associations, Farmer Groups, Farmers-Controlled Enterprises are other
     mechanisms to build up economy of scale, reduce transaction costs, access credit
     and finance, improve their negotiating power and accrue political muscle. Farmers‘
     enterprises can result from cooperation through formal cooperatives, farmer
     associations or groups, and reap benefits for members by achieving economies of
     scale for a range of activities, e.g. bulking up in output marketing or storage. This
     important aspect of agro-economics is largely overlooked by MoA‘s R&D agencies.
     Policy research and good practices of group formations have never been a research
     and extension priority. Cooperatives, associations and contract farming can be
     effective ways of delivering agricultural services to smallholder farmers, enabling an
     intensification of production and diversification into more profitable cash crops.

f.   Precision farming is the most appropriate technology for organic agriculture. This
     meticulous and ICT-intensive mode of cultivation is justified for any high-value cash
     crops, accruing enormous benefits in input reduction, better quality and high yield,
     natural resource conservation and protection of environment. The basic principle is
     the exploitation of resource capability and enforcement of variable rate production

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         management. Research and extension aptitude is completely lacking in this sphere,
         while it holds great promise for advancing organic agriculture in the country.

g.       With almost three decades of applied and adaptive research behind us, the stage for
         assimilation and ingestion of accumulated knowledge and information is long overdue.
         The system of agricultural technology transfer we follow diligently is outmoded and
         ineffectual. Farmers and practitioners alike are inclined to experimentation by doing
         things on their own and not by reading top-down packages of practices. The A to Z
         advisories in technology applications are intimidating and breed inferiority complexes
         that actually distances the end users. What is really expected of the experts is
         contextual help in the autonomous decision process; to clear off dead ends and open
         up the situation to move ahead. This is what is commonly referred to as decision
         support system that can be implemented quite easily on a normal office or farm PC
         using artificial intelligence, expert system shells or modeled using mechanistic,
         stochastic or empirical algorithms. Given the availability of free computing power,
         the accumulated knowledge from our research efforts now needs to be translated
         into decision tools. Most of the technology generation and transfer roles of research
         and extension agencies can also be replaced by computers thus saving costs and
         professional time for other works. The RNRRCs and the extension agent must
         assess the feasibility and evaluate the benefits of using these tools to shorten the
         development period and expedite adoption of agricultural technologies.

3.3     Funding Reform
A fundamental problem is that Agriculture Research & Extension institutions are typically
funded by block grants whose renewal is seldom linked to performance or impact. Without
such a linkage, there tends to be:

        lack of client orientation;
        lack of prioritization in line with national policy objectives;
        failure to allocate scarce resources efficiently;
        political interference in governance and management;
        lack of transparency and professionalism in project selection, management and
        bureaucracy and over-centralization.

Elsewhere in the world, establishment of so-called competitive agricultural technology funds
have found increasing favor with both donor agencies and some national governments. The
Royal Government may like to introduce a funding modality along similar lines. The fund is a
pool of money designed to support the development of agricultural technology. When it is
established, a set of rules guiding its use, management and accountability arrangements are
put in place in support of its objectives. The fund can cover research, technology delivery
and uptake processes. There is advance identification of priority areas in which activities will
be supported. The availability of funds in the agreed thematic areas is then widely advertised,
and proposals are solicited. The key is open competition to work on sections of an agreed
agenda for the development and delivery of agricultural technology.

This funding logic will have the following characteristics:

        Autonomous or semi-autonomous status in relation to all stakeholders.
        Priority areas clearly derived from national policy priorities.
        Requirement of evidence that the proposed research is demand-driven.

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      A set of rules that encourages the widest possible participation in the scheme.
      Wide advertisement of the program and of conditions for application.
      Peer review procedures that are clear, transparent, professional and anonymous.
      A financial and administrative review process that balances priority and quality with
      Adequate financial provision.
      Integrity, independence, accountability and quality of management.
      Non-intrusive monitoring of progress by competent reviewers, and institutionalized
       evaluation and impact assessment.

 The potential benefits from such funding mechanism are:

      increased effectiveness by directing resources by merit;
      increased efficiency by reducing costs, eliminating duplication, increasing
       accountability of research resources, and increasing utilization of infrastructure by
       providing operating resources;
      closer alignment of Research & Extension with national research priorities;
      promotion of a demand-driven national system;
      strengthened links between research and extension organizations, agricultural
       production and agricultural policies;
      induced institutional change in the national innovation system;
      merit review and expert feedback.

3.4     Policy Reform
Agriculture must become economically, environmentally and socially viable through
appropriate policy support in encouraging resource-conserving technologies and practices,
fostering local group and community action and reforming external institutions. These are
the policies aimed at addressing some of the issues and constraints in the three areas of
action to promote sustainable alternatives to conventional systems of agriculture production.
The way we conduct economic activities for food and agriculture are not a set of practices
fixed in time and space. The capacity to adapt and change as external and internal conditions
change is fundamental to the process of introducing innovation and creativity in agriculture
by creating the enabling conditions for locally generated and adapted technologies, locally
available resources, and local skills and knowledge. Farmers too need supportive public
policies that foster farming opportunities, remove obstacles to farm entry, and encourage
farm development.

Policy 1: Declare a National Policy for Sustainable Agriculture
Declaring a national policy for sustainable agriculture helps to raise the profile of these
processes and needs, as well as giving explicit value to alternative societal goals. It would
also establish the necessary framework within which the specific actions listed below can fit
and be supported.

Policy 2: Prioritize Research into Sustainable Agriculture
There is a need for increased research by the MoA departments and RUB RNR colleges into
resource-conserving technologies. Current practices are heavily biased towards modern
agricultural practices. Where possible, farmers should be involved closely in research design
and implementation, as it is they who know their local conditions best. Indigenous
knowledge and management systems form an important focus for such research.

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Policy 3: Grant Farmers Appropriate Property Rights
Sustainable agriculture incorporates the notion of giving value to the future availability of
resources. But where there is lack of secure tenure and clear property rights, this
discriminates against the long-term investment necessary for sustainable agriculture. If
tenant farmers are uncertain how long they will be permitted to farm a piece of land, then
they will have few incentives to invest in practices that only pay off in the long term, such as
soil and water conservation, agroforestry, planting hedgerows and building up soil fertility. In
some places, tenants risk eviction if they improve the land they farm — if the land becomes
too productive, landlords may claim it and farm it for themselves. The best option is to
grant property and titling rights through national programs for land reform and resettlement.

Policy 4: Direct Subsidies and Grants Towards Sustainable Technologies
Offer direct financial support in return for the adoption by farmers of conservation-oriented
practices and technologies. This conservation focus can be tied to existing support payments,
rather than implying additional financial resources.

Policy 5: Provide Better Information for Consumers and the Public
The opportunity exists for policies to couple food markets to the environment. There are
many options including new cosmetic standards and publicity campaigns to demonstrate to
consumers that poor appearance does not necessarily mean poor quality. 'Eco-labeling' of
foods can also help, so that consumers may exercise greater choice.

Policy 6: Greening National Accounts
Current methods for determining national and sectoral income are very mi sleading
indicators of sustainable economic development. By convention, national income accounts
ignore natural assets, assuming that the productivity of these resources is not relevant to
national economic health. Conventional accounting effectively values natural capital at zero.
When natural resource accounting is used, national income accounts are adjusted to reflect
the depreciation of natural capital and the direct costs of environmental degradation.

Policy 7: Encourage the Formation of Local Groups
The first action is to encourage more coordinated local action through better linkages
between farmers. Six types of local group or institutions are directly relevant to the needs
for sustainable agriculture: community organizations; natural resource management groups;
farmer research groups; farmer-to-farmer extension groups; credit management groups; and
consumer groups.

Policy 8: Foster Rural Partnerships
There is a need for a coordinated national approach to rural development that puts
community action and social cohesion as the primary goal. These should emphasize the need
for local diversity, community involvement in decisions, local added value for agricultural
produce, provision of services, and good networks and communications to achieve
sustainable development.

Policy 9: Permit Groups to Have Access to Credit
Local credit groups directly help poorer families both to stay out of debt and reap
productive returns on small investments on their farms. What is needed to support these
efforts is for banks to change their rules about lending. The convention has been that they
only lend to individuals with collateral. But where banks have been instructed or have
chosen to lend to groups as an institution, with the groups taking collective responsibility for
the loans, many more poor and needy people have access to credit. They are also better at
paying back loans.

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Policy 10: Reform Teaching and Training Establishments
Sustainable agriculture implies new thinking about teaching and learning. The central concept
of sustainable agriculture is that it enshrines new ways of learning about the world.
Professionals who are to work with local complexity, diversity and uncertainty need to
engage in sensitive learning about the particular conditions of rapid change. Everyone
involved in agriculture, including farmers, trainers, educators, researchers, extensionists and
administrators becomes important, as do the relationships between them.

Policy 11: Policies specific to poverty reduction
Agricultural research, development, and extension services have clear geographical
dimensions. The larger the Dzongkhag and the more varied its agro-climatic conditions, the
larger the differences between the crops grown in different farming systems. As a result,
commodity-based research programs affect mostly those regions in which these
commodities are the main crops, and thematic research programs affect mostly the regions
that have the specific (soil, climatic, etc.) conditions which are the subject of the research.
Bhutan exhibits considerable geographic diversity in agricultural production due to
significant differences in climate and soil texture and composition between regions.

The large differences in the standard of living and the prevalence of poverty between
different geographically distinct Dzongkhags on the one hand, and differences in the
cropping patterns and farming systems between many of these areas on the other hand
suggest that agricultural R&D programs, combined with well designed extension services,
can be an important policy instrument to reduce poverty. By targeting agricultural R&D on
commodities that are common in the farming systems of the poor, and targeting the
extension services on areas where the poor concentrate, these measures can bring about an
increase in output and/or reduction in production costs of the poor thereby raising their
incomes and reducing the incidence and depth of poverty.

Options relating to the scope and form of pro-poor agricultural extension cannot be viewed
in isolation from wider policy options in agriculture and rural development. Many of these
are specific to the economic, social and cultural context, in particular to market conditions
(i.e. whether farming areas are weakly or strongly integrated into markets), to resource
availability in the public sector, and to the extent to which government is oriented towards
poverty reduction. Other policy options are more generic, including the need to:

      promote the privatization of extension in well integrated areas like GCs and EHs,
       switching public resources to more remote areas;
      de-emphasize the (land) productivity enhancement objectives which have dominated
       agricultural extension policy hitherto, giving increased emphasis to labor productivity,
       employment generation and vulnerability reduction, including reduction of the impact
       of seasonality on incomes;
      support the development of Dzongkhag HQs and other towns as nodal points at the
       interface between government, markets and rural people. Focusing on small-town
       development offers wider prospects of cross-sectoral integration in government
       strategies – especially between rural and urban strategies;
      strengthen people‘s demands on the facilities newly created in Dzongkhag HQs and
       other towns.

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3.5     Amendment of laws and land policy
A full range of legal tools is needed to ensure the proper implementation of the National
Spatial Policy. The planning process must be amended to realign with the new philosophy of
governance. Other existing Acts must come under the purview of this single overarching
policy framework. Various investment schemes needs to be in place to contribute to the
realization of the objectives of the NSP.

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Revitalization of Agro Based Industries

Situation Analysis
The natural resource based manufacturing sector in Bhutan is limited to a few agro-
processing units that have been set up mainly to meet the growing demands for processed
products and to serve as an outlet for surplus agricultural produce. However the informal
sector is also on the increase which is mostly confined to the backyard of homes. The
informal sector mainly caters to the domestic market and despite the competition from the
imported products which are comparatively better in quality, the informal sector is growing.

Agro-industrial development even at the small and cottage industry levels is deemed critically
important to the expansion and diversification of the agriculture sector. It is a recognized fact
that vibrant agro-industrial activities can expand the markets for primary agricultural products
and add value by vertically integrating primary production and food processing systems. This
will not only ensure the availability of the product throughout the season but would also
reduce the marketing risks on the part of the farmers, increase their incomes and provide
rural employment.

However, the agro-industrial development in Bhutan is beset with the following problems and

      An inconsistent and insufficient supply of raw materials
      Seasonality of crops
      Inappropriate or obsolete processing equipment
      Sub-optimal use of processing facilities and equipment
      High packaging costs
      Lack of technical support
      Lack of incentives
      Lack of necessary resources
      Lack of access to Foreign Exchange
      Lack of mobility of labor
      Management problems

There is potential for agro-zones to be set up for processing of:

       Agro                   Potato snacks
                              Fruit Juices/Squash
                              Canned vegetables/fruits
                              Fried Tegma
                              Aezey/Chilly powder
                              Tofu/Soya products
                              Fruit Roll

       Livestock              Cheese

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                             Yak Meat
                             Ice cream

       Forestry              Incense
                             Herbal medicines
                             Star anise

2.     Need for Revitalization
The key objective of any organization in the current context should be that of profit
maximization without which the processing industries may not be able to meet the social
responsibility. The growing consumerism in the world has spiked the demand for processed
products and as such the processing industries will have to depend on the farmers for their
supply of raw materials, a two way process of symbiotic relationship.

Moreover, the growing competition in the domestic market from cheap imported products as
well as in the global market necessitates the processing industries to redefine their goals and
objectives, and structurally adjust themselves through various measures and means to re-
position them in the market as a brand to be reckoned with.

The growth of the informal sector is a positive trend in the development of the agriculture
sector. Though they operate on a very small scale, their contribution to the economy cannot
be underestimated. There is a need for the sector to formalize their set up so that necessary
training could be imparted to enhance entrepreneurial and managerial skills. Necessary
technical assistance could also be given especially on the quality and quality control aspects.
Slowly this sector could be upgraded into a small scale industry depending on the size of its
operations. The informal sector should be encouraged to get itself registered in order to avail
of the training and R&D services offered by the Government.

3.     Revitalization Strategy
3.1    Technology upgradation
Up gradation of technology is seen necessary in the face of growing competition not only in
the global market but in the domestic market as well. Appropriate household technologies
should also be made available to the farmers not only for drying but for value addition of the
products to enhance shelf life and to facilitate marketing.

3.2      Vertical Integration - contract farming
The agro-processing sector should go into contract farming with the farmers. Such type of
integration will ensure consistent supply of raw materials, provide extension services to the
farmers and make available credit facilities and other support. The farmers would have an
assured market and rural cash incomes would be enhanced while on the other hand, the
agro-processing industries would have the required quality and quantity of raw materials.

The agreement could also be to supply intermediate products like pulp and other products.
Since the intermediate products would be processed at the production sites, it will be
cheaper for the agro-processing firms than having to transport the fresh produce at the
factory site and processing it into intermediate products.

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3.3     Formation of farmers groups and IFPPs
The formation of farmers groups should be mainly to engage in marketing activities
collectively. Since most of the farmers operate on small scale, it is necessary for them to
work in groups. As examples, there are currently two integrated fruit processing plants (IFPP)
– one at Dagapela and the other at Goling, Zhemgang, which supply orange pulp during the
season. More such units need to be set up across the country – such as in Nganglam and
Panbang as well which are also major orange producing regions.

The IFPPs should be set up in the rural areas near the production area. The farmers groups
should manage the IFPPs given the fact that most of the farmers operate on small-scale and to
enable distribution of the benefits more evenly. The farmers groups should also undertake
marketing of the produce in order to fetch better prices than processing into pulp.
Infrastructural facilities such as processing plants and permanent structures for grading and
packaging need to be put in place. Other support facilities also need to be made available to
attract services like shops, restaurants, etc.

3.4     Infrastructure Provision
Speedy development of infrastructure and provision of facilities is seen necessary for the
promotion of food processing sector especially in a developing country like Bhutan. Provision
of such facilities will be critical for the informal sector and this is necessary to attract the
informal sector, not only to get them formalized but also in further developing their
capabilities. The Government should charge a certain fee for the facilities being rendered

3.5      Extension services
The main problem with the farmers is their lack of knowledge on the management of
orchards as well as on the cultivation aspects. As such, necessary extension services have to
be provided on a regular basis. Such assistance can be extended by the processing units and
this will ensure that the processing units get the right type and quality of raw materials.

3.6    Marketing
Currently, processed products are exported only to India and Bangladesh. While Druk
products have established their markets in India and Bangladesh, the inconsistent supply is an
impeding factor which forces the consumer to look for substitutes. Druk fruit products are
also produced in Kolkata that caters to other parts of India.

For small food processing companies, a common brand may be used to market its products
that can be possible only through the establishment of a common marketing agency.

3.7     Enabling environment
3.7.1 Labor Mobility
The labor policy would have to be reviewed to allow movement of skilled labor on a contract
basis so as to give hands-on-training to the employees. Technological transfer necessitates
technological know-how which needs to be imported. If restrictions are imposed on the same,
the processing industries will continue to use the current equipment/machines which may
have become obsolete that would render the company uncompetitive in the domestic as well
as international market.

3.7.2 Foreign Investment
The FDI Policy stipulates investment of US$ 1 million in the agriculture sector. Considering
the size of the economy and other aspects, no foreign firm will be willing to make investments

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of such scale. As such, the investment required to be made should be reduced to a
reasonable scale to facilitate investments as most of the operations are small.

3.7.3 Foreign Exchange
Access to forex is a major impediment that restricts the companies in importing essential raw
materials. Therefore the government should support initially in maki ng available the foreign
exchange requirements till such time the company is well established.

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Revitalization of Wood-Based Industries

Forests are a source of tangible economic and intangible ecological benefits. Out of the total
forest area, 29% is earmarked as protected areas for environmental conservation. A
preliminary assessment of forest resources in the country indicate that 54% of the total forest
(excluding protected areas) is unsuitable for commercial forestry due to the steepness, 8%
holds potential for commercial forests and 9% is being used by the rural communities.

The most tangible economic use of forest is for timber. The timber is supplied from the
Forest Management Units (FMUs) which are operated under a scientific plan. The re are 15
FMUs in operation covering 4.4% of the total forest area. Most of the harvested timber from
the FMUs is supplied to the urban consumers and part of it to rural consumers at subsidized

Economic activities related to forestry are undertaken collectively by private sector,
corporations and rural communities, while the government regulates and provides support in
terms of planning and implementing forest resource utilization plans and conservation
management. Prior to July 1979, logging for commercial purposes was undertaken by private
contractors. However, the 50th session of the National Assembly resolved that all logging will
be done by the Government and logging in Southern Bhutan was banned. Accordingly, forest
logging operations were allowed for commercial purposes (export and industries), internal
Government needs and rural and urban timber requirements.

The timber required to meet the urban demand are harvested by the Natural Resources
Development Corporation (NRDC) according to the management plans prepared by the DoF
and sold to the private sawmills. A Management Plan is prepared every 10 years and an
Operation Plan every year. The NRDC is responsible for implementing the plans. Generally,
timber for rural communities is also supplied by NRDC but where it cannot operate, the
rural population is allowed to harvest their requirements with approval of the Government.
As a new initiative, community groups have been formed to create community forests and
manage them for their own sustainable use in accordance with the rules for community
forests and the approved management plan.

The wood-based manufacturing sector is dependent on processing primary products with low
value addition. Most of the establishments are engaged in sawmills and furniture making in the
wood based industry.

Until 1998, there were four different price categories for logs (i.e. rural, urban, industrial and
export). Both rural and urban timber were subsidized. Industrial timber had a fixed price that
was based on the most recent export prices. Under the new Timber Marketing and Pricing
Policy implemented in January 1999, only two prices remained: (i) a rural price for supplying
rural timber for genuine uses; and (ii) the urban category, which includes all timber for
commercial, construction and industrial purposes - wood prices under this category are
determined by the market.

Generally, there has been little development in the logging, saw milling and furniture
producing sectors in relation to technology and the manufacturing process of cutting and
storage of timber and the wastage during production has not lessened. The Wood Craft
Center however, has played an important role in setting a standard for quality furniture and
providing advice to private firms on modern techniques for storing wood, etc. Today, there

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are about 4 to 5 firms producing high quality furniture the demand for which is increasing
especially in the urban areas.

Currently, the establishment of economically viable wood-based industries still faces obstacles.
Potential investors perceive the forest policy as volatile, they are not sure of the availability of
raw materials, they do not have proper knowledge of national and export markets for value -
added products and lack access to sufficient skilled workers. Moreover, if NRDC continues
the approach of auctioning less marketable species and low quality logs by mixing lots, it may
further be a disincentive for the development of smaller scale wood-based industries.

Issues and Constraints
1. Non-availability of preferred raw materials
    Firms do not have access to the right grade, size, quality and quantity of timber required.
    The firms buy the timber in lots of mixed species through open auctions out of which
    only about 1/3 can be used for the core business. This makes it necessary for the firms to
    start other processing units to process the unwanted timber into other subsidiary
    products, which takes the focus away from the core product line and prevents workers to
    specialize in one particular area.

   The hoarding of timber for long periods of time by NRDC renders most of the timber as
   not usable for the furniture production. Only upto 1/3 of the timber can be used and the
   firm has no choice but to add the cost of the unwanted timber to the cost of their core
   product thereby increasing the cost of the finished product. As a result, the firm loses
   competitive edge in the international market. Due to the high wastage while using local
   timber, some companies have resorted to importing timber boards from India and other
   third countries which have increased their profitability. Some firms have also started
   sawmilling to get the required quality and size of timber, thereby diverting the focus from
   the core business.

2. Lack of appropriate technology
   The technology used by the wood based firms is out-dated, resulting in low quality
   products and high wastage. Technology use is lacking in the areas of production,
   marketing, management and product design. Most of the firms lack innovativeness and
   incentives for technology promotion are largely absent. The sharing of information,
   technology and know-how amongst the firms is also rarely practiced.

3. Lack of skilled/affordable labor
   The availability of skilled and affordable labor is a critical factor for enhancing productivity
   and efficiency. However, most of the wood based firms cited the shortage of skilled
   Bhutanese laborers as a major constraint. Moreover, specialization and building of
   expertise is not possible since laborers have to undertake several tasks besides the core
   product line due to the unavailability of the required quality of timber.

   Firms find the workers trained and provided by the Wood Craft Center (WCC) too
   costly and in short supply, further, they are not available as and when the firms require
   them. Sometimes, there is also a mismatch between the skills possessed by the WCC
   trainees and the skills required by the industry where most of the firms use out-dated and
   obsolete machinery. Non-national day workers from across the border are found to be
   more affordable and flexible to employ particularly by the firms located in Phuentsholing
   and other southern towns.

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4. Lack of incentive for quality
   The furniture industry‘s focus is on the domestic market where government and the
   corporations are the main buyers. However, the policy of awarding of tenders to the
   lowest bidder provides no incentive for these firms to focus on quality. As such, firms are
   compelled to lower the quality of their products in order to compete.

5. High cost of transportation
   The cost of transporting timber from the harvesting site to the auction yard and again to
   the processing sites/locations proves higher than the cost of timber itself resulting in high
   cost of production.

Recommendations for revitalization

1. Enhancing efficiency in the supply of raw materials
a. Improving the existing institutional set up
     The sole reason for the under-performance of the wood-based industry is attributed
       to non-availability of the right grade, quality, size and quantity of timber. The policy of
       subsidy on rural timber needs to be reviewed to ensure that the rural communities
       avail of it for genuine reasons and such timber does not find its way to the urban
       markets. Timber should then be sorted and made available in lots of same species so
       that users get the required kind of timber at the right price.
     NRDC should not stock timber for long periods of time, which results in loss of utility
       especially for furniture producing firms. Such kind of timber is useful only for the
       construction sector.
     Timber demand in the wood-based industry needs to be assessed and considered by
       the NRDC so that the gap between timber demand and supply can be bridged.

b. Decentralization of logging activities
     Wood-based industrial development should be private sector led. The Government‘s
       intervention should be limited to creating the enabling environment and leaving
       productive investment to the private sector.
     NRDC should move out from direct logging activities (currently most of the logging is
       carried out by private contractors and auctioned to the wood-based firms by NRDC)
       and concentrate more on planning and monitoring the implementation of the forestry
       management plans.
     The DoF should spearhead the R&D, monitoring and regulatory roles and be
       responsible for the approval of management plans. The areas/zones for conservation,
       watershed protection, production forests and community/private forestry should be
       identified and allocated and the issue of conflicting land uses should be studied and
       reviewed with concerned agencies. The nature of soil, climatic conditions, etc. for
       growing different species of timber should be ascertained.
     Community Forestry should be encouraged. This would transfer the primary
       responsibility for management (protection, development, and utilization) of forests
       adjacent to communities to local management groups. The institutional and technical
       capacity of forest management groups should be strengthened to sustainably manage
       and equitably share the benefits from the forests handed over to them. The local
       management groups could pay royalty at specified percentage of the cuts to the
     Community Forest Management Units (CFMUs) should be formed and local farmers
       trained and encouraged to take up plantations and logging activities at the community
       level on a commercial basis.

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2. Creation of an enabling policy environment
In order to create an enabling environment the following strategies should be pursued:
     Review the policy on the export of semi-finished products in order to have a clear
       technical definition and categorization of semi-finished products and finished products.
     Need to study the implications of the increase in the lease rent for the industrial
       estates and review accordingly.
     FDI limit for the Forest and Agro based industries should be reduced from US$ 1
       million to US$ 0.5 million. Since most of the existing firms operate on small to
       medium scale, the incentive for huge FDI investment may not arise, discouraging
       investment in the industry. FDI can increase the firms‘ competitive edge in terms of
       quality and price. There can also be technology and skill transfer from the investing
       company to the Bhutanese counterpart. Such technology/know-how transfer would
       over time reduce the dependence on imported cheap labor and cheap technology.

3. Technology
    Appropriate technologies should be acquired that conform to local needs and ensure
     a smooth transition from outdated technologies to more modern technologies.
     Technologies that are available from nearby regions and are compatible with the local
     culture, skills, raw materials and demand should be acquired. Financial assistance for
     technology upgrading and modernization could also be provided.
    Import of capital goods, especially advanced machineries for the wood based sector
     should be liberalized with a reduction in import duties.
    As allowed under the FDI policy, firms should be encouraged to enter into
     collaboration for technical know-how and technology upgradation with a view to
     enhance the marketability of their products or entering into buy-back arrangements
     for exports. Technology transfer will enable firms to come up with products, which
     can compete at least with the products of the countries in the region.
    E-commerce and development of information technology should be encouraged.

4. Training and skills development
    In order to address the shortage of skilled workers in the wood-based industry, the
      WCC should be converted into a training institute so that skilled people in this area
      are made readily available.
    However, the existing infrastructure at WCC is semi-permanent, as such requiring the
      construction of completely new infrastructure. This would include investment in
      infrastructure for a training unit and hostels for the trainees. Acquisition of land would
      not be necessary as the WCC has about 5 acres of land.
    The conversion into a training institute would also require an assessment of the skills
      demanded in the market, technology being used by the wood-based firms and
      diversifying of the training materials and skills to include the operation of advanced
      technology and the use of indigenous and simple tools, techniques and equipments.
    The recruitment of additional qualified trainers and technical assistance for
      transferring knowledge on designing and advanced production techniques and
      development/diversification of curriculum and resource materials would also be
    Training on traditional Bhutanese design should also be promoted and enhanced so as
      to be able to compete in the international market with product uniqueness and quality.
    In addition, the wood-based firms should be encouraged to initiate labor training
      programmes through cost-sharing training programmes, apprenticeship training,
      enforcing compulsory training budget and gradual skill transfer from foreign workers
      to national workers.

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        Besides the 4-year course, short term courses based on the demand of the wood
         based industry should also be developed – enabling the center to earn additional

5.       Marketing/Brand Promotion
        Bhutanese traditional design furniture should be promoted for the purpose of export.
         Given the fact that it is difficult for Bhutanese firms to compete based on production
         efficiency in the international market, it has to compete on product uniqueness and
        Trading houses/export houses like those in Japan should be set up to assist in the
         marketing of Bhutanese products. In the initial stage, the Government may be
         required to extend various facilities and incentives for the establishment of such
        The procedure for obtaining export clearances should be reviewed and made easier
         to encourage Bhutanese firms to export.
        The participation of Bhutanese firms in domestic and international trade fairs should
         be encouraged and promoted.
        Companies should be encouraged to come up with quality products, which can
         compete with the products in the region.

6.       Cluster Development
        Cluster development in the wood-based industry can offer several advantages.
         Clustering wood-based industries and relevant services in one area and providing
         infrastructure facilities will bring down the cost of infrastructure development and
         provide opportunities in sharing of common services, knowledge and technology. The
         management of pollution and waste and integration of environmental issues and
         enforcement will become more efficient.
        Potential wood-based clusters should be identified and located near the FMUs where
         logging is carried out (raw material source) or other considerations such as availability
         of labor, transportation, marketing facilities, etc. The programme would require the
         development of adequate infrastructure at strategic locations for the clusters and
         active involvement of the industry in the maintenance of their services.
        For the cluster formation, NRDC should take the role of planning, supervising and
         R&D. The private logging companies should take up the logging activities under the
         stringent supervision and monitoring by the NRDC - the private logging companies
         and the CFMUs should take over the plantation, harvesting, supply of timber as per
         the guidelines for the area, plantation/cut ratio, etc. A royalty amount fixed as a
         percentage of the cuts should be levied by the NRDC and paid by the private logging
         firms and the CFMU. The supply of timber to the industry should be based on market
         demand and supplied after sorting the timber according to the requirements of the
         firms in the cluster.
        Each firm in the cluster can specialize in the manufacture of block boards, plywood,
         joinery product, construction products, etc. and furniture. The packaging firms can
         take over the packaging of the products that are focused for export and the export
         companies can export those products under a common brand name or individual
        The marketing firm can promote the products of the cluster to the domestic as well
         as the international market by organizing trade fairs, web advertising, tying up with
         agents abroad, etc. The firms in the cluster can pay a certain percentage of the sales to
         the marketing firm as commission. Transportation agencies in the cluster will be
         responsible for arranging the transportation of the products to the markets.

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Role of NRDC and DoF in the Cluster formation
1.    NRDC should take up the preparation of forestry management plans and the
      monitoring of the logging activities of the private contractors. The cost of planning and
      monitoring could be met from the royalties paid by the private logging companies.

2.     DoF should be responsible for approval of management plans, R&D and monitoring
       NRDC on the plan implementation. This would include identifying zones/areas suited
       to grow the identified species based on climatic conditions, altitude, soil type, etc.

3.     DoF should carry out the mapping of tree species available in different parts of the
       country and its economic value and identify areas for forest conservation, commercial
       forest, etc. Areas that fall under forest conservation should not be fixed because old
       trees do not generate any benefits for the environment nor the community or
       government. In appropriate periods of time the conserved forest area should be
       rotated giving access to logging activities.

4.     Rules and regulations should be framed pertaining to:
          a. Determination of royalty amount based on percentage of the timber harvested.
          b. Deforestation/afforestation ratio depending on the time taken for regeneration.
          c. Number of trees that need to be planted for every tree cut down.
          d. Proper spacing and distance required between trees for those identified to be
                  cut down.

5.     NRDC will be responsible for issuing licenses to the logging companies for a period of
       3 years each and strictly monitor their cut/plantation ratio and the tree species
       planted. Renewal of license will be subject to proper adherence to the logging rules
       and regulations.

6.     Provide training and skills for plantation, maintenance, harvesting, etc.

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Revitalization of the Construction Industry

0.     Background
The construction industry in Bhutan is one of the largest sectors both in terms of GDP share
as well as in the number of agencies and personnel involved in the government and the
private sector. Almost every other industry depends on man-made structures so that the
construction industry has become the foundation of any economic development. Therefore,
the productivity, efficiency and competitiveness of building and construction are of critical
importance to the growth and success of the Bhutanese economy. The construction sector
contributed 21% to the GDP in 2004 and recorded a growth rate of 19% in the same year.
However, this growth is attributable solely to the government‘s investments in infrastructure
development such as the large power projects of Tala and Basochu and not due to any
improvements in productivity of the industry itself.

The industry is characterized by the following constraints and problems:

a. Very low levels of productivity
   Due to reasons such as the use of conventional labour-intensive methods of construction
   and poor project management, productivity levels are very low resulting in long project
   gestation periods. For example, Planning Commission statistics reveal that during the 9th
   FYP, we were able to construct only 37.5 km of national highways roads and 155 km of
   feeder roads. At this rate, the construction of the Southern East -West Highway would
   take more than 10 Plan periods! Construction of buildings and other infrastructure are
   equally slow. This extremely slow rate of infrastructure development has an exponential
   negative impact on the development and growth of all other downstream activities that
   are dependent on infrastructure.

b. Poor quality of construction
   The poor quality of construction is an area of major concern that has been debated and
   highlighted at various forums including the National Assembly. The MoWHS has
   submitted a report to the NA which details steps to be taken to improve the quality of
   construction. However, unless the two major causes of poor quality construction which
   are inferior/spurious building materials and inadequately skilled workers are addressed,
   improvements in quality will be insignificant. There is a need to adopt construction
   techniques that are less dependent on intensive non-national labour whose skills are
   questionable and whose training cannot be taken up by the government since they are not
   regular construction workers in the country.

c. Lack of real competition among contractors
   While there are more than 1700 contractors of all levels operating in the country, the
   competition is not healthy. On the one hand, particularly for larger works where only a
   few contractors may be qualified, bid prices run extremely high due to inadequate
   competition. On the other extreme, due to intense competition and the inability of some
   contractors to get jobs, impractically low prices are quoted which leads to compromises
   in quality or the inability to complete the job. Neither of these two scenarios is good for
   the construction industry and there is the need to stimulate healthy competition that
   would promote quality services as well as contractors‘ skills and professionalism.

d. Poor skills at both professional and working levels
   At the professional level (engineers and architects), there is a lack of exposure to modern
   technology and international best practices. Construction techniques applied in the
   country today are not much different to those that were introduced in Bhutan with the

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   start of its modern socio-economic development more than 40 years ago. During the
   same time, construction technology has advanced to such a degree that in some advanced
   countries, they are already experimenting with the idea of a house being constructed by
   robots in 24 hours! While we are nowhere near such advancement, it is necessary for
   professionals in the industry to be exposed to techniques and materials that are prevalent
   in international markets that can be adopted in the country.

   At the working level, the industry is totally dependent on non-national workers whose
   skills can neither be certified nor upgraded. Therefore, there is the need to adopt
   techniques and practices that minimize labour requirements or allow substitution of
   imported labour by Bhutanese workers who can be both trained and certified.

e. Proliferation of undesirable practices such as fronting and collusion
   For reasons such as weak regulatory authority and lack of professional ethics, the
   practices of fronting and collusion have become very rampant. Collusion among
   contractors leads to very high bid prices that are a burden on the government and
   fronting, particularly through non-nationals, stifles the professional growth of contractors
   while also creating room for compromises in quality since now the profits have to be
   shared between two parties. Strong legal instruments and strict enforcement are required
   to curb such malpractices.

f. Poor motivation and morale among government engineers
   All the ills of the construction industry have been rightfully or wrongly attributed to the
   engineers. While engineers cannot shirk from their duties and responsibilities, often,
   inspite of constant monitoring of projects, contractors are either unable or unwilling to
   provide the inputs that are required to complete the project to the specifications
   required. As the first tier in the construction process, the contractor is responsible to
   complete the project within the stipulated time and the given specifications. However, all
   accountability is placed on the government engineer causing loss of motivation and morale
   in the engineering community. Despite being the proverbial backbone of all socio-
   economic development, the government has not seen the need to provide any additional
   incentives to the engineering profession and with the new PCS system curbing the career
   growth of diploma engineers, there will be further loss of motivation and morale which
   could be damaging to the construction industry and further to the whole socio-economic
   development of the country.

g. Fragmentation of design and construction process
   It is standard procedure in the construction industry for the design to be done by the
   client, usually the government, and the implementation by a contractor. This creates a
   situation where any design defects detected during the construction process have to be
   referred to the designer who has to rectify the defect and then start a series of approval
   procedures that lead to delays and financial deviations. By implementing projects on a
   design and build basis, such problems would be minimized and project implementation
   would be smoother as the designing engineer/architect would be available with the
   constructor to supervise the construction and changes required could be made
   immediately. This would further have additional benefits in terms of contractors
   developing their professional capacities and the government being able to downsize their
   design units. Experience in other countries show that design and build projects usually
   promote ―buildable‖ designs which means they are easier and faster to build.

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h. Lack of specialization
   Specialization is lacking in both the government and the private sector. In the government,
   engineers are required to be transferred every five years and usually, after five years of
   gaining experience in a certain field, an engineer can find himself starting afresh in a new
   field. In the private sector, a contractor, particularly in the lower categories, is usually also
   a retailer or a trader or a travel agent or maybe even a housewife! This does not lead to
   efficiency and professionalism but results in poor management and therefore, poor
   services. By default, big contractors are also owners of construction machinery so they
   also function as equipment hiring units which distracts from their primary responsibilities
   as contractors. Therefore, there is a need both in the government and the private sector
   to promote and encourage specialization.

i. Primitive technology
   As mentioned earlier, construction technology has not made any significant advances over
   the last 9 Five Year Plan periods. Heavy investment costs have hindered the speed of the
   mechanization process and thereby, the continued reliance on techniques and practices
   that are highly labour-intensive and requiring almost total fabrication of components at
   site. Such practices invariably result in poor quality construction unless the skills of the
   craftsmen or the level of supervision by a skilled supervisor is very high, which are very
   rare. Therefore, there is the need to adopt technologies where most of the components
   are prefabricated requiring only assembly at site. The onus of quality achievement must be
   shifted from the worker at site to the factory where the components are manufactured,
   usually by machines whose ability to achieve consistency and quality is greater than that of
   humans. This will also have the added benefit of requiring simpler training programs for
   the workers at site.

j. High Cost of Construction
   Construction costs in Bhutan are seen to be rather high compared to those within the
   region. Even within the country, costs can be almost double in places like Thimphu and
   Paro compared to costs in the border towns. It is evident, therefore, that costs are high
   because of higher transportation and labour costs. With the move towards more
   mechanization and prefabrication, it is expected that costs will rise further. However, the
   initial cost increase on these accounts should generally be offset by the gains in terms of
   improved quality, longer durability and the greater socio-economic impact of creating
   employment for Bhutanese youth replacing the imported work force.

   The other paradox that blights the construction industry in Bhutan is that while in other
   developing countries, locally available materials are encouraged primarily for their cost-
   effectiveness, here the ―locally available materials‖ such as timber, sand and stone are
   becoming increasingly unaffordable. It is ironic that in a country that boasts of its vast
   natural resource base, we are already looking for things like timber substitutes. One of
   the reasons for the high costs of local materials is the way the resources are managed and
   distributed. The other reason is that usually the supplier of local materials is a monopoly
   and even where there is an apparent competition due to the presence of a number of
   suppliers, through collusion, supply again becomes monopolistic. With the shift in
   technology towards prefabrication and premixed concrete, more monopolies will emerge
   as the size of the market will not allow more than one or two players. There is the need,
   therefore, to prohibit monopoly and collusion and declare such practices liable for

It is suggested that in order to revitalize the construction industry and address the issues
listed above, there is the need to provide interventions in three broad areas as under:

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   I. Technology development
   II. Contractors‟ capacity/skills development as well as regulation
   III. Human Resources Development and Management

I.      Technology Development
1.1     Situation Analysis
The construction industry in Bhutan is characterized by low productivity levels that are a
result of primitive construction technology that rely heavily on conventional building materials
and intensive labour requirements. On the whole, local construction continues to use
extensive wet trades on site which are labour intensive. Quality of the finished product is
extremely dependent on the skills of the craftsman as well as the intensive supervision of
them for quality assurance.

While the growth of the construction sector has been fast-paced due to the government‘s
huge investments in infrastructure, the technology itself has not kept up concurrently. The
main building materials are bricks and concrete and the technology of brick-laying and
concreting are largely manual – practices that have been introduced in Bhutan since the
erstwhile PWD started modern building construction about 30 years ago. Mechanization has
made certain headway in areas such as excavation of foundations in buildings and formation
cutting in roads but beyond that, manual methods that rely heavily on cheap imported labour
are still predominant.

The slow pace of mechanization and therefore low productivity can be attributed to the
following factors:

       -   Traditional but labour intensive systems are economical
       -   Investments in construction machinery are huge vis-à-vis the size of projects
           executed by contractors and therefore, contractors are unwilling or unable to
           invest in heavy machinery
       -   Likewise, huge investment costs have inhibited the growth of equipment hiring
           agencies. This could also be attributed to the CDB requirements that mandate
           contractors to own their own equipment even though it would probably be more
           economical and efficient to hire equipment whenever required.
       -   Industry professionals such as architects and engineers are not familiar with
           buildable designs and standardization in the field of prefabrication.

The productivity levels in Bhutanese construction is extremely low and while this can be
accepted as normal features of the industry in a developing country, it is now envisaged to
build up the industry into a sophisticated one, able to undertake large, and technologically and
managerially complex projects including high-rise buildings, high technology industrial
installations, and large civil engineering works including underground structures. Such a
transformation can only be achieved through dedicated government efforts through which the
industry has benefited from the government‘s understanding of its strategic importance, and
its commitment to nurture a strong and competitive local construction industry.

1.2     Objectives
The objective of enhancing productivity in the construction industry will be primarily to
improve the quality of construction and reduce the total number of workers (mainly unskilled
imported workers) deployed on construction sites through mechanization of the construction
process and the use of prefabricated building components. Concurrently, such a development
in technology will also have the following benefits:

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       -   Reduction in project completion periods
       -   Reduction in construction waste
       -   Reduction in non-national workers
       -   Creation of job opportunities for semi-educated semi-skilled Bhutanese workers

The move towards prefabrication will also open up opportunities in allied industries such as
component manufacturers, batching plants, etc. The flip side is that mechanization and
prefabrication usually tend to cost more and seen against the backdrop of existing concerns
on the high costs of construction in Bhutan, this could pose a threat to technology

1.3     Areas of Productivity Improvement
1.3.1 Roads
The roads sector is seen as having a high potential for mechanization. However, this potential
needs to be exploited within the short term since most other developments are dependent
on road infrastructure. This is particularly so given the huge developmental activities
envisioned in both the SGNH and the 10th FYP. Unless the roads sector is mechanized to a
high degree, road infrastructure development, or rather the lack of it, will render meaningless,
or at the very least, significantly dilute what could be achieved by the SGNH.

Fortunately, the two inhibiting factors of cost and design may not be as serious obstacles in
the roads sector. Firstly, as almost 100% investment in roads is made by the government,
while cost of mechanization may be a cause of concern, it would not be as big an issue as it
would be for private individuals. In fact, initial additional construction costs could probably be
offset by improved construction quality, reduced construction periods and improved
geometrics and durability. Secondly, in terms of design, while buildings have to be designed
differently based on the components and technology used during construction, the design of
roads will remain the same regardless of the method of construction. Mechanization in the
roads sector can be done in the following areas:

       Formation cutting – Bulldozers, Excavators, Crawler Drills
       Base Course – Quarries, Chips Spreader
       Bitumen Sealing - Bitumen Sprayer, Motor Grader

1.3.2 Building Construction
In the building construction sector, productivity can be improved through a combination of
mechanization and prefabrication. While studies in Bhutan have not yet been carried out,
analysis of labour usage done in Singapore (1992) showed that 65% to 70% of construction
labour are engaged in structural work and the ―brick and mortar‖ finishing work such as
external and internal brickwork, plastering and tiling. Largely, these figures would appear to
hold good in Bhutanese conditions except that in our situation, we would need to factor in
the timber works in roofing, flooring and joinery where labour usage is quite significant.
There would, therefore, be considerable potential to raise productivity in these three areas
and the major areas of focus are suggested as:

       -   More prefabrication of structural components (concrete beams and columns) with
           the objective of reduction or elimination of on-site beam construction.
       -   Replacement of brick/hollow block and plaster external and internal walls with
           precast, prefinished walls and partition elements
       -   Standardization and promotion of modular timber components such as
           door/window frames and shutters, timber cornices and prefabricated flooring

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       -   More use of light electric equipment for carpentry, masonry and plumbing.

1.3.3 Power Sector
The construction of big power projects will require special attention since they are the
biggest importers of non-national workers and also because the construction of power
projects will have to be speeded up in order to make more significant impact on the
Bhutanese economy. While the areas identified above will partially address the issue since the
power projects involve heavy investments in buildings and roads, there are other specialized
areas that will require more in-depth study such as:

       -   Tunnels
       -   Dams
       -   Power House
       -   Transmission Towers

1.3.4 Other Areas
Apart from the two major areas of road and building construction, opportunities to
mechanize or prefabricate exist in other areas such as irrigation channels, roadside or building
drains, footpath paving and edging, etc. Some work has already been initiated in some of these
areas and now require further support through standardization and aggressive promotion.

1.4     Procurement Procedures (that promote buildability)
Tenders are sought on Design and build basis where the procuring agency gives preliminary
specifications and data and the contracting firm does both detailed design and construction.
This has been found to facilitate designs that are easier to build and supervision will also
become easier since the designer and constructor are the same. Much of the construction
problems such as design defects and financial deviations can be controlled through this system
of procurement. It will also promote accountability and encourage contractors to build a
professional team of engineers and architects. Alternatively, consultancy firms can also be
hired to perform the functions of both designer and supervisor with a contractor executing
the job. Currently, when design jobs are outsourced to private consultancies, their
accountability ends once the design process is complete and the job has been tendered for
construction. Design defects observed during the construction period are hard to rectify due
to this lack of accountability. Design and Build or Design and Supervise projects will enable
full accountability as since only one party is involved, there is no one else at whom to point
the finger. Only through increased accountability is it likely to improve the professionalism
and ethical conduct of those in the construction industry.

In the medium or longer term, contracts may also be procured on Lump-sum basis or where
feasible on Build-Operate-Transfer (BOT) basis. The BOT model would probably be suitable
only for power projects because it does not appear feasible for other typical areas such as
road or bridge projects since charging of tolls for such facilities does not appear to be
emergent within the planned period. Such infrastructure is seen as social investments that do
not levy charges/tolls and looks likely to continue for the next 15-20 years.

1.5    Information Technology
The use of IT in the Bhutanese construction industry is limited to partial use of design
software such as AutoCAD and StaadPro and the use of spreadsheets to prepare estimates.
While any number of software and IT aids are available for engineering design, planning and
monitoring, IT use is still limited due, firstly, to the natural human reluctance to learn or try
anything new and secondly, to the government‘s restrictive approach to the purchase of
software and sometimes even the basic hardware. With the move now to create a knowledge

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based economy, the government must seek to provide a Desktop on every desk top and the
connectivity and the software required along with it. Appropriate engineering and
architectural software must be selected and all industry professionals trained in their use.

In the area of record keeping, site engineers are burdened with the Financial Manual‘s
requirement to maintain tedious records such as the Measurement Book, Muster Roll, any
number of registers, etc. Since these are the records through which his accountability is
checked, an engineer spends a disproportionate amount of time on these activities, prying him
away from his more important duties of project monitoring. In the interest of accountability,
records will have to be maintained but electronic records, which are more efficient and less
prone to manipulation, should replace the current systems which are archaic and tedious.

E-tendering must be promoted as it not only has the advantage of being efficient but more
importantly, in our conditions where collusion is very prevalent, in e-tenders nobody, not
even the client, knows who or how many bids are being offered. After the tender has been
programmed to be opened on a certain date and time, until that date and time, each
contractor has access to only his own bid which he can change as frequently as he likes, but
not to any other bid. This concept could also be extended to government auctions where
collusion is rampant such as in the auction of timber.

1.6      Strategies
The construction industry has the potential to reach much higher productivity levels mainly
because current productivity levels are very low and because the small size of the industry
will be easier to regulate and promote. In order to achieve this, however, there is the need
for a comprehensive strategy that addresses all issues of design, production, fabrication and
skills requirements that include the following:

   i. Development and promotion of designs that use prefabricated components and
         standardized modules requiring only assembly at site and substitution of wet finishing
         methods with dry walls.
   ii. Aggressive promotion, through a mix of incentives and directives, of premixed
         concrete in the short and medium term and precast structural components in the long
   iii. Adoption of fully mechanized construction techniques in the roads sector.
   iv. Adoption of construction techniques that make extensive use of light tools and
         equipment such as electric-powered drills, planes, saws, painting rollers, Sun blaster
         (for plastering), etc.
   v. Development of core of skilled Bhutanese workers. With the shift from manual to
         mechanized construction processes coupled with other incentives, there will be more
         Bhutanese youth opting for the construction trade but the training methods at the
         CTC‘s and VTI‘s will have to change accordingly.
   vi. Adoption of design, planning and monitoring software and training of professionals;
         substitution of manual records by electronic record-keeping; e-tendering.
   vii. Promotion of specialized equipment hiring units while also discouraging contractors to
         own their own equipment.
   viii. The Competition Act that is mentioned in EE 2008 is strongly endorsed and must be
         enacted urgently to curb monopolies and the practices of collusion and price-

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II.    Contractor‟s Development and Regulation
2.1 Analysis of Current Situation
The private construction sector today comprises of more than 1700 firms - Thimphu has the
highest number of contractors at 478, followed by Chhukha with 134. Trashigang and
Mongar have 112 and 108 respectively. As of 31st December 2006, the above 1700
construction firms reportedly hold some 6030 licenses under different categories of works as
shown in the table below:
       Class/category        W1            W2                 W3                    W4
                            Roads       Traditional     Building, water          Power and
                             and         Paintings         supply &          Telecommunication
                           Bridges                         drainage
              A               35                               44                       14
              B               31                               28                       12
              C              262                              273                       79
              D             1,378                            1,375                    1,459
             Total          1,706          1,370             1,720                    1,564

In terms of volume of works executed in 2006 by different classes of contractors, Class A
contractors (44 nos.) have executed as much as 70% of the total volume of work while class
B (31 nos.) has executed 8%, C (280 nos.) 18% and D (1,378 nos.) has executed only 4%. The
above figure indicates that classes B, C and D together which make up to 97% of the total
strength has executed only 30%. On the other hand, 44 Class A contractors have executed
up to 70% comparatively far more than the rest of the classes put together.

In terms of employment of engineers in construction firms, records maintained by CDB
reveal 578 civil and electrical engineers (148 non-nationals) with the private sector against the
minimum CDB mandatory requirement of 613 numbers (for re-registration). Although it
appears that disparity is minimal, reality is that shortage is significant. Requirement of
engineers during actual execution far surpass the minimum requirement.

Table - II
             Field                 Bhutanese                Non Bhutanese            Total
                               Degree    Diploma           Degree Diploma
      Civil Engineers            58        260               57       67              442
    Electrical Engineers         18         94                9       15              136
           Total                 76        354               66       82              578

Notwithstanding the above, the current situation of the private construction sector however,
as revealed during the qualitative survey involving series of interviews and consultations with
stakeholders and reviews of reports including strategy for development of private
construction sector in Bhutan undertaken by CAB, parts of which have been reproduced
given its relevance, reveals that contractors, by and large, are still in an emerging phase with
limited growth in terms of its capacity.

2.2     Present Drawbacks
An indigenous Bhutanese private construction sector only started to emerge and develop in
the late 80‘s, when the Government decided to privatize construction operations. The Royal
Government has since been in the process of redefining its role from that of ―Provider‖ to
―Enabler‖ of public services, confining its role to policy, planning and regulation. Despite many
years of this initiative, the private construction sector is still relatively small and grappling with

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issues of shortage of manpower at all levels, plant and equipment, and limited capacity.
Typically, Bhutanese construction firms are categorized by a highly personalized management
structures. Most of these firms are owned and operated by a family (sole proprietorship) and
often looked at as a means to supplement other businesses. The private construction sector
to this day has nonetheless played its role in the physical realization of facilities of the Royal
Government. The principal impediments to growth of contractors are attributable to:

Lack of professionalism among contractors
Lack of professionalism among contractors is identified as the primary problem confronted by
the construction industry. Weak organizational set up, highly personalized management
structures - owned and operated by family, briefcase contractors, poor quality, under-quoting
of bids, unofficial sub-letting of works, absence of any qualified staff and collusion are some of
the common features of the Bhutanese construction industry. Construction firms are
generally weak in management with most managers being technically unqualified and
inexperienced and therefore most do not have the capacity to effectively deal with
contractual and site managerial issues. Instances of ―Briefcase contractors‖ accessing to
opportunities at the detriment of established and bona fide contractors are quite common.
Efforts to build capacity by way of setting aside requisite funds to train and upgrade the
capacity of their employees to enhance efficiency, productivity and quality of works and
undertake works in a more professional way is hardly existent. Construction business, by
some, is considered as a casual part time business and a stepping stone to other more
lucrative business.

Lack of sense of urgency to develop capacity among contractors
One of the reasons that deter expansion of their business is the perceived notion of
insecurity – lack of continuity of work. Consultations reveal that absence of a long range
market perspective or absence of any kind of construction industry development policy/vision
is attributable to this lack of initiative. A stable market would allow Contractors to plan their
long term investments in the construction business in the absence of which most contractors
have no long term plans to help organize and encourage staffing at appropriate levels to build
their capacity and resources.

The small size of contract packages has been another factor that reportedly inhibited the
growth of larger firms‘ capacity, in particular. The tendency of procuring agencies to
fragment larger project into smaller packages to complete within the time frame, such as
Road Projects, have not had significant impact to contractors in terms of building capacity and
continuity of work. Larger projects, such as hydro-power, telecom and bridges, according to
contractors, are beyond the reach of local contractors given their limited capacity. On the
other hand, stiff competition, among smaller contractors, for work has forced bidding
unreasonably low with hardly any profit to invest in building up capacity. Weak enforcement
of contract terms by procuring agencies was another factor said to be responsible for the lack
of growth.

Fronting in construction industry
Collusion and business fronting among contractors do not ensure fair competition and
prejudice the growth of the private sector construction industry. Yet these are major
challenges faced today in the Bhutanese construction industry. According to CDB, fronting
has become a norm in the interior parts of the country and more so in the Southern
Dzongkhags affecting the national contractors in their business. Given its seriousness, the
matter was discussed on several occasions during CDB meetings, Annual Engineering
Conference and during the 84th and 85th National Assembly as well. CDB, since March 2004,
had initiated measures to curb fronting that included frequent inspections, verification of

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documents and creating awareness including strict action on defaulters. This is an ongoing
effort. Fronting is unethical and unprofessional and impacts adversely on the growth of the
contractors, vis-à-vis the construction industry. Common forms of fronting taking place are:
(i)     among national contractors of same or different classes where in the latter big
        contractors either down-plunge or small classes take up works beyond their capacity,
(ii)    with non-nationals, particularly in bordering Dzongkhags in the guise of employees
        where government‘s resources are piped out.

Poor growth of construction firms under protected environment
CDB at present registers contractors under four classes and four categories based on their
financial capacity, technical capability and past experience. Registration with CDB is a system
of a formal pre-qualification and it is not limited to particular contract. Proof of enrolment on
CDB‘s Registration System constitutes a presumption of overall suitabi lity of contractors,
unless proved otherwise, and qualify contractors to participate in the biding within the range
of their class and category of works. Only CDB registered contractors are eligible for
obtaining contract license. The present system of procurement is a restrictive bidding as is
evident from the Table-III.

               Table III - Bidding Limits for Different Classes
         Class of  Financial Limit of                     Remarks
        Contractor Bidding - Nu. (Million)

           A          15 and above                A maximum of five numbers of contracts at
                                                  a time – based on bid capacity
           B          7.5 to 15                   Only three contracts at a time subject to
                                                  their total not exceeding 20 million and
                                                  subject to verification of capabilities
           C          1 to 7.5                    Only three contracts at a time subject to
                                                  their total not exceeding 10 million and
                                                  subject to verification of capabilities
           D          Up to1.5                     Work up to 1.5 million only one contract at
                                                   a time

Contractors are confined to bid only within their allowable range of contract and the
prescribed number of contracts that can be taken up simultaneously. Bigger contractors are
prohibited to participate in the smaller contracts falling below their prescribed limits and vice -
versa smaller contractor taking up larger works. Further, all new entrants to the industry are
required to register initially in the Petty category and work their way up to ‗A‘ after gaining
experience in the smaller categories. This system does not allow entry of new companies
directly into the ‗A‘ class even though they might be well equipped in terms of technical and
financial capacity and therefore capable of delivering quality services. Such a restrictive system
which does not facilitate competition and allocates works for a particular class does not
encourage economy and efficiency in public procurement and gives no sense of urgency to
grow. For example, contracts valuing between Nu. 7.5 to 15 million are exclusively reserved
for 32 ―B‖ class contractors for bidding. It is quite likely that several of these are not active in
the business currently. Thus, the broader competition is denied at the cost of the public

Technical competence of most contractors limited
The private sector Development Strategy report of CAB recognizes the constraints of
technical competence in the private construction sector. The capacity of most contractors in
Bhutan to deal with both managerial and technical issues related to work execution, especially
for larger and more sophisticated jobs, is limited, according to the report. Due to lack of

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skilled and experienced domestic personnel, engineers and site technical staff often have to be
hired from outside on a project basis. This is a unique feature amongst Bhutanese contractors
where firms, irrespective of its class, do not assimilate its past knowledge and experience for
future usage. By the same token, there is no professional approach towards tender bidding,
or perhaps even reading the tender documents, indicating casualness in their business
approach which results in brain-drain and loss of valuable experience.

Legal and regulatory framework not fully developed
In keeping with the development and time it is felt necessary that appropriate Laws, Rules and
Acts related to construction industry are put in place so as to realign and bring about a
fundamental change in enforcing quality. Clear regulatory guidelines allow Contractors that
focus on quality and value for money to remain in business weeding out incompetent
competitors. Against this backdrop there is the need for Acts and laws in order to guide,
nurture and develop the construction industry to attain the required quality. In its absence,
the industry is challenged with decline in construction quality, acute shortage of skilled and
unskilled labour, leading to an over-dependency on foreign labour. These policy reforms have
been identified as instrumental in order to enhance construction quality.

Poor management capacity of contractors
Most construction firms are weak in management with most managers being technically
unqualified and inexperienced. Due to lack of experience in operating in a competitive
environment, most contractors do not have the capacity to effectively deal with contractual
and site managerial issues. This leads to uneconomic operations, wastage in terms of material
and labour inputs, wrong deployment and mishandling of equipment, time and quality losses.
Ignorance of the kind of skills to support the business activities, value for worker training,
best practices and appropriate technologies required for their line of operation create weak
management. Training opportunities for contract and site management are basically not
available in Bhutan.

Lack of strong central agency for construction industry
One of the main concerns raised is the absence of a strong regulatory body for the
construction sector that has a clear authority, vision and mandate to give the desired
directions towards a systematic growth. At present, efforts to develop the industry are
fragmented and ambiguous and considered by many as decelerating factor to the growth of
the industry. CDB‘s efforts to promote and regulate is severely constrained due to its poor
staffing. This is evident from the fact that despite its many years of establishment, CDB has
even today a very lean establishment structure facing severe capacity constraint. This has
forced it to limit its functions to registration aspects only compromising on other important
mandates such as:

       (i)     development and promotion of technical and managerial skill within the
               domestic construction industry;
       (ii)    promotion of private participation in construction activities;
       (iii)   administration of institutional capacity and performance of contractors; and
       (iv)    development of policy guidelines for construction industry.

There has been expressed desire by stakeholders that the current capacity is not in a position
to carry out its mandate of regulatory and promotional activities of contractors effectively.

Another factor that has impeded CDB in its effort to streamline the industry has been the
absence of regulatory/legal frame works and appropriate enabling environment to support its
actions. There has been increasing instances where the Board‘s decisions in procurement

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related disputes were challenged by agencies or when it failed to take actions on contractors
involved in fronting. There is no proper system in place as yet where recourse against
agencies or fronters/bogus contractors can be taken given the difficulty to prove the
existence of fronting in the absence of any regulatory framework.

In order to ensure fair play, transparency, honesty and ethical conduct among contractors, it
is necessary to have a strong central agency to enforce rules and regulations in the
construction industry. For the Bhutanese construction industry to undergo transformation,
there is need for contractor promotion to be given due impetus. This will require a central
focal agency that is dedicated, capable and well equipped to execute the mandate.

Poor bidding system
Bidding practices by many Bhutanese construction firms are not yet professional. Therefore,
bidding, especially by lower class contractors, is seldom based on detailed analysis and true
facts but is guesswork in the best of instances. This leads, more often than not, to under-
bidding far below any reasonable market rates. There is a danger that this may lead to killing
the domestic construction sector and constantly providing ―compromised‖ quality products.
Further, the present item rate system of contract is mainly a post qualification method. It has
its own limitations and weaknesses. The modern concept of project delivery systems such as
Build Operate and Transfer (BOT), Design and Build, Lump Sum contracts, etc. are some of
the useful applications foreseen to be applied in the future constructions for which our
contractors will take some time to develop its capacity.

Joint Ventures and Consortium
Because of the small size of our industry, foreign investors are almost non existent. This is
also true because of the absence of a sound legal system. Few joint ventures and consortium
initiated with the foreign contractors has failed to meet the desired objectives to tap the
extensive resources and experience of the foreign contractors by way of technology transfer
and capacity building measures which will immensely help to promote the national
contractors. At this rate, it is felt that Bhutanese contractors will not get to build its capacity
to participate in hydropower projects that are in the pipeline unless government intervenes
to support the sector.

2.3    Development Strategy
Strategy objective: To develop and promote the Bhutanese contractors to be able to take
up the country‘s infrastructure work, create employment opportunities and continuously
upgrade their performance to achieve excellence and become regionally and internationally
competitive. The major areas for development are identified and summarized below:

   2.3.1   Strengthening of CDB/CDA
   2.3.2   Enabling policies and Legal frame work
   2.3.3   Introducing preferential treatment and penalties system in procurement of works
   2.3.4   Restructuring contractors‘ classification to promote professionalism
   2.3.5   Broader competition in public procurement

2.3.1 Strengthening CDB to carry out its functions more effectively
The need for a strong agency and clear leadership that has the capacity and authority in the
construction sector to play a more proactive and dynamic role towards the overall
development of construction industry is of paramount importance for an emerging and
vibrant industry such as ours. It was in this light the CDB was established as an interagency of
the Royal Government in 1987, consisting of members from both government and private

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agencies. Its role, among others, is to act as bridge between the private construction industry
and public sector, provide essential services, promote, regulate and provide effective
leadership of the construction industry. The overall mission being ―promotion of an
efficient and quality-based construction industry in Bhutan”, its role briefly is to:

       Act as overseer as well as promoter of the construction industry;
       Act as a bridge between the private and public sectors;
       Assist contractors in undertaking a more expansive part in the industry while also
        helping the Government to obtain an increased return on its investment.
       Ensure contractors fair and equal access to the award of contracts as well as fair
        treatment in the execution of contracts.
       Establish and maintain the list of Registered Contractors by classes and categories based
        on set criteria;
       To regulate, monitor and promote the construction industry;

In light of the above, the CDB should be strengthened with the long term strategy of
delinking it from the MoWHS and establishing it as an independent Construction
Development Authority (CDA) for effective and unbiased pursuance of its important
functions. The quality division presently under SQCA is proposed to be transferred under
CDA. The advantage for all partners would be an unbiased link between the different entities,
transparent procedures and relationships and improved efficiency.

2.3.2 Legal frame work
Appropriate Laws, Rules and Acts related to the construction industry are required so as to
realign and bring about a fundamental change in bringing professionalism and enforcing quality
of construction. A clear regulatory framework viz. Contract Acts (which is being drafted),
Arbitration Act, Procurement Acts, National Construction Industry Policy, and Construction
Development Board Act would not only enable growth of construction industry vis-à-vis
domestic contractors but also create an enabling environment to foreign contractors
interested to invest in Bhutan. The following is proposed:

   Enact the Contract Act as early as possible (draft in progress)
   Development of Arbitration Act
   Development of Procurement Act
   Amend penal code of Bhutan not to make breach of contract a ‗Criminal Act‘.
   Frame a CDB Act to enable CDB to carry out the Registration, Regulation and Promotion
    functions which will be binding on all the players in the construction industry
   Develop a comprehensive strategy or the National Construction Industry Policy (policies
    based on long term planning with the long term market perspective).

2.3.3 Preferential treatment to good contractors and penalties for poor
To encourage contractors to develop and enhance their capacity it is proposed that
preferential treatment system be introduced to good performing contractors. Such incentive
would give a more compelling reason and sense of urgency for contractors to develop and
build their capacity. In this regard the following recommendations are made:

   Develop appropriate and objective construction qualitative assessment system such as
    CONQUAS of Singapore; every completed project will be subjected to a Quality Audit,
    the results of which will be used to grade contractors for future tender evaluations.

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    Develop evaluation system that recognizes scores produced by CONQUAS giving
     advantage to good-performing contractors during evaluation of bids;
    Study feasibility of ‗Repeat Order System‘. An agency who is satisfied with the past
     performance with a construction firm could directly award work orders under very well
     defined and unambiguous conditions and transparency. Such a system would encourage
     contractors to consistently improve their performance and deliver quality works.

Conversely, there is also the need to promote greater accountability in the contractors by
changing the approach to construction supervision and incorporating penalties for poor work.
As in any other industry or service, the government should set the specifications and refrain
from day-to-day supervision which is the responsibility of the contractor. Government
supervision must be limited to inspections of the quality of the finished work and ensuring
that the project is progressing within the specified time and financial limits. In this regard, the
following recommendations are made:

    The implementing agency must ensure that the completed work is within the
     specifications stipulated and sub-standard work must be rejected or adjusted through
     payments as may be specified in the Tender terms and conditions.
    Supervision of day-to-day works must be left to the contractor who must be trusted to
     complete the job in accordance with the terms and conditions of the contract and
     government supervision must be limited to milestone and financial monitoring.
    Guarantees must be built into the contract agreement and contractors must be liable for
     faulty workmanship for the period of the guarantee which can be anything from 1 to 5
     years depending on the size and nature of the work.
    Failure to make good the rectifications during the guarantee period must be reported to
     the CDB which should formulate rules that will take into account such poor performance
     during tender evaluation or suspension of license for repeated breach of terms.

2.3.4 Restructuring contractors‟ classification to promote professionalism
In order to encourage professionalism among contractors and to generate a sense of urgency
for growth among contractors it is proposed to restructure the present contractors
‗Classification‘ system. The present practice of procurement based on pre-qualification by
CDB, with due respect to its numerous merits, is a restrictive bidding system that is based on
arbitrary criteria and does not encourage the growth of contractors. Classification system
although widely followed elsewhere has not had significant impact in terms of competitiveness,
growth, and professionalism among Bhutanese Contractors. Doing away with the
‗classification system‘, as promulgated by WTO, WB, etc. can only inject competitiveness and
end dormancy of private construction industry.

In order to address the issues of stimulating greater competition and creating an environment
for contractors to expand their capabilities and professionalism, while also taking into account
the concerns of the smaller contractors, the following system of classification is proposed
(refer diagram below):

i.    Contractors will be placed into two categories – Class I and Class II.
       Class II contractors will be allowed to take part in works upto Nu. 2.0 million. For
         this category, there will be minimal or no criteria for registration. Even in terms of
         tender evaluations, there will be very simple criteria with the work being generally
         awarded to the lowest bidder after determining the reasonability of the bid.

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            Class I contractors can take up works greater in value than Nu. 2.0 million with no
             upper limits. Registration into this category will have some criteria based mainly on
             financial capacity and technical manpower with some considerations for equipment.

ii.    Under such a scenario, however, there are concerns that it may result in a free for all
       and create a situation conducive to the proliferation of briefcase contractors who will
       submit their bids based on ―paper resources‖ and then run into a series of problems
       trying to complete the project. In order to prevent this, during registration, CDB will
       verify the technical personnel employed by the registering company based on which
       they will be allowed to take up works as under:
        Class I contractors who employ only diploma engineers will be allowed to take up
           works upto Nu. 20.0 million;
        Class I contractors who employ graduate engineers will be allowed to take up works
           with no upper ceiling.
        Those contractors who wish to take up larger projects (financial ceilings to be fixed)
           on Design and Build System will have to employ design teams in addition to the
           employees mentioned above OR affect collaboration with registered
           architectural/engineering design companies.

iii.   Similarly, the number of works that can be taken up simultaneously by a contractor
       needs to be rationalized. Currently, as given in Table III, this number has been arbitrarily
       fixed as 3 for smaller contractors and 5 in the case of Class A contractors which means
       that a Class A contractor can take up 5 works simultaneously even though he may be
       employing only 2 engineers. With his technical resources spread so thinly, it obviously
       leads to poor project execution and in many cases to ‗fronting‘. Therefore, it is
       recommended that this number be fixed depending upon the number of technical
       personnel that is employed by that contractor so that if a contractor employs only 1
       engineer, he will be allowed only 1 work regardless of his financial capacity while a
       contractor employing 10 engineers may be allowed 10 works (the exact number of
       engineers and thus the number of works will depend upon the specifications laid out by each
       project). However, a maximum of about 7 works may be considered as the upper ceiling
       since beyond this, there will be too much demand on the contractor‘s managerial and
       financial resources and capabilities. Such a scenario will not only lead to professional
       execution of projects but also have the greatest impact on the capacity development of
       the contractors since now their intrinsic capacity will dictate the number of works they
       have access to unlike the present scenario where capabilities may differ from contractor
       to contractor but they are all treated alike with arbitrary limitations such as 5 works per
       contractor irrespective of their capacities.

iv.    There may be a third category of contractors called ‗Trade Specialists‘ which would
       include Traditional Painting, HVAC Specialists, Lift & Escalator Specialists, Internal
       Electrification, etc. This category will have no threshold limits and they will work either
       through sub-contracts through the Class I and II Contractors or independently where
       the works are awarded through competitive bidding directly to them by the Procuring

                                                                      1. General Contractors:
           Trade Specialist:               Class - I                  (above Nu. 2.0 million)
           Bhutanese Painting,
           HVAC, Lift, Labour
           Contract etc.
                                           Class - II                1. General Contractors:
           (No financial ceiling)
                                                                     (upto 2.0 million)

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Pre-conditions, however, to implementing the above are as listed below:

         Frame rules, procedures and criteria for regulation/registration of contractors based
          on above proposal. Effort must be made to ensure that the registration criteria are
          clear, detailed and unambiguous specifying items of assessment. (Class would be
          based on Turnover, Technical personnel, Financial Capacity, Experience, Equipment,
          Office establishment etc.)
         Review and revise Procurement Manual, Standard Bidding Documents, and Evaluation
         Create enabling environment for pooling of contractor‘s resources by way of forming
          Companies, Joint Venture or Consortium – criteria/rules need to be developed.
         Develop rules for mandatory sub-contracting by main contractor based on trade and
          specialization. Rules should however have defined conditions so that fronting does
          not take place.
                                                 M ain Contractor

                          HVAC                 Bhutanese Painting        Labour Contract Etc.

         Review packaging of works; the present practice of fragmenting larger contracts to
          small packages does not justify overhead investments while deterring further growth.
         Enhance engineers‘ capacity to carry out evaluation more objectively,
         CDB to maintain up-to-date information and track record of each firm
         Registration of foreign contractors desiring to work in Bhutan with CDB

2.3.5 Broader competition in public procurement
Frequent instances of collusion and bid rigging by the contractors, particularly in the larger
categories, indicate that there is a lack of true competition even though the number of
contractors is quite large. Given this scenario, contractors are not willing to upgrade their
capacities any further than what is already existent. Moreover, the government‘s tendency to
break up large projects into smaller components to fit the contractors‘ perceived capacities
gives rise to a Catch 22 situation. The government breaks up large projects into smaller
components out of concerns that contractors will not be able to complete the large project
on time and with the required quality. And since these downscaled projects are now within
the contractors ―capacities‖, there is no incentive for contractors to develop any further. In
fact, one contractor even claims that they are downsizing since having large resources, either
in terms of professional manpower or in equipment, only adds to overheads with no
corresponding access to larger projects. In order to stimulate greater competition and
encourage contractors to upgrade, the following is proposed:

i.       All procuring agencies shall be encouraged to float tenders as single packages so that
         works values are enhanced and contractors will upgrade their capacities in order to
         execute these large projects19 .

   Existing data indicates that in 2006, only 2 projects were valued at more than Nu. 50 million, the rest were
either small projects or were downsized into smaller packages .

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j.   For projects valued at more than Nu. 50 million, international competitive bidding will
     be mandatory (or at the least bidding within the SAARC region).This is firstl y to ensure
     wider competition since local competition, particularly for large projects, is limited and
     secondly, to expose local contractors to the kind of competition that will encourage and
     stimulate professional capacity development. It is likely that in the initial stages,
     international contractors will outbid local ones but in the long term, local contractors
     will be forced to consolidate and upgrade in order to compete, thereby resulting in
     improvements in the professional capacity of the contractors, eventually allowing them
     to also compete in regional markets.

III.     Human Resource Development and Management
3.1 Situation Analysis
The Construction Sector is one of the fastest growing economies in the Country with an
overall GDP contribution of around 20% and an average annual growth rate of 8.5%.
However in terms of the development of the sector per se, it is observed that the overall
professional capacity of the Industry has not developed to the potential that it could have.
The Construction Industry today is increasingly stigmatized for its lack of professionalism,
competition and quality outputs. Amongst others, one of the main reasons for such stagnation
has been the lack of overall development vision and limited institutional capacities among
those involved in the development of the Industry. As in the case of most developing
countries, the recent development parameters required the public functionaries to be
strengthened as the engine of growth and hence the limited available resources were spent
towards the development of such institutions. However in recent times, the potential of the
private sector has been recognized and accordingly conscious efforts were made by the
Government to promote and develop the private sector as important development partners.
Unfortunately, our recent direction towards private sector development has not been
matched with commensurate plans and programs that would strengthen and professionalize
human resources within this sector. If the Government‘s objective of promoting a highly
developed Construction Industry is to be achieved, the human resource capacity of not only
the public sector but that of the private sector should also be developed on priority through
the development and implementation of effective programs and timely transfer of the
necessary resources. Hence, there is an urgent need to review/develop a comprehensive
development plan for the Construction Industry involving amongst others, aspects of
institutional development, human resource management and development etc. Where sector
based plans and policies exist, these would warrant further review on the relevance of their
overall objectives, resource capacities and the potential benefits of such plans and policies for
the overall benefit of the Construction Industry.

Within the areas of Institutional and Human Resource development, the following key issues
have been observed to be fundamental to the development of professionalism and capacity
within the Construction Industry.
i. Lack of motivation and morale among the professionals and skilled workers
The lack of motivation, morale and initiatives among the National professionals and workers
within the Construction Industry is seen as one of the main threats that could seriously
hinder the qualitative growth of the Industry.
With the start of a number of important Government projects and in view of its important
social and economic implications, the Construction Industry attracts regular media and public
attentions. Unfortunately, such publicity has often drawn the negative aspects of the Industry
only. Given the Industry‘s current stage of development where professional capacities of both
the private and the Government sectors have not matured, there are increased possibilities of
inadequate performances by these sectors. Correspondingly, consistent and indiscriminate

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negative publicity in the construction field has given reasons for alarm and concern among the
public and the authorities. This situation in turn has led to persistent and often stern public
scrutiny over the activities carried out by these professionals causing professional disdain and
apprehensions within and outside the Industry. Some of the repeated and rather prejudiced
coverage of the Industry by the media and by the investigating agencies have raised serious
and extended doubts on the credibility of the profession and the ethics of the professionals
on the whole. Wide spread apprehension and the lack of incentives, investments and
environment for these professionals and skilled workers to take risk and innovate has largely
been responsible for the decline in motivation and morale among those with the capacity or
interest to improve their profession and the Industry on the whole. It has even been reported
that some of the training Institutions are finding it increasingly difficult to attract competent
faculties and students in the profession.

ii. Mismatch in the supply and demand of professionals and skilled workers
Considering the demand for appropriate and adequate human resources within the
Construction Industry, it is not too early if not too late, to review the long-term strategy
concerning the overall supply and demand of professionals, skills and other manpower
requirements of the Industry.

The capacities of the premier institutions in the Country show that, during the 9 th plan period,
only a total number of 175 students at degree level, 350 at diploma level and about 500 at the
certificate level can be produced. These figures in the current context are seen to be far too
short of the demand.

The available information also shows that the Government agencies currently employ close to
a total of only about 800 construction Engineers of various categories. On the side of the
private sector, the available 1,731 registered contractors employ about 578 Engineers
(including 148 numbers of non-nationals) against the minimum required number of 613. In
both the cases, acute shortages of professionals and skilled workers have been experienced
given the limited supply of National Engineers and skilled workers from the institutions. The
fact that Tala Hydro-Electric project alone has employed about 20,000 workers clearly
indicates that the demand for professionals and workers for any project of equivalent size or
bigger would demand corresponding size of manpower. The demand for human resources
within the Industry will skyrocket once the proposed major infrastructure development
projects are underway (e.g. Tala II, Sunkosh, Puna Tsangchhu, Southern East-West highway
construction, widening of lateral East-West Highway etc.). Unless immediate measures to plan
and prepare for the upcoming demand are initiated on priority, a major human resource problem in
the Construction Industry will occur.

Presently, it has been reported that higher institutions viz. the College of Science and
Technology and the Royal Bhutan Polytechnic, both responsible for the primary development
of Engineering professionals within the Country, are plagued with protracted problems of
infrastructure adequacy and shortages of quality faculties. It has been reported that the
institutions are increasingly unable to attract capable faculties or competent students in their
strength. Such shortcomings are mainly the result of lack of investment priority and incentives
required by the Institutions. The lack of adequate infrastructure and capable faculties in turn
has affected the quality and the quantity of the students‘ output.

On the other hand, the MoLHR has made some attempts to review market demand for
skilled workers and are currently expanding Vocational Training Institutes (VTI) and the
Construction Training Center (CTC) for increased intake of students. However, the

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expansion program seems to require practical consultation with those involved in the
Construction Industry to ascertain the quantity of intake and output of these institutions
based on market demand including the assessment on the relevance of such skills
development programs over time.

iii. Issues related to the import of foreign workers and development of
In the current situation, not only are the Engineers looked at with disdain, but blue collar jobs
especially in the construction sector has never been considered as an attractive or a secure
profession by the Bhutanese. While there are numerous reasons involving technological,
environmental, social and economic factors leading to such a situation, this widespread
attitude perhaps is one of the main reasons for the Industry not being able to harness
adequate skilled and unskilled workers thereby leading to the import of large numbers of
foreign professionals and workers.

3.2      Strategies for the Promotion of Institutional and Human Resource
         Development Capacity
The following are some of the measures proposed towards resolving the issues noted above.
The recommendations have been largely limited to critical policy and management issues of
Institutional and Human Resource development aspects.

3.2.1 Increasing the capacity of private construction sector
It should be mandatory for contracting firms to have professional institutional management
and development plans including; specific plans for manpower recruitment & training,
investment plans for institutional development, skills assurance procedures etc. The
manpower development plan should include the training of managers and proprietors on
basic management and contract management skills. Where possible, funds for generic training
should be supported by the Government either in full or in part, as the situation would allow.

Contractors awarded with projects should be mandated to deploy adequate and capable site
supervisors through firm enforcement of contract procedures by the CDB and the
implementing agencies. Contract procedures and agreement should include quality monitoring
mechanisms like: milestone development schemes, essential periodic quality tests, built in
quality certification procedures etc. Mechanisms and rules to hold the defaulting contractors
and Engineers liable for poor quality work should be in place in the contract terms.

The Government, on its part should provide clear regulatory guidelines and access to timely
information on projects in pipeline, contract requirements, bid procedures, transparent
information on contract award etc. It should also review and simplify contract procedures
and requirements such as bidding documents, financial manuals etc. to promote efficiency,
transparency and professionalism. The possibility for the promotion and use of internet
services in tendering and bidding should be promoted including the use of proven
computerized construction management software.

Depending upon the prospects and proposals related to the contractors‘ specialization
program, the procedures and plans for manpower recruitment/specialization should be
adopted accordingly i.e. whether to be developed in-house or recruited from the market on
contract based employment. Correspondingly, the hiring of the equipment should also follow

                                Annexures to the Strategy for Gross National Happiness

3.2.2 Building professionalism, motivation and initiatives among the
professionals and skilled workers within the Construction Industry

i. Promoting motivation and morale among professionals and skilled workers
The development of a motivated and competent human resource is contingent to the
development of a vibrant Construction Industry. However the dwindling image and
diminishing motivation among the professionals and skilled workers has not been a move in
the right direction especially when there is the growing need for highly motivated
professionals and skilled workers in the Industry. Due to the overall shortage of professionals
and skilled personnel in the market, the distribution of such resources among the sectors has
been ineffective and inadequate in the process limiting the impact and benefit of their
As an important move to promote the required collective recognition of the profession,
standardization of Engineers‘ professional value, effective dissemination of information and to
increase the weightage of Engineers‘ collective representation, the proposed body of
Engineers‟ Association should be immediately instituted on priority.
Taking clue from the best practices of private and corporate management system, even within
the Government sector, it is important to create an environment that would allow innovation,
initiatives and effective sharing of information through improved procedural and management
approaches that would promote the spirit of entrepreneurship among its employees. Hence
unless some of the following procedures and policies are laid down and implemented
diligently i.e. clear delineation of authority and accountability among the employees, organized
forums for exchanges of ideas and innovations, competitive assessment procedures etc. the
spirit of innovation, motivation and morale will not stand promoted.

If the profession has to be given priority in the nation‘s economic development, it is
important to recognize the value of the profession and hence create opportunities to lure and
retain individuals within the sector by providing appropriate incentives/allowances and career
opportunities. Such incentives should also promote ethical output from these professionals. A
case in point was the earlier pursuit for teachers in the country wherein, measures with
improved career opportunities and incentives for profession had brought in large influx of
aspirant teachers, although, the criteria for entry could have been more objectively set or
assessed. Considering the fact that there will be increased and a sustained requirement of
engineers and skilled workers for a long time to come, it will be necessary to devise
strategies that will attract more workers and professionals into this field while also retaining
the ones already in the field.

Further, to motivate the intake of students and individuals in the field, it may be worthwhile
to review the career advancement policy adopted by the Position Classification System (PCS)
which primarily emphasizes the career path development for the profession on formal
educational requirement while also proposing upper limits for career advancement within the
levels of specialists, diploma and lower categories. While recognizing the fact that there
should be some upper limits set based on qualification compatibility, considering the current
requirements in the profession and the differences in the specialization intensity of the
profession, it would appear important to at least increase the vertical mobility of these
professionals/skills rather than horizontal movement to provide symbolic advantage of the
profession which offers equivalent or better scope when compared to other professions.

Ethics and attitudes cannot be developed overnight, hence topics on ethics in general should
be introduced at all levels of the schools but most certainly, subject on engineering ethics
should find their way in all engineering and skills training institutions including during the in-

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service courses.

ii. Improving human resource capacity in construction design, planning and
One of the aspects which affect the quality and technological progress in the Construction
Industry has been the lack of importance attached to the design and planning of most
construction projects. Most projects are planned and designed under emergent circumstances
and implemented based on the availability of yearly budget release although, the importance
of some of these projects would warrant project planning to be carried out over a long
period of time.

The project design and planning does not only determine the quality and the buildability of
any construction project but also the extent of innovation and skills required for such
projects including determining the number of workers to be employed in the project. Since
the quality of a project begins on the drawing table, it is important that adequate time is
allocated to design and planning. The designers should not only be qualified but should
dedicate adequate time to plan, discuss and design the projects effectively. This would mean
that specialized and qualified design teams should be planned and promoted both within the
public and private sectors. Within its given advantage of manpower and financial resources,
the public sector should take the initiative in promoting innovative designs and skills and
where possible, the concept of design and build should be encouraged within the private
sector to promote innovation, buildable designs and capacity building.

In context to our Construction projects, poor quality is not only the result of poor planning
and design but also due to the apparent weaknesses in project implementation processes
primarily due to the lack of competent and adequate site Engineers. Site Engineers both
within the public and private sectors are often overburdened, inexperienced, underpaid or
under-motivated to perform the required functions. Hence, as much as it is important for the
project to have the required time to plan and design the projects effectively, it is equally
important to plan and deploy adequate and motivated site supervisors with the required
knowledge and skills to implement the projects successfully. Considering the importance of
supervisory functions, the Site Engineers should be mandated/provided with periodic training
on contract management and supervision techniques. Appropriate incentives and
administrative support mechanisms should be provided to help motivate and monitor their

iii. Developing institutional capacity of the Training Institutions
Under the current situation, the existing institutions responsible for the development of these
professionals have neither the mandate nor the obligation to meet the current and projected
demands of professionals and skills in the Construction Industry. Their production capacities
are mostly guided by the existing Institutional facilities and the development policy framed by
their authority.

Least of all, our primary Engineering Institutions viz. College of Science and Technology and
Royal Bhutan Polytechnic are currently faced with serious shortage of faculties and
infrastructure necessary to conduct their normal courses. It has been mentioned that the
current incentives received by the institutions for the payment of the faculties are found to be
much too inadequate for them to recruit adequate or qualified faculties which in turn affect
the quality of the students passing out from the institutions.

As an immediate measure, the following actions would have to be taken on priority if the
demands for professionals have to be catered to; a) Assess and provide immediate financial

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support required by these institutions to perform their ongoing functions. b) Assess and
expand the capacities of these institutions to develop additional capacity. c) Explore opening
up of other institutions on priority.

The quantity of students‘ intake at various levels of skills should be assessed and guided by the
current and projected demand of human resources in the Country.

Apart from the required expansion of the infrastructure and intake capacities of these
institutions, it is also important that the courses offered are aligned to the requirements of
the users. Training curriculums and programs in these institutions should be developed based
on the ongoing and projected market demand upon thorough study and consultation with the
stakeholders. Curriculum development especially at the levels of vocational training and to
lesser extent at Diploma and Degree levels should be periodically reviewed based on market
demands. In the Degree and Diploma levels, relevant skills specialization should be introduced
with appropriate duration to promote skills proficiency in entering the job markets. It was
also noted that practical courses and field attachments are much too inadequate in the
courses offered by the Institutions. These requirements should be adequately mandated for
the students in the final years of their training so that they are absorbed in the market with
good effect. Important and relevant subjects like contract management, tendering/bidding
processes, estimating & costing, familiarization to Financial Manual including computer aided
software like Auto-cad design, Staad-pro, Construction manager etc. should be introduced or
expanded in these institutions.

It was also reported that the intake level of students at diploma level has been upgraded to
class 12 passed from the earlier level of class 10 passed for the same or a slightly reduced
course duration. While higher intake level would help the basic proficiency of these students,
the main concerns are; a) whether class 12 passed students would be motivated to undergo a
diploma course while opportunities to obtain degrees under similar duration exists, b)
whether the proposed reduced duration of the course would not compromise on the level of
technical skills proficiency required of a diploma student.

Notwithstanding the issues mentioned above, if the policy to persist with class 12 passed as
the entry level for diploma course is retained, it would be important to motivate the intake of
such students without compromising on the quality of the skills required for a diploma course.
One of the possibilities for such consideration would be to increase the entry level of the
position in the Civil Service and re-designation of the post title.

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Track 3: Hydropower

1.     Introduction
1.1.   Bhutan has long identified its hydropower potential estimated at 30,000 MW, as its
       main economic resource. Even with the current development of only 1,500 MW of
       the potential, the power sector is estimated to contribute 43% of the national
       revenues in 2006-07. However, this impressive figure indicates the relatively small
       contributions of the other sectors rather than the optimal harnessing of this huge
       renewable natural resource. Meanwhile, the development of other hydropower
       plants in the region is rapidly leaving behind the Bhutanese hydropower sector
       unless its development is taken up as a national priority. The SGNH has accordingly
       identified the accelerated development of the hydropower as one of the thrust areas
       to generate revenues that will support the long term strategic goals of the country.
1.2.   Realizing this urgency, an ambitious target of generating 10,000 MW of electricity by
       the year 2028 has been set as part of accelerated hydropower development strategy.
       With accelerated hydropower development strategy, the sector shall contribute Nu.
       39 billion to the net annual revenue of the nation by the year 2028. Such
       contribution will substantially increase GDP over the next twenty years. Such a
       target, though lofty, shall be achieved through accelerated development strategies
       outlined in this report and by according the highest development priority.
1.3.   The accelerated hydropower development during the next twenty years will require
       an investment of about Nu. 500 billion; generate employment for about 100,000
       workers during the peak construction stage and about 7,400 (6,000 skilled and 1,400
       security personnel) employees during the operation and maintenance period
       thereafter. In addition, the sector will directly promote investments in important
       infrastructure like roads, bridges, construction of new schools and BHUs and
       upgradation of several other existing schools and health facilities. The sector will
       facilitate the growth of other sectors; power intensive manufacturing industries,
       service industries (recreational facilities around the reservoir schemes), navigation
       waterways (Sunkosh), and facilitate the growth of special economic zones in the
       country. This report presents the necessary strategy and the implementation plans
       to achieve the above target of accelerated hydropower development by the year
1.4.   The above target of 10,000 MW by 2028 is a two-fold increment of the Power
       System Master Plan‘s (PSMP) target of 5,000 MW by 2022. This increment in target
       is based on the additional time till 2028 (6 years) for project development, changing
       power market scenario, and the proposal of major storage schemes like Sunkosh
       with 4,060 MW capacity. However, the main factor for achieving the above targets
       hinges on first of all the sector being able to mobilize all the resources through the
       various models proposed for project development and also the institutional capacity
       being strengthened and empowered with adequate manpower and the authority to
       take timely decisions and on the government creating the right enabling environment
       for the sector.
1.5.   The mobilization of the capital expenditure and its disbursement of almost Nu. 20-
       50 billion per annum indicates an expenditure in the power sector equal to the
       current GDP (Nu. 46 billion for 2006-2007) or more than the current national debt
       of Nu. 26.00 billion (December 2006). Pending the mobilization of the required fund
       and the institutional strengthening, the above target might not be met unless the
       accelerated hydropower development is accorded the highest national development
1.6.   This report presents the situational analysis of the sector with achievements till date,
       builds a case for accelerated hydropower development, and presents the strategies

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           and the implementation schedules for translating these strategies into actions. It also
           establishes the linkages with the NSP-2008 and SKILLS-2008 with details on
           projection of manpower requirement in the sector. A section is also devoted to the
           discussion on the minimum threshold levels for hydropower pricing with India which
           is our main market, and the concept of Independent Power Producers (IPP) since
           private sector investment would be highly crucial to achieving the above targets.
           While the PSMP (March 2004) has provided the basis for the project listing and
           technical references, the focus of this report is on the changing power market
           scenario in the region and Bhutan‘s strategic positioning of her competitive
           advantage in hydro development and her renewed confidence and ambition in
           accelerating economic development through export of power to India.

2.         Situation Analysis
2.1.       Today, Bhutan‘s hydroelectricity sector contributes about 43% of the national
           revenue (2006-2007) which amounts to Nu. 6.902 billion 20 . However, the
           development of this existing capacity (1,488 MW) has taken over 20 years with
           multi-dimensional challenges faced by the sector.
2.2.       The draft energy policy highlights the complexities in the management of supply and
           demand for energy and difficulties in rural electrification as being some of the most
           daunting challenges faced by the power sector. Although Bhutan is a net power
           exporter, it experiences deficit of firm power in the lean season21 and has to resort
           to import of power from India. Bhutan has exported electricity worth almost Nu.
           2.21 billion in 2005-06 but imported about Nu. 2 billion worth of other sources of
           energy in the form of fossil fuels and petroleum products.
2.3.       Although electricity is exported as surplus generation, half the population of Bhutan
           does not have access to electricity or other modern forms of energy services. Use
           of traditional bio-mass (fuel wood) still dominates as the main source of energy in
           Bhutan for the rural population. The sector‘s vision of ―Electricity for All‖ by 2020
           thus requires investment of over US$ 100 million over the next 15 years. On the
           other hand, the real impact of rural electrification has not yet been assessed.
2.4.       While richer countries like US and Australia have refused being signatory to Kyoto
           Protocol, Bhutan has signed the Protocol and has steadfastly sacrificed
           developmental opportunities to maintain her commitment towards environmental
           conservation22 . Although hydropower is being touted as the main revenue earner for
           the nation, recently it has fallen behind the trade sector 23 . Therefore, the current
           situation calls for a renewed urgency in providing extra impetus to the development
           of hydropower sector to achieve energy security, enhance revenue earnings and
           fulfill the needs of Bhutan‘s integrated development as per the SGNH.
2.5.       The energy sector has achieved an installed capacity of 1,488 MW as of 2006-07 and
           has set a target to achieve a minimum export of 5,000 MW by 2020. The sector has
           prepared the following plans and studies and these studies provide for a solid
           foundation to embark on an accelerated development path:

                The Power System Master Plan (1993 with update in March 2004).
                The Integrated Energy Management Master Plan (IEMMP-2007)
                The Rural Electrification Master Plan (2005)

20 Depart ment of Revenue and Customs, MOF, National Revenue Report, 2005-06
   The firm power with commissioning of Tala is 283 MW against the projected demand of almost 400 MW fro m
the recent industrial estate at Pasakha.
   Bhutan has developed only the run-of-the river schemes and deferred the development of mu lti-purpose storage
scheme till date.
   Revenue data as presented in 2006 (Kuensel issue of November 26th , 2006).

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                   Urban Electrification Master Plan (BPC-2006)
                   Transmission Network Plans (BPC-2006)
                   The experiences of Chhukha and Tala Hydropower projects
                   Agreement between the Royal Government of Bhutan and the Government of
                    the Republic of India concerning cooperation in the field of Hydroelectric
                    Power – signed on 28th July, 2006 (Annexure 2.2).
                   The Electricity Act-2001 providing the legal basis for restructuring and
                    regulating electricity industry, and enabling private sector participation.

2.6.       The Power System Master Plan
2.6.1.     The Power System Master Plan (PSMP) prepared by the Department of Energy
           (DoE) and updated in 2003-04 is a comprehensive document on the power system
           with details on the project rankings, implementation schedules and domestic market
           analysis. The document is still the most reliable reference for technical details on
           project profiles and most of the information in it is still relevant. The changed
           circumstances, market reforms and renewed and urgent current focus on
           accelerated development are discussed under topics like power pricing, enabling
           environment and integration with the development of other infrastructure works.
2.6.2.     The PSMP has identified the development of seven projects with a total investment
           of about US$ 4.00 billion by the year 2022. The revised target has been set at 10,000
           MW since mobilizing resources for these projects would have required the same
           level of efforts. Details on the project transmission networks, domestic power
           demand scenario and environmental and social impact assessments have been
           adequately deliberated in the PSMP. However, the document does not address the
           main issues of development models, mobilization of resources, and IPP potential.
           There is also very little discussion on institutional strengthening that would be
           required for the sector in order to handle the volume of works associated with the
           accelerated hydro development. The following seven projects have already been
           included for formulation and development during 2003-2022 in the PSMP.

         Table 2.1: Projects Identified for Implementation by 2022 in the PSMP.
                                                 Firm power           Installed
          Sl              Name of Project           (MW)                (MW)          Energy (GWh)
           1       Punatsangchhu-I HEP                    168                 1,002            4,770
           2       Mangdechhu HEP                           92                  670            2,909
           3       Punatsangchhu-II HEP                   165                   992            4,667
           4       Kholongchhu                              61                  486            2,207
           5       Chamkharchhu-I                            113               671            3,207
           6       Chamkharchhu-II                            95               568            2,714
           7       Amochhu (814 Yangtsegang)                  82               499            2,210
                   Total                                     776             4,888           22,684

2.7.       Umbrella Agreement with the Government of India
2.7.1.     The Cooperation Agreement signed between the RGoB and the GoI on July 28,
           2006, is a landmark Agreement that lays the foundation for accelerating hydropower
           development in Bhutan. Amongst others, the Agreement allows Bhutan to export a
           minimum of 5,000 MW of electricity to India by 2020 and also has provision for
           private sector participation (Article 2) from both countries in the power sector.
           This not only provides the framework for export of energy and establishes a reliable
           long-term market but also identifies the private sector to participate as potential
           IPPs thereby opening up opportunities for alternative resources and skills. This

                                      Annexures to the Strategy for Gross National Happiness

           Agreement was in fact pointed out as a highly successful Agreement to be even
           modeled and adapted in other neighbouring countries like Nepal.

3.         Basis for Adopting the Strategy for Accelerated Hydropower
3.1.       The situational analysis clearly points out the urgent need to accelerate hydropower
           development mainly to provide energy security and to realize hydro potential as the
           main source of national revenue. In addition, trends in the region indicate that
           Bhutan has already lost out on the opportunity to accelerate its hydropower
           development over the last decade. Now the sector will increasingly face competition
           in the market making it less and less viable because of emerging influence of other
           energy sources like nuclear and thermal plants 24 . Bhutan‘s hydro sector cannot
           afford to wait any longer.

3.2.       Highly Favourable Political Situation.
3.2.1.     The ambitious target of 10,093 MW within the next twenty years has been set not
           only because of the urgency for Bhutan but also to capitalize on the highly favourable
           geopolitical situations. With the further strengthening of the ties between Bhutan
           and India, this is an opportune moment for Bhutan to push forward such ambitious

3.3.       Market Opportunity
3.3.1.     The PSMP-2004 indicated that the justification for preparing a PSMP as a tool for
           planning the development of the projects is mainly based on the potential for
           exporting power to India. The study has quoted the demand of 170,000 MW in India
           by 2012 and also mentions the key constraints and challenges facing Bhutan‘s power
           export to India. A review of the demand and the crucial factors and issues raised in
           the PSMP show that the conditions have now become more favourable for Bhutan‘s
           export to India.
3.3.2.     India‘s demand for energy to fuel its 8% annual economic growth is a big opportunity
           for Bhutan‘s hydropower sector. In 2006, India‘s power deficit was 14,041 MW
           against their installed capacity of 127,752 MW25 . The projected demand by 2030 is as
           high as 800,000 MW 26 or at least 450,000 MW (CEA). More than 70% of the
           generation is from coal, gas fired and oil based thermal plants. To enhance their
           energy security, India has set a target of achieving 40% hydro generation in their
           energy mix. This opens up a huge export market opportunity for Bhutan‘s
3.3.3.     The PSMP has identified the poor financial conditions of the Indian State Electricity
           Boards (SEBs) and resulting problems of financing IPP projects, difficulties in making
           predictions about the pace of Indian economic and power sector reform, and the
           expectations that initially reforms will increase in efficiency in the use of energy
           rather than increase its demand as potential challenges for Bhutan‘s power export to
           India. However, the adoption of the Electricity Act and the recent reforms of the
           SEBs present a different picture. ―The legislation brought together structural and
           regulatory reforms designed to foster competition, encouraged private sector participation
           and transformed the role of the state from a service provider to a regulator. SEBs were
           unbundled, autonomous regulatory commissions were created, rules of open access

   India is adding about 6000 MW of nuclear plant in the recently concluded deal with the US.
   CEA presentation to Bhutanese Hydropower Develop ment Co mmittee on 15.01.2007.
   Talmiz Ah med- Director General of Indian Council of World Affairs during an IPPAI seminar on 28 January,
2007. Th is figure is derived fro m the Integrated Energy Policy document of India that says that India will need
800,000 MW of power by 2021-32. A lso quoted in Outlook Business of February 20, 2007.

                                      Annexures to the Strategy for Gross National Happiness

           transmission were developed to encourage electricity trading as a separate business. Tariffs
           were rationalized to reflect the cost of subsidy, institute strong anti-theft provisions and
           protect consumer interests‖27 .

3.4.       Regional Investment Plans in the Energy Sector
3.4.1.     The changes in the sector has led to the lining up of investments worth over
           US$ 100 billion and addition of another 100,000 MW of generation capacity by 2012
           in the Indian power sector.

           Table 3.1:   Planned Investments by some Public and Private Sector in India by 2017.
                     Firm            NTPC NHPC Powergrid            Tata     Reliance       Total
                                                                   Power      Energy
            Investment (Rs.          1,600 410       510          250       600           3,370
               Source: Outlook Business, February 20, 2007 & Times of India, January 26, 2007.

3.4.2.     From the above investment plans, it is seen that the region will be mobilizing a huge
           amount of resources for various projects to be taken up both in the public and the
           private sectors. Strategically, if the projects in Bhutan can be taken up immediately,
           these planned investments could be attracted to Bhutan instead of the competing
           projects in the region. Therefore, the market is ripe and it is the opportune moment
           for Bhutan to accelerate its hydropower development.

3.5.     Competition to Bhutan‘s Hydro Development
3.5.1.    The GoI has taken numerous steps to increase hydro capacity. Hydro power
          development in the country has now been recognized as national priority and
          initiatives like the introduction of Hydro Policy, Ranking Study of 50,000 MW
          potential has given boost to the sector 28 . In the last Plan period, India has installed
          6,896 MW of hydropower capacity with additional 8,854 MW likely to be
          commissioned soon (CEA-2006). Public sector companies like the National
          Hydroelectric Power Corporation (NHPC) are actively expanding their activities
          throughout the country, with NHPC alone developing about 10,000 MW.

           Table 3.2: Status of NHPC hydro projects in various Indian States
              Sl             Projects            Capacity           States                      Status
            1       Tawang-I                                750 Arunachal                MOU
            2       Tawang-II                               750 Arunachal                MOU
            3       Dibang                               3,000 Arunachal                 MOU
            4       Subansiri Lower                      2,000 Arunachal                 Construction
            5       Teesta V                                510 Sikkim                   Construction
            6       Teesta Stage III & Others               292 Sikkim                   Construction
            7       Parbati-II                              800 Himachal                 Construction
            8       Parbati III                             520 Himachal                 Construction
            9       Chamera                                 231 Himachal                 Construction
            10      Uri                                     240 J&K                      Construction
            11      Omkareshwar                             520 MP                       MOU
                    Total                                9,613
                (Garg, NHPC-Jan, 2007).

   Already 20 states have unbundled their utilities, 24 have independent regulators, and 18 regulatory co mmissions
have awarded tariff orders. Ashis Gupta & Ran jana Kaushal – Power Sh ift; Outlook Business, Feb 20, 2007.
   S K Garg, CM D, National Hydroelectric Power Corporation in Times of India (January 26, 2007).

                                       Annexures to the Strategy for Gross National Happiness

3.6.         Competition from Nepal Hydro Development
3.6.1.       Nepal is also aggressively pursuing investment in their hydropower sector 29 with
             projects like West Seti (800 MW), Karnali (10,800 MW), Pancheswar (5,800 MW)
             and Sapta Koshi (3,300 MW) under active consideration from their overall potential
             of over 80,000 MW.

             Table 3.3: Hydropower Potential in Nepal
                   River Basin           Major (MW)                     Small (MW)                Total
              Koshi                                        18,750                    360             22,530
              Gandak                                       17,950                    270             20,650
              Karnali (Ghaghra)                            28,840                  3,170             32,010
              Mahakali                                      3,840                    320              4,160
              Southern Rivers                               3,070                  1,040              4,110
              Total                                       72,450                  10,830            83,280
                 Source: Pricewaterhouse Coopers (July 2006)

3.6.2.       Till date, India has assisted Nepal in a limited way but now public sectors like NHPC
             are also considering projects like Upper Karnali (300 MW) as an IPP and WAPCOS
             is considering DPR of Burhi Gandaki (600 MW). Nepal had also executed PPA with
             SMEC of Australia for the development of its 750 MW West Seti Project. Recently,
             there has been indication that the following projects in Nepal has been outlined for
             possible development with Indian agencies:

             Table 3.4: Projects Outlined for Possible Development in Nepal by Indian Agencies
              Sl.No. Project Name              Potential (MW)                    Status
              1.        West Seti                            750 MOU signed
              2.        Budhi Gandaki                        600 DPR considered by WAPCOS
              3.        Arun III                             400 -
              4.        Marshyanngdi                         121 -
              5.        Upper Karnali                        300 Expression of Interest by NHPC
              Total                                        2,171

3.6.3.  In the face of such competition, the strategy should be to accelerate our
        development and capture the market with the right pricing mechanism.
3.6.4.  One of the ways to overcome the above competition is through acceleration of
        hydropower development. This can be done through the following strategies:
        Aggressively push for more bilateral funded projects by prioritizing those projects
          with multiple benefits especially for the importing country, India.
        Revisit the project lists of the PSMP and reprioritize them keeping in mind
          potential investors‘ interests.
        Adopt the draft energy policy, hydropower policy and the IPP policy.
        Strengthen institutional capacity of the sector by recruiting additional manpower
          and skills and putting a proper institutional structure in place so that the sector
          can achieve the target of adding the capacity of 10,000 MW by 2028.
        Open up the sector for private sector participation with 100% FDI.
        Reprioritize Sunkosh multipurpose project keeping in mind that it has additional
          benefits both to Bhutan and India.
        Establish internal funding mechanism so that at least DPR studies of the potential
          project sites can be taken up without having to wait for donor financing.

     Hydropower Pricing in Nepal, Developing a Perspective, Jalsrot Vikas Sanstha (JVS), Nepal.

                                    Annexures to the Strategy for Gross National Happiness

              Provide right enabling environment for attracting IPPs and expediting project
               implementations in Bhutan.

3.6.5.     Establish the Joint Group for Speedy Implementation as envisaged under
           Article 2 of the Umbrella Agreement to carry out the following activities:
           to facilitate identification of projects and preparation of DPRs;
           to select agencies for speedy implementation through Bilateral/JV models;
           consideration of IPP projects; and
           to advise the governments on implementation modalities.

4.            Hydropower Pricing for Export to the Indian Market
4.1.          Since hydropower projects in Bhutan face competition from the Indian and Nepalese
              hydropower projects, the first requirement for trade to occur between Bhutan and
              India is that the costs of Bhutanese hydropower projects are sufficiently below the
              costs of competing projects, to allow enough benefit for both parties to share
              (PSMP-2004). The next section explores some of the hydropower mechanisms for
              the Bhutanese export of power.

4.2.          Generation cost for Existing Hydropower Plants
              The existing projects have been constructed under a highly favourable financing and
              implementation model. Chhukha, Tala and Kurichhu have been developed under GoI
              financing where the equity portion has been provided as grant by the GoI and the
              cost of debt especially for Chhukha has been very low (5%). Basochhu has been
              financed through soft financing with grace period of 5 years for loan repayment.
              Hence the generation costs for the earlier projects are very competitive.

          Table 4.1: Generation Cost of Existing Hydropower Plants in Bhutan
         Sl.No.    Project Name     Generation        Generation Cost     Cost of    Cost of
                                         (MU)           (Nu./unit)         Debt      Equity
         1.       CHPC                       1,863                 0.27         5%        14%
         2.       Tala (THPA)                4,865                 1.57         9%        14%
         3.       Kurichu                      400                 2.26     10.75%        14%
         4.       Basochhu                     311                 1.25         6%        14%
                  Consolidated              7,439                  1.21
          Source BEA – Generation Tariff Model

4.3.          Generation Cost for Accelerated Hydropower Plants
4.3.1.        Based on the total investment of Nu. 468 billion spread over the period 2007-2027
              for construction of 10,000 MW installed capacity with 37 billion units of annual
              energy generation capacity and as per the discounted cash flow analysis for the 12
              projects lined up for development in the next 20 years, long range marginal cost of
              generation works out to Nu. 2.20 per unit at 10% discount rate.

                                      Annexures to the Strategy for Gross National Happiness

     Table 4.2: Estimated Cost of Generation for Accelerated Power Projects
                                               Firm                                            Cost of
                                              Power        Installed Energy                   Generation
     Sl          Name of Project              (MW)          (MW)     (GWh)                      (Nu)
      1 Punatsangchhu-I HEP                       182.50       1,095    5,377                          1.90
      2 Mangdechhu HEP                             91.00         672    2,909                          2.54
      3 Punatsangchhu-II HEP                      165.33         992    4,667                          2.33
      4 Kholongchhu                                81.33         486    2,209                          2.42
      5 Sunkosh Multipurpose Project              647.40       4,060    8,961                          3.41
      6 Dagachhu CDM Project (800)                 19.00         114      500                          2.89
      7 Nikachhu (Tangsibji)                       35.00         208    1,042                          2.19
         Chamkharchhu-I                                                                                2.29
      8 (Digala/Sangling)                         111.67         670    3,207
        Chamkharchhu-II                                                                                    2.31
      9 (Kheng/Khomsar)                                  95.00           570       2,713
     10 Amochhu (814 Yangtsegang)                        83.33           500       2,210
     11 Khomachhu (1920)                                 54.33          326       1,507                    2.38
     12 Rotpashong (400)                                 66.67          400       1,883                    2.33
        Total                                        1,632.56        10,093      37,185

4.4.       Minimum threshold level for Bhutan‘s Hydropower Pricing.
4.4.1.     Hydropower pricing in Bhutan for export in the past has been more through
           political goodwill (Chhukha Nu. 2.00) or with negotiation on some form of cost plus
           basis (Kurichu Nu. 1.75 and Tala Nu. 1.80). The Central Electricity Regulatory
           Commission (CERC) in India allows cost plus model for the state owned power
           plants. However, this norm might not be sustainable as it does not provide any
           incentive for reducing costs and burdens the state utilities with costly PPAs. The
           trend now is to move towards tariff based IPPs where project developments are
           awarded to the developers offering the lowest tariffs. Whatever is the existing norm,
           the bottom line is to maintain a lower tariff than those of the competing projects in
           the region. A project developer would typically include his cost of equity (14 -16%) 30
           and commercial interests costs of 8-14%. Since we are looking at encouraging IPPs in
           the future, the tariff could also be determined through open bidding process or
           electricity spot market 31 for the project developers. Therefore, the minimum
           threshold level will vary depending on the corresponding development model.

4.5.       Threshold for Bilateral Projects
4.5.1.     In the case of bilateral projects, the equity is also a grant from GoI. Therefore,
           RGoB has no direct financial stake and hence we could argue that the minimum
           financial return threshold is anything that is over and above meeting the cost of the
           O&M and debt servicing of the project. We could consider these projects as 100%
           leveraged and do not factor in the cost of equity at all. On the other hand, we could
           monetize other associated costs like the environmental, social and opportunity cost
           of water32 . Such subjective factors, however, are points of contention that might
           prove to be a strategic negotiation blunder. Negotiations are typically guided by our
           fall back positions on what is our ―best alternative to a negotiated agreement‖

   Norms established by the Central Electricity Regulatory Authority (CERC) of India.
   IPPs in India are based on bidding process and spot trading is now being considered (CERC -July 2006).
Developing a Co mmon Platform for Electricity Trad ing, CERC, Ju ly 2006.
   Nepal is trying to consider these and other induced and external costs that raises their threshold level.

                                      Annexures to the Strategy for Gross National Happiness

             (BATNA) 33 . In case of Bhutan, bilateral projects will always result in mutually
             negotiated arrangements as we cannot expect any better mechanisms. The unique
             model of current project implementation between the two countries further
             corroborates this argument.
4.5.2.       Tariff determination eventually becomes a function of many parameters including the
             location of the plant, peaking capacity, firm power and distance from the load centre.
             The important thing for us is to be aware of the various tariff ranges and find the
             one best suited to both parties. Following are some of the existing generation tariffs
             in India:

                   Table 4.3: Cost per unit of Power in India (CERC-2006)
                                                                                Cost per unit of
               1    35% of power traded in India in 2006                        Rs.2.50 to Rs.3.00
               2    33% of power traded in India in 2006                        Rs.3.00 to Rs.3.50
               3    Cost of old hydro generation (198 MW Baira Suil – 1984) Rs. 0.71
               4    Tariff for Chamera-II (300 MW commissioned in 2004)         Rs. 2.55
               5    Tariff for Tehri storage plant (1000 MW -2006)              Rs. 3.50
               6    Bid tariff for ultra mega thermal projects, pit head – 4000 Rs. 1.19
                    MW at Sasan by Lanco (Madhya Pradesh – Jan 2008)
               7    Bid tariff for Mundhra (Gujarat) ultra mega project with Rs.2.26
                    imported coal (4000 MW) by Tata Power – January 2008
               8    Tariff for Baspa II, IPP Plant (300 MW)                     Rs. 2.79
               9    Tariff for Malana Power Plant (100 MW)                      Rs. 2.35

4.6.         Tariff and Royalty/Free Power for IPP through Bidding Process
4.6.1.       For the IPP plants, the trend in India for determining the tariff is through competitive
             bidding process especially for the thermal plants. Where State purchases power,
             bidding is based on the lowest tariff offered by the IPP to the State (e.g. tariff of Nu.
             1.19 per unit offered by Lanco for the 4,000 MW thermal based Sasan Project) 34 . For
             Bhutan, since most of the energy would be exported by the IPP through their own
             PPA, the bidding could be based on the maximum royalty/free power that the
             developer(s) would offer to Bhutan. Or it can be a combination of royalty/free
             power as well as the minimum tariff for those plants from where both export and
             domestic demand is also met. The CERC (India) norm for free power is 12%. In
             individual states, they demand upto 18% free power from IPPs. This threshold again
             would be site specific. Sophisticated IPPs would in turn maximize their returns
             through a PPA tariff that is determined through a combination of all the above
             methods including that of ―spot trading‖ in the electricity market. Whatever the
             method of determining the minimum threshold level, it is strategically crucial for us
             to be familiar with market developments in India and to make consistent efforts to
             reduce our project costs to make our pricing competitive.

4.7.         Key Issues that still remain as challenges to Bhutan‘s power export
4.7.1.       Resource constraints, especially given the requirement of investments worth Nu.
             468 billion would be a huge challenge. Since internal resources will not be adequate
             to fund even a single project the entire accelerated development model is built
             around the continuity of the existing GoI assistance in the power sector with
             opportunities for private sector participation.

     Theory of negotiation - Getting to Say Yes (Harvard Un iversity)
     Sasan Project by Lanco Group; Powering UP by Balaji Chandramouli in Bus iness Today (28 January, 2007).

                                      Annexures to the Strategy for Gross National Happiness

4.7.2.       Power from Bhutan is far from the load centers in Northern and Western region of
             India. Existing transmission corridor is through the ―chicken neck corridor‖, a
             narrow strip of land in West Bengal bordering Bangladesh. The cost of delivered
             power at these load centers increases substantially to be able to compete with other
             sources. However, in the future, there might be a possibility that GoI and regional
             countries could establish a regional grid for exchange of power 35 . This will eliminate
             the above bottleneck.

           Table 4.4:        Cost of Delivered Electricity from Bhutan to India compared with the bid
                             offer of some recent Thermal Ultra-mega Projects
             Source: (World Bank Report) 36
                    Export          Cost at           Pithead Thermal Generation in      Rate
                     Tariff          Orissa                          India
       CHPC        Nu.2.00         Nu.2.42          Recent IPP at Sasan with local coal Nu.1.19
       Power                                        (Sasan 4000 MW plant by Lanco)
       Tala        Nu.1.80         Nu.3.09          Mundhra IPP by Tata Power using Nu.2.26
       Power                                        imported coal

4.7.3.       The World Bank report claims that Bhutan‘s delivery cost increases due to
             transmission costs, cost of GoI equity and subsidy in some cases. However,
             compared to some of the IPP projects carried out in India, the Bhutanese projects
             are still competitive. For instance, the generation cost of BASPA II and Malana I are
             Rs. 2.79 per unit and Rs. 2.35 per unit respectively.
4.7.4.       Competition as outlined above from North-Eastern region of India (Arunachal
             Pradesh with potential of 60,000 MW) and Nepal (80,000 MW) also poses a direct
             challenge and threat to Bhutan‘s hydropower development.

4.8.         Reduction of Hydropower Costs in Bhutan
4.8.1.       To ensure cost competitiveness of Bhutanese hydro power in the Indian market, we
             need to focus on reduction of project costs. Bhutan‘s strategy of accelerated
             hydropower development could achieve this objective through integration of
             activities, sharing of infrastructure resources, enhancement of manpower skills,
             achieving economy of scale and through other measures such as:
                  Transmission corridors, roads and bridges;
                  Expedited clearances and permit procedures through a special purpose
                     vehicle (SPV);
                  Lowering price through tax exemption and policy intervention;
                  Long term vendor negotiations support by RGoB on the investors behalf
                     given the huge demand for the equipment and supplies.
                  Manufacturing scheduling to be influenced at the earliest before their orders
                     gets backlogged. Earlier the signal, better their planning and supply time.
4.8.2.       Since Bhutan shares very similar topography and hydropower potential with the
             other competitors like Arunachal and Nepal, the only major advantage that
             Bhutanese hydro sector will have over the others is our experiences in executing
             projects on time. This has substantial implications on the project since any project
             delayed will not only lead to cost escalation but also result in potential revenue
             losses. This is mainly due to minimized bureaucracy, high priority accorded by the
             Government towards hydropower development and absence of pressure groups
             (Civil Society Organizations and environmental groups).

     Bhutan is signatory to the SAARC and BIMSTEC foru ms for establishing a regional power grid.
     Preliminary draft of World Bank Report for “Hydropower Sector Study: Opportunities and Strategic Options”.

                               Annexures to the Strategy for Gross National Happiness

4.8.3.   Bhutan‘s transparent society with minimal corruption will lead to further reduction
         in costs as developers will not be subject to additional costs due to extortion and
         bribery. Bhutanese society is also less litigious which normally leads to project delays
         in the other countries.

5. The Accelerated Projects (10,000 MW Target)
5.1.  The addition of 10,000 MW of hydropower generation capacity by 2028 has been set
      for accelerated hydropower development. Even though the sector faces the most
      daunting challenge of mobilizing huge resources, this ambitious target nevertheless
      has the following rationale based on earlier plans.
5.2.  The PSMP has suggested the development of seven projects with total installed
      capacity of about 5,000 MW and investment of about US$ 4.00 billion from 2003-
      2022. The revised target of 10,000 MW is an increment of another 5,000 MW over
      and above the power system master plan‘s target. This increased target is based on
      increased time period till 2028 for project development, changing power market
      scenario (increased demand in India) and also given Bhutan‘s urgency to move ahead
      before competing projects in the region leaves us behind. Moreover, the addition of a
      single reservoir scheme (Sunkosh) with a capacity of 4,060 MW makes the target
      highly achievable. The only additions to the earlier project lists are: Sunkosh,
      Dagachhu, Nikachhu, Amochhu and Rotpashong.
5.3.  Also past experiences indicate that achievements in hydro sector even by India have
      been always lagging behind their targets due to time, cost over-runs and other
      challenges. For instance, GoI has been able to add a capacity of only 6,896 MW
      against their target of 15,750 MW for their 10 th Plan. This indicates that unless we
      aim at a substantial target, the chances of achieving anything close would be
      impossible. Therefore, 10,000 MW for Bhutan has to be pursued vigorously to
      achieve the desired target.
5.4.  With the target of 10,000 MW by 2028, the following projects are being selected
      from the master plan for implementation. While most projects are selected based on
      the PSMP ranking list, other projects like Sunkosh are selected for energy security
      and strategic reasons. The rest are selected for potential IPP investment given their
      development costs and other infrastructure facilities.

                                 Annexures to the Strategy for Gross National Happiness

       Table 5.1 List of the Accelerated Projects

                                     Firm Power        Installed   Energy    Target as
         Sl    Name of Project          (MW)            (MW)       (GWh)       per
               Punatsangchhu-I                                                   PSMP
           1   HEP                             182.5       1,095     5,377
           2   Mangdechhu HEP                  91.00         672     2,909        PSMP
           3   HEP                            165.33         992     4,667        PSMP
           4   Kholongchhu                     81.33         486     2,209        PSMP
               Multipurpose                                                  Accelerated
           5   Project                        647.40       4,060     8,961
               Dagachhu CDM
           6   Project                         19.00         114       500 Accelerated
               Nikachhu                                                    Accelerated
           7   (Tangsibji)                     35.00         208     1,042
           8 (Digala/Sangling)                111.67         670     3,207        PSMP
          9 (Kheng/Khomsar)                    95.00         570     2,713        PSMP
            Amochhu (814
         10 Yangtsegang)                       83.33         500     2,210        PSMP
         11 Khomachhu (1920)                   54.33         326     1,507 Accelerated
        12  Rotpashong (400)                   66.67         400     1,883 Accelerated
            Total                          1,632.56       10,093    37,185
5.5.     Project Profiles
5.5.1. Sunkosh Project Sunkosh is the biggest storage scheme designed for multipurpose benefits. In the past
         it has not been prioritized as it was considered too massive (4,060 MW) and co mplex
         with submergence of 62 Km2 area within Bhutan. However, this is the right time to
         develop Sunkosh as it will be crucial for enhancing energy security for Bhutan and
         perhaps the most attractive project for GoI given its multipurpose benefits. The DPR
         of the project has already been completed in 1995. The project will also catalyse
         development of other infrastructure (Lhamoizingkha township) and recreational
         facilities around the reservoir lake. There is also the possibility of optimizing the design capacity (from 4,060 to 2,060
         MW), with the same generating capacity, increasing the project viability. The issues of
         concern are: environmental and resettlement issues (120 households at Deorali Geog)
         and transboundary water rights with Bangladesh as the project irrigation scheme plans
         to divert the water towards Teesta barrage with a 142 km canal (13 km within
         Bhutan). These aspects shall be reviewed during updating of the DPR cost estimates
         and environmental impact assessments (EIA) as part of the pre-construction survey
         report (PCR). The DPR study of the Sunkosh Multi-purpose project was carried out by the Central
         Water Commission, Government of India, in 1995. The project envisages two stage
         development with main dam complex sited near Kerabari and the lift dam located near
         Lhamoizingkha. The powerhouse of the main dam is placed downstream on the left
         bank of Sunkosh, whereas the powerhouse of the lift dam is located at the toe of the
         lift dam on right bank. The project has the following salient features:

                               Annexures to the Strategy for Gross National Happiness Main Dam Complex : The scheme envisages a 265 m high, 770 m long rockfill dam
         with gross storage capacity of the reservoir of 6,325 million m3 , surface area at full
         reservoir level (FRL) of about 61.78 km2 and reservoir stretch of about 52 km; four
         numbers 12.5 m finished diameter head-race tunnel of length 560 m to 660 m will
         convey a total maximum discharge of 520 m3 /s; a surface power house operating
         under a net rated head of about 194 m, and open tailrace channel of about 50 m long.
         An installed capacity of 4,000 MW (8 x 500 MW) has been proposed, with an annual
         90% dependable energy generation of 6542 GWh. The cost of generation for firm
         energy and total 90% dependable energy is Nu. 1.62 per unit and Nu. 1.38 per unit
         respectively (1995 price level). Lift Dam Complex: The scheme envisages a composite dam of rockfill and concrete
         gravity with height of 37.5 m and 62.5 m respectively. The length of the concrete dam
         is 343 m and rockfill is 1329 m. The gross storage volume at FRL is 144 million m 3 and
         surface area of about 8.21 km2 with reservoir stretch of about 13 km. Three number
         penstock pipes of 4 m diameter and length of 99.50m length each conveying a total
         design discharge of 60 m3 /s; a surface power house operating under a net rated head
         of about 36.5 m, and open tailrace channel of about 43 m long. An installed capacity of
         60 MW (3 x 20 MW) has been proposed, with an annual 90% dependable year energy
         generation of 376.3 GWh. The cost of generation (90% dependable year) is Nu. 0.86
         per unit (1995 price level). The total estimated cost of the project excluding the irrigation system and
         transmission line cost is Nu. 65,346.51 million (1995 price level) of which Nu. 56,182
         million is allocated for power component. The cost of generation for project as a
         whole for 90% dependable year energy is Nu. 1.36 per unit (1995 price level). A
         budget of Nu. 30.00 million has been proposed during the 10 th five year plan for pre-
         construction survey and to update the EIA study report and the project cost. The
         updated project cost has been taken as Nu. 168.546 billion with escalation over the
         DPR cost and generation cost of Nu. 3.41 per unit.

5.5.2. Dagachhu Hydropower Project Dagachhu hydropower project is being prioritized because of the CDM benefits and
         the unique model of development. The feasibility study is completed (June 2006) and
         the Government has already accorded the approval to develop the project under the
         CDM mechanism and commercial financing with domestic equity and soft loans. The
         CDM benefits to this 114 MW project shall be almost Euro 2.5 million annually at the
         current certified emission reduction rates (CERs). While the continuity of the Kyoto
         protocol is in question post 2012, it is expected that the value of the CERs will
         increase in the near future. This project can in fact be a project dedicated for the
         environment to further promote Bhutan‘s environmental conservation and institute a
         mechanism of ―payment for ecosystem services‖ within the context of the accelerated
         hydropower development. Domestic equity participation can be mobilized from
         environmental funds like the Bhutan Trust Fund (BTF) and the domestic capital
         markets (liquidity from NPF and Bank of Bhutan) and debt shall be arranged through
         soft financing from development partners like the Government of Austria (responsible
         for the feasibility study of the project) and/or Asian Development Bank (ADB),
         through ordinary capital resource (OCR). The above implementation model will provide a new dimension to the hydropower
         project development. This new approach will provide the much needed capacity
         building for the local agencies and players to mobilize resources for hydropower
         development to carry through financial closures and make deals on cross border
         power trading and internal project financing. Such experiences will enable Bhutan to
         expedite its hydropower development and open up an investment opportunity to the

                               Annexures to the Strategy for Gross National Happiness

         Bhutanese capital market which is almost non-existent at present. Most important,
         such a bold move would reinforce Bhutan‘s commitment to environmental
         conservation while accelerating hydropower development with local efforts and
         resources through innovative approach and means. Dagachhu is a pure run-of-the-river scheme with no diurnal pondage facility along the
         course of Dagachhu, which is a tributary stream of Punatsangchhu. The project is
         located on left bank of Dagachhu with the power house located 10.5 km upstream of
         the Punatsangchhu confluence. As per the feasibility study report, the scheme
         envisages a 20.50 m (above river bed) high and 18.20m long diversion weir, 3 surface
         desilting basin, 7.79 km long head-race tunnel conveying a maximum design discharge
         of 50.0 m3 /s, an underground power house operating under a gross head of about 304
         m, and tail-race tunnel of about 679 m long. An installed capacity of 114 MW has been
         proposed, with an annual average energy generation of 500 GWh. The power shall be
         evacuated by 19 km 220 kV transmission line from the powerhouse switchyard to the
         220 kV substation at Tsirang, which will be connected to the Western grid for onward
         evacuation to India via Malbase substation at Pasakha. Only 492 GWh mean annual
         energy is expected to be delivered at Indo-Bhutan border for export. The total estimated cost of the project is US$ 182.40 million (2008 price level,
         excluding transmission line cost and interest during construction). The accumulated
         interest during construction would be US$ 37.27 million, thereby bringing the total
         capital cost of the project to US$ 219.67 million. As per the feasibility report, the
         generation cost of the project is about Nu. 2.58/kWh. However, as per the simulation
         done by the Department of Energy considering soft term loan financing and 40:60 debt
         equity financing mix, the long run levelised cost of delivery works out to Nu.
         2.68/kWh. The net return on equity from electricity sales on annual basis varies from
         7% in the first year to 10.21% in the 16th year. The IRR and NPV work out to 10.57%
         and Euro 3.4 million. Considering 10% as the opportunity cost of capital in the
         Bhutanese market and with the starting tariff of Nu. 2.25 per unit in 2011, the
         proposed financing option seems viable. The PTC (India), the buyer of the Dagachhu
         power has already indicated a starting tariff of Nu. 2.25 per unit. For signing of power
         purchase agreement (PPA) with PTC, the export tariff will be negotiated with
         indicated starting tariff of Nu. 2.25 per unit. This project is being promoted as a CDM project using the Indian baseline. Through
         this mechanism, the Dagachhu power will reduce about 330,000 tons of CO 2
         equivalent in India and qualify for certified emission reduction (CER) certificate worth
         Euro 2.50 million per annum at the current CER rates of Euro 8.00/CER till 2012. The
         Kommunalkredit Public Consulting (KPC) of Austria has already indicated a price of
         Euro 8.00/CER. The Austrian Government has committed Euro 300,000 for the preparation of tender
         documents and tendering aspects of Dagachhu project. The above tendering work is
         proposed to be contracted out to M/s Bernard Engineers to save time and expedite
         the project construction. The project development will be done through turnkey (EPC
         contract) model and is expected to start within 2007.

5.5.3. Punatsangchhu-I Hydroelectric Project This is a run-of-the-river scheme on Punatsangchhu located 8.50 km downstream of
         Wangdue Bridge. The dam site is located at Lawakha and the powerhouse is sited just
         downstream of Rurichhu. Consequent upon signing of Memorandum of Understanding (MoU) between the
         RGoB and the GoI for the preparation of DPR on 15 th September 2003, WAPCOS
         (India) Ltd. has completed the DPR and submitted the draft DPR in August 2006.

                               Annexures to the Strategy for Gross National Happiness As per the draft DPR, the project envisages installed capacity of 1,095 MW (6 x
         182.50 MW) with annual average energy generation of 5,377.45 GWh. The project
         will have 137m high concrete dam, 4 intakes, 4 underground desilting chambers, 7.50
         km long (10.3m diameter) headrace tunnel, 2 vertical pressure shaft and an
         underground powerhouse. The total estimated cost of the project as per the draft
         DPR is Nu. 49,894.60 million (2006 price level, without including interest during
         construction). During the 4th Project Monitoring Committee (PMC) meeting held on 4-5 September
         2006 in Thimphu, it was agreed that Nu. 150.0 million will be re-prioritized in the 9th
         plan on reimbursable basis for pre-construction activities such as roads and bridges in
         order to save time. The pre-construction activities will be undertaken by the DoE
         with WAPCOS as the Consultant. The agreement between DoE and WAPCOS is yet
         to be signed. The two governments have also exchanged draft agreement with regard to the actual
         implementation of the project. DoE‘s comments/views/suggestions on the draft
         agreement prepared by GoI for implementation of the project had been forwarded
         back to GoI. It is hoped that this agreement will be signed within the next few months
         so as to allow the construction of the project to begin by the end of 2007. The
         agreement is in partial modification of the Tala model with 60% loan and 40% grant.

5.5.4. Mangdechhu Hydroelectric Project This is a run-of-the-river scheme along the course of the Mangdechhu river,
         downstream of Trongsa town. As per the feasibility study conducted in 1999 and the
         updated PSMP, the scheme envisages a 66 m high diversion dam, 12.167 km long
         headrace tunnel and an underground powerhouse. An installed capacity of about 672
         MW has been proposed, with an annual average energy generation of 2,909 GWh.
         The total estimated cost of the project as per the updated PSMP is US$ 587.7 million
         (2003 price level). The MoU between the RGoB and the GoI for the preparation of DPR of the project
         was signed on 25th January 2005. The implementation agreement has been signed
         between the DoE and NHPC of India on 29 th September 2006 at a contract price of
         Nu. 75.90 million + 12.24% Service tax. The 20% mobilization advance for the DPR
         study has already being released to the Consultant in December 2006 from the RGoB
         pre-finance. A first release of Nu.27.960 million was received from the GoI for the
         DPR study on 4th January 2007. The DPR study will be completed by end of 2008. As per the discussions between the two Governments, the GoI indicated that it would
         not be possible to undertake further projects on the same financing arrangement as
         that of Tala HEP. Except for Punatsangchhu I, which will be developed in similar
         pattern of Tala model (changes in loan and grant), the implementation of Mangdechhu
         and Punatsangchhu II projects would be taken up through the Joint Venture (JV) route
         in which the GoI agencies such as NHPC and the RGoB agencies could form the JV
         companies to develop these projects with debt equity structure of 70:30. In order to
         save time for construction of the projects, it was also discussed that NHPC would
         take up development of infrastructure for Mangdechhu.

5.5.5. Punatsangchhu-II Hydroelectric Project This is a run-of-the-river project located downstream of Punatsangchhu-I. As per the
         pre-feasibility study conducted in 1993 and updated PSMP, the scheme envisages a 70
         m high diversion dam, 11.5 km long head-race tunnel and an underground power
         house. An installed capacity of 992 MW has been proposed, with an annual average
         energy generation of 4,667 GWh. The total estimated cost of the project as per the
         updated PSMP is US$ 875.10 million (2003 price level).

                               Annexures to the Strategy for Gross National Happiness The MoU for the preparation of DPR of the project was signed between the RGoB
         and the GoI on 25th January 2005. M/s WAPCOS has been selected for the DPR study
         of Punatsangchhu-II, so as to allow integrated development of the combined
         transmission network and other common infrastructures of both Punatsangchhu-I and
         II for economic reasons. The consultancy agreement for DPR study has been signed
         between the DoE and WAPCOS on 28th September 2006 at a contract sum of Nu.
         92.507 million + 12.24% Service tax. The 20% mobilization advance for the DPR study
         has already being released to the Consultant in November 2006 from the RGoB pre-
         finance. A first release of Nu. 26.596 million was received from the GoI for the DPR
         study on 4 th January 2007. The DPR study will be completed by end of 2008.

5.5.6. Nikachhu (Tangsibji) Hydroelectric Project This is a run-of-the-river scheme along the course of the Nikachhu river, tributary of
         Mangdechhu. The project is located between Chendebji (3km downstream of the
         Chunapchhu confluence) and the power house (located at Tangsibji near the
         Nikachhu/Mangdechhu). As per the updated PSMP, the scheme envisages a 48 m high diversion dam (above
         foundation), 6.60 km long head-race tunnel conveying a design discharge of 29.30 m3 /s,
         an underground power house operating under a gross head of about 837 m, and tail -
         race tunnel of about 1.50 km long. An installed capacity of 208 MW has been
         proposed, with an annual average energy generation of 1,042 GWh. The updating of the 1980s DPR study report of the Tangsibji project (60 MW) is
         planned to be carried out in the 10 th FYP. The above technical features of the project
         are based on desktop and reconnaissance level studies.

5.5.7. Kholongchhu Hydroelectric Project This is a run-of-the-river scheme along the course of the Kholongchhu river, tributary
         of Gongri. The project is located on Kholongchhu from the outlet (in Gongrichhu) just
         downstream of Duksum to the dam site approximately 6 km along the river upstream
         from the confluence. The dam site is situated 2 km north of where the road to
         Khamdang takes-off from Trashigang-Trashi Yangtse road. As per the updated PSMP, the scheme envisages a 51 m high diversion dam (above
         foundation), 5.90 km long head-race tunnel conveying a design discharge of 151 m3 /s,
         an underground power house operating under a gross head of about 378 m, and tail -
         race tunnel of about 400 m long. An installed capacity of 486 MW has been proposed,
         with an annual average energy generation of 2,209 GWh. The pre-feasibility study of the project was carried out by Norconsult of Norway in
         1992-93. The preparation of DPR of the project is planned to be carried out in the
         10th FYP.

5.5.8. Chamkharchhu-I (Digala) Hydroelectric Project This is a run-of-the-river scheme along the course of the Chamkharchhu river. The
         project is located on Chamkharchhu between Khomshar and Digala (from 25km to
         8km upstream of the Chamkharchhu/Mangdechhu confluence near Gongphu). The
         power house is located opposite to Digala village on the right bank of Chamkharchhu. As per the updated PSMP, the scheme envisages a 65 m high diversion dam, 11.80 km
         long head-race tunnel conveying a design discharge of 148.80 m3 /s, an underground
         power house operating under a gross head of about 527 m, and tail -race tunnel of
         about 550 m long. An installed capacity of 672 MW has been proposed, with an annual
         average energy generation of 3,208 GWh. The above features of the project are based on the desktop and reconnaissance level
         survey and study. The preparation of DPR of the project is planned to be carried out

                               Annexures to the Strategy for Gross National Happiness

       in 10th FYP. As per the updated PSMP, the project is scheduled for development from
       2014 to 2020.

5.5.9. Chamkharchhu-II (Kheng/Shingkhar) Hydroelectric Project This is a run-of-the-river scheme along the course of the Chamkharchhu river,
         upstream of Chamkharchhu-I project. The project is located on Chamkharchhu from
         8km upstream of Shingkhar to just below Shingkhar school near the suspension bridge
         across to Raidi village. As per the updated PSMP, the scheme envisages a 50 m high diversion dam, 9.60 km
         long head-race tunnel conveying a design discharge of 136.20 m3 /s, an underground
         power house operating under a gross head of about 487 m, and tail-race tunnel of
         about 500 m long. An installed capacity of 570 MW has been proposed, with an annual
         average energy generation of 2,713 GWh. The above features of the project are based on the desktop and reconnaissance level
         survey and study. The preparation of DPR of the project is planned to be carried out
         in 10th FYP. As per the updated PSMP, the project is scheduled for development from
         2018 to 2023.

5.5.10 Amochhu (El. 815 Yangtsegang) Hydroelectric Project       This is a run-of-the-river scheme along the course of the Amochhu river from
        1 km upstream of the Ketha Khola confluence to 1 km downstream of the Chushe
        Khola Confluence.       As per the updated PSMP, the scheme envisages a 55 m high diversion dam,
        6.60 km long twin head-race tunnel conveying a design discharge of 204 m3 /s, an
        underground power house operating under a gross head of about 288 m, and two tail -
        race tunnel of about 150 m long each. An installed capacity of 500 MW has been
        proposed, with an annual average energy generation of 2,210 GWh.       The above features of the project are based on the desktop study and no
        reconnaissance survey and field verification has been carried out. The preparation of
        pre-feasibility study report of the project is planned to be carried out in 10th FYP.

5.5.11 Khomachhu Hydroelectric Project       This is a run-of-the-river scheme along the course of the Khomachhu, in
        Lhuentse Dzongkhag, which is the tributary stream of Kurichhu. The intake is located
        at about El. 1920 masl.       As per the desktop study, the scheme envisages a 40 m high diversion dam, 8
        km long head-race tunnel conveying a design discharge of 57.3 m3 /s, an underground
        power house operating under a gross head of about 667 m, and tail -race tunnel of
        about 700 m long. An installed capacity of 326 MW has been proposed, with an annual
        average energy generation of 1,507 GWh.

5.5.12 Rotpashong (El. 720) Hydroelectric Project       This is a run-of-the-river scheme along the course of the Kurichhu river, which
        is located upstream of the existing 60 MW Kurichhu hydroelectric project at
        Gyalpoizhing.       As per the desktop study, the scheme envisages a 55 m high diversion dam,
        9.50 km long head-race tunnel conveying a design discharge of 401 m 3 /s, an
        underground power house operating under a gross head of about 117 m, and tail-race
        tunnel of about 450 m long. An installed capacity of 400 MW has been proposed, with
        an annual average energy generation of 1,883 GWh.

                                      Annexures to the Strategy for Gross National Happiness

5.6    National Transmission Grid
5.6.1. For accelerated hydropower development, high voltage transmission lines are crucial
       for export of power to India and for internal distribution of electricity supply. Project-
       wise requirement was studied in detail to optimise cost and make the construction of
       lines environment friendly. Since the load centres are in northern & western India,
       power from the hydropower projects in the Eastern Bhutan have to be transferred to
       Siliguri. Considering this aspect, Gelephu is the potential link with India for export of
       above 3,000 MW from Central & Eastern Bhutan. The possible RoW problem from
       Tingtibi to Gelephu and with location of International Airport at Gelephu shall be
       integrated with the overall zoning plans. A minimum RoW requirement of 85 meters
       for two 400 kV double circuits (1,000 MW) and one 220 kV single circuit (200 MW) is
       required. In addition, an area of about 10 acres will be required for construction of
       substation at Gelephu.
5.6.2. At least a high voltage direct current (HVDC) substation and link is envisaged for
       export of power from mega projects such as the Sunkosh in future, for which land and
       RoW shall be provided in Lhamoizingkha Dungkhag. The issue of the ROW for the
       HVDC link may need to be coordinated with the Indian authorities in West Bengal.
5.6.3. One option of ensuring corresponding development of transmission network across
       the border in India commensurate with the accelerated hydropower development
       plan of Bhutan is to pursue Article 2 of the Umbrella Agreement between the two
       governments and initiate discussions on export capacity from minimum of 5,000 MW
       by 2020 to minimum of 10,000 MW by 2028.
5.6.4. We could also reciprocate the use of Indian transmission network by offering our
       own transmission network for evacuation of power from some of the sites in
       Arunachal Pradesh to the load centres in North India. The details of such
       arrangements are described in Chapter 8 for specific projects like Tawang I (750 MW)
       and Tawang II (750 MW).
5.6.5. Transmission networks in Bhutan can be developed by the BPC, the transmission
       licensee, who already has the institutional capacity to undertake the projects either
       through self-financing or joint venture with Indian public sector companies like PGCIL
       and PTC. BPC is currently the utility who owns the transmission network in the
       country and is also identified as the system coordinator.
5.6.6. Fair compensation for the RoW required for HV transmission lines is also considered
       for accelerated hydropower development. Under the draft regulations on RoW
       transmission line RoW is considered as Easement right and no compensations are
       being paid.
5.6.7. Since obtaining the ROW is increasingly becoming difficult 37 , it is proposed that a
       regulation on RoWs for power infrastructure be adopted under the proposed
       National Spatial Act.

6      Implementation Schedule, Resource Requirement & Revenue Projections
6.1.   Implementation Schedule
6.1.1. The accelerated hydropower development would require the addition of 10,000 MW
       within the next 20 years (2028). This is an addition of 12 new projects or an average
       of about 1 project every 1.5 years. While this might seem a very ambitious
       implementation target, it is felt that the best way of accelerating the development
       would be to implement the projects simultaneously. Waiting for one project to finish
       to start the next one would take extremely long, given the long gestation period of
       hydropower projects. Moreover, if the IPP and the JV model takes off, then the

     Refer Bhutan Times issue of February 11, 2007 - “Power Transmission Versus Property Rights”

                                  Annexures to the Strategy for Gross National Happiness

       implementation of all these projects simultaneously would be possible given that the
       security issues and other enabling environment issues are met.

       Table 6.1: Implementation Schedule of Planned 10,093 MW Projects

         Planned Project             10th Plan       11th Plan       12th Plan          13th Plan
                                   (2008-2013)     (2013-2018)     (2018-2023)         (2023-28)
    Punatsangchhu-I (Bilateral)    Start 2007      Finish 2014
    Sunkosh (Bilateral)            Start 2009      Finish 2018
    Mangdechhu (JV)                Start 2009      Finish 2016
    Punatsangchhu-II (JV)          Start 2009      Finish 2016
    Dagachhu CDM (JV)              Start 2007,
                                   Finish 2011
    Kholongchhu (IPP)              Start 2010      Finish 2017
    Rotpashong/Kurichhu (IPP)      Start 2010      Finish 2017
    Chamkhar-I (Digala) IPP        Start 2011      Finish 2018
    Nikachhu (IPP)                 Start 2012      Finish 2016
    Khomachhu (IPP)                                Start 2014      Finish 2021
    Chamkhar-II (Shingkhar) IPP                    Start 2017                         Finish 2024
    Amochhu-(Ngatse/Ygang)                                         Start 2020         Finish 2027

       Table 6.2: Standby Projects in case IPPS are interested for early implementation.
        Standby Projects             10th Plan        11th Plan       12th Plan       13th Plan
                                  (2008-2013) (2013-2018) (2018-2023)                (2023-28)
    Gongri (485) /Kuri (450)      Start 2011                        Finish 2018
    Amochhu Reservoir IPP         Start 2013                        Finish 2020
    Amochhu (Bend) IPP                                              Start 2021     Finish 2028

6.2.   Schedule for Implementation of Pre-conditions
6.2.1. As discussed in detail in the chapter on the enabling environment, the following pre-
       condition activities need to be implemented in order to facilitate the implementation
       of projects as per the above schedule. Most important are the adoption of the policies,
       legislations, rules and regulations enabling private sector investments in the power
       sector and the strengthening of the institutional structure of the power sector.

       Table 6.3: Schedule of Policy, Guidelines and Institutional Strengthening
                       Activities                        2007                  2008
        Hydropower Policy                         June
        IPP Policy                                                      April
        IPP Bidding Guidelines                                          April
        IPP Tender                                                      July
        Establish Joint Group                     July
        Formation of DGPC                         December
        Autonomy of BEA                                                 July

6.3.   Investment Projections
6.3.1. With the accelerated implementation schedule and the proposed model of financing, it
       is anticipated that the investment for most of the projects shall commence from the
       10th FYP. The investment of Nu. 468 billion over the next twenty years would be
       required as follows.

                                    Annexures to the Strategy for Gross National Happiness

        Table 6.4: Investment Projections (Nu. Billion)
              10th Plan              11th Plan               12th Plan               13th Plan
                 179                    227                     40                      18

6.3.2. This ambitious investment plan with front loading during the 10 th and 11th FYP is
       proposed as a strategy to keep up with regional competition and market demand and
       to attract the available investment at the earliest before other projects in the region.
       Accordingly, 87% of the investments would be required during the next two plan
       periods. The capital amount required from various sources are as follows:

        Table 6.5: Financing Sources (Nu. Billion)
                        10th Plan           11th Plan             12th Plan           13th Plan
        Bilateral          103                 112                    *                    *
            JV             42                   42                    *                    *
          IPPs             34                   73                   40                   18
        TOTAL             179                 227                    40                  18

        * There is no planned investment during this period to allow for buffer time in case of time over-runs.
        In addition, other projects can always be taken up during this period depending upon resource
        mobilization capacity.

6.3.3. The investment requirement for the 10 th FYP is Nu. 103 billion from bilateral, Nu. 42
       billion under JV and Nu. 34 billion under IPP. This requirement against the backdrop of
       plan investment of equivalent Nu. 4,400 billion in India during the next five years
       makes the investment layout achievable provided we promote our projects faster. The
       annual investments are expected to peak in 2014 and 2015 where the requirement
       would be close to Nu. 70 billion a year. Therefore, its impact on the overall economy
       needs to be assessed.
6.3.4. While the investment amount is substantial, the actual equity contribution under the
       proposed models (JV) is only Nu. 12.5 billion from RGoB which will need to be made
       available upfront during project construction. The IPP models will ensure that the
       projects will have no financial burden on the national exchequer. These projects are
       kept under the non-plan activities, as in the past.

6.4.   Revenue Projections
6.4.1. Preliminary revenue projection indicates a net annual revenue contribution of Nu
       4.889 billion by the end of the 9 th FYP to Nu. 38.137 billion by 2028 after factoring
       interest and loan repayments.

        Table 6.6: Revenue Projections (Nu. Billion)
               10th Plan             11th Plan                   12th Plan               13th Plan
                   30                    42                         120                     147

6.4.2   Revenue projections includes 30 % CIT and 100 % dividends from bilateral projects,
        30 % CIT and 50 % dividends from JV projects and 30 % CIT and 15 % royalty (either
        in cash or energy) from IPPs. Revenue from the energy sales are both from domestic
        sales and export.
6.4.3   The distribution of energy between domestic and export in million units is projected
        as follows. The revenue projections would change depending on energy distribution.

                                 Annexures to the Strategy for Gross National Happiness

        Table 6.7: Energy Distribution Schedule (Million Units)
                          10th Plan          11th Plan          12th Plan      13th Plan
         Domestic           11,454             17,501             28,602        36,994
         Export             30,125             60,022            156,295        202,693
         Total             41,579             77,523            184,897        239,687

6.4.4   A provision of 20% retained earning on profit after tax is kept, out of which 10%
        would be generally retained by generating companies and 10% available for equity
        investments by DGPC/DHI. The projected retained earnings are as follows.

        Table 6.8: Retained Earning Schedule (Nu. Billion)
             10th Plan            11th Plan              12th Plan          13th Plan
                5.00                 6.00                  16.00              17.00

6.5 Financing Issues/Recommendations
6.5.1 Foreign Exchange Reserves – Since earnings from export of hydroelectricity would be
       in Rupee, any investments in foreign currency (other than rupee) would have to be
       assessed in light of its impact on foreign exchange reserves. The major source of our
       foreign exchange reserves is from project-tied external grants and borrowings.
       Therefore, investments that would require repatriation in foreign currency should be
       minimized. For projects requiring foreign exchange during the construction phase,
       PPA should include provision for partial power tariff payment in foreign currency.
6.5.2 National Debt Sustainability – To avoid excessive debt burdens on the government,
       private investments which will not form part of the government‘s contingent liability
       should be considered through promotion of IPP projects and also JV projects financing.
6.5.3 Revision of FDI Policy 2002 – The present FDI policy excludes foreign investments in
       ―hydroelectric sector‖, investment in ―rupee‖ and limits maximum investment at 70 %.
       To attract investments from IPPs/JVs, particularly from India, the FDI Policy 2002
       needs to be revised to include the above.

7.     Financing Options
7.1.   Introduction
7.1.1. The financing options proposed under the various models will be key towards raising
       investment of Nu. 468 billion required for the accelerated hydropower development.
       Therefore the following sections are devoted to analysis of the various options.
7.1.2. Hydropower projects are capital intensive and have long gestation period. Their
       development requires huge financial resources. For accelerated hydropower
       development alternative financing modalities are proposed. Taking stock of the
       existing practices and to attract IPP and JV undertakings for hydropower development,
       certain assumptions are made and these assumptions are laid down separately under
       appropriate financing arrangements.

7.2.   Financing of Hydroelectric Projects in the Past
7.2.1. Till date, 1,488 MW has been developed at a cost of Nu. 55 billion financed through a
       mixture of grants and loans from the governments of India and Austria. Chhukha,
       Kurichhu and Tala Hydro electric projects were financed with 60 % grant and 40 %
       loan from the Government of India. The Government of Austria financed Basochhu
       Hydroelectric Project I through grant assistance and concessionary loans and Phase II
       through soft loan under Official Export Promotion Scheme.

                                    Annexures to the Strategy for Gross National Happiness

        Table 7.1: Project Profiles and Terms and Conditions of Existing Hydroelectricity Loans
    Project         Capacit       Const.       Project      Interest       Rept        Repayment
     Name/          y (MW)        Period       Cost**      Rate (%)       Period        Start/End
   (Financed                                     (in                      (Years)          Date
       By)                                    millions)
 Chhukha (GoI)           336 1975-1988         Nu. 2,459               5        15        1/1/1993 to
                                  (14 years)                                                 1/1/2008
 Kurichhu (GoI)            60 1994-2002        Nu. 5,600          10.75         12        1/7/2004 to
                                   (9 years)                                                 1/7/2015
 Tala (GoI)             1020 1997-2007 Nu. 43,270                      9        12         Tentatively
                                  (10 years)                                             15/6/2008 to
 Basochhu       I          24 1996-2000             Euro               0        20     31/12/2006 to
 (Austria)                         (4 years)      30.231                                   31/12/2025
 Basochhu      II          40 2002-2004             Euro         2.786*         15       30/6/2010 to
 (Austria)                         (2 years)      31.249                                    30/6/2024
             * Commitment fee = 0.15; management fee = 0.25
             **    Project costs are without IDC

7.2.2. The loans availed by RGoB for the existing hydroelectricity projects amount to Nu. 23
       billion (US$ 516 million). The total national outstanding debt as of 31 st December
       2006 is Nu. 31 billion, out of which Nu. 21 billion is for hydroelectric projects (69% of
       the total loan outstanding). These loans are from GoI and Austria. The status of loans
       from GoI as of 31 December 2006 is as given in Table 7.2.

       Table 7.2: Status of GoI Loans (Rs. million)
                             Loan               Principal                           Outstanding
         Project                                                  Interest Paid
                          Disbursed          Repayment                                 Loan
        Chhukha                      984                  852                824             131
        Kurichhu                   2,240                 467                 504           1,773
        Tala*                     16,464                                                  16,464
        Total                    19,688                1,319               1,328          18,368
       * Without IDC

7.2.3. For Basochhu I, Austria provided EURO 13.081 m as grant and EURO 17.150 m as
       interest free loan. For Basochhu II, soft loan of EURO 31.249 m from Austrian Official
       Export Promotion Scheme was obtained. The status of Austrian loan as of 31 st
       December 2006 is as presented in Table 7.3:

       Table 7.3: Status of Austrian Loans (EURO million)
                          Loan             Principal            Interest       Outstanding
                      Committed          Repayment                Paid            Loan
        Basochhu         48.395              0.857                3.212          47.539
           Total           48.395                  0.857         3.212             47.539

7.3.   Electricity Contribution to Domestic Revenues
7.3.1. Electricity sector is the major contributor to the domestic revenue. In the financial
       year 2005-06, electricity sector contributed 32 % (Nu. 2.2 billion) to the total revenue,
       second only to the trade sector (Nu. 2.3 billion). Among the top ten revenue agencies,
       Chhukha was ranked number one and Basochhu seventh. With the commissioning of
       Tala, domestic revenues are expected to grow by about 43%. In financial year 2006-07,

                                Annexures to the Strategy for Gross National Happiness

       electricity sector is expected to contribute approximately Nu. 4.3 billion, about 23 %
       of the national budget and 43 % of the total revenue.

7.4.   Cost Considerations for Accelerated Projects
7.4.1. To harness additional 10,000 MW by 2028, twelve hydroelectric projects have been
       identified. The construction of these projects over the next 20 years would increase
       the installed capacity by 10,000 MW and is projected to cost approximately Nu. 468
7.4.2. The costs for Dagachhu and Punatsangchhu I are based on the Detailed Feasibility and
       Project Reports (DPR). For Sunkosh, the cost is based on the 1995 DPR of Power
       component and inflated by 300% to account for cost escalations. For other projects
       for which DPR is yet to be prepared a thumb rule cost estimate figure of Nu. 50
       million per MW is assumed.
7.4.3. The transmission cost is not included in projects where the costing is based on Nu. 50
       million per MW. Hence a wheeling charge of Nu. 0.125 per unit is taken to account
       for transmission cost except for Sunkosh where the project is going to be located
       near the Bhutan-India border.
7.4.4. The costs are based on 2006 prices with annual cost escalation of 10-15 % (in the case
       of Tala, cost escalations were about 300% over a ten year period). The actual cost of
       completion of hydroelectric projects, however, will be largely site specific.

       Table 7.4: Cost of Accelerated Projects
        Sl.                                                 Installed       Mean Annual
                                              Cost (Nu.
        No          Project Name                            Capacity        Generation
         .                                                   (MW)              (MU)
           1 Dagachhu                               8,208            114              500
           2 Punatsangchhu I                      49,894           1,095            5,377
           3 Sunkosh HEP                         168,546           4,060            8,961
           4 Mangdechhu                           33,600             672            2,909
           5 Punatsangchhu II                     49,600             992            4,667
           6 Kholongchhu                          24,250             486            2,209
           7 Rotpashong                           20,050             400            1,883
           8 Chamkharchhu I - Digala              33,500             670            3,207
           9 Nikachhu (Tangsibji)                 10,400             208            1,042
         10 Khomachhu                             16,300             326            1,507
         11   Chamkharchhu II- Kheng              28,500             570            2,713
         12 Shingkhar I (Yangtsegang)
               Amochhu                            25,000             500            2,210
                   GRAND TOTAL                  467,848          10,093           37,185

7.5.   Proposed Financing Options
7.5.1. It is not possible for all the proposed projects to be financed under existing financing
       modalities particularly if development of hydroelectric is to be accelerated. GoI has
       reversed the ratio of grant and loan element to 40:60 for Punatsangchhu I and Austria
       has already indicated that financing along Basochhu modalities would not be possible in
       the future.
7.5.2. Further, preliminary estimates for harnessing additional 10,000 MW by 2028 at a cost
       of about Nu. 468 billion (covering four FYP periods) as per the planned investment
       schedule indicate huge requirement of Nu. 179 billion, Nu. 227 billion, Nu. 40 billion
       and Nu. 18 billion during 10th , 11th , 12 th and 13th FYPs respectively. It is also to be
       noted that the average fund requirement for the next four FYPs would be more than
       Nu. 117 billion per plan period which is 60 % more than the whole national 9 th FYP

                                  Annexures to the Strategy for Gross National Happiness

       budget allocation. Therefore, we need to explore other financing options through
       bilateral, JV and IPP and other means (e.g. Carbon financing and CDM).

7.6.     Justification for the different Financing Options
7.6.1. While RGoB‘s financing preference for all the proposed projects would still be
         bilateral funding from GoI, alternate financing options are being proposed mainly in
         view of the following: Past GoI trends of financing mega projects – Till date GoI has been financing one mega
         project per plan. It is likely that this trend would continue in spite of RGoB‘s desire to
         accelerate hydropower development. Therefore, other financing options are being
         proposed, to avoid delays in achievement of RGoB‘s vision for harnessing additional
         10,000 MW by 2028. RGoB‘s National Debt Situation - The national debt outstanding as of December 2006
         is Nu. 31 billion (US$ 679 million). Based on the preliminary 10th FYP debt assessment
         of DADM, by the end of the 10th FYP (FY 2012-2013) debt stock is projected to be
         around Nu. 104 billion or about 105% of GDP. Of the total debt, 66% would be Indian
         Rupee contracted for construction of hydro power projects and 34% in convertible
         currency contracted mainly for financing other development needs. Debt servicing
         during 10th FYP would average around Nu. 4 billion per annum. The debt service ratio
         is projected to average around 15%, with a high of 17.1% in FY 2008-09 and a low of
         12.6% in FY 2012-13. Rupee debt servicing would constitute around 13% and 2%
         would be on account of convertible currency. Given the high level of public debt stock
         accumulated till date and also as Bhutan has been classified as ―highly indebted
         country‖, government‘s capacity to borrow for hydroelectric projects would be
         limited. If the government continues to borrow for hydroelectric projects, it would
         deteriorate the government‘s debt ratios and thereby limit access to borrowing for
         other sectors. In view of this, private investments and other options should be

              Table 7.5: Debt Situation (Nu. million)
                                                        2006-07      2012-2013
               Total Debt Stock                            37,783        104,372
               GoI (hydropower)                            18,750         68,222
               Austria (hydropower)                         2,700          5,324
               Debt to GDP (%)                               70.8          105.3
               Debt Services (% of export G& S)                2.3          12.6
               Nominal GDP                                 46,728         99,109
               Exports of Goods & Services                 19,741         40,120

7.7. Financing Options
7.7.1. RGoB Financing Dagachhu is scheduled to be taken up by the RGoB in 2007 on debt equity ratio of
         75:25. Possibilities of BTEFC financing are being explored and should this be
         considered, it is proposed that the project be dedicated for environmental
         conservation and management.

     Table 7.6: RGoB Financed Projects
        Sl.     Project     Cost (Nu.     Capacit
                                                      ion        Financing            Status
        No      Name        millions)     y (MW)
           1 Dagachhu            8,208          114      500 75:25 debt equity     2007-2011
             Total               8,208          114

                                 Annexures to the Strategy for Gross National Happiness

7.7.2. Bilateral Financing Punatsangchhu I and Sunkosh are proposed as bilateral projects to be funded by GoI.
         Discussion on implementation modality for Punatsangchhu I on 40% grant and 60%
         loan is in advanced stage and draft agreement for construction of the project is being
         finalized with GoI. For Sunkosh, it is proposed that GoI be requested to finance the
         project on 80% grant and 20% loan since it is a multipurpose project with irrigation
         and other downstream benefits to India. However, the financial analysis is carried out
         on 60% grant and 40% loan basis to be on the conservative side.

       Table 7.7: Bilateral Financed Projects
        Project                   Capacity Generation
                       (Nu.                                Financing                   Status
         Name                      (MW)       (MU)
        Puna I          49,894        1,095      5,377 60% Loan 40% Grant            2007-2014
        Sunkosh        168,546        4,060      8,961 80% Grant 20% Loan            2009-2018
        Total                         5,155     14,338
                      218,440 Financing from other bilateral donors may be difficult for construction of hydropower
         projects, however grant assistance from other donors would be sought mainly for
         technical assistance and human resource development.

7.7.3. Joint Venture Financing Punatsangchhu II and Mangdechhu are proposed under joint venture financing
         mechanism with Indian Public Sector Undertaking (PSU) on 70:30 debt equity ratio.
         Indian PSUs such as NPHC could form a JV undertaking with RGoB‘s Druk Green
         Power Corporation (DGPC) on 50:50 equity ratio (this would however depend on
         negotiation with Indian PSU and RGoB‘s capacity to raise its equity contribution). The
         JV with Indian PSU would facilitate raising capital financing from the Indian financial
         market. Therefore, Indian PSU should be encouraged to raise the debt portion along
         with fifty percent of the equity contribution. DGPC‘s financial contribution will be
         limited to financing the other fifty percent of equity contribution. It is being noted that
         50 % of equity contribution for Punatsangchhu II and Mangdechhu would be around
         Nu. 12 billion as shown in Table 7.8.

       Table 7.8: RGoB‘s Equity Contribution Implications for Joint Venture Projects (Nu. Billion)
          Project Name            Cost         Debt            Equity          RGoB‟s 50% on
                                               (70%)            (30%)               Equity
          Punatsangchhu II         50             35              15                    7
            Mangdechhu             34             24              10                    5
                Total              84             59              25                   12 For the proposed two joint venture projects, RGoB equity contribution of 50% would
         amount to approximately Nu. 12 billion over eight year construction period if upfront
         equity is not available. As per the proposed investment schedule, the RGoB‘s equity
         contribution could be as given in Table 7.9:

       Table 7.9: RGoB‘s Equity Contribution Schedule for Joint Venture Projects (Nu. million)
        Project Name 2009 2010 2011 2012 2013 2014 2015 2016
        Punatsangchhu II      372     595     744      893 1,116 1,860 1,488             372
          Mangdechhu          252     403     505      605      756     260 1,008        252
             Total            624    998 1,248 1,498 1,872 3,120 2,496 624

                               Annexures to the Strategy for Gross National Happiness During the period of eight years (2009-2016), the projected retained earnings of the
         government owned hydroelectric corporations would amount to only about Nu. 8
         billion, out of which only 50% will be available for equity investment. Therefore,
         additional funds may be mobilized through domestic financial institutions and or
         International Financial Institutions such as Asian Development Bank (ADB),
         International Finance Corporation (IFC), Export Promotion Scheme (EPS), Japan Bank
         for International Cooperation (JBIC), etc. It should however, be noted that raising
         additional funds would pose debt burden to the government. ADB provides sovereign loans to member countries under Ordinary Capital
         Resources (OCR), with 20 years repayment period including 5 year grace period. The
         loans are provided in three major currencies, US$, Japanese Yen and EURO, carrying
         a floating lending rate consisting of 6 months LIBOR ($ & Yen) and 6 months
         EUROBAR incase of Euro, spread, front-end fess and commitment fees. ADB could
         also provide Rupee denominated loans. So far Bhutan has not accessed OCR loans but
         possibilities are being explored for financing of Dagachhu HEP. IFC provides loans to member countries for private sector projects, which are
         technically sound and meets IFC and host government‘s environmental and social
         standards. IFC provides 25 % of the total project cost for new projects. While IFC‘s
         lending is mainly for the private sector, IFC could consider lending to government
         owned corporations (DGPC) operating on commercial basis. JBIC could also be a potential IFI to finance hydroelectric projects. In the 10 th Plan,
         JBIC has been identified for Rural Electrification Program and this would be the first
         project to be taken up by JBIC in Bhutan. However, indications are that JBIC normally
         does not take up more than one project at a time. JBIC borrowing for development of
         hydroelectric projects would be available only in the 11 th Plan. Financing under EPS could be explored particularly for financing of electro-mechanical
         equipment, as in the case of Dagachhu HEP. The preparation of DPR for the Punatsangchhu II and Mangdechhu projects was
         initiated in November/December 2006 and is expected to be completed by end 2008
         with financing from GoI. Since the DPR is being financed by GoI, it is expected that JV
         with Indian PSU would be facilitated by GoI should bilateral financing not be possible.

7.7.4. Private Sector Financing (IPP) The remaining seven projects (Table 7.10) are proposed to be financed by IPPs. The
         information on most of the projects is based on desktop studies and reconnaissance
         surveys as DPR is yet to be prepared. To attract IPPs for these projects, it is
         recommended that pre-feasibility studies be carried out by the RGoB within the 10 th
         Plan and depending on IPPs interest DPR could be carried out by them. While
         tentative implementation status is indicated in Table 7.10, the actual implementation
         would depend on the responses received from the IPPs. The details of IPP modalities
         are discussed in Chapter 8.

       Table 7.10: IPP Projects
                                            Cost (Nu.     Capacit     Generati
        No           Project Name                                                   Status
                                            millions)     y (MW)      on (MU)
           1 Kholongchhu                         24,250        485         2,209   2010-2017
           2 Rotpashong                          20,050        401         1,883   2010-2017
           3 Chamkharchhu I – Digala             33,500        670         3,207   2011-2018
           4 Nikachhu (Tangsibji)                10,400        208         1,042   2012-2016
           5 Khomachhu                           16,300        326         1,507   2014-2021

                                Annexures to the Strategy for Gross National Happiness

            6 Chamkharchhu II- Kheng              28,500         570        2,713     2017-2024
            7 Shingkhar I (Yangtsegang)
              Amochhu                             25,000         500        2,210     2020-2027
              Total                             158,000        3,160       14,771

7.8. Assumptions for Financial Analysis
7.8.1. For RGoB Financed Projects (Dagachhu)

                               Box 1: RGoB Financed Project (Dagachhu)
   a.   Effective life of hydroelectric project is taken as 30 years.
   b.   Interest rate of 9% per annum and repayment period of 15 years.
   c.   Five year construction period from 2007-2011.
   d.   All the energy produced is exported.
   e.   Export energy tariff is worked out at 10% discounted rate, 30 years levelised cost of
        generation with levelised annual cost divided by the sale at the border.
   f.   Corporate Income Tax (CIT) of 30% from the date of commissioning.
   g.   Retained earnings of 20% on profit after tax.
   h.   Return on equity – 14%
   i.   Operation & Maintenance at 1.5% in the first year of commissioning on th e total cost and
        escalated at 4% per annum thereafter,
   j.   10% interest on working capital,
   k.   The transmission wheeling charge is taken as Nu. 0.125 per unit for export energy.

7.8.2. For Bilateral Projects

                     Box 2. Bilateral Projects (Punatsangchhu I and Sunkosh)
   a. Effective life of hydroelectric projects is taken as 30 years.
   b. Interest rate of 9.5% per annum and repayment period of 12 years for Punatsangchhu I and 10
      years for Sunkosh.
   c. Punatsangchhu I is 60% loan and 40% grant; and for Sunkosh while the proposed financing is
      80% grant and 20% loan, the financial analysis are based on 60% grant and 40% loan to be on a
      conservative side.
   d. Construction period of Punatsangchhu I is taken to be eight years (2007 -2014) and Sunkosh
      ten years (2009 to 2018).
   e. From the total energy generation in a year, 15% of the energy produced will be provided as
      Royalty to the Government at Nu. 0.30 per unit. However, for the additional energy,
      Punatsangchhu I will provide about 5% of annual generation till 2018 at Nu. 1.20. For Sunkosh
      no additional energy requirement is projected.
   f. Export energy tariff is assumed at 10% discounted rate, 30 years levelised annual cost divided
      by the levelised saleable energy rate at the border.
   g. Corporate Income Tax (CIT) of 30% is assumed from the date of commissioning.
   h. Retained earnings of 20% on profit after tax.
   i. Return on equity – 14% for Punatsangchhu I and 10% for Sunkosh.
   j. Operation & Maintenance at 1.5% in the first year of commissioning on th e total cost and
      escalated at 4% per annum thereafter,
   k. 10% interest on working capital,
   l. The transmission wheeling charge is taken as Nu. 0.125 per unit for export energy. No
      wheeling charge considered for Sunkosh as it is located near the border.

7.8.3. For Joint Venture

                       Box 3. Joint Venture Projects (Mangdechhu and Punatsangchhu II)
   a.   Effective life of hydroelectric projects is taken as 30 years.
   b.   Interest rate of 9.5% per annum and repayment period of 10.
   c.   Debt equity ratio of 70:30.
   d.   Construction period of eight years each (2009-2016).

                                 Annexures to the Strategy for Gross National Happiness

   e. From the total energy generation in a year, 15% of the energy produced will be provided as
      Royalty to the Government at Nu. 0.30 per unit. However, additional energy of 5% of annual
      generation to be provided at Nu. 1.20 per unit till 2018.
   f. Export energy tariff is assumed at 10% discounted rate, 30 years levelised cost of generation.
   g. Corporate Income Tax (CIT) of 30 % from the date of commissioning.
   h. Retained earnings of 10% on profit after tax.
   i. Return on equity – 14%
   j. Operation & Maintenance at 1.5% on the total cost in the first year of c ommissioning and
      escalated at 4% per annum thereafter,
   k. 10% interest on working capital,
   l. The transmission wheeling charge is taken as Nu. 0.125 per unit for export energy.

7.8.4. For IPPs

                  Box 4. Independent Power Producers Projects (7 projects)
   a. All the projects are to be constructed, operated and handed over to the Government on the
      principle of build operate and transfer (BOT).
   b. The developer will run the project for 30 years.
   c. Debt equity ratio is 70:30.
   d. Interest rate of 9.5% per annum and repayment period of 10 years.
   e. All the projects to be constructed in eight years.
   f. From the total energy generation in a year, 15% of the energy produced will be provided as
      Royalty to the Government either in the form of energy or cash at export price.
   g. No distinction between domestic and export tariff – same rate.
   h. Export energy tariff is set at 10% discounted rate, 30 years levelised annual cost of generation
      divided by saleable energy at the border.
   i. Corporate Income Tax (CIT) of 30% from the date of commissioning.
   j. No retained earnings.
   k. Return on equity – 14%.
   l. Operation & Maintenance at 1.5% in the first year of commissioning and escalated at 4 % per
      annum thereafter,
   m. 10 % interest on working capital.
   n. The transmission wheeling charge is taken as Nu. 0.125 per unit for export energy.

7.9. Revenue Projections based on the above assumptions.
7.9.1. For Bilateral Revenue: On the first year of commissioning (2015), Punatsangchhu I would
         contribute to the Government revenue an amount of Nu. 2.521 billion. The revenue
         increases to Nu. 5.164 billion by the year 2027 after the loan is liquidated. Sunkosh is
         expected to provide about Nu. 8.134 billion by the year 2019 and the revenue would
         remain more or less at around Nu. 7 billion till the loan is fully liquidated in 2028,
         thereafter the revenue is expected to increase to Nu. 11.8 billion. NPV & IRR: With the DPR cost of Nu. 49,894 m for Punatsangchhu I and the
         construction period of eight years, at 9.5 % interest rate repayable in 12 years and the
         expected life of the project taken to be 30 years, the NPV is Nu. 7,859 and IRR is
         11.46%. This indicates that the project is financially viable. With respect to Sunkosh,
         construction period of 10 years, 9.5% interest rate repayable in 10 years‘ time, taking
         30 years as the expected life, the NPV is Nu. 2,278 and IRR is 9.68%. Power Tariff: The levelised annual cost divided by saleable energy at the border for 30
         years discounted at 8%, 10% and 12% yields an electricity price of Nu.1.86, Nu. 1.90
         and Nu. 1.94 respectively for Punatsangchhu I. However, the export price is taken to
         be Nu. 1.90 at 10 % discount rate. In the case of Sunkosh, the power price is taken as
         Nu. 3.41 which is obtained by taking the total annual cost divided by the sale price at

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       the border but at the same discount rate of 10 %. Any price below Nu.3.41 is found
       to be financially not viable.

7.9.2. For Joint Venture Revenue: In the case of Mangdechhu, the revenue to the Government in the first year
         of commissioning (2017) would be around Nu. 317 million only. But the revenue
         would be around Nu. 3.289 billion by the year 2027 following the completion of loan
         repayment. For Punatsangchhu II, the project will contribute Nu. 204 million to the
         government revenue in the first year of commissioning. However, the revenue picks
         up to Nu. 4.872 billion (2027) after the completion of loan repayment. NPV & IRR: With Mangdechhu cost of Nu.33.6 billion and the construction period of
         eight years, at 9.5% interest rate repayable in 10 years and the expected life of the
         project taken to be 30 years, the NPV is Nu. 8,827 and IRR is 12.61%. With respect to
         Punatsangchhu II, at a unit cost of Nu. 50 million per MW, construction period of 10
         years, 9.5% interest rate repayable in 10 years time, taking 30 years as the expected
         life, the NPV is Nu. 13,281 and IRR is 12.66%. Power Tariff: The levelised annual cost of generation for 30 years divided by the
         saleable electricity at the border discounted at 8%, 10% and 12% yields Nu.2.45, Nu.
         2.54 and Nu. 3.06 respectively for Mangdechhu. The export price is taken as Nu. 2.54
         at 10 % discount rate. In the case of Punatsangchhu II, the levelised annual cost of
         generation for 30 years divided by the saleable electricity at the border discounted at
         8%, 10% and 12% yields Nu.2.26, Nu.2.33 and Nu. 2.83 respectively. The power
         export price is taken as Nu. 2.33.

7.9.3. For IPPs Revenue: During the 11th Plan, the IPPs would be contributing about Nu. 1.712 billion
         to the Government revenue. Its contribution to the Government revenue increases
         substantially in the 12th and 13th Five Year Plans to Nu. 13.875 billion and Nu. 22.733
         billion respectively. In the year 2028, the IPPs will be contributing about Nu. 6.439
         billion to the Government revenue.

       Table 7.11: Summary of Findings for IPP Projects
                                                          NPV       IRR      Levelised Sale
         Sl.               Project Name
                                                          (Nu.)     (%)          Price
               1   Kholongchhu                                       13.41                2.42
               2   Rotpashong                               8,080
                                                            6,592    13.36                2.33
               3   Chamkharchhu I – Digala                           13.39                2.29
               4   Nikachhu (Tangsibji)                    11,095
                                                            5,425    15.32                2.19
               5   Khomachhu                                         13.39                2.38
               6   Chamkharchhu II- Kheng Shingkhar         5,398    13.39                2.31
               7   Amochhu I (Yangtsegang)                  9,439    13.39                2.48
7.10. Key Financial Parameters
7.10.1. The key financial parameters of all the selected projects are presented in Table 7.12

                                       Annexures to the Strategy for Gross National Happiness

Table 7.12: Key Financial Parameters of all the Selected Projects
              Bilateral        RG          Joint
 Key                                                                   Independent Power Producer
              Projects         oB        Venture
                                       Puna    Mang      Kholo               Cham              Khom     Cham
 eter       Puna I   S/kosh    Daga                                 Rotpa             Nika                       Amo I
                                        II       de       ng                   I                 a       II

Cap MW       1,095     4,060    114      992      672       486       400      670      208      326      570      500
Av Gen
GWh          5,377     8,961    500     4,667    2,909     2,209     1,883    3,207    1,042    1507     2,713    2210
Pit Cost
Millions    49,894   168,546   8,208   49,600   33,600    24,300    20,000   33,500   10,400   16,300   28,500   25,000

Loan        29,936    67,418   6,156   34,720   23,520    17,010    14,000   23,450    7,280   11,410   19,950   17,500
            19,958   101,128   2,052   14,880   10,080     7,290     6,000   10,050    3,120    4,890    8,550    7,500
Int.   on
loan (%)      9.50      9.50    9.00     9.50     9.50      9.50      9.50     9.50     9.50     9.50     9.50     9.50
prd (Yrs)      12         10     15       10       10          10      10       10       10       10       10       10
IRR (%)      11.46      9.68   13.44    12.66    12.61     13.41     13.36    13.39    15.32    13.39    13.39    13.39

NPV         7,859      2,278 3,280     13,281    8,827     8,080     6,592   11,095    5,425    5,398    9,439    8,280
ion Year     2015       2019 2012       2017     2017      2018      2018     2019     2017     2022     2012     2028
Levelized Tariff (30 yrs) (Nu/unit)
rate          1.86     3.37    2.83      2.26     2.45      2.34      2.26     2.22     2.12     2.30     2.23     2.40
10     %
rate          1.90     3.41    2.89      2.33     2.54      2.42      2.33     2.29     2.19     2.38     2.31     2.48
12     %
rate          1.94     3.45    2.94      2.83     3.06      2.49      2.40     2.36     2.12     2.45     2.38     2.56
Tariff        1.90     3.41    2.89      2.33     2.54      2.42      2.33     2.29     2.19     2.38     2.31     2.48
(1) 10% discount rate of Sunkosh does not include BPC transmission cost of Nu. 0.125 per unit but includes 15%
royalty energy.
(2) Electricity export rates are all based on the 10% discount rates.

8.    Accelerated Hydropower Development through Independent Power
8.1   Situation Analysis
8.1.1 To meet the expected growth in demand for electricity by 2030, developing countries
      across the globe are anticipated to need investment of US$ 5 trillion, with more than
      US$ 2 trillion required only for new generation capacity alone38 . With governments
      unable to provide the required level of investment, capacity additions and expansions
      have to be through private investment. Worldwide, IPP deals closed in 1996 alone was
      US$ 17 billion.
8.1.2 In India, development of hydropower by the private sector was opened up in 1991 and
      9 hydropower projects with an installed capacity of 1,700 MW will be in operation by
      March 2007. Three others, total capacity of 1,522 MW, are under construction 39 . The
      details of the hydro power projects under the private sector in India are indicated in
      Table 8.1 below.

38 Erik J. Woodhouse, A Political Economy of International Infrastructure Contracting: Lessons from the IPP
Experience, Center for Env iron mental Science and Policy, Stanford Un iversity , CA, USA, September 30, 2005.
   Jaypee Group Presentation to the Bhutanese Hydropower Development Co mmittee at Delhi on 15/ 1/2007.

                                    Annexures to the Strategy for Gross National Happiness

Table 8.1: Hydropower Projects under Private Sector in India
Sl.     Project       Agency            State           Capaci     Commission        4/02 to         4/07-3/
No                                                        ty        ed till 3/02      3/ 07         12 (MW)
 .                                                      (MW)          (MW)           (MW)
  1.     Khopoli*      Tata PCL         Maharashtra          72                72              -              -
  2.     Bhivpuri*     Tata PCL         Maharashtra          72                72              -              -
  3.        Bhira*     Tata PCL         Maharashtra         150               150                             -
  4.    Bhira PSS*     Tata PCL         Maharashtra         150               150           -                 -
  5.       Malana    Malana PCL     Himachal Pradesh         86                86           -                 -
  6.    Dhamvari         DPCPL      Himachal Pradesh         70                  -         70                 -
  7.    Maheswar     SMHPC/Sku       Madhya Pradesh        400                   -        400                 -
  8.       Vishnu         Jaypee         Uttaranchal       400                   -        400                 -
           Prayag         Group
  9.      Baspa-II        Jaypee    Himachal Pradesh       300                   -        300                 -
10.        Allian      RS & WM      Himachal Pradesh       192                   -             -          192
        Duhangan             Ltd.
11.     Shrinagar       Duncans          Uttaranchal       330                   -             -          330
12.     Karcham-          Jaypee      Himachal Pradesh    1,000                  -             -        1,000
         Wangto           Group
        TOTAL                                             3,222              530       1,170            1,522
          *Projects developed in pre-independence period.

8.1.3   At home, the target for addition of 10,000 MW by 2028, requiring an investment of
        Nu. 468 billion may not be possible, while preferable, through bilateral cooperation
        with India, similar to CHPC, KHPC and THPA. With only four projects of 6,819 MW
        proposed to be executed through bilateral cooperation with India (Puna-I and
        Sunkosh) and joint ventures (Puna-II and Mangdechhu), 7 Projects with a total installed
        capacity of 3,160 MW is proposed to be executed through private investors as IPPs.
        This requires a huge private investment of about Nu. 158 billion as shown in table

        Table 8.2: Projects to be developed through Private Investment
                                              Firm                                      Estimated
    Sl.                                      power       Installed Energy               Cost (Nu.
   No.         Name of Project               (MW)          (MW)       (GWh)              Million)
   1      Kholongchhu                             81.33         486     2,209                  24,300
   2      Nikachhu (Tangsibji)                    35.00         208     1,042                  10,400
          Chamkharchhu-I                                                                       33,500
   3      (Digala/Khomshar)                      111.67         670     3,207
          Chamkharchhu-II                                                                           28,500
   4      (Kheng/Shingkhar)                       95.00         570     2,713
   5      Amochhu (814 Yangtsegang)                83.33            500      2,210
   6      Khomachhu (1920)                         54.33            326      1,507                   16,300
   7      Rotpashong (720)                        66.667            400      1,883                   20,000
          Total                                 527.327           3,160     14,771                 158,000

8.1.4   To meet the increasing demand for electricity within the country, the unmet and
        rapidly growing demand in India, the competing opportunities in India and Nepal,
        Bhutan has to mobilize quickly to attract the required amount of private investment in
        hydropower development to achieve the targeted capacity addition. Otherwise, we

                                       Annexures to the Strategy for Gross National Happiness

         will continue to waste the opportunity of utilizing one of our most valuable and
         renewable natural resources. The comparatively fast, relatively low-cost and successful
         implementation of the Chhukha and Tala Projects indicate some inherent advantages
         that Bhutan possesses in development of hydropower projects. We need to capitalize
         on these comparative advantages before we lose them.
8.1.5    The intentions of involving and expediting private investment in hydropower
         development are clearly reflected in the Electricity Act of Bhutan 2001. However, the
         fact that no private investment has occurred till date would indicate that additional
         policies and capacity building is required. To approve investment within six months of
         inviting offers, additional policies and legislations, institutional capacity strengthening is
         critical. To be able to tender, evaluate, award, monitor and eventually take over the
         projects developed by private investor, restructuring and augmentation of the DoE
         and Bhutan Electricity Authority (BEA) is essential to facilitate private investment.
8.1.6    Due to inadequate domestic capital, and not to crowd out investment in other equally
         important sectors, FDI will be required to achieve the level of timely investment in
         hydropower development. Anticipating such a requirement even way back in 2001,
         the Royal Government has incorporated this aspect in the Electricity Act of Bhutan
         2001 40 . Since the primary purpose is to accelerate hydropower development, the
         investment climate has to be made sufficiently attractive to draw investors to the
         Kingdom, especially in view of competing opportunities in Nepal and India.
8.1.7    Given the cordial relations between Bhutan and India, large potential for export of
         Bhutanese power to India and existence of resource capacities in the Indian private
         sector, it is expected that almost all private external investment in hydropower
         development might be from India. With this basic assumption and reality, the policy on
         IPP has to be targeted to attract investment mainly from India.
8.1.8    Investment plans worth US $10041 billion by NTPC, Reliance Energy, Tata Power and
         others and global giants like ABB, Alstrom and GE have been finalized for the power
         sector in India. Power equipment manufacturers in India are ramping up capacities to
         meet the increasing demand.

8.2      Opportunities and Challenges for Bhutan
8.2.1    The location and terrain of Bhutan provides both advantages and disadvantages to the
         development of hydropower. While the terrain is the reason for the nation being
         blessed with 30,000 MW of hydropower potential, it also provides challenges in
         providing access to all the potential project sites, increasing transportation and
         execution time.
8.2.2    With eastern and north-eastern India not developing at the same pace as other
         regions of that country, Bhutan‘s location makes it far away from the load centers of
         India. This increases delivery costs of electricity and puts us at a disadvantage in
         comparison to Nepal and the western Himalayan states of India. However, our
         projects are better placed physically while compared to the huge potential in the
         north eastern states of India.
8.2.3    The relatively fast and economical completion of Chhukha and Tala hydroelectric
         projects are proof of the comparative advantages that Bhutan provides to project
         development. These are:
             o Timely and transparent decisions accorded by a compact and efficient

   Part 4 of the Electricity Act of Bhutan 2001 defines private participation in the electricity industry. However,
the Bhutan Electricity Authority has yet to “prepare and promulgate regulations in relat ion to the establishment,
ownership, operations and activities of private investment.”
   Outlook Business, February 20, 2007 issue.

                                      Annexures to the Strategy for Gross National Happiness

           o No political interference in the management of the projects;
           o Quick environmental and other clearances;
           o Good law and order situation provided to the project activities;
           o Non-existence or minimal corruption; and
           o Exemption of taxes and duties.
8.2.4 The growing demand for electricity in India is an opportunity that cannot be delayed
       or wasted. The existing trade in electricity with India and the bilateral arrangement for
       future trade in this sector provides the basis for expediting hydropower development
       for export to India. Therefore, the growth of electricity generation capacity in Bhutan
       need not be constrained by domestic requirement 42 . Any domestic economic
       downturn with consequent crash in electricity demand will not impact the sector.
8.2.5 The success of hydropower development in Bhutan is contingent on the growth of
       India‘s economy and its steady need for huge amounts of electrical energy. Electricity
       production in India 2006 was 630.6 billion units against 2,500 billion units for China
       and 3,979 billion units for USA 43 . For the Indian economy to grow to the level of
       China, and to eventually reach the standards of USA, India needs to add huge
       capacities in electricity production.
8.2.6 In the long run, if multi-lateral cooperation takes off in South and South-east Asia,
       there could be market for Bhutan‘s hydropower beyond India.
8.2.7 As the level and concern of pollution in India grows, clean energy may become
       attractive and essential even at a premium. Coal based thermal power plants pollute
       air and poses problem of ash 44 disposal in particular while thermal plants in general
       require huge quantities of water. While nuclear power appears to be an attractive
       alternative in India, the level of ―not in my backyard‖ opposition could determine its
       real success.
8.2.8 The Indo-US Nuclear deal has attracted serious interest in development of nuclear
       power generation business in India that, on a conservative scale, will be worth more
       than US$ 9 billion over the next five years 45 . CEA, GoI has projected that nuclear
       energy will account for 35% of total power generated in India by 2050.
8.2.9 With the private sector aggressively investing in the power sector in India, capacity
       addition within the country may pick up to a level to meet its growing demand for
       electricity. This may make import of hydropower from Bhutan, with availability varying
       greatly with the seasons, unnecessary or unattractive unless we are able to move
       rapidly to have the first-mover advantage and fill the demand and supply mismatches in
       India before the opportunity is lost forever.
8.2.10 India‘s desire to have a thermal hydro generation mix of 60:40 is with the purpose of
       thermal generation, including nuclear, meeting the base load and the hydro to mee t
       the daily peaks. Therefore, hydro generation from large reservoirs would become the
       need of the day as India‘s power sector grows. Because of our own need for greater
       firm power, and the growing realities of Indian power sector, we need to find the
       means to develop reservoir schemes. The run of the river schemes in Bhutan provide
       68% 46 of the annual generation during the four monsoon months, making such
       schemes suitable for only daily peaking during the winter months. With the same

   Because of the Asian financial crisis, power demand dipped in Ph ilippines during 1999-2002 just when power
plants started earlier were co ming on line. This drained the state utility’s finances and made the IPPs susceptible
to criticism.[Erik J. Woodhouse, The Experience of Independent Power Producers in Developing Countries, June
2-3, 2005}
   The Times of India, Kolkata Ed ition, Thursday, February 1, 2007.
   Especially local India coal has very high ash content of more than 30%.
   Business Today, December 31, 2006.
   Price Waterhouse Cooper, World Ban k Report on Bhutan Hydropower Sector Study: Opportunities and
Strategic Options, October 2006.

                                    Annexures to the Strategy for Gross National Happiness

         monsoon season across the kingdom, the generation pattern of all run of the river
         schemes would be similar, making these unsuitable for seasonal peaking power.
8.2.11   With tremendous investment taking place in India in the power sector, both in the
         public and private sectors, there could be resource crunches – financial, human
         resources, material, machinery and equipment. Unless Bhutan moves quickly to
         develop its potential in hydropower, we could find ourselves crowded out of this
         business. Even during the construction of Tala Project, delays in deliveries were
         experienced because the production capacities of the manufacturers were not
         available because of demand out pacing supply. Experienced and skilled manpower,
         especially in hydropower construction, can also become a factor for projects not
         being picked for development. In the mid-1990s, leading firms like Siemens and GE
         would not even quote a price because their backlog was so long 47 . Currently
         manufacturers like BHEL in India are also sitting on order backlogs as long as three
         years prompting the Ministry of Power, GOI to even consider setting up an additional
         PSU for manufacturing power equipment.
8.2.12   The present institutions managing the power sector in Bhutan are not geared to
         manage both the magnitude and the schedule of investment envisaged for hydropower
         development in the country. This needs immediate focus and time bound
8.2.13   Before committing to investment and payment in hard currency, impacts on the
         nation‘s economy and finances need to be carefully examined. Countries like
         Philippines, Mexico, Argentina and a whole lot of others have experienced severe
         difficulties in their payment obligations and electricity tariff for allowing dollar
         denominated investment in electricity sector48 .
8.2.14   Under the defined assumptions, summary of the financial analysis in Table 7.12 indicate
         that hydropower projects can be developed in Bhutan by private investors at
         competitive electricity tariff.

8.3    Policy Guidelines
8.3.1. Since 34% of the investment fund is being targeted through IPP, it is essenti al that IPP
       projects be promoted immediately, for which, an IPP policy needs to be adopted using
       the following policy guidelines:
8.3.2. The DoE has already received a TA from ADB for development of Hydropower Policy
       which would also cover policies concerning private sector participation in hydropower
       development. While issues concerning private investment in hydropower would be
       comprehensively addressed under this TA, the areas that need to be addressed are
       enumerated below.
8.3.3. The development of hydropower projects is capital intensive with long pay back
       period. Hydropower projects are also subject to risks like encountering poor geology
       in underground works, lack of control of ―fuel delivery‖, etc. These realities need to
       be factored in the policies through proper risk-sharing mechanisms so that investors
       are adequately safeguarded. The broad outline of the issues that need to be addressed
       in the policies to facilitate private investment in hydropower development are
       presented in the following sections.

   Erik J. Woodhouse, The Experience of Independent Power Producers in Developing Countries, Program for
Sustainable Development, Center for Environ mental Science and Policy, Stanford University, CA, USA, June 2-3,

                                       Annexures to the Strategy for Gross National Happiness

8.3.4. Royalty/Free Energy For being accorded the privilege of utilizing the natural resource of the country, the
         state shall be compensated by payment of royalty 49 from the energy generated by the
         hydropower stations. Based on the Indian experience of IPPs providing 12% of
         generated energy to the state government 50 , royalty at 15%51 of generation at bus bar
         for run of the river schemes will be levied, with payment to be either in energy or in
         cash as it may be convenient to the government. Jaiprakash Associates Limited (JAL)
         has signed MOU with Arunachal Pradesh for execution of two projects, where free
         power for the first ten years is 12% and then 15-15.5% thereafter 52 . Because reservoir
         schemes provide added benefits such as recreational facilities, waterways, fisheries,
         etc., the rights of which will remain with the state, royalty for such projects could be
         different from run off the river schemes. The other option for deciding on the amount of royalty could be through competitive
         bidding. This will ensure that the relative advantages of different projects are factored
         in by the investors and yet ensure a reasonable return to the state. To protect the
         interest of both the state and the investor, mechanism has to be built into the royalty
         payment structure; royalty is defined on design generation with allowance for auxiliary
         consumption capped, minimum royalty payment is defined so that the state receives
         payment even during circumstances when the producer is unable to market their
         energy and royalty is based on actual generation when shortfalls are on account of
         hydrological reasons.

8.3.5. Ownership & Financing The Electricity Act of Bhutan 2001 requires the construction of electricity supply
         facilities by private parties to be executed through competitive bidding. Pursuant to
         this requirement and for obtaining the best offers, the 7 projects identified for
         development through private capital need to be tendered out through competitive
         bidding, with tendering management and approvals to be accorded by the regulatory
         authority (BEA) 53 and the government (DoE). Both agencies need to be strengthened
         to cater to these requirements. The development of such projects will be under Build
         Operate and Transfer (BOT) mechanism, with the transfer of assets to the state to
         occur after 30 years of commercial operation54 . To be able to achieve the targeted generation capacity by 2028, 100% FDI need to be
         allowed for hydropower development. The government, through its investment
         agencies, can retain an option to participate as an equity partner in the venture.
         Present FDI policy has to be amended to include investment in Indian rupees and to
         permit 100% ownership. Conditions for repatriation of profits, especially in hard
         currency, for projects where some liability is in hard currency, need to be addressed
         in the IPP policy in consultation with concerned ministries and agencies.

49 Section 53.7, Part 5 of Electricity Act of Bhutan 2001 requires “Royalty on use and land resources may be
determined by the Authority.”
   Ministry of Po wer, Govern ment of India, Policy on Hydro Power Development, August 1998
   As per DOE’s notification No. 9/DOE/HQ/2005-06/16, dated 20/ 6/06, the government owned hydropower
stations are required to provide 15% of their annual generation as royalty energy, at a subsidized price, to BPC for
meet ing domestic demand.
   JAL’s presentation to the Bhutanese Hydro Power Development Co mmittee on 15/01/07 at Delh i. JAL has
signed MOU for the 1600 MW Lower Siang Project (Rs. 82.96 b illion) and the 500 MW Hirong Pro ject (Rs.
20.73 b illion) with Govern ment of A runachal Pradesh on BOOT (Build Own Operate Transfer) basis for a lease
period of 40 years.
   Clause 49.2, Part 4 of Electricity Act states “The bidding procedures shall be managed by the Authority, which
shall give his reco mmendations to the Minister for final decision regarding the selection of the successful bidder.”
54 Section 31.1 of Part 3 of the Electricity Act of Bhutan 2001 limits the duration of a licence to thirty years, with

provision for renewal on terms and conditions specified by the Authority.

                                       Annexures to the Strategy for Gross National Happiness For projects that do not perform to projections, for reasons beyond their control, the
         BEA may provide extension to the BOT duration for a period not exceeding 5 years.
         Under such circumstances, the original contract shall be renegotiated. At the end of
         the BOT duration, the IPP shall hand over all installed assets, including inventory items
         and O&M manpower, to the state. To ensure viability of the project as a vibrant
         continuing concern, all rights to existing contracts shall be transferred to the state or
         its authorized agency. However, the projects shall be handed over without any
         residual obligations. It is expected that there will be substantial differences in service
         rules and benefits between the IPP and DGPC, which on behalf of the state would be
         taking over the projects, which need to be appropriately addressed at the time of

8.3.6. Taxes To encourage investment in the sector and to make the projects competitive,
         investors need to be provided with tax breaks and holidays. During the construction
         stage, customs and sales tax be exempted for material and equipment utilized for
         construction of the project 55 . To provide at least a level playing field, duration and
         type of tax holidays need to be provided in line with those provided to IPPs in
         hydropower in India and Nepal. PIT and BEA fees will be paid as per the existing
         norms in the country. Levy of CIT, on actual or notional profits, after the tax holiday
         and imposition of a turnover tax need to be addressed in detail in the IPP policy to be
         developed by DoE. As per the existing arrangement on the domestic sale and export to India of electricity,
         no taxes and duties shall be levied on the sale of electricity.

8.3.7. Power Purchase Agreement (PPA) As per the Electricity Act 2001, PPAs are not subject to tariff regulations which will
         allow the IPPs to trade their power in the market facilitated by the recent open access
         in the Indian transmission grid and promotion of spot market. A well formulated, transparent and predictable PPA will be the only basis which will
         attract private capital in hydropower development. Therefore, it is crucial that the
         government is either a direct party to the PPA or a proactive facilitator. Provided that
         the investment environment is made really competitive, it is anticipated that some
         investors will utilize some of the projects as captive plants to wheel energy to
         manufacturing bases outside Bhutan or arrange their own PPA. Where investors are
         unable to arrange their own PPA for export of energy, the cooperation agreement
         signed between Bhutan and India on 28 th July 2006 can be used by Bhutan to arrange
         off take of energy from IPPs for export to India through PTC. To provide comfort to
         IPPs and that the state shall not resort to ―obsolescing bargain‖56 , government may
         accept that all disputes with the IPPs, especially with regard to state guaranteed PPA ,
         are subject to international arbitration norms. While there are inherent risks in the government committing to purchase all energy
         produced by the IPPs, especially with the IPPs owning about 27% 57 of generation by

   Draft Energy Policy recommends taxes and duties be exempted for the import and sale of all hydropower
generation, transmission and distribution equipment.
56 Erik J. Woodhouse, The Experience of Independent Power Producers in Developing Cou ntries, Program on

Energy and Sustainable Develop ment, CESP, Stanford Un iversity, Seminar Draft, June 2-3, 2005. “Obsolescing
bargain” – negotiating leverage in a large private infrastructure shifts during the project life cycle. Investors face
an amort ization of several years wh ile the government has already secured its need once the project is operational;
original bargain is obsolete and the state could force change in terms.
   Of the total installed capacity of 11,581 MW, IPPs will o wn 3,160 MW.

                                     Annexures to the Strategy for Gross National Happiness

        2028, the domestic demand 58 projected to increase to 1,201 59 MW by 2028 may
        require the government to bear such risks. Capacity addition of 10,000 MW by 2028
        assures firm power of only 1,860 MW and may therefore require the royal
        government to be engaged, in one manner or the other, in the PPA with the IPPs for
        making energy available for the domestic market – especially during the lean river
        inflow period in winter. Therefore, the royal government has to retain the first right
        for power purchase from the IPPs while awarding contracts.

8.3.8. Foreign Exchange It is possible that investors from third countries would be interested in participating in
         hydropower development in the kingdom, especially if they are able to arrange their
         own PPA or if state guarantee can be provided for off take of their production. Also to encourage the most efficient equipment and the latest technology, Indian and
         Bhutanese IPPs may make part of their investment in foreign exchange. Investors who
         arrange their own PPA will be required to factor their foreign currency obligation
         risks in their PPA and for cases where the state or its agency is the power purchaser,
         the currency fluctuation risks will have to be borne by the state. Since IPPs have experienced difficulties in staying afloat during devaluation of the local
         currency when their PPA has been arranged in local currency and governments have
         encountered severe fiscal imbalances and crisis when having committed to cover
         currency fluctuations risks, the magnitude of transaction and risks need to be carefully
         assessed while permitting investment in hard currency or when PPAs are arranged in
         such currencies. Based upon prevailing or forecasted conditions, the government can
         hedge such risks and also negotiate for part of the payment for export of electricity in
         hard currency 60 . Subsection 49.1 (vi) of Part 4 of the Electricity Act of Bhutan 2001
         requires the preparation and publication of clear mechanism for currency
         convertibility and remittances.

8.3.9. Land Acquisition and Other Infrastructure All land required by IPPs will be acquired by the government 61 and leased to them for
         the duration of the BOT. Since the project ownership would be transferred to the
         government at the end of the BOT term, the government will bear all costs of land
         acquisition. This will include the land required for providing access roads, colonies and
         storage sites. Resettlement, though to be arranged by the government, costs would
         have to be included in the project cost. Acquisition of land, clearances from NEC, DoF, etc. should be initiated concurrently
         with preparation of the DPR of the projects and all such activities should be
         completed on completion of the DPR. Thus, clearances and acquisitions should be
         completed along with the DPR. Procedures of land acquisition and various clearances
         shall be defined by the related agencies. When DPR is ready all clearances are ready. Transmission networks, to optimize resources, will be developed by the transmission
         licensee, currently BPC, up to the border for export projects. A summary of the new
         roads and transmission lines required for the projects is provided in the table below.

   The 2003-2022 Power System Master Plan, March 2004 has projected domestic peak by 2022 at 352 MW.
   Pro jection made by BPC.
   It is reported that 50% of the power sale to PTC fro m 750 MW West Seti Pro ject in Nepal has been arranged for
payment in US $.
61 Section 51.2, Part 5 of Electricity Act of Bhutan 2001 states “the Minister shall pursue the acquisition of the

land on behalf of the Licensee in accordance with the Land Act.”

                                       Annexures to the Strategy for Gross National Happiness

         Table 8.3: New Transmission Lines and Roads for IPP Projects
                                                                       New Transmission                 New
                                                                         Lines (km)62                   Roads
         Sl. No.               Name of Project                         220 kV      400 kV               (km)
                   1   Kholongchhu                                            63       124                  14
                   2   Nikachhu (Tangsibji)                                   37        46                  12
                   3   Chamkharchhu-I (Digala/Khomshar)                         -       84                  63
                   4   Chamkharchhu-II (Kheng/Shingkhar)                        -      105                  60
                   5   Amochhu (814 Yangtsegang)                                -       30                  51
                   6   Khomachhu (1920)                                       63        67                  40
                   7   Rotpashong (720)                                       10       124                  15 Regulated wheeling charges will have to be paid by the power producer. 63 Beyond the
         border, the IPP which arranges its own PPA will be responsible for acquiring the
         transmission capacity. However, to make the investment in hydropower projects as
         attractive as possible, the government could leverage its bilateral relationship with
         India to facilitate transmission capacity addition in India for evacuation of power from
         projects in Bhutan. Two power stations of 750 MW each are being developed on Tawangchhu in Tawang
         District of Arunachal Pradesh 64 , which adjoins the districts of Trashi Yangtse and
         Trashigang in Bhutan. These two projects are estimated to generate 6,636.50 MU in a
         90% dependable year. Since this energy would need to be evacuated to West Bengal
         and beyond, there would be common interest to India and Bhutan if this power could
         be evacuated through shorter transmission lines through Bhutan. Since we could use
         these transmission lines to piggy back our own production from Kholongchhu, this
         possibility needs to be seriously examined. Wheeling of 1,500 MW and 6,636.50 MU
         would bring Nu. 830 million in annual revenue to BPC, even at current wheeling
         charge of Nu. 0.125 per unit. Six of the projects to be offered to private investors require construction of roads
         more than 40 km per project. Leaving these to the IPPs may not only discourage them
         in picking up these projects, but also increase project costs and delay the completion
         of the projects. Where road access are planned to be provided near these sites in the
         Road Sector Master Plan 2007-27, the construction of these roads need to be initiated
         by the government in advance of project implementation. All expenses related to environment protection and mitigation will be at the cost of
         the project.

8.3.10. Risks and Guarantees       There are risks associated with both the construction and operation of
        hydropower stations. The possible risks and their allocation and mitigation are
        indicated in the table below:

         Construction Risks
         Cost Overrun                         Allocated to the investor via PPA
         Underperformance                     Allocated to the investor by performance bonds.

   So me sections of the transmission lines are to be shared by several projects, beyond a pooling point.
   Existing level o f wheeling tariff is Nu. 0.125 per unit, but BPC has indicated that this could increase to Nu. 0.24
for the existing system.
   MoU has been signed between NHPC and Govt. of Arunachal Pradesh on 21/ 09/ 06 for imp lementa tion of
Tawang I (750 MW, 3156.10 MU in a 90% dependable year) and Tawang II (750 MW, 3480.40 MU in a 90%
dependable year) Projects by NHPC.

                                Annexures to the Strategy for Gross National Happiness

       Operation Risks
       Cost Overrun                   Allocated to the investor by basing tax payment on notional profits
                                      and cash based royalty payment on deemed generation.
       Underperformance               Shared by the investor and the state. To the investor by basing tax
                                      payment on notional profits. For shortfall in generation due to
                                      hydrological reasons, some risks to be borne by the state by
                                      adjustment in royalty payment.
       Others                         Allocated to the investor. To be covered through appropriate
       Hydrological Risks
       Water Availability             Shared. State to adjust royalty payment for shortfall in generation
                                      on account of poor river inflow. Investor gets return as per actual
       Flood                          Shared. For lost production, state adjusts royalty payment. Investor
                                      to provide insurance coverage as deemed fit.
       Market Risks
       Off-take/Demand                Allocated to Power Purchaser through long term PPA specifying rate
                                      and quantity.
       Currency Risk                  Allocated to investor who arranges own PPA. To the state if the off
                                      take is by the state.
       Political Risks
       Regulatory Risks               Allocated to the government through appropriate terms in the
       Legal Risks                    Reduce by applying international arbitration norms to settle legal
       Contract Agreement             Performance Guarantee and arbitration through international
                                      norms      While we need to provide competitive enabling environment to attract IPPs,
        the interest of the state has to be also protected. To ensure that the committed
        investment is made, performance bond of 5% of project cost till 20% of the financial
        progress is achieved will be required to be provided by the investors. In case the
        project is abandoned, all assets at site and the performance bond will be forfeited to
        the government.

8.3.11. Employment and Immigration Issues       The execution of 12 projects over the next twenty years indicates deployment
        of 100,000 employees during the peak construction period of 2013-16. The operation
        and maintenance of these stations will provide permanent employment to 7,400 (6,000
        skilled and 1,400 security personnel). It would not be possible to provide all the
        required manpower for construction and operation of the projects from within the
        country. This requires import of thousands of manpower, especially during the
        construction period. With the primary aim of accelerating hydropower development,
        import of manpower required for both construction and operation of hydropower
        stations need to be freely allowed. However, the opportunity for providing substantial
        numbers of good paying jobs cannot be wasted and implementation of SKILLS-2008 as
        an integral component of SGNH should provide the desired critical mass of skilled
        manpower to be employed by these projects. Without hampering the progress of the
        project implementation, to the extent that local skills are available, a minimum
        threshold of employment of Bhutanese by the IPPs should be defined in the IPP policy.

8.3.12. Security Issues      All activities in the nation will be secondary to its security and sovereignty, and
        therefore all IPPs shall strictly abide by the prevailing law and order requirements of

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       the nation. During the construction period, when thousands of employees would be
       concentrated in project sites, special security arrangement would need to be provided
       by the state to ensure law and order in the particular region. The state shall accord
       equal protection to the IPP and their employees as to its citizens. IPPs will be
       responsible for the security of their plant and personnel.

8.3.13. Enabling Environment       The key to successful involvement of private developers in hydropower sector
        will hinge on the enabling factors to be provided by the government. To achieve the
        desired level of investment, certain shifts in policies and systems will be essential.       IPPs will be subject to all the laws of the nation. However, if required to
        encourage adequate and timely investment in the sector, special dispensation from
        certain Acts and their regulations need to be provided. Additional Acts to facilitate
        investment, such as Contract Law, Arbitration Act, IPP Act, etc. may need to be
        enacted. The full extent of the specific project dispensations to be provided would
        become clearer once the process for soliciting offers for private investment has been
        initiated, even before the finalization of the IPP policy and associated institutional
        strengthening has been implemented. All stakeholders should be involved during
        preparation of the project DPR so that all clearances are obtained on finalization of
        the DPR.       Institutional capacity building and restructuring is required to respond to these
        requirement. In the near term, in view of the capacity constraints within the nation,
        consulting firms for enabling developing of hydropower projects need to be
        immediately engaged. Single window for expediting project clearances shall be
        provided along with clear procedures for provision of permits during the execution

  8.4. Implementation Procedure and Program
8.4.1. To achieve the development of more than 3,000 MW of installed capacity by the year
        2028 through private investment, an aggressive program for implementation has to be
        pursued. Because of what is occurring in our energy market – India, time is the
        essence if we are to succeed in our ambitious goals.
8.4.2. To serve as a learning experience, a pilot IPP project was contemplated to be initiated
        even ahead of finalization of related policies and institutional strengthening. However,
        a comparative study of the projects identified to be developed through IPPs does not
        provide a clear picture for selection of a pilot IPP project. Instead, it has been deemed
        better to initiate invitation of offers for implementing projects by IPPs even while
        related policies are being framed.
8.4.3. While the Hydropower Policy, including IPP participation, is being developed under
        the ADB TA, the offer of hydropower projects to private investment needs to be
        initiated concurrently while the policies are being developed. To enable this,
        consultants may be recruited to tender out some projects. A program for
        introduction of IPP is proposed below.

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 Table 8.4: Program for Introduction of IPP
Activity                 2007                     2008
                3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
for IPP
Road Show
potential IPP
to Bhutan
Invite Offers
for IPP
Project to
be awarded

 8.4.4. The implementation schedule of the 12 projects, including the 7 to be developed
        through private capital is as per Table 6.1. The schedule for these 7 projects of 3,160
        MW extends from 2008 till 2028. However, if private investors can be attracted to
        invest in these projects, these projects could be implemented well before 2028. Based
        on the response of investors at the road show and their visits to Bhutan, the required
        institutional strengthening would then have to be adequately and timely addressed.
        The potential IPP participants are identified in the next section.

 9.        Domestic Power Pricing and Industrial Demand
 9.1.      The existing domestic demand as of December 2006 is 157 MW (67 MW for
           household consumers and 90 MW for the industries). In addition, about 140 MW of
           load demand has already been approved as of December, 2006. This will require that a
           total of 300 MW capacity is available for domestic consumption against the firm
           power availability of 283 MW even with the commissioning of Tala.
 9.2.      The demand shortage is mainly on account of the recent mushrooming of power
           intensive industries due to the subsidized power tariff in Bhutan. The current annual
           subsidy to the domestic energy demand is over Nu. 1.00 billion with the heaviest
           subsidy to the household customers followed by industries.

           Table 9.1: Power subsidy for 2008 (BEA)
                                          Heavy Industry    Small industry   HH Consumers
           MW                                         175               55              70
           Energy (MU)                              1,021              210             272
           Subsidy Amount (Nu. million)               300              230             750

 9.3.   Power Allocation and Industrial Subsidy Phase Out
 9.3.1. Considering that rural electrification will add another 50,000 households and the
        industrial demand is increasing at a rapid rate (mainly on account of subsidized tariff), a
        power allocation notification (No. 9/DOE/HQ/2005-06/16 dated 20.6.06) has been
        issued limiting the sanctioning of new demand within the firm power availability. As
        per the tariff determination regulation of the BEA, the subsidy to the industrial
        consumers shall also be phased out by 2010 (with tariff increment of 10% per annum).

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9.3.2. On the other hand, it would be in the long term interest of the nation to encourage
       power intensive industries so long as they are not subsidized and the seasonal
       variation of energy is acceptable to their production schedule. This will not only add
       to the GDP but also ensure a diversified demand to complement the export market.
       After the improvement of the regional infrastructure (through road and railway
       linkages) and establishment of the economic hubs, the production costs in Bhutan
       might still be competitive. Therefore, appropriate power pricing policy guidelines need
       to be adopted to encourage investments in the industrial sector.

9.4.   Policy Guidelines for future power pricing in the Industrial Sector
9.4.1. The ideal situation is to capitalize on the export market and grow the domestic
       demand after removing the subsidy. Norway, another hydropower dominated country,
       in the early sixties found its export market limited due to lack of transmission
       infrastructure across the sea to mainland Europe. The country was also limited with
       internal resources to promote any domestic industries. However, they came up with
       the innovative idea of capitalizing on their competitive shipping industry; barges and
       ships were used not only for bringing in raw materials from overseas but also as
       marine industrial bases where factories where erected and connected with power
       supplies. After manufacturing, the finished goods were then exported in the same
       barges to overseas market. A similar strategy could be used to promote domestic
       industrial base.
9.4.2. Given that the industrial tariff is very high in most regions of India (Nu. 4-5/unit),
       Bhutanese industries might still be competitive since tariff in Bhutan will still be lower
       than that of India even after removing subsidy. In addition, CIT contribution and
       employment generated might be additional benefits from these industries. Some of the
       policy guidelines to be adopted in industrial power pricing could be as follows:
      o Power industries are encouraged provided there is no subsidy in tariff
      o Send a predictable signal for industrial power tariff to guide long term industrial
      o Tariff should be either equal to export tariff (at least meet the opportunity cost) or
         based on actual cost of delivery (remove subsidy).
      o Notify firm power availability and load scheduling (industries might have to shut
         down during the lean season).
      o Utilize re-import arrangement with GoI at export tariff during lean season as per the
         Article-7 of the Umbrella Agreement between the Royal Government of Bhutan and
         the GoI concerning cooperation in the field of Hydroelectric Power.
      o Encourage the Bhutanese hydropower plants with diurnal pondage to peak during
         lean season to further facilitate re-import during off-peak hours and export during
         peaking hours.
      o Discontinue re-import if re-import tariff is more than export tariff unless otherwise
         cost can be passed onto industrial customers.
      o Allocation of firm power should be in the order of priority; households & public
         institutions, small and medium industries and & heavy industries.
      o The remaining firm power allocation if available shall be done on antecedent rights
         (vested rights of first come first serve).
      o Allow captive power plants for domestic industries.

9.4.3. Domestic Load and Demand Forecast: The PSMP (2004) had estimated that the domestic demand would reach 352 MW and
         1,793 GWh of energy by 2022.

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         Table 9.2:       Load Forecast as per the PSMP (2004)
                Year              Forecast            Peak Load
                                   (Mu)                 (MW)
                 2002                         587            105
                 2007                         746            144
                 2012                        1057            214
                 2017                        1394            273
                 2022                        1793            352

9.4.4. Revised Load and Demand Forecast The revised forecast with the latest data from the BPC indicates that the PSMP
         forecast has been exceeded by three fold (757 MW of demand by 2022 as against the
         projection of 352 MW in the PSMP). This is primarily due to the increased industrial
         demand and the increased rate of the rural electrification. This revised demand seems
         to be more realistic especially after considering that industrial estates are planned at
         Samtse & Jigmeling each with preliminary requirement of 100 MVA and with the
         growth centres and economic hubs planned along the southern and central belt.

         Table 9.3:       Supply & Demand forecast based on planned generation and prevailing trend
                          of internal demand

                             Demand                                Supply
      Year               Load        Peak                    Firm        Peaking             Surplus/Deficit
                        Forecast     Load                   Energy     firm power                (MW)
                         (MU)       (MW)                     (MU)         (MW)
         2008              2,144.41      340                    2,444           388                           48
         2009              2,183.05      346                    2,444           388                           42
         2010              2,368.72      376                    2,444           388                           12
         2011              2,406.25      382                    2,444           388                            6
         2012              3,592.30      570                    2,444           388                         -182
         2013              3,637.78      577                    2,444           388                         -189
         2014              3,689.40      585                    2,444           388                         -197
         2015              3,748.27      594                    4,038           640                           46
         2016              3,803.05      603                    4,038           640                           37
         2017              3,861.84      612                    5,335           845                          233
         2018              3,928.51      623                    5,948           943                          320
         2019              4,004.66      635                    7,770         1,232                          597
         2020              4,092.27      649                    7,770         1,232                          583
         2021              4,419.65      701                    7,770         1,232                          531
         2022              4,773.22      757                    7,996         1,268                          511
         2023              5,155.08      817                    7,996         1,268                          451
         2024              5,567.49      883                    7,996         1,268                          385
         2025              6,012.89      953                    8,403         1,332                          379
         2026              6,493.92    1,030                    8,403         1,332                          302
         2027              7,013.43    1,112                    8,403         1,332                          220
         2028              7,574.51    1,201                    8,735         1,385                          184
          The diversity load factors used are 0.6 for domestic, 0.7 for MV and 0.8 for HV customers.
          Transmission and distribution losses are taken in account based on the actual field records.
          Due to constraint in availability of firm power during the lean season, the power sanction for new
           industries has been capped at 400 MW. This will be the scenario till the commissioning of the next
           project in 2011 unless we can arrange optimal exchange for export and re-import during peak and
           non-peak hours during lean season.
          The number of prospective industries is not known and this will be driven by the availability of firm
           power. For the load forecasting purpose, 8% annual growth rate has been used.

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9.4.5. Domestic Energy Security: The above demand forecast indicates that the domestic
       energy security will not be achieved unless the target of accelerated hydropower
       development is met.

9.5. Rural Electrification (RE)
9.5.1. Rural Electrification is another challenge for the electricity sector. Given the difficult
        terrain of the remote villages, the cost of bringing electricity to the rural households is
        extremely high. The capital cost is over Nu. 100,000 per household and then the
        energy subsidy is almost Nu.3 per unit 65 . This translates into a fund requirement of Nu.
        5.00 billion as capital investment and Nu. 1.00 billion per annum as energy subsidy
        thereafter for providing the services. While all rural electrification is based on an
        economic internal rate of return (EIRR) of 12%, the real impact, both economic and
        social has not been assessed as yet. Therefore, it is necessary to realign the targets of
        RE along with the SGNH.
9.5.2. Meanwhile, the target of Electricity for All by 2020 is being implemented rigorously for
        poverty alleviation and to provide access to clean energy for livelihood, environment
        conservation and creating opportunities to mitigate rural-urban migration. RE
        programs under the 10th & 11th FYPs are synchronised with the construction of feeder
        roads to optimise costs. While target number of households will remain the same, the
        actual list of villages shall now be changed depending on the strategy of cluster
        development which will require that first the other infrastructure like roads and urban
        centres be established before grid electricity is taken to those certain areas.
9.5.3. RE proposals for the villages covered in the Sunkosh & Amochhu basins need to be re-
        looked considering the submergence. The affected villages have to be relocated and
        provided electricity as per the RE Master Plan. The RE plan to electrify Merak &
        Sakten on grid also needs to be re-looked in view of the NSP 2008.
9.5.4. Alternative Planning Framework for RE Project: Going by the 10 FYP RE Plan through
        JBIC financing, it is apparent that contribution from Central and Local Governments
        are working out to 70:30 ratio. The idea of constructing high tension line (11 kV or 33
        kV) upto the village load center including distribution substations by the Central
        Government and allowing the Local Government to develop the LT network at its
        cost is already in practice as per the following cost allocation for the RE projects.

                 Table 9.4: 10 FYP RE Plan included in JBIC financing
              Dzongkhag           Central Govt.            Local Govt.                   House Hold
            Bumthang                   77%                      23%                                701
            Chhukha                    60%                      40%                              2,506
            Dagana                     72%                      28%                              2,096
            Mongar                     70%                      30%                                874
            Paro                       88%                      12%                                 21
            Samtse                     58%                      42%                              2,456
            Yangtse                    69%                      31%                                819
            Trongsa                    76%                      24%                              1,146
            Tsirang                    69%                      31%                              4,832
            Average/Total              71 %                     29%                             15,451
            Cost                  581.31 million          237.44 million

     Based on the generation subsidy of Nu.0.91 (1.21-0.30) & d istribution subsidy of Nu.1.80 (2.8-1.0).

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             Table 9.5: RE Master Plan
                            Till 9 FYP   10 & 11                 Remarks
                               (Km)     FYP (Km)
        No. of HH                64,500     29,338 21,519 in 10 FYP & 7,819 in 11 FYP
        33 kV lines                 886      1,585 Booked to Central Budget
        11 kV lines               1,468        725 Booked to Central Budget
        LT lines                  3,027            Booked to Local Budget

10.     Enabling Environment for Accelerated Hydropower Development
10.1.1 The hydropower sector should capitalize on certain inherent and favorable conditions
        that exist in our country, e.g. safe and secure working environment, small and
        relatively more efficient bureaucracy, etc. Hydropower development should be
        accelerated while we still have this advantage.
10.1.2 A firm and quick decisions and approval from the government on accelerated projects
        (including IPP projects) with Sunkosh as one of the priority projects shall enable the
        sector to achieve the target faster.
10.1.3 The GoI is already committed to implement 1,095 MW Punatsangchu-I on a model
        similar to Tala Project. The realistic modality for execution of Sunkosh Project would
        be total financing from GoI preferably with 80% grant and 20% loan because of its
        magnitude and multiple benefits. In the event that the irrigation components of the
        project are not constructed, the project could be implemented as a peaking
        hydropower station without the 60 MW lift concrete dam and 13 km irrigation canal
        downstream of the main rock-fill dam. This mega (4,060 MW) project could be yet
        another major friendship project between India and Bhutan and therefore is
        recommended to be implemented.

10.2Formulation of Policies and Guidelines for Foreign Investment
10.2.1 In addition to the current policies and plans, the following policies and gui delines
       which are crucial for acceleration of hydropower development should be formulated
       by the DoE on priority basis and adopted by the government by June 2007:
       -      Energy Policy
       -      Hydropower Policy
       -      IPP Guidelines
10.2.2 Bidding documents should be also prepared for prospective IPP projects by the
       Department of Energy.

10.3Fund for DPRs and Hydropower Development Activities
10.3.1 For accelerated hydropower development, DPRs and availability of fund for equity
       investment would be very crucial. For this, 20% of the profit after tax from fully
       government owned generating companies should be retained with DGPC/DHI for re-
       investment in hydropower development activities. This needs to be implemented
       starting from 2007 calendar year.

10.4 Permits and Clearances
10.4.1 For expeditious development of hydropower projects under SGNH, it is desired that
       the status of Special Economic Zones (SEZs) be given to the hydropower project sites
       to attract investments and expedite necessary clearances for implementation of
       projects. Past experience indicate that valuable time is lost on obtaining permits from
       the agencies. If this process is not improved, it will make our projects less attractive to
       the private investors. The following agencies involved in the issuance clearances for

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       the projects should make every effort to improve their service delivery mechanisms to
       expedite the project implementation:

           (i)      National Environment Commission
           (ii)     Department of Survey, Ministry of Agriculture
           (iii)    Department of Agriculture, Ministry of Agriculture
           (iv)     Department of Forest, Ministry of Agriculture
           (v)      Department of Immigration, Ministry of Home & Cultural Affairs
           (vi)     Department of Revenue & Customs, Ministry of Finance
           (vii)    Department of Labor, Ministry of Labor & Human Resources
           (viii)   Department of Energy, Ministry of Economic Affairs
           (ix)     Bhutan Electricity Authority
           (x)      Dzongkhag Administration, Ministry of Home & Cultural Affairs
           (xi)     Royal Bhutan Police
           (xii)    Department of Medical Services and Department of Public Health,
                                 Ministry of Health Services
           (xiii)   Department of Roads, Ministry of Works & Human Settlement

10.4.2 The DoE should provide the schedule of project activities to be implemented well in
       advance to concerned organizations for the purpose of obtaining clearances.
10.4.3 The NEC should process and issue Environment Clearance on time. It is necessary
       also to involve stakeholder agencies like NEC right from the pre-feasibility to DPR
       stage so that the EIAs are carried out and incorporated in the DPR to the satisfaction
       of NEC. This will enable fast environmental clearance for projects.
10.4.4 For continuous movement of people and transportation of machinery and materials,
       check posts on access roads will have to be kept open till late hours and also open at
       early hours. It is estimated that, just for Punatsangchhu alone, it would require 0.60
       millions MT of steel, and 1.25 million MT of sands and in aggregate these translates
       into 2 million truckloads over 3 years of the project lifetime. In aggregate, this will
       require 87 days just to clear steel and sand even if the check posts operate 24 hours a
       day. Therefore, it is very essential that the agencies that are putting up check points
       facilitate movement of such goods without delay. Furthermore, a large number of
       heavy machinery & equipment, trailers, trippers and trucks would have to be
       mobilized for project construction and demobilized after completion of projects.
       Therefore, the following government agencies which have their respective regional
       offices/units in border town(s) will have to establish devoted counters for delivery of
       quick and efficient services to hydropower projects:
                i)     Department of Revenue and Customs (MoF)
                ii)    Department of Immigration (MoHCA)
                iii)   Department of Labor (MoLHR)
                iv)    Road Safety & Transport Authority (MoIC).
10.4.5 Devoted clearance arrangement by the above agencies is necessary for fast and
       smooth a) mobilization of large foreign workforce, b) induction of
       machinery/equipment/vehicles c) import of construction materials during construction
       period and d) demobilization of such resources after completion of hydropower
       project works. The Immigration and Labor departments will need to grant blanket
       annual sanction to the project authorities for en masse induction of foreign workers
       (skilled & semiskilled) and facilitate expeditious renewal of identity cards of project
10.4.6 The DoF will need to issue forestry clearance for survey and erection of transmission
       lines. It is recommended that this clearance be issued by the concerned Divisional
       Forest Officers and Park Managers during the preparation of DPR. It is also

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       recommended that the allotment of government land required for constructing HE
       Projects and construction of residential colonies for the project staff be processed or
       facilitated within the DPR preparation period by the DFO.
10.4.7 It is learnt from the experience of Tala Project that rocks suitable for construction of
       dam, tunnel lining, etc. is indeed scarce as most of the hard rocks in Bhutan Himalayas
       not only contain a lot of mica but also contain silica which reacts with alkali in cement
       (OPC). This alkali-silica-reactivity (ASR) is known to cause gradual deterioration of
       concrete structures. For this reason, it is very important that the quarries are
       adequately tested for their quality and suitability for production of aggregates and
       mass concrete for construction of dam, tunnels and other major civil structures. Large
       quantities of building materials like stones and boulders would be required by the
       projects. The DGM in co-ordination with DoF will have to be actively involved in
       identification of suitable quarries for sand & aggregate deposits and along with the
       NEC and grant permits expeditiously for extraction of such materials by major
       contractors or private parties.

10.5Land Acquisition, Right of Ways & Compensation
10.5.1 The current land acquisition and allotment procedures are a major hurdle in the
       timely implementation of projects. Prospective developers have indicated this as their
       biggest concern. To expedite this, the following measures are recommended:
       -      Have a clear policy on buy versus rent on development of housing colonies and
              it is suggested that private housing be encouraged to supplement the
              requirement of projects during O&M stage.
       -      Share the information on project sites, transmission corridors layout and
              acquisition areas with Dzongkhag administrations and land owners.
       -      Familiarize stakeholders on revised Land Act procedures and assessment of fair
              market value.
       -      Constitute a strong national committee to plan, implement and supervise land
              acquisition and compensation process for projects.
       -      Adopt the draft ROW regulations from the energy sector (BEA).
10.5.2 The existing procedures have become lengthy due to limited coordination among the
       agencies concerned. In the case of hydropower projects, land has to be acquired for
       construction of permanent structures like dam, power house (if surface), substations,
       transmission towers, office & residential complexes and establishment of temporary
       sites such as labour camps, etc. Concerned Dzongkhag Administration should be
       involved in the allotment of government land and acquisition of private land for
       project construction right from the beginning.
10.5.3 Further, as land compensation rates are not attractive, private landowners are
       reluctant to give up their land for project purposes. To avoid complications which may
       arise from such situations, the procedures for land acquisition and land allotment need
       to be established as per the provisions of the latest Land Act. The Act specifies that
       compensation for land acquisition should be based on fair market value. If this
       procedure is implemented it will create an enabling environment not only for
       hydropower development but also for other development activities.
10.5.4 In the case of transmission lines passing through private or government land, easement
       right 66 has to be provided for un-interrupted distribution and supply of power to

   An easement is the right to make certain uses of another person’s property (affirmative easement) o r the right to
prevent another person from making certain uses of his own property (negative easement). The right to run a
sewer line across someone else’s property would be an affirmat ive easement. An easement preventing somebody
fro m erecting a structure in his won land would be a negative easement. A mong others, easements are required by
grant, reservation, prescription and by imp licat ion. For utilit ies, most relevant are those created by grants and by

                               Annexures to the Strategy for Gross National Happiness

       consumers and for export purposes. A land or portion thereof required for the
       purpose of constructing transmission lines and underground cables shall be carried out
       with the RoW where it does not constitute a full acquisition and transfer of the
       ownership to the utility agency. Such right constitutes an easement by the utility
       agency both to the public and private property.

10.6Safe Transport & Custody of Explosives
10.6.1 Safe transport and custody of explosives is of utmost national security concern as
       huge quantities of explosives & accessories would be stored at various locations
       within each project area. For example, Tala Project had built five magazines at various
       construction sites with a total capacity of 50 metric tones. The project works had
       consumed about 4,546 metric tones of explosives by end of January 2002. The prime
       responsibility for storage and safe custody of such large volumes of explosives should
       not lie with the project authorities, managements and their contractors. The
       explosives magazines could be built at required locations in the project area by the
       project authority as per the specifications approved by the MoHCA to be operated by
       State Trading Corporation of Bhutan (government authorized dealer) and guarded by
       RBP or NISF personnel. Armed escorts will have to be provided by RBP whenever
       explosives are transported from STCB‘s mother magazine(s) to site magazines and
       within the project area. Regular inspections of site magazines and checking of monthly
       consumption of explosives should be carried out jointly by the Division of Law &
       Order (MoHCA), concerned Dzongkhag administration, RBP and project‘s chief
       security officer (deputed by ISF) and destruction of damaged or expired explosives,
       detonators and accessories to be carried out as per prevailing Explosives Rul es &
       Regulations. All these measures will enable proper storage, custody and handling of
       explosives and prevention of untoward incidences involving such restricted and
       dangerous items.

10.7Infrastructure Facilities
10.7.1 Unhindered road access to the hydropower project sites is the most crucial enabling
        condition for timely and successful implementation. Delays in transportation of goods,
        machinery and services to project sites due to road blocks or traffic jams will lead to
        slow progress of works, substantial increase in project cost and contractors‘ claims.
10.7.2 Since most project sites to be implemented are in central and western Bhutan, the
        immediate tendency of the contractors would be to use the Phuentsholing-Thimphu
        highway for transportation of construction materials and movement of heavy
        machinery. When this happens, the traffic density on this vital national highway would
        suddenly increase and would hinder the implementation of Punatsangchhu-I (1,095
        MW) and Punatsangchhu-II (990 MW) mega projects. Further, the Phase-III road
        widening activity of DANTAK will further compound this problem. And conversely,
        such a situation may also drastically slow down the progress of DANTAK‘s works on
        the highway.
10.7.3 During the peak construction stage of Tala Project, the traffic density had increased
        very significantly on the national highway between Phuentsholing and Wangkha with
        the addition of more than 150 to 200 trucks daily carrying construction materials and
        supplies to the project sites. This led to the rapid deterioration of the highway (as it
        was not built for such higher loads), occasional vehicle accidents and traffic jams which
        caused delays in transport of men & machinery and inconvenience to travelers.
10.7.4 Long and frequent traffic jams or road blocks on the Thimphu-Phuentsholing highway
        will not only lead to costly delays during the construction period but also adversely
        affect the daily lives of many living in the capital, western and part of central Bhutan.

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       The Jhumja landslides during rainy season will add yet another dimension to this
10.7.5 Therefore, to avoid such an undesirable and costly situation in the near future,
       widening of Gelephu-Sarpang-Tsirang-Wangdi and Gelephu-Trongsa roads and
       construction/reinforcement of bridges need to be accorded top priority as the basic
       enabling condition for Punatsangchhu-I & II, Dagachhu (CDM), Nikachhu and
       Mangdechhu projects. It is recommended that the above mentioned works be taken
       up by the Ministry of Works & Human Settlement using our internal resources.
10.7.6 However, while widening and up-gradation of Gelephu/Sarpang-Tsirang-Wangdi road
       is undertaken, due consideration needs to be given to the level and extent of
       submergence which would result when Sunkosh Project is implemented (up to 391.2
       masl as per DPR, 1995, CWC, GoI). The highways/roads and bridges which need to
       be upgraded in the immediate and near future are given in Table 10.1. The Table also
       includes new roads which needs to be built on priority basis to meet the given
       implementation schedule (2008-2028).

       Table 10.1: Access Roads to Facilitate Implementation of Hydro Projects (2008-28)
        Highway/Road/Brid           Hydropower            Constructe             Remarks
                  ge                   Projects           d/upgraded
        Gelephu-Sarpang-        Punatsangchu I & II & 2008               About 77 tons single
        Tsirang–Wangdi          Dagachhu (CDM)                           load expected with
                                                                         4.5x5.5x6 metres trailer
                                                                         weighing      30      tons
        Gelephu-Tingtibi-       Mangdechhu            & 2009             -do-
        Trongsa                 Nikachhu
        Tingtibi-Gongphu-       Chamkharchhu-I            2010-2015      Prioritize construction
        Digala-Thidangbi        (Digala),                                of inter-district highway
        (Mongar) link (Inter- Chamkharchhu-II                            Gomphu-Shingkhar
        Dzongkhag               (Kheng Shingkhar) +                      (Zhemgang)             and
        connectivity)           power transmission                       extension to Thidangbi
                                right of ways)                           (Mongar)
        Halhalay(Samtse)-       Amochhu I                 2009-2013       Prioritize            the
        Dorokha-Rangtse-                                                 construction           and
        Yaba      (23+40+11.3                                            upgrade to 2 double
        km)                                                              lane roads.
        Mongar-Lhuentse-        Khomachhu                 2013           Build this section of
        Khoma                                                            road and bridge over
        Tashigang/Chazam-       Kholongchhu               2009
        Mongar-Lhuentse         Rotpashong                2009
        Phuntsholing-Raidak-    Sunkosh & East-West 2009                 Schedule construction
        Lhamoizingkha-          national highway                         of Sunkosh Project and
        Phibsoo-Sarpang-                                                 SEWH so that Sunkosh
        Gelephu                                                          lift dam would serve as
                                                                         the      bridge     across
                                                                         Sunkosh       river      in

10.8Construction Power
10.8.1 Construction power would constitute yet another very important requirement for
       implementation of hydro power projects. Tala Project‘s demand during its 5 years of

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       peak construction stage was about 14 MW and was provided by CHPC located just 3
       km upstream of Tala‘s dam at Wangkha. Therefore, just as access roads have to be
       built or upgraded, the transmission lines and substations have to be constructed as per
       the schedule given below and this task is proposed to be given to BPC as soon as
       agreements are signed with the parties concerned for implementation.

       Table 10.2: Arrangement for construction power
     Construction Power &            Hydropower           Proposed            Remarks
        Telecom Facilities              Projects           Action
    66/33 kV Transmission Puna I, Puna II & Construction                About        15     MW
    lines    from     Rurichhu/ Dagachhu CDM            power lines to construction power
    Tsirang        transmission                         be    initiated required for Puna-I
    substations                                         from 2007       and Puna-II and about
                                                                        10 MW for Dagachhu.
    132/33 kV lines extension Mangdechhu              & 2009            15        MW           for
    from            Yurmochhu Nikachhu                                  Mangdechhu and 10
    substation                                                          MW for Nikachhu
    132/33 kV lines extension Chamkharchhu              2010            15 MW each for each
    from Tingtibi                                                       Project.
    132/33 kV lines extension Kholongchhu,              2010-2020       15 MW construction
    from Kanglung/Nangkor/ Rotpashong and Khoma                         power is required and
    Gyelpoizhing/Tangmachhu                                             delivery       to       be
                                                                        scheduled       as per
                                                                        Implementation Plan
    66/33 kV lines extension For Amochhu Power          2009-2013       -do-
    from Samtse/P/ling
    220/400 kV lines extension Sunkosh                  2009            Choose higher voltage
    from Malbase/Monitor or                                             for inter-connection
    from Jigmeling/Tsirang                                              possibility in future.

10.10 Labor and Immigration
10.10.1A total of about 17,000 workers were engaged during the peak construction stage of
       1,020 MW Tala Project. Punatsangchhu-I and II together would engage about 30,000
       workers when their peak labour requirements overlap. About 90% of this work force
       would be foreigners who would become fairly mobile once they are inducted. Further
       another 30-40% of this number will constitute people who will be going out on leave,
       getting repatriated or getting listed as absconded. In this regard, the immigration
       offices at the border town(s), at check post(s) and at outpost(s) in the project area
       need to be strengthened with adequate staff and modern office equipment to keep up-
       to-date accurate records of entry and exit of foreign workers and fast verification of
       the identity of workers. The Labor Wing of the project would be their counterparts
       for ensuring peaceful working atmosphere in labor camps, general welfare of the
       laborers, their safety at work places and compensation in cases of accidents.

10.11 Health Services
10.11.1The Ministry of Health will have to provide the necessary health service support
       through establishment of hospitals and BHUs in project areas to cater to the project
       staff and workers. The hospitals and BHUs should be adequately equipped to deal with
       accident cases and carry out regular activities to prevent diseases in the project area
       or spread of disease from labor camps to local communities and vice-versa, and
       promote health and sanitation. In coordination with the Dzongkhag health officials, the
       project hospitals should initiate and carry out awareness campaigns on STD, HIV/AIDS,
       malaria, dengue and other life-threatening diseases.

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10.12 Emergency and Disaster Management Plans
10.12.1An effective monitoring and warning system will have to be established by the DGM in
       coordination with MoHCA for glacial lake outbursts (GLOFs) taking place at the
       sources of Phochhu and Chamkharchhu. This is of paramount importance to
       downstream projects like Punatsangchhu-I & II, Sunkosh, Chamkharchhu I & II projects
       where several hundreds of people would be working day and night at or near river
       bed level. This is a very serious concern as GLOFs are known to be very catastrophic.
       It is essential that the project authorities make emergency/contingency plans and
       standard operating procedures (SOPs) for safe evacuation of men and machinery in
       the event of such flash floods.

10.13 Legal Issues
10.13.1Legal, regulatory and contractual issues will dominate the implementation of the mega
       hydropower projects with the involvement of the multinational stakeholders through
       IPP. Not only the policies have to be translated into Acts, rules and regulations and
       monitored thereafter, but also systems for proper contractual dispute resolution as
       per international norm should be established. In this regard, the BEA has to be
       strengthened to enable it to initiate the formulation of the regulatory frame work and
       create conducive investment environment.
10.13.2The following legislations may need to be adopted/observed to create proper
       environment for attracting IPPs:

              IPP Act
              Arbitration Act
              Dispute Resolution System
              National Spatial Act for governing zoning for hydropower
              Amendment of the Electricity Act-2001 to empower the BEA instead of the
              Labour Act
              Immigration Act
              Investment Act

10.14 Support Services by Private Sector
10.14.1The private sector participation in the construction of 1,020 MW Tala Project has
       been quiet substantial given the absorptive capacity of the local economy. The national
       contractors have taken up contracts and work orders for roads and buildings worth
       Nu. 4.52 billion during the period May 1997 – December 2006. For details refer table

       Table 10.3: Payments made by THPA and its Executing Agencies to National Contractors
       S#        Type of Payment            THPA                THPA                Total
                                         (Nu. million)       Contractors            (Nu.
                                                             (Nu. million)         million)
       1    Payment on account of                  2,120                   975           3,095
            contracts awarded
       2    Payment on account of work               324                1,101            1,425
            order awarded
            Total                                  2,444                2,076           4,520

10.14.2Considering the huge quantities of construction materials (steel, cement, sand,
       boulders, etc.) which would have to be transported to the project sites almost daily

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       from the border town, the private sector would have to gear up to meet this
       enormous and critical requirement. The owners of local trucks and trailers should
       take all necessary prior actions to avail this opportunity and ensure that the bulk
       transportation needs of the project are fulfilled by them. The Bhutan Chamber of
       Commerce and Industry (BCCI) should find out the details of such requirement when
       projects are about to be started and quickly disseminate the information to the local
       transport agencies well before tendering of project works start.

10.15 Supply of Construction Materials
10.15.1Besides cement, steel and explosives, the projects would also require huge quantities
       of sand and aggregates of appropriate quality and strength for the construction of dam
       structures, tunnel lining, etc. Private business houses which have already been given
       licenses for operation of quarries, for example, in Wangdi-Punakha area should get
       their materials tested in advance for their physical properties and alkali-silica reactivity.
       If the quality and specification of the materials are found suitable they could supply the
       material as boulders to the major contractors to supplement their bulk requirement
       at rates negotiated between the parties. Such boulders could be extracted from
       quarries or from river beds. The DGM should initiate geological studies to locate
       suitable quarries and river borne material (RBM) in project areas for allotment to the
       lowest bidder through public auction. Competing demand from the housing industry
       might not leave much for the project requirement. Therefore, as far as possible,
       specific quarries need to be identified and reserved for projects. The DGM in
       coordination with the DoE and the DoF should carefully look into this future need
       and plan accordingly for making the materials available. In the event the sand quarries
       are not feasible or suitable, the possibility of setting up crushing plants should be

       Table 10.4:     Consumption of Cement, Steel, Aggregate & Explosives in Metric Tones (MT)
                for THPA up to 31 January 2007
        Works/Contracts           Cement           Steel         Explosives       Aggregate
        C1 Package (Dam
        complex)                     235,236.55     32,857.88         1,356.35      1,058,269.23
        C2 Package (HRT)              70,198.58      4,304.48           523.05        351,533.32
        C3 Package (HRT)              63,722.30      4,561.04           480.01        200,391.65
        C4 Package (HRT)              95,021.80     10,645.14           593.36        476,295.94
        C5 Package (Power
        complex)                     191,396.00     27,515.00         1,043.65        473,228.00
        (Civil)                       47,170.59      3,994.21           529.85         70,269.00
        Works                         17,960.55     11,961.05            20.11         94,126.00
        Works                          2,983.75      2,362.72            -------            -----
        Total                       723,690.12    98,201.52          4,546.38     2,724,113.14

10.16 Supplies of POL and LPG
10.16.1 The local distributors of POL and LPG should set up their outlets in or near the
    project area(s) for supply to project establishments, major contractors and the townships
    which are expected to spring up in the vicinity of project locations. Their storage
    capacities would have to be large enough so that they would be able to cater to the
    requirement of all relevant agencies. If this does not happen then there is likelihood that
    contractors will keep their own stock of POL to meet emergency requirements arising
    mainly from road blocks due to landslides during the rainy season. The concerned

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    Dzongkhag Administration and Government Agencies will have to allot land on lease at
    suitable locations to the local POL distributors to set up their depots.

11 Environmental and Social Impacts
11.1. Introduction
11.1.1. The accelerated development of hydropower projects and subsequent development of
        other important sectors in the country will inevitably result in impacts on our
        environment. This chapter highlights some of the major environmental concerns due
        to accelerated hydropower development in the country.

11.2. Impacts on Forest Coverage
11.2.1. Bhutan has a statutory requirement of maintaining 60% of the land under forest cover
        for all times to come. While most of the hydropower projects are environmentally
        friendly, the concern of deforestation and resulting environmental impacts are
        nevertheless apparent. As of today, Bhutan has a forest area of 72.5% of the total land
        area. The total area of forest with crown cover over 10% is 64.4% and the area under
        scrub forest is 8.1% of the total land area. The details are provided in the table below.

       Table 11.1: Forest Coverage
                   Land Use Types                         Area (Km2)   As % of Land Area
        Forest (with >10 % crown cover)
                                              Fir            3,453             8.6
                                  Mixed conifer              4,868            12.2
                                       Blue pine             1,286             3.2
                                       Chir pine             1,009             2.5
                             Conifer + broadleaf             1,358             3.4
                                       Broadleaf            13,749            34.3
                                      Plantation                64             0.2
         Sub Total                                          25,787            64.4
         Scrub forest (Forest with < 10 % crown              3,258             8.1
         Sub Total                                           3,258             8.1
         Total Forest                                       29,045            72.5
         Source: MoA, 1995

11.2.2. As per data on accelerated hydropower development (2008-2028) provided by the
        DoE, approximately 165.49 km2 of forest area would be affected by accelerated
        hydropower development, which represents about 0.64% of the total forest area with
        cover. This means that the area under forest cover of the country would be reduced
        to 63.76% from the present figure of 64.4%. Further, there is another 8.1% of the
        forest area categorized as scrub forest. Therefore, the total area that would be
        available for all developmental activities, without compromising the statutory
        requirement of retaining 60% of the land under forest cover for all times to come,
        would be 12.5% of the total land area. The total forest area that would be affected
        through hydropower development would not reduce the area below the statutory
        requirement enshrined in the Constitution. The details of total land requirement are
        given in the table below.

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       Table 11.2: Land/Forest area requirement for Hydropower Development.
            Particulars             Existing (Km2)          Future Requirement (Km2)
       Rural Electrification              28.22                        25.45
       Transmission                       18.16                        23.10
       Submergence                         0.74                        69.82
       Total                              47.12                       118.37
       Source: DOE, 2006

11.2.3. Further, even after considering the remaining potential sites for development of
        hydropower, a maximum of 300 km2 of forest area is expected to be affected.
        Therefore, taking this as the total impact of future development of hydropower, the
        total forest land required for the development of hydropower, as per the PSMP would
        be about 1.2% of the total forest area.
11.2.4. However, even if changes in forest cover, due to accelerated hydropower
        development seem insignificant, the implication on area due to infrastructure
        development in the other sectors (as per SGNH) such as roads, urban development,
        etc. needs to be considered to provide an overall picture.

11.3. Transmission/Evacuation of Power
11.3.1. The transmission lines for power evacuation from Punatsangchhu II and Mangdechhu
        (and later - Chamkharchhu I and II) which is proposed through Jigme Singye
        Wangchuck National Park and Royal Manas National Park to India through Gelephu is
        very crucial for these projects. Hence RoWs and corridors for these lines should be
        incorporated within the zoning group.

11.4. Watershed Management and Environment Conservation
11.4.1. Water is a crucial element for development in general and hydropower development
        in particular. Therefore, conservation, development, utilization and management of
        this important resource will have to be guided by national goals. Effective watershed
        management is imperative for water resources conservation and sustainable utilization.
        Due to rapid pace of socio-economic development, there is increased pressure on
        watersheds. Although harvesting of forest produce is based on sustainable
        management plans, increasing demand for timber, firewood and non wood forest
        produce is starting to have negative impacts on watersheds. Further, forestland
        encroachment and forest fires pose serious challenges for watershed conservation.
        Therefore, the management of watersheds as a reservoir of water and other natural
        resources must be addressed collectively in the interest of all resource users.
11.4.2 Most of the hydropower projects today are mainly run-of-the-river schemes. As such
        they do not pose serious environmental and social threats as in other countries.
        However, the cumulative impacts of multiple projects could be a concern.
11.4.3 During construction phase of the projects, it is a requirement, as per law, to have an
        environment management plan (including environment mitigation) drawn up for the
        project. Drawing from the experiences from the neighbouring countries, a budget of
        0.5 – 1% of the total project should be earmarked for environment management and
        mitigation. This will take care of environmental concerns during the construction stage.
11.4.4 The above proposal will only take care of environmental concerns during the
        construction stage. Therefore, to ensure steady supply and flow of water, it is
        important that efforts on watershed conservation are pursued on a continuous basis.
        This will call for plough-back of funds for the above purpose. One way of doing this
        could be through channeling funds for conservation directly. Alternatively, a small -
        scale or a medium-scale HP plant could be dedicated to conservation of the
        watersheds and catchments.

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11.5. Water Resources Management and Coordination
11.5.1. Water allocation is not an issue as of now. However, in the longer term, there could
        be potential problem in this area. With rapid socio-economic development and
        population increase, the need for water in other sectors will rise. This may pose
        potential conflicts in the use of the resource. In addition, the value of water is often
        misunderstood as a free resource. This may not hold true, especially when IPPs and
        private sector participation becomes more prominent in the future. Water resource
        should be priced (in an equitable and affordable manner) to make the users
        understand the value of the resource. A surcharge could be imposed on the project
        developers/water users for the use of the resource.
11.5.2. The institutional capacity building efforts in the energy sector should also be
        accompanied by subsequent capacity building in other sectors – such as Environment,
        Forestry, Immigration, Customs, etc. Since 2002, the NEC has been appointed as the
        Focal Agency for water resources coordination and regulation. However, additional
        resources and manpower have not been allocated to pursue the mandates in the
        water resources sector.
11.5.3. The need for an integrated approach is crucial for effective management of water
        resources for fulfilling our diverse national objectives. An enabling environment has to
        be created for active participation of all stakeholders and for an integrated water
        resources management. A common framework for water resources assessment is
        crucial for informed decision-making. The inventory of water resources both in terms
        of quality and quantity needs to be developed. The development of the HP sector has
        to take into consideration the water needs and use of other sectors.
11.5.4. There is a need for coordinated efforts on all water resources development in the
        country. It is also pertinent that an institutional base be created to ensure an
        integrated approach in the management of water resources and its sustainable
        utilization. Efforts under accelerated hydropower development must consider the
        needs and development of the other related sectors. While hydropower development
        is crucial for Bhutan‘s economic development, it should not compromise the needs
        and requirement of other sectors.
11.5.5. With accelerated development of HP sector, the role of NEC will increase
        substantially (Clearance procedures, monitoring, strategic environment assessment,
        coordination, etc). In addition and as the apex body on water resources coordination
        and regulation, the NEC is expected to execute the following functions:
         Planning of water resources at national level,
         Formulation of water policy and required legislation,
         Monitoring and evaluation,
         Setting water quality standards and guidelines,
         International water co-operation,
         Licensing and regulating activities,
         Report to the Government/National Assembly
11.5.6 Further, in collaboration with relevant sectors, the NEC is expected to coordinate:
         Research, development planning and support,
         Capacity building and technical backstopping,
         Coordination of emergency preparedness,
         Data collection and distribution,
         Flood and disaster management related to water resources
11.5.7 With accelerated development of HP Sector, the role of NEC in each of the above
        areas will increase substantially. This will call for additional resources (financial and
        human resources) to execute the above functions in an effective manner.

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11.6 Glacial Lake Outburst Floods (GLOF)
11.6.1. Climate change has serious impacts on Bhutan. Glacial Lake Outburst Floods (GLOF)
        are increasingly becoming threats due to melting of glaciers triggered by climate
        change. GLOFs have serious impacts on life, properties and future infrastructure
        development in the country. Another major impact of climate change will be in
        reducing the natural flow and regulating capacity of the glaciers to feed our rivers with
        serious consequences on our water resources. Therefore, since Bhutan is affected by
        this phenomenon on which we have no control, we must continue to participate in
        international forums on climate change to negotiate on mitigation measures for our
        important resources. In addition, we must also mobilize resources to do things on our
        own. Hydropower development in Bhutan should consider the potential risks
        associated with GLOF, especially in the river basins which are glacial-fed.
11.6.2. There are various interventions being pursued through GEF in the country. These are:
         Lowering of Thorthomi lake/early warning system in Punatsangchhu valley and
          hazard zonation of Chamkharchhu. The total amount of the project is US$ 3.5m and
          PDF-B has been approved for project. The NEC, as the focal agency on United
          Nations Framework Convention on Climate Change (UNFCCC) is the executing
          agency and the DGM is the implementing agency.
         Hazard zonation of Punatsangchhu (downstream of Khuruthang until Kalikhola): The
          total project amount is 84,000 Euros funded through the Netherlands Climate
          Assistance Programme (NCAP). The NEC, as the focal agency on UNFCCC is the
          executing agency and the DGM is the implementing agency.
11.6.3 Future development in the HP sector may be pursued keeping in mind the above
        programmes and also future programmes that might come in as a result of the
        UNFCCC process.

12 Integration with the 10 th FYP
12.1To achieve the above targets in the sector, a lot of activities will have to be initiated
    within the 10th FYP. During the 10th FYP, the energy sector would like to focus on
    accelerated hydropower development and institutional capacity building of the sector.
    This includes the development of major hydropower projects of Nu. 179.00 billion
    (outside of the normal planned works) and total planned works of Nu. 6.30 billion.
12.2The 10th FYP projects mainly include the interconnection transmission lines for industrial
    development in Bhutan, rural electrification of 25,000 households, hydropower
    development DPRs and feasibility studies, Institutional Strengthening and Capacity
    Building, Renewable Energy, and others for total plan outlay of Nu.6,308 million.

       Table 12.1 Summary of the 10 FYP works.
          Sl.         Code                       Program                      Budget in Nu.
          No.                                                                   (millions)
           1      MTI/007/01      Power Transmission Programme                         1,340.000
           2      MTI/007/02      Rural Electrification Programme                      3,162.000
           3      MTI/007/03      Accelerated Hydropower Development                     792.110

           4      MTI/007/04      Institutional strengthening of the                     666.455
                                  Energy Sector -
           5      MTI/007/05      Development of Renewable Energy -                      343.120
           6      MTI/007/06      Strengthening of National Hydrological                 145.990
                                  and Meteorological Services -
           7      MTI/007/07      Electricity Regulation -                               200.000
           8      MTI/007/08      Private Sector Participation -                          72.000
                                         TOTAL                                        6,721.680

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12.2.1 The bulk of the above planned works are for the power transmission works (Nu.
       1,340 million), the Rural Electrification Programme (Nu. 3,162 million), and
       Development of Renewable Energy (Nu. 343 million). Fund for these projects have
       already been identified under GoI, JBIC loans, and RGoB budget respectively. Budget
       for the power transmission network is being proposed as part of the GoI assistance
       for the upcoming industrial estate. Funds for the RE is being negotiated with the JBIC
       to be directly passed onto the BPC who will be implementing the RE projects.

12.3For accelerated hydro development, the direct cost is for the activities identified for the
      preparation of the project feasibility studies and DPRs (Nu. 792 million). Since the
      DPR and reports are very crucial for accelerating the development of the hydropower
      projects, fund requirement for these activities shall be sourced from internal
      resources such as the hydropower retained earnings (20%) in the event the budgetary
      support for the amount is not available.
12.4The budget required for strengthening of hydro-meteorological services is Nu. 146.00
      million mainly for the collection of data and hydrological studies important for the
      design of the hydropower development. This amount is required for strengthening and
      establishment of additional gauge stations for the new hydropower sites where
      readings are either not available or need to be validated.
12.5The budget for electricity regulation (Nu. 200 million) and for private sector participation
      (Nu. 72 million) are mainly for strengthening of the BEA, developing the regulations,
      preparation of the tender documents and policies for private sector participation.
      Since IPP is being taken up on priority basis, bulk of the budget shall initially be used to
      acquire short term institutional requirement like hiring of the professional services,
      etc. Fund for this shall be sourced either through NORAD institutional cooperation
      and other donor agencies or collected through the levy of licensing fees from the
      generating plants as per the provision of the Electricity Act by the BEA.
12.6The development of the major hydropower projects under the accelerated program has
      been kept outside the plan works as used to be done in the past, especially for those
      projects identified under the bilateral financing:

       Table 12.2: Summary of Major Hydropower Projects Budget outside Plan works.
         #.             Description of Projects/ Activities                   Budget
                                                                           (Nu. Millions)
        1     Construction of Punatsangchhu I HEP (95 % of fund                     44,905.00
        2     Construction of Sunkosh HEP (34 % of fund disbursement)               58,991.00
              Bilateral                                                              103,896
        3     Construction of Dagachhu CDM HEP (100 % of fund                        7,387.00
              RGoB                                                                  7,387.00
        4     Construction of Mangdechhu HEP (50 % of fund                          16,800.00
        5     Construction of Punatsangchhu II HEP (50 % of fund                    24,800.00
              Joint Venture                                                        41,600.00
        6     Construction of Kholongchhu HEP (35 % of fund                          8,505.00
        7     Construction of Nikachhu HEP (30 % of fund                             3,120.00
        8     Construction of Chamkharchhu I HEP (23 % of fund                       7,705.00
        9     Construction of Rotpashong HEP (35 % of fund                           7,000.00

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                                      IPP                                         26,330.00
                                    Total:                                       179,213.00

13 Recommendations
13.1The energy sector shall target an additional capacity of 10,000 MW by the year 2028.

13.2Facilitate and enable the sector to achieve the above target through the following action
13.2.1 Adopt the draft Energy Policy, Hydropower Policy & IPP Guidelines.
13.2.2 Amend FDI policy to include 100% participation in power sector with investment in
       Rupees also.
13.2.3 Establish Druk Green Power Corporation (DGPC).
13.2.4 Strengthen and grant autonomy to BEA.

13.3   Initiate IPP projects.

13.4Initiate and establish Joint Working Group as per Umbrella Agreement.
13.4.1 Start DPR studies for the listed projects by July 2008. Update studies for Sunkosh.

13.5Accommodate the change in strategy for urban growth centres and cluster growths (road
        networks and other infrastructure) in the RE Master Plan, in consultation with other
        zoning group and NSP-2008

13.6Remove subsidy for industrial power tariff.

13.7Explore the following financing options:
13.7.1 Initiate for more bilateral projects, including Sunkosh.
13.7.2 Promote Joint Venture partnership between Indian PSUs and RGoB.
13.7.3 Attract and promote private sector investment through IPP.

13.8Create the following enabling environment for investment:
13.8.1 When DPR is ready, all clearances for project DPRs are ready.
13.8.2 Government to do all land acquisitions and endorse the draft RoW Regulations within
       the proposed National Spatial Policy/Act.
13.8.3 Adopt suggested definition of forest cover and identify hydropower sites and
       transmission corridors as per the PSMP (2004) and the document on Accelerated
       Hydropower Development in the zoning strategy.
13.8.4 0.5% to 1% of project development costs should be dedicated to watershed
       conservation and management during project construction.

13.9Enact the following Legislations/Regulations:
        Contract Law
        Arbitration Law
        IPP Law
        Amend Electricity Act to transfer some of the powers vested in the Minister to
        RoW Regulations

13.10 Implement following strategic project infrastructures:
13.10.1Upgrade existing and construct new highways and bridges line with the hydro strategy.

                              Annexures to the Strategy for Gross National Happiness

13.10.2Encourage private sector participation for construction colony developments.
13.10.3Align power network (construction power) and telecommunication networks in line
       with the hydro sites.
13.10.4Facilitate supply of local materials like sand and stones to the project sites. DGM to
       identify quarries and test material quality in advance.
13.10.5Require transmission licensee (BPC) to invest in the transmission network both for
       domestic as well as generating plants including IPP through self financing and joint
13.10.6Allow evacuation of power from Indian projects in Gongri head waters in Arunachal
       Pradesh to load centres in India using Bhutan‘s transmission lines.

13.11 Re-invest 20% (from June 2007) of profit after tax of the fully government-owned
       hydropower plants to be used for preparation of DPRs and equity injection in new
       power plants.

13.12 Expedite clearances and permits through inter-sectoral coordination amongst agencies
        like NEC, DoF, DGM, DoR, DRC, RSTA and Dept. of Immigration.

                                  Annexures to the Strategy for Gross National Happiness

Part II. National Spatial Policy (NSP 2008)
The National Spatial Policy 2008 is a twenty year strategy that aims at achieving holistic
economic development for Bhutan through high-quality planning, development and use of the
spatial resources and values of Bhutan. It recognizes that every region and place has its own
potential and roles and seeks to develop these potential to their highest levels to contribute
to the optimal overall development of the country. It ensures that regions are developed in a
competitive manner that works to complement other areas and not work against each other.
The main objectives are a better quality of life for the people of Bhutan, a strong, competitive
economic position and an environment of the highest quality.

Present spatial structure in Bhutan
The table below presents a quick summary overview of the current spatial land use in
Bhutan67 :

                         Land use classes      Area in „000 Ha     Percentage
                   Forests                              2,578.70         64.35
                   Scrub/Shrubs                           325.80          8.13
                   Pasture                                156.40          3.90
                   Agriculture land                       314.60          7.85
                   Settlements                              3.10          0.08
                   Water spreads                           30.40          0.76
                   Others (rocky outcrops)                598.50         14.93
                   Total                              4,007.50         100.00

Bhutan is spatially divided into twenty Dzongkhags and two urban Municipalities which are
currently being developed with development aims that are basically the same and contained
within each Dzongkhag. Spatial development is thus fragmented. The diverse context and
distinctive potential of one area as opposed to another area is not really taken into account
to contribute to the optimal development of the country as a whole.

No comprehensive spatial frameworks, plans or polices exist in the Government that looks at
the spatial development and land resource utilization of the country as a whole. Each Agency
has is own proposals, follows its own regulations and has its own sector legislations which
often contradicts the legislation and policies of other sectors. There is thus a lack of
coordination and cohesion for the spatial development, use and planning in Bhutan.

Present spatial practices demarcate zones but do not actually comprehensively study and
clear them for the activities they have been zoned for. This means that an agency or
individual that wants to implement a task or project within these areas has to travel from
office to office and wait long durations- often several months and at times even years - to get
clearances from various agencies such as environment, forest, mining, industrial, municipal,
and Dzongkhag to name a few.

Thus, although an area is zoned for an activity, to actually initiate and implement the activity
requires exhaustive effort and time for clearances leading to waste of funds and time. This
does not create a conducive and attractive environment for investments nor ensures robust
economic growth at an optimal pace.

     Land Use Survey 1995

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The Department of Survey and Land Records (DSLR) has thus far only been able to update
the 1:50,000 topographic maps originally produced by Survey of India. Recently it has initiated
the production of 1:25,000 series topographic maps, and established a permanent GPS
reference station to facilitate efficient ground survey. Shortage of funds and lack of primary
data have hindered the full potential to embark on the 1:25,000 and larger scale mapping that
is necessary for zoning.

To ensure that the spatial values of the country are harnessed to stimulate and support a
high-quality socio-economic growth in Bhutan at an optimal pace, it is necessary to plan ahead
for the allocation and management of the spatial values of Bhutan (land, water and other
natural resources) as a whole and for the appropriate distribution of population, commerce
and public facilities within this spatial framework. This consequently will ensure a better
quality of life for the people of Bhutan, a strong, competitive economic position and an
environment of the highest standard in the world.

National Population Settlement Objectives
The current Government objective is to try to stem and slow the fast migration of population
from rural to urban areas. This creates a weak urban development system. However, the NSP
2008 acknowledges that there is a strong relationship between the settlement size to create
critical masses and the levels of services that can be supported. The support of a balanced
distribution of population growth in Bhutan thus requires the economic strength that urban
structures provide. Strong economic conditions in turn sustain and expand employment and
population levels.

Therefore rather than trying to stem the inevitable flow of population from the rural areas to
the urban centres, spatial allocations and management should be put in place to not only
allow this urban growth but also to enhance these urban areas to ensure that the potential
and levels of services rise within a reasonable and cost efficient spatial development
framework. The creation of dynamic and competitive economic conditions in regional urban
centres other than Thimphu or Phuentsholing will support the ability of places to retain their
existing population within the regions and ca ter for increasing population. With the
establishment of selective urban hubs and centres in different regions of Bhutan, the
population could be regionally balanced as opposed to the present trend where the rural
urban migration is mainly from east to west.

Recommendations for spatial use to enhance holistic economic development
To ensure that the spatial values of the country are harnessed to stimulate and support high-
quality socio-economic growth in Bhutan at an optimal pace, it is necessary to plan ahead for
the allocation, and management of the spatial values of Bhutan. The recommendations are
given below:

The Spatial Values of the Environment
The rich and beautiful natural environment in Bhutan and its values and resources are among
the greatest assets of the country. The environment is an integral part of the good quality of
life that the Bhutanese enjoy and it is also greatly appreciated by visitors from around the
world. The values and resources of the environment are already proving to be a great
stimulus for economic growth through industries such as tourism and power. The protection
and enhancement of the rich natural environment that Bhutan presently enjoys is thus an
important objective. However, to ensure optimal socio-economic growth for the Bhutanese,
it is important to not only maintain and enhance the quality and diversity of the natural
environment and its resources but also to tap and integrate these values in a sustainable

                                Annexures to the Strategy for Gross National Happiness

manner to accommodate and enhance economic development strategies and activities that
will consequently create a dynamic and unique economic position for Bhutan.

Maintaining and enhancing the natural environment in Bhutan
Protected Areas: national parks, wild life sanctuaries, nature reserves
Prior to 1993, the Protected Area system comprised only of areas in the Northern and
Southern parts of the country. Since this did not represent all the ecosystems in the country,
the protected area network was revised to rationalize the ecological representative -ness of
the country. In 1993 except for Royal Manas National Park, all other protected areas were
―Paper Parks‖ with little or no management. Since then six more protected areas – Jigme
Dorji National Park, Thrumshingla National Park, Jigme Singye National Park, Bumdeling
Wildlife Sanctuary, Sakteng Wildlife Sanctuary and Phibsoo Wildlife Sanctuary have been fully
operationalized. Khaling (Shingkhar-Lauri) Wildlife Sanctuary and Toorsa Strict Nature
Reserve will be operationalized during the 10 th Five Year Plan.

In order to enhance the protection and development of the Protected Areas in Bhutan within
the NSP 2008, the following are recommended:

i.    Maintain the current status quo of the Protected Area system.
ii.   Upgrade all management plans for present Protected Areas according to the policies and
      objectives of the SGNH.
iii. In the northern areas above 3000 masl and slopes above 51 degrees, the protection of
      the environment should be accorded high priority thus effectively increasing and
      enhancing the protected areas of the Bhutan.
iv. Create and implement new environment management and area development plans for
      these areas.
v. Operationalize Khaling Wildlife Sanctuary and the Toorsa Strict Nature Reserve during
      the 10th Five Year Plan.
vi. Address environment protection conflicts among different land resource utilization
      agencies and individuals through the legalization of NEPA (National Environmental
      Protection Act) which is presently being prepared by the NEC.
vii. Where Protected Areas are absolutely essential and are currently being disturbed by
      human settlements, measures for resettlement may be carried out. However,
      resettlement should be carried out in a manner that does not adversely affect the lives
      and future development of the people identified for resettlement. The resettlement thus
      should effectively be carried out to improve the quality and standard of lives and there
      should be no mandatory resettlement before notification.
viii. No immigration into the Parks should be allowed
ix. Parks should encourage voluntary migration from the Park. Each Park with inhabitants
      should explore and formulate incentives and resettlement plans in coordination with
      other relevant agencies so that these options are available to the inhabitants and not
      hastily drawn up in the last stages of necessity.
x. For effective holistic and sustainable management, the Parks will be zoned into core,
      multiple use and buffer zones.
             a. Core zone- strictly for conservation
             b. Multiple use zone- limited use of park resources such as supply of forest
                products for park residents, trekking, and other non-consumptive uses
             c. Buffer zone- same level of use as other forest areas.
xi. The Parks will promote ICDP (Integrated Conservation and Development Programs).
xii. Management of the use of Park should be planned and implemented at a high
      professional standard that enhances the environment of the Park but does not keep the
      Park in isolation and allows it to integrate into future development strategies of a region.

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xiii. To ensure the parks are not encroached by buildings, thus spoiling the attractiveness or
      the balance of environment within Parks, careful regular monitoring systems should be
      kept in place. Green buffer belts between the Parks and built up human areas should be

Biological Corridors
With a total area of 3800 km2 , Biological Corridors (BCs) form 9% of the country. BCs are
expected to provide space for movement of mammals from one protected area to another.
BCs also ensure that there is no fragmentation of habitat and that mammals can move around
within their natural range. Therefore, for protected areas to function, biological corridors are

However, BCs do not have the same legal status as that of National Park, Wildlife Sanctuaries
and Strict Nature Reserves. BCs are equivalent to a ―multi-purpose use zone‖ where
sustainable use of resources that do not disturb the movement of mammals that cross them
is allowed. Some of the BCs pass through human habitations while others are dissected by
large rivers.

The following are recommended for biological corridors:

i.     The BCs be maintained as they are to ensure that habitats are not fragmented. However,
       the BCs in the south-east require further studies to assess whether these areas are
       necessary or functioning as they should since these areas have not been studied properly
       in detail nor are there any recent reports on these areas. If these areas are not
       functioning as they should, then they may be removed to allow for development.
ii.    An updated detailed study of all other the BCs is also recommended.
iii.   The requirement of a legal status for BCs should be explored and enacted if necessary
       to ensure that they operate as required and are not in place in name only.
iv.    Where BCs are absolutely essential and are currently being disturbed by human
       settlements, measures for resettlement may be carried out.
v.     No migration into the BCs should be allowed.
vi.    BCs should encourage voluntary migration.

According to the Land Use Survey (1995) the total forest cover is 64.35% (2.6 million
hectares) with an additional 8.13% (0.32 million hectares) of scrub forest. The draft
Constitution of Bhutan requires that a minimum of 60% of the country must be maintained
under forest cover for all times to come. Till date the DoF has planted 20,000 ha of forest
land. The Master plan has indicated that the DoF must plant 2500 ha annually, which amounts
to 50,000 ha over a period of 20 years. Some of the constraints for successful plantation are
grazing, shortage of water and forest fire.

Assuming that 26,979 ha of forest land will be lost in the next 20 years for various
developmental activities, and that plantations will be carried out as planned, it will be possible
to maintain the 60% forest cover. It might be important to note that factors such as forest
loss to forest fire, disease, natural disasters, etc. has not been taken into account while
making the above projection. It is recommended that to ensure 60% forest cover while
allowing the rest to be utilized, it is important to put in place the following:

i.     A mechanism for regular monitoring of forest cover.
ii.    Regular monitoring to ensure survival of replanted trees.

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iii.   Any institution (mining, hydropower, road, tourism, etc.) using forest land should invest
       in replenishing the forest cover through providing funds or direct investment. The
       Environment Protection fund should be initiated with the help of these funds.
iv.    Effective coordination among all land users is necessary and a clear framework and
       management should be put in place for this.
v.     Promote both private and community forestry activities to encourage people‘s
       participation of conservation and management of forest as well as ensure forest cover.

Definition of Forest:
The present definition of ―FOREST‖ in Chapter 1, 3e, in the Forest and Nature Conservation
Act 1995 creates an impression that irrespective of whether there is tree cover or not, any
land that is not registered under an individual is forest. This registration is not accurate and
creates confusion.

The current definition of Forest Cover should be replaced by the following suggested
definition: ―Land spanning more than 0.5 ha with trees higher than 5m, and canopy cover of more
than 10%”. All other areas should be registered as Government Land.

Watersheds are one of the most important natural resources of Bhutan. It is imperative to
protect and enhance these resources. Currently there are 64 water sampling sites spread
across the country. Although superficial studies exist, a comprehensive study of watersheds is
yet to be conducted or made available. Further, presently there is no coordination in the
management or protection of watersheds as there is no single agency focused on the
protection of watersheds in spite of its importance as a natural economic resource and an
important ecological feature. The following are the recommendations for watersheds:

i.     Carry out a comprehensive study of water sheds and rivers in Bhutan and make the
       report available to all agencies.
ii.    Identify critical watersheds, and prepare and implement conservation plans.
iii.   Develop a framework to link upstream conservation efforts and downstream
iv.    Create a Watershed Conservation Fund (e.g. one chetrum to be contributed for every
       unit of electricity generated from hydropower projects) for management of watersheds
       and related programs.
v.     The study of glaciers and watershed management should be closely coordinated.
vi.    All agencies such as DoE, DGM, MoA, NEC, should coordinate for proper management
       and monitoring of catchments under the NEPA legislation.

Integrating environment values to accommodate and enhance development
There are nine protected areas in the form of national parks, wildlife sanctuaries and strict
nature reserves. Each of these protected areas represents the unique ecosystems of the
country. Presently these protected areas are primarily managed for conservation of
biodiversity. The management of protected areas could be diversified to derive economic
benefits through non-consumptive programs and activities such as trekking, river-rafting,
fishing, wildlife safari, bird-watching, etc. The table below presents the present situation and
the future potential of each Protected Area in Bhutan for integrated development goals:

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      Name       Size                    Significance                       Present Infrastructure      Inhabitants                Future potential
      of PA
1   Royal      1,000      Manas is the keystone national park in Bhutan     Park Range Office       3,250                   River Rafting
    Manas      km2        and world for the following reasons:              Guest House                                     Trekking
    Nationa                Is habitat for globally endangered species      Connected by motor                              Elephant Safari
    l Park                   such as tiger, rhinoceros, elephant,            road from the Indian                            Wildlife Sightseeing
                             leopard, gaur and pigmy hog and endemic         NH – with a distance of                         Bird Watching
                             species such as golden langur.                  29 km from Barpeta,                             Green Resorts
                           More than 424 bird species and 9 globally        Assam.                                          Research and training
                             threatened species                             Connected to Panbang                            Trans-boundary       Conservation
                           Large tracts of sub-tropical forest with         Dungkhag by motor                                Opportunities. Across the border
                             rich biodiversity                               road (12km)                                      is the Indian Manas National Park
                           River Manas flowing through the Park that       River    transport   by                          which has been designated as
                             adds to aesthetic value and aquatic             wooden boats                                     World Heritage Site. After the
                             diversity                                                                                        establishment of Bodo Territorial
                                                                                                                              Council, the Park has been fully
                                                                                                                              operationalized.     The     Park
                                                                                                                              receives hundreds of visitors
                                                                                                                              every month. The approach to
                                                                                                                              Royal Manas National Park is
                                                                                                                              through the Manas National Park
                                                                                                                              of Assam.
2   Phibsoo     278    It is the only habitat where spotted deer          Range Office               The village of       Elephant Safari
    Wildlife   sq km     (Axis axis) is found.                              Guest House                Singye falls in      Wildlife Sightseeing
    Sanctua     Altitu It is the only place in the country where          Seasonal      Four-wheel   the     buffer       Trekking
    ry           de      natural Sal (Shorea robusta) forest exists.         drive road from Sarpang    zone of the          Green Camping Sites
                 from   The Sanctuary is habitat for globally               – 32 km                    Sanctuary.           Bird watching
                 150m    endangered species such as tiger, elephant,        Wireless station                                Research and training
                 to      gaur.
                 700m   The Sanctuary could be home to 496
                         species of birds.
3   Jigme       4,200  There is a wide range of ecosystem –               The Park headquarters is To            be  Trekking
    Dorji        sq km   broadleaf, temperate, sub-alpine and                located at Gyan Damji surveyed             Collection of Medicinal Plants
    Nationa     1,650   alpine.                                             under Gasa Dzongkhag.                      Develop additional camping sites
    l Park       m to  It is habitat for the takin, the national            It is connected by the                      along the trekking routes
                 over    animal, blue sheep, snow leopard, tiger,            Tashithang-Damji motor                     Develop resorts in ―special

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                 7,000       leopard, marmot, samber                              road.                                designated zones‖ for the
                 m          There are 317 bird species and 9 globally           There are park range                 tourists.
                             threatened species                                   Offices located at Gasa,            Strengthen     Management    of
                            The Park is home to several valuable                 Lingzhi, Soe and Rimchu.             Medicinal Plants
                             medicinal plants such as Cordyceps,                 Camping sites have been             Organize Bird Watching Groups
                             Sasuria, Delphenuim, Datylorhiza, Putishing,         developed at Damji, Soe
                             etc                                                  and Jangkothang.
                            Most of the mountain peaks such as                  The Park headquarters is
                             Jumolhari,          Gangkar       Puensum,           connected by motor
                             Gangchentak are inside the park                      road – 50 km from
                            Spectacular scenery with snow-capped                 Punakha.
                             mountain ranges and vast valleys                    All Park Range Offices
                            Important rivers such as Thimchhu and                are connected by mule
                             Pachhu originate from the Park                       tracks.
                            Gasa Hot Spring is located inside the Park
                            The Park is home to the Layaps with
                             distinct culture and tradition
4   Sakteng    650   sq     Large tracts of temperate forests                The Park headquarters is 3,080         Wildlife Sightseeing
    Wildlife   km           Habitat for red Panda                             located at Phongmey, 40                Trekking
    Sanctua                 More than 25 species of Rhododendron              km from Trashigang.                    Green Camping Sites
    ry                       including R. kezangai                            There are three Park                   Bird watching
                            Residence of Brokpas that represent a             Range Offices – Sakteng,               Research and training
                             unique cultural heritage system.                  Merak and Jongkhar.                    Cultural tourism
5   Bumdeli  1,300         The Sanctuary is habitat for the       The             Sanctuary 680                    Religious and Cultural Tour
    ng         sq km         threatened migratory Black-necked crane headquarters is located                          Black-necked Crane Watching in
    Wildlife  1,650        It is habitat for the Red Panda         at Chortenkora.                                   Bumdeling
    Sanctua    m to                                                There are three Park
                             There are more than 296 species of which                                                 Trekking
    ry         4,500         7 are globally threatened.              Range Offices located at                         Research and training
               m                                                     Dungzam,       Sherzong,
6   Thrums      768    Over 343 species of birds.                 The Park headquarters is 3,330                     Wildlife Sightseeing
    hingla       sq km  Two of the best bird watching sites –       located in Ura and is                              Trekking
    Nationa     650 m   Yongkola and Lingmethang are inside the     connected by the east-                             Green Camping Sites
    l Park       to      Park.                                       west national highway.                             Bird watching
                 5,500  10 species found in the Park are globally  There are three Park                               Research and training
                 m       threatened                                  Range Offices – Autsho,

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                      With altitude range of 650 – 5,500 masl,        Lingmethang, Ura.
                       the biodiversity is one of the richest in the
                      The Park is home to endangered species
                       such as tiger, leopard, Red Panda, etc.
7   Jigme   1,400 sq  The habitat of threatened migratory  The Park headquarters is 4750                Wildlife Sightseeing
    Singye  km         Black-necked crane is inside the Park           located at Tshangkha on            Trekking
    Wangch 1,500 m  The Park is home to several endangered            the east-west national             Bird watching
    uck     to 4,500   species such as tiger, leopard, clouded         highway.                           Research and training
    Nationa m          leopard, Red Panda, Golden Languor             Range     Offices    are
    l Park            It is home to 391 species of birds out of       located in Langthel,
                       which 11 are globally threatened.               Athang and Tingtibi.

8   Khaling   273    sq  This reserve will consist of the existing Nil                   Survey not  Trekking from Merak to Daipham
    WS        km          reserves of Khaling and Neoli.                                  carried out  Research and training
                         The reserve is important for elephant,
                          gaur, and other tropical wildlife and may
                          be the only locality in Bhutan where
                          pygmy hog and hispid hare occur. Both
                          are known from the Khaling Reserve on
                          the Assam side of the border with which
                          this reserve will form a transfrontier
9   Toorsa    650.74 sq  This reserve protects the western most Nil                      0            Potential research site
    SNR       km          temperate forests of the country from
                          broadleaf forests to alpine parks including
                          the small lakes of Sinchulungpa. The area
                          has no human habitation and is a security
                          area near the Chinese border.

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Recommendations to enhance the non-consumptive use of Protected Areas are:

i.    Carry out comprehensive biodiversity and socio-economic surveys.
ii.   Develop Management Implementation plans for each Park.
iii.  Develop proposals to enhance the sustainable use of all the protected areas through
      non-consumptive measures such as fishing, river rafting, trekking, bird watching,
      ecotourism, service centers and for research and institutional studies.
iv. Take up the Royal Manas National Park as pilot project under ―autonomous‖
      management. This approach will provide an opportunity for the park management to
      work directly with other partners such as Department of Tourism, Association of
      Bhutanese Tour Operators (ABTO), local communities to develop programs for the use
      of the park.
v. The Royal Manas National Park should be managed by a Park Manager who will report
      to the Board of Directors. The Chairman of the Board will be the Director of Forest
      and members will be drawn from Dept. of Tourism, ABTO, Nature Conservation
      Division, Ministry of Finance, NEC, Dzongkhag, local community members and relevant
vi. Prepare and implement proposals to use the potential of the Indian Manas World
      Heritage Park for the Royal Manas National Park.
vii. Explore the possibility of putting the Royal Manas National Park up for approval to the
      World Heritage Council for selection as a World Heritage site.
viii. Integrate the enhancement and management of all protected areas with the regional
      development plans keeping in mind the links of Parks with neighbouring areas including
      urban centres and hubs where there will be population concentrations. The Parks and its
      attractions could provide a stimulus for development of urban areas.

Urbanization in Bhutan
The Population and Housing Census of Bhutan, 2005, indicates the total population of Bhutan
at 634,982, with an urban population of 196,111. This establishes the present urban
population of Bhutan at 30.8% of the total population. While the annual population growth
rate of the nation is established at 1.28%, the urban population is estimated to be growing at a
rate of 7.3% owing particularly to high levels of rural-urban migration. At the current urban
population growth rate, the implied urbanization level by 2020 will be 73%.

The two key urban sector issues in Bhutan are the very high rates of urbanization inspite of
the Government‘s objectives to try to stem rural-urban migration and the limited availability
of serviced land. This rapid urban growth has already created severe pressures on services as
well as the environment such as water shortages, lack of sanitation and waste disposal
facilities. This has been largely due to lack of well laid plans and projections to create proper
liveable urban areas. Urbanization, however, if managed and planned well allows for the
concentration of population markets which foster faster, cheaper and diverse economic

Presently, each Dzongkhag has separate development proposals and policies to create a
central urban area within each Dzongkhag regardless of the context and potential of the area.
There is no linkage between urban proposals for the country as a whole. In general,
urbanization presently consumes prime agricultural lands in the valleys.

Urbanization is inevitable and as urbanization has many economic benefits if planned
appropriately, the development strategy of the nation thus needs to change from inhibition

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policies of rural-urban migration to the more focused concentration on planning of high
quality liveable urban areas.

The recommendations for Urban Growth are:

i.     The policies and development strategy of the nation needs to change from inhibitive
       policies of rural-urban migration to the more focused concentration on planning of high
       quality liveable urban areas. However, this does not mean the neglect of rural areas
       which also require development.
ii.    Urbanization thus should be classified and planned for the country as a whole for the
       next 20 years. This planning should take into account the country as a whole rather than
       focusing on each individual Dzongkhag.
iii.   Urbanization according to the potentials and objectives of each region should be studied
       in detail and created accordingly. This means that urbanization policies in the North may
       be different from the urbanization policies in the South as the needs and potentials of
       each area are different.
iv.    Urbanization should be planned in areas that do not threaten prime agricultural land or
       around agricultural land. This agricultural land should be incorporated into the urban
       area as part of the greening of the urban area rather than being urbanized. This may
       include the introduction of higher densities in certain areas. However, all lands zoned as
       agricultural belt, etc. should be provided by the government.
v.     Before areas are zoned for different activities and uses (e.g. industrial, IT parks, tourism,
       etc), all necessary comprehensive studies for approvals such as environmental clearance,
       type and intensity of activities, forest clearance, road clearance, etc. should be
       conducted by all agencies within a given period before the zoning is approved. Once a
       zone is approved, this means that this area is ready for implementation and time is not
       wasted in efforts to get clearances all over again.

Encouraging National Urban growth to stimulate development
Currently, although there are plans by the Government to develop the present urban areas,
the Government‘s objectives have always been to try to stem and slow rural-urban migration.
However, through the NSP 2008, urbanization in Bhutan seeks to enhance the performance
of strategically placed engines of growth or "gateways" to attract ‗critical masses‘ and thus
draw together people, business activities, services, infrastructure and amenities that are
necessary to drive economic growth and contribute to more balanced patterns of
development within the country. Dzongkhag Head Quarter towns, other towns, villages and
rural areas around these main hubs and centres will draw strength from, contribute to and
complement them. Through urbanization, bringing together the location of buildings,
amenities, shops, employment and transport in a given area and in the appropriate way can
dramatically enhance people‘s access to the services they need while enhancing the
attractiveness of the area for investment, business activity and progress.

The key element of the preferred development scenario is the recognition of the spatial
diversity of the region and the role of various regionally centered urban hubs and centres,
determined by population, function and location, within the development areas. This is
addressed by way of:

• Accelerated population and economic growth to gateway and principle towns
• Targeted population and economic growth to key service towns
• Consolidation of service towns
• Appropriate service provision to local service towns to serve wider rural regions

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• Physical, social and recreational infrastructure to support settlement strategy

The development of a strong transport and communication links between the hubs and
centres as well as links to Dzongkhag Headquarter towns and other towns is also essential in
order to fuel the growth of the hubs and centres and for the development of the country as a

Proposed Urban Hubs and Centres in Bhutan
Traditionally, urban centres in Bhutan are categorized into three classes A, B and C based on
about 26 criteria ranging from population estimates to number and types of schools, shops,
other commercial facilities, public bus service, and level of urban infrastructure provision. The
classification is mainly used for taxation and assessment of compensation when government
acquires land pursuant to the Land Act.

As per the NSP 2008, ten regional urban centres are envisioned. Of these, six Growth
Centers are located in the hinterland and four Economic Hubs are proposed in the South.
These regional urban centres and hubs include Paro, Thimphu, Punakha/Wangdue, Bumthang,
Mongar, Kanglung, Samdrup Jongkhar/Nganglam, Gelephu, Phuentsholing, and Samtse.

Urban boundaries, design and planning of the Urban Hubs and Centers
The draft Bhutan National Urbanization Policy 2006 (BNUS) similarly envisions the
development of all these regional urban centers except for Kanglung. Extensive studies have
been carried out by large consulting firms for all the regional urban areas identified in the NSP
(except for Kanglung) and their respective structure/master plans are already in place. This
study includes population projections and potentials of each urban centre. However, these
have limited to the present municipal boundaries and do not take into account the extended
boundaries as proposed in the NSP 2008. They have also not looked at urbanization within
the country as a whole.

The recommendations for Urban Hubs and Centres are:

i.     The existing proposals for the urban centres should be developed further for the urban
       centres identified in the NSP 2008 as the range and scope of the NSP extends beyond
       the existing municipal boundaries of each of these townships and therefore more
       detailed study requires to be undertaken at a regional level, looking at potentials and
       constraints beyond the present defined town limits.
ii.    Accurate maps with all details should be developed for each urban centre with their new
       extended boundaries.
iii.   In the context of developing the 10 urban centres and hubs identified in the NSP, it is
       proposed that each area be developed around a predominant concept and theme which
       is comparatively advantageous for the particular area. This means that each urban centre
       develops around its own potential rather than being treated as the same as it is
       presently done.
iv.    For instance the following themes could be explored and adopted for the urban centres
       in the hinterland:
             1) Kanglung (Knowledge City)
             2) Mongar (Handicrafts City)
             3) Bumthang (Cultural City)
             4) Punakha-Wangdue (Horticultural City)
             5) Thimphu (National Capital City)
             6) Paro (Resort City)

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v.   Likewise, the four economic hubs could also be designed around a predominant
     economic activity such as:
            1) Samtse: Mining and f&b industries, development of large institutions, healthcare,
               and integrated resorts of international standards.
            2) Phuentsholing: Heavy industrial, mining, finance, services and commercial
            3) Gelephu: Export, integrated resorts, high value processing industries, education
               and training, finance and commercial centre.
            4) Samdrup Jongkhar: Coal and related industries, services and trading, and
               export services.
vi. The urban hubs and centers should be developed with the highest standards of
     infrastructure and services to fulfill their national level roles.
vii. To strengthen local areas, and to realize balanced regional growth and to sustain the
     main centres and hubs, Dzongkhag HQ towns and other towns should be developed
     with positive links to the centres and hubs in their regions.

Role of rural areas
A high quality rural environment is an economic, social and environmental asset to both
urban and rural areas. A high proportion of Bhutan is rural and provides tranquility, leisure
and recreation opportunities for urban and rural inhabitants. There are many attractive
villages in Bhutan and the quality of the rural environment is vital to the quality of life.
Therefore, the protection, management and enhancement of the natural and cultural assets of
the rural areas of Bhutan should be integral considerations in decisions on development.

While the quality of the landscape in rural areas is fragile, the environmental quality of the
rural regions is an important characteristic in attracting investment especially tourism related
industries. Therefore, damaging the quality and aesthetics of landscape should be avoided.
The promotion of the quality of life for local people and visitors by ensuring that the rural
landscape remains unspoilt, the rivers remain unpolluted and the towns and villages retain
their character is important.

The futures of both urban and rural areas are increasingly intertwined. The sustainable
development, conservation and marketing of rural attractions are increasingly important in
defining a positive and unique identity and setting for the establishment of competitive urban
hubs and centres in the region. Conversely, the development and enhancement of the vitality
of the urban centres is vital to the economic development of rural areas as increasingly, the
traditional reliance on agricultural based employment in rural communities is being replaced
by a dependence on jobs in urban areas in the manufacturing and services sector. Many rural
areas in Bhutan especially those next to present urban centres like Thimphu and
Phuentsholing are undergoing profound changes due to the economic restructuring of
agriculture or to the influence of nearby urban areas.

Recommendations for rural areas are:

i.   Develop a complete mapping of all rural areas and their potentials such as landscape,
     natural and cultural heritage and other resources.
ii. Rural area development plans should be formulated keeping in mind the l inks to urban
     hubs and centres and the rural assets of the country as a whole as identified from the
     mapping of potentials of the rural areas.
iii. Establish clear positive links between rural areas and urban centres.

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iv. Rural areas should be developed with the aim to ensure that the strengths and resources
    of the rural areas in agriculture, tourism and local services are harnessed and developed
    to the highest standards.
v. The quality and aesthetics of landscape should be conserved and development activities
    should avoid negative effects to this asset. All new buildings should add to the aesthetics
    rather than the current trend of degrading the aesthetics of the natural landscape of rural

Harnessing architectural design and forms
The imprint of architecture is a powerful visible physical aspect of our image as a country in
the international scene. However, presently there are no concrete efforts to develop,
upgrade or use this physical imprint for benefits to the country as a whole or to look at
creating unique and regional physical environments for each region based on their potentials.
This has huge bearing on sectors such as tourism which brings the second highest revenue to
our country and the quality of life for our citizens.

There are current negative practices undertaken both by the Government and the private
sector where areas of huge aesthetic potential are often ruined by the construction of
architecture or other physical infrastructure that aesthetically degrades the beautiful
environment it imposes on. Thus rather than increasing the aesthetics of an area, the current
practice of infrastructure and architecture almost always leads to the decreasing of the
environmental aesthetics of the country.

The overall concepts and regulations for architecture are presently the same for all
Dzongkhags within Bhutan. They do not take into account the diverse potentials of different
areas within the country. For example, every school or health building is the same. Even in
areas with no roads, one often finds RCC structures of the same design and type found in
urban areas. This creates monotony throughout the country and does not provide the
incentive for visitors to travel from place to place as each place looks the same.

The present strict regulations for the urban centres and the free regulations with material
incentives within rural areas act to inhibit development and creative growth within the urban
centres while the rural areas are encouraged to grow haphazardly and often with RCC high
rise buildings of low standards and designs that actually create negative benefits to the overall
aesthetics for the rural environment.

Bhutan has a very recent history of urbanization which can be dated perhaps to the early 60s
with the growth of two urban centers namely Phuentsholing and Thimphu. The need to
establish a Bhutanese identity based on existing rules in the built form today has led to a
degree of monotony in the urban facades today. This is due to factors like:

1. Regulations and bye-laws regarding no. of floors, setbacks, etc
To facilitate easy and cost effective infrastructure, regular plot sizes are encouraged but
compounded with rules regarding set backs and no. of floors that are similar; the urban
landscape today constitutes of similar looking buildings. Norzin Lam is good example of a
streetscape that is characterized by buildings, each similar to the other without making any
attempt to create any urban and social spaces. The built forms all tend to maximize the
allowable area in terms of coverage and no. of floors.

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The above problem could be addressed by introducing the Floor Area Ratio along with the
plot coverage and no. of floors. This was initially proposed in the draft Development Control
Rules (DCR) for the Thimphu Structure Plan and was presented as follows:

“Floor Area Ratio:
Floor Area Ratio (FAR) and Floor Space Index (FSI) are basically the same concepts. They mean the
amount of built-up area that will be allowed on a given amount of land. If in a residential area the
FAR is 75; it means that on a 1000 sqm plot one can build 750 sqm. If we restrict the “plot
coverage” to 40 percent it means one can build ground floor (400sqm) plus an additional floor
restricted to 350 sqm. By payment of a premium the owner can choose to build upt o FAR 350 sqm,
which means he can build a total of 1500 sqm on his plot (three floors of 400sqm plus another
partial floor of 300 sqm.)

Floor Area Ratio (calculation) = Total floor area including walls of all floors x 100
                                    Total Plot Area

Building features that shall be excluded from the calculation of built up area and hence from FAR
calculations are
     Areas covered by porches, canopies, weather shields etc
     Parking Spaces
     Basements if not used for habitable purposes.

There shall be two stages for permissible FAR: a Basic FAR without payment of premium, an optional
higher Maximum FAR allowable on payment of premium”.

The FAR concept would therefore give the freedom to builders to go high rise and free the
ground for recreational, parking, etc. purposes. It must be noted that the FAR will not make
sense if the rule for the number of permissible floors are still applied. The rule regarding
maximum number of permissible floors shall have to be updated.

The other concept which was proposed in the draft DCR was the concept of Transfer of
Development Rights.

“In the Thimphu Structure Plan certain areas are designated as Reserved Land. Such Reserved land is
to be used in the public interest for a public purpose. Transfer of Development Rights or TDR is a
mechanism to protect the development rights of the owners of Reserved Land, while facilitating the
Municipal Authorities in acquiring lands needed to implement a Structure Plan.
 In cases where the government has to acquire land for the public good, the owners may choose to be
compensated, or their land traded for an equal size of FAR or Development Rights which can be used
elsewhere. The compensation is in the form of FAR which can be transferred and used elsewhere.”

The concept of TDR should however be used only as a source of fair compensation regarding
a particular plot for the greater good of the city or town area. It should not be a tool for real
estate developers to maximize FAR and therefore gain commercially from it. The concept of
TDR could have saved the Luger Theatre Square, which was perhaps the only urban public
space in Thimphu (besides the Clock Tower square) from being developed. The owner or
intending developer could have been given a substitute plot with additional FAR rights in
another location.

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2.     Traditional Architectural Features
One may agree to the need to have a Bhutanese identity in terms of architectural form and
therefore a sense of place. However the contemporary building language that has emerged in
the urban towns has to address other factors besides mere superficial ornamentation. Though
decoration and ornamentation is an integral part of Bhutanese architecture, other aspects like
materials, forms, textures and colours are not explored enough. The Aman projects have to a
large extent managed to capture the essence of Bhutanese architecture without relying on
the profuse use of decoration. The new Druk hotel building is a good example of the use of
textures and colours that are vernacular.

The ―Guidelines to Traditional Architecture‖ which was introduced to merely guide
architects has become a steadfast rule/byelaw which has regulated the facades of buildings to
the elements/features that are propounded by ―the book‖. Traditional architecture has a lot
more to offer which is manifested in various buildings (Dzongs, farmhouses, temples, etc.)
throughout the country.

Mere imitation and superficial use of elements on the facades is not the only way of creating a
Bhutanese contemporary identity. There is the need to explore and encourage the use of
local materials, forms (sloping walls, roofs), textures and colours. Other features and
elements that are existent in traditional architecture should be accepted beyond what is
labeled as permissible and not permissible in the guidelines.

3.      Construction Materials
Traditional architectural form and language is in many ways a resultant of the method of
construction. The massive sloping walls, rabseys, lintels, cornices are features that were
integral to a load bearing system of construction. However today in multistoried buildings,
RCC and brick or Concrete blocks are the order of the day. The urban centers are prime
examples of this kind of buildings. Commercial buildings may often demand this kind of
approach but institutional and residences certainly have a better alternative.

Use of traditional materials makes it easier to capture the essence of Bhutanese architecture.
This makes it easier for the designer to conceive and realize a building which is more
appropriate and in harmony with the environment. It also helps sustain a host of traditional
disciplines that are associated with buildings like zows (master builders), traditional painters,
wood carvers, sculptors, etc.

However the general misconception amongst people is that a RCC building is more
permanent and therefore better. These buildings are also valued much more by financial
institutions, which encourage business people when they want to use it as a mortgage. People
who try to use local materials which are more eco-friendly and climatically appropriate find
many obstacles while trying to implement them. Availability and costs of materials and
workers make it difficult compounded by the fact that a lot of traditional buildings fail to meet
the structural standards that are enforced by the authorities. This is due to the fact that a lot
of architects and engineers are primarily trained in the design of such RCC structures.

Need to encourage use of local building materials which can be achieved by:

          Creating awareness in the building industry (professionals and builders)
          Making it more affordable by meeting demands

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            Training more construction workers in appropriate skills (e.g. CTC workers that
             are already working with Heritage projects)
            Looking into alternative technology like stabilized/interlocking mud blocks which
             has already been initiated by the SQCA; but somehow has not permeated to the
             local building industry.
            Facilitating easier and quicker procedures during scrutiny of drawings by
            Facilitating housing loans for applicants that are interested in building with
             traditional materials.
            Marrying appropriate technology like modern amenities and services within.

The other recommendations for harnessing architectural and other built forms to
stimulate and enhance socio-economic growth are:

i.     The diverse potentials of different areas within the country should be reviewed and an
       architectural proposal should be prepared not just for individual regions and towns but
       keeping in mind the benefits of architecture to the country as a whole. These objectives
       should be achieved through a comprehensive review and revision of the existing rules on
       building construction such as the Bhutan Building Rules and the Guidelines to Traditional
ii.    Within the North the focus should be on maintaining the beautiful and pristine
       environment, diverse wild life, ancient living cultural traditions and through these
       measures enhancing the benefits that these can bring through tourism. Therefore the
       architectural design concepts should reflect and promote these objectives. The following
       architectural design concepts are recommended for the North:
             a. Environmentally friendly and sustainable buildings.
             b. The main materials should be traditional – stone, earth, bamboo, and timber as
                 per the regional style and local availability.
             c. The construction methods should be mainly traditional with modern materials
                 used only where required and absolutely necessary (e.g. bathrooms).
             d. No new building should be higher than two floors.
             e. Sewerage and waste systems should be environmentally friendly.
             f. The designs should be largely traditional and as per the regional design
             g. RCC buildings (of the type presently being built for apartments, schools,
                 hospitals, industrial structures) should not be allowed in order to uphold the
                 historical environment of the zone.
             h. Above all the built environment should enhance the natural environment
                 rather than degrade the existing quality of the natural environment as is often
                 the case at the present.
iii.   Within the hinterland: This zone will have a combination of buildings that reflect the
       needs of the Growth Centers and enhance the economic benefits and the living
       standards of the population within this zone. Regulations will be freed up for the main
       centres while the rural areas will have traditional buildings and will follow the Northern
       regulations to maintain an environment that will be conducive to tourism.
iv.    In the Economic Hubs: Architectural designs and forms should be conducive to
       encourage economic growth but at the same time it is also important to ensure that the
       hubs in this zone grow to have identities that are recognizable as being Bhutanese.
v.     All architectural works must be implemented only by trained and registered
       professionals to ensure that the built environment maintains high standards as the
       physical environment has a high impact on not only living environments and quality of

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      lives but also on such industries as Tourism which depend on visual aesthetics. Presently
      many works are taken up or approved by non-professionals. Further, approving
      authorities often have professionals that do not have much experience or specialized
      education and therefore are unable to appraise projects appropriately.
vi.   Natural and local materials should be made available at competitive prices. Presently the
      regulations and practices in place inhibit people from using natural and local materials
      even though Bhutan is said to have abundant natural resources. This results in
      architecture built with cheaper imported materials – e.g. RCC even in rural areas.

Legislation and policies for spatial use
There is no integrated utilization of land resources in the country. As a result, land related
issues are evident in the field. These issues often lead to conflict among the involved
institutions that are working for good cause - working independently while the basic resource
in question is land. The table below summarizes these current and anticipated problems and

     Land related                               Present and anticipated Issues
 Land use policies.         Lack of comprehensive national land use policy.
                            Existing policies are sector-specific objectives and have conflicting
                            No integrated land use plan or zonation particularly at district level.
 Legislation.               The existence of Acts in different organizations shows the complexity of
                            regulations governing the land.
                            The Acts are sector specific and were framed in the past when situations
                            were different.
                            There are contradictions and mismatches in these regulations.
                            Absence of national spatial code.
 Implementation             There are instances of overlapping interests, which give rise to clashes in
 problems                   the interpretation of policies and legal provisions, the non-application or
                            overlooking the existing laws, etc.
                            The implementers of policies, landowners and land users are often
                            confused with complexity of regulations.
                            Time and other resources are under-utilized in getting or sorting out legal
 Urbanization         and   Half of total population will live in urban centers by 2020. Currently,
 industrialization          agriculture, industrialization and urbanization compete for developable
                            While high cost of investment has been a constraining factor, the
                            possibility of exploring hills and steeper areas for settlements is hindered
                            by the lack of geological data.
                            Appropriate spatial code is critical for making and using land for urban
                            and industrial purposes.
 Conservation        of     Dzongs, monasteries and cultural and religious monuments are subject to
 cultural and religious     adverse impacts of modernization. Most impacts could have been avoided
 sites                      if there was proper land use planning.
                            In some cases, local people‘s religious sites have not been respected while
                            constructing development infrastructure.
 Land information           Lack of database on land resources specifying their capability and
                            potentials. In absence of such database, we are not able to prepare land
                            use plan that considers the requirements from different sectors.
 Implementation of large    A large land surface required by mega projects is met haphazardly either
 projects                   through acquisition of land belonging to local population or through
                            occupation of government reserved forests. This creates hardship to the

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                         affected population and adhoc release of forest areas. A national spatial
                         code that shall not compromise our forests resources while using them
                         on sustainable basis is required.
 Land valuation          Both from sustainable use as well as from economic point of views, it is
                         now necessary that we tag value to our land. Currently, the utilization
                         and taxation of our land is not based on its economic value. Also, it may
                         be necessary to assess the land value, particularly of wetland, from the
                         policy of food self-sufficiency. One starting point for land valuation is to
                         have enabling legal code on land and to assess and develop land capability
                         information system which will also be the basis for an integrated national
                         level land use planning and land use policy.

The current legal environment is very strong where environmental protection is concerned
but not very conducive to developmental processes. Many Acts exist with blocks and
approval requirements for development activities. The present laws governing some of the
land uses are a serious concern to creating a conducive environment for a fast growing

The recommendations are:

i.     A National Spatial Act should be formulated. Sectoral rules on land and space should
       fall within this broad national spatial code.
ii.    All Acts related to spatial use should be reviewed and revised to not only provide
       protection to the environment but also at the same time be conducive to development.
       This means including certain clauses such as:
         Lift the prohibition on Chhuzhing and orchard in those regions that fall outside the
            prime agricultural production zones.
         Manage the Chhuzhing in agricultural production zones under special Government
            programs, such as incentive or compensation packages.
iii.   The Land Act should have provisions to allow urban areas under the jurisdiction of
        Thromde Tshogde to be managed and used as per the Thromde Act.
iv.    The rules and regulations on social forestry should allow establishment of private
        forestry schemes on areas less than 2 acres.
v.     Within a national policy of land resources zoning, the potential Government Reserved
        Forests land, including those under tree cover, as community forests, should be
        identified and demarcated.
vi.    Both the Land Act or the Forest and Nature Conservation Act should support the use
        of Government Reserved Forests land for cardamom plantation and other niche
vii.   All land used for different categories of agriculture/horticulture should be allowed to
        be used for any type of agricultural or horticultural use that will be of the most
        economic benefit to the farmer rather than restricting the types of crops, plants, trees,
        etc. that can be planted. However, if there are requirements to maintain certain areas
        for only certain types of farming/horticulture, then incentives and tax breaks should be
        granted as these regulations prohibit a farmer from maximizing the benefits of his land
        as per market forces.

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Part III. Strategic Infrastructure (SI 2008)

Surface Transport
Being landlocked, Bhutan faces unique challenges and opportunities as it pursues the
development of its road transport network. In the absence of other modes of transport,
movement of goods and services within the country takes place by land transport through a
system of roads and mule tracks while connectivity to the outside world takes place both by
land and air.

Road Sector Master Plan 2007-2027 (RSMP)
In order to make road transport fast, reliable and efficient, an aggressive policy of national
highway expansion, improvement and shortening needs to be adopted while ensuring
connectivity to the far flung villages and rural communities to reduce regional disparity and
ultimately to fulfill the vision of GNH. The RSMP envisions construction of over 2,600 km of
new feeder roads, 537 km of National Highways for inter–Dzongkhag connectivity,
construction and improvement of 794 km of the Southern East – West Highway (SEWH), and
realignment and construction of tunnels on the existing national highways. Among the roads
included in the RSMP, the construction of the SEWH is vital to catalyze economic activities in
the economic hubs.

Transport service delivery
The Road Safety & Transport Authority (RSTA) is mandated with public service delivery
covering vehicle registration and annual renewal, driver licensing and renewal, vehicle fitness
program and monitoring of passenger transport services. The amount of work involved is
often lengthy and generally of routine nature. The printing of driving license is centralized at
the head-office with vehicle registration and fitness program handled at the level of the
regional offices. Monitoring of passenger transport services are further decentralized at the
base office level.

Logistics service providers are usually transport operators and freight forwarders using
multiple modes of transport issuing a single transport document and accepting responsibility
for delivery to the end retailer/user. It involves the integration of information, transportation,
inventory, warehousing, material handling and packaging at the lowest cost possible. In other
words, it is associated with having the right item in the right quantity at the right time for the
right price to ensure steady flow of material through a network of transport links and storage
nodes. This is missing at the moment with the logistic management system highly disorganized.

Bhutan‟s 2028 Transport Network
To support balanced regional development, Bhutan‘s transport network must be expanded
and improved particularly the East-West and North-South Highways to spur and sustain the
Bhutanese economy. It should be ensured that the hopes and aspirations of every Bhutanese
to live within half a day‘s walk from the nearest motorable road are fulfilled by the year 2028.
Looking forward Bhutan‘s 2028 transport network can be envisioned in terms of:

Primary National Highways (PNHs) comprising of:
              -      Thimphu –Phuentsholing
              -      Wangdue-Sarpang-Gelephu
              -      Trongsa-Gelephu
              -      Gyalpoizhing - Nganglam
              -      Trashigang-Samdrup Jongkhar

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                -      Thimphu-Wangdue-Trongsa-Bumthang-Mongar-Trashigang
                -      Samtse-Phuentsholing-Lhamoizingkha-Sarpang-Manas-Nganglam-
                       Samdrup Jongkhar

The PNH being the highest in the road hierarchy shall connect points through the shortest
routes, be of double lane with partial access control and constructed to high design standards
catering to high travel speeds to facilitate fast movement of goods and services.

Secondary National Highways (SNHs) comprising of:
             -      Autsho –Gorbaktang Road (new)
             -      Chazam-Trashi Yangtse Road (existing)
             -      Ura-Ungar-Gorgan Road (new)
             -      Shingkhar-Thidangbi Road (new)
             -      Ura-Shingkhar-Zhemgang/Panbang Road (new)
             -      Haa-Samtse road (new)
             -      Khasadrapchu-Paro - Haa (Khasadrapchu –Paro new and Paro-Haa
             -      Chuzom-Paro (existing)
             -      Chuzom-Haa (existing)
             -      Paro –Haa (existing)
             -      Dewathang – Samdrupcholing - Jomotsangkha (Dewathang
                    Samdrupcholing existing and Samdrupcholing - Jomotsangkha new)
             -      Tshelingor-Pema Gatshel-Tsebar-Mikuri-Sokphurongchu
             -      Punakha-Gasa

Road network expansion over the next 20 years would have to be primarily guided by the
RSMP which would have to be reviewed from time to time in line with the country‘s needs
and priorities. Crucial among the roads included in the RSMP is the construction of the
SEWH in the South which is important to fuel and sustain the country‘s economic growth as
a whole.

Road Network Development Intervention Strategy
Working towards achieving the above vision of road transport connectivity requires the
following broad interventions to be made in the development of the country‘s road network:

         Improvement or up-gradation of existing roads to PNHs and SNHs
         Construction of new PNHs and SNHs
         Road realignment / tunneling
         Construction of feeder/link roads
         Construction and Strengthening of Bridges
         Alternative modes of surface transport (urban transport, ropeways, railway links &

Thimphu-Phuentsholing Highway
Thimphu-Phuentsholing Highway (TPH) forms a part of the Asian Highway link of Thimphu-
Phuentsholing-Indian Border – AH48 and is currently being upgraded to Class III (2 lanes)
standard of the Asian Highway. The development and improvement of TPH would essentially
comprise of the following three components:

   (i)       Widening between (a) Damchhu and Babesa and (b) Chhukha and Phuentsholing
   (ii)      Realignment between Damchhu and Chhukha and

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   (iii)   Tunnel construction to bypass the problematic area at Jhumja

The widening works of Damchhu-Babesa and Chhukha-Phuentsholing section of the highway
is to be implemented in three phases and completed in 2010. The pavement crust would
consist of granular sub-base (GSB), graded aggregate base course (GABC) and bitumen sealing
(BS) and is designed to carry 30 ton axle load which corresponds to structure loading HS20-

Wangdue-Sarpang-Gelephu Highway
Considering that a new international airport will come up in Gelephu, the Wangdue -Sarpang-
Gelephu Highway will become the most important transport corridor. Further it is required
to be improved and widened to facilitate the implementation of the upcoming Punatsangchhu
Hydropower Project.

Trongsa-Gelephu Highway (TGH)
TGH is an important North–South transit corridor connecting Gelephu and should be
upgraded to PNH in a phased manner. It is recommended to adopt a phased construction

Gyalpoizhing-Nganglam Highway
Gyalpoizhing-Nganglam Highway is under construction as a single lane highway from both
Gyalpoizhing as well as from Nganglam side. Construction of 20 km (10 km each from
Gyalpoizhing as well as from Nganglam side) which has already started to single lane highway
standard will be completed during the 9 th Plan. The remaining 44 km should be designed and
constructed as per PNH specifications with provisions for upgrading the 20 km section to
PNH standard at a later date.

Trashigang-Samdrup Jongkhar Highway
Trashigang-Samdrup Jongkhar Highway (TSH) is currently under the maintenance
responsibility of Project DANTAK. It is proposed to take over TSH from Project DANTAK
and upgrade it to PNH standard.

Thimphu-Wangdue-Trongsa-Bumthang-Mongar-Trashigang Highway
Currently the East-West Highway in the North provides the only connectivity to Eastern
Bhutan from within the country. Up-gradation of Thimphu-Wangdue and Trongsa-Bumthang
sections of the highway to PNH shall receive highest priority followed by the sections
Mongar/Lingmethang-Trashigang and Bumthang-Mongar. Construction of the 35.6 km
realignment between Nangar and Ura which is being implemented will reduce the road length
by about 27 km. Construction of the bypass with 8.5 meters formation width has commenced
and 25.6 km is planned to be completed during the 9 th Plan and the remaining 10 km will be
implemented during the 10th plan. It will be upgraded to PNH at a future date.

Five potential locations for road tunneling are identified viz. between Thimphu and Wangdue,
Nobding and Chendebji, Dorji Goenpa and Geytsa, Gayzamchu and Sengor and Kilikhar and

Jongkhar Highway (SEWH)
As per the RSMP, the length of the SEWH is 794 consisting of 506 km of missing links on
various stretches and 288 km of up-gradation of existing roads. Another alternative alignment

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close to the international border was studied within an aerial distance of 1 to 2 km which
yielded a distance of 743 km.

The construction of Samtse –Phuentsholing section (69 km) is underway and 30 km each of
formation cutting and permanent works are planned to be completed by the end of 9 th Plan.
All remaining works including formation cutting, permanent works, base course and bitumen
sealing works are planned to be implemented during the 10 th plan. The entire project has
been divided into 15 contract packages and each package is designed to be implemented
simultaneously from both ends. The number of contract packages can be reduced further by
increasing the contract value.

Construction/Improvement of roads to SNHs
The following SNHs are identified in the NSP. The SNHs shall be of single lane without access
control. The SNHs which will complement the PNHs to make the transport network efficient
and meaningful would cater for at least 80 percent of the design speed of the PNHs.

Autsho – Gorbaktang Road (51km)
It will provide the shortest and fastest connectivity between Lhuentse and Mongar Dzongkhag
while bypassing the problematic area at Rotpashong on the existing Gangola–Lhuentse Road.
The construction of this road is scheduled to commence in the 9 th Plan as a feeder road and
completed during 2009-2010 of the 10th Plan. It is proposed to be upgraded to SNH in future
if the flow of traffic justifies upgradation.

Chazam-Trashi Yangtse Road
The existing Chazam-Trashi Yangtse road currently classified as Dzongkhag/District road will
be upgraded to SNH standard.

Ura – Ungar-Gorgan Road
Ura-Ungar-Gorgan road will shorten travel distance between Bumthang and Lhuentse by at
least 69 km and thus time saving would be substantial. The Ungar-Gorgan section of this road
reflected in the RSMP as a feeder road should be designated as SNH. This road will be initially
constructed to feeder road specifications and upgraded to SNH in future.

Shingkhar-Thidangbi Road
The Shingkhar-Thidangbi Road will improve connectivity between Bumthang Dzongkhag,
Mongar Dzongkhag and Zhemgang Dzongkhag once Ura-Shingkhar-Zhemgang road is

Ura-Shingkhar-Zhemgang/Panbang Road
Ura-Shingkhar-Panbang Road will become another important North-South connectivity which
will provide fastest and shortest route to Panbang on the 2 nd East-West Highway in the South.
It would also facilitate the implementation of the Chamkharchhu Hydropower Project. Out of
56 km of Gomphu-Panbang highway construction of 4.86 km is completed to double standard.
Since Gomphu-Panbang highway will become part of Ura-Shingkhar-Zhemgang/Panbang road
the specification for Gomphu-Panbang Road is proposed to be downgraded to SNH standard
for consistency. The existing 40 km of Tingtibi-Gomphu road will be upgraded to SNH
standard at a later date.

The farm road planned to be constructed from Buli to Shingkhar via Nimshong and the
existing feeder road from Buli to Dakpai should be upgraded to SNH standard.

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Haa-Samtse Road
Haa-Samtse road will serve as the North-South link in western Bhutan. It will comprise of
the 21 km Samtse - Halhalay segment of the SEWH in the South and five feeder road links
identified in the RSMP namely Halhalay-Dorokha (23 km), Dorokha - Rangtse (40 km),
Rangtse – Yaba (11.3 km), Yaba - Sombeykha (24.5 km) and Sombeykha - Haa (117 km).
Samtse - Halhalay section which forms part of the SEWH is under construction and will be
completed during the 9th plan.

Only few settlement areas would be connected between Dorokha and Haa and therefore the
proposal to construct this road segment may have to be reviewed.

The proposed Khasadrapchu-Paro-Haa SNH would essentially mean linking Khasadrapchu and
Paro as there already is a road fro m Paro to Haa. There is an existing rough road from
Khasadrapchu leading towards Paro and another existing rough road from Paro towards
Khasadrapchu which could be connected by constructing the missing link. However,
preliminary studies have shown that it is possible to construct a tunnel between
Khasadrapchu and Shaba which is estimated to be about 9 km with the tunnel portal on Paro
side located near Nego at Shaba and that on Thimphu side located at Jamdowon (opposite
Langdru) near Khasadrapchu. If this tunnel is constructed the distance between Thimphu and
Paro would reduce by at least 31 km (from the present length of 58 km to 27 km). After up-
grading Babesa/Thimphu-Chuzom segment of the existing highway to the Asian Highway
standard and Chuzom-Paro road to PNH standard the effective journey time between
Thimphu and Paro can be reduced from one and half hours to half an hour or less.

Since the distance reduction is substantial and in view of the high intensity of traffic expected
to travel on this route the idea of build, operate and transfer (BOT) scheme should be
explored with the involvement of private sector in partnership with regional/international
firms. Feasibility study for tunneling should be carried out during the 10 th plan and
construction implemented in the 11th Plan if tunneling is found feasible.

Chhuzom-Paro Highway
With over 1,100 vehicles per day (including two wheelers) currently plying on this route
Chhuzom-Paro road would continue to remain heavily trafficked in future by virtue of the
existence of the airport at Paro. Double laning works which have commenced are planned to
be completed soon. The magnitude of the present and the anticipated future traffic growth
justifies it to be designated as PNH. As highlighted above the travel time between Thimphu
and Paro would reduce from present journey time of one and half hours to about half an
hour if a tunnel is constructed between Khasadrapchu and Shaba. As a result of the reduced
travel time people from Paro and its adjoining areas would prefer to commute daily to work
in Thimphu which would have the positive impact of depopulating Thimphu City.

Chhuzom-Haa Road
Although it is presently categorized as national highway, Chhuzom-Haa does not conform to
the national highway standard. It should be upgraded to SNH standard. It is proposed to
ascertain the requirement to upgrade this road and the course of action taken at a future

Paro-Haa Road via Chelela
Paro-Haa road (also all other roads in Bhutan constructed by DANTAK) is said to be
constructed to Class 9 specification of the Indian Border Roads Organization and it therefore

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does not conform to national highway standard. It should be upgraded as SNH to enhance
linkage between Paro, Thimphu and Haa Dzongkhag.

Dewathang-Samdrupcholing-Jomotsangkha Road
Dewathang-Samdrupcholing-Jomotshangkha road would essentially form part of the SEWH in
the South but would have lower traffic intensity as the urban growth is likely to remain
confined within Samdrup Jongkhar and Samdrupcholing. Therefore, this road which is
presently classified as Dzongkhag road should be designated as SNH.

The stability of geologically weak spots on the existing Dewathang-Samdrupcholing road
should be ascertained thoroughly prior to the implementation of the up-gradation works.

Tshelingor-Pema Gatshel-Tsebar-Mikuri-Sokphurongchu Road
It will connect Pema Gatshel to Gyalpoizhing-Nganglam highway at Sokphurongchu and create
access to Nganglam on the SEWH while opening up many isolated villages under Pema
Gatshel Dzongkhag. The existing Dzongkhag road from Tshelingor to Pema Gatshel and Pema
Gatshel to Khothakpa require to be improved and construction of Khothakpa-Tsebar road
which is planned to be implemented in the 9 th plan as a feeder road should be designed with
basic highway geometric features for up-gradation to SNH in future.

Nyaskar-Shingchunri Road
Khothakpa-Khar-Tsebar-Yurung road is identified to be implemented as a feeder road under
the Rural Access Project Phase II starting in the 9 th Plan. Instead of extending the road from
Yurung to Nyaskar which is about 45 km it would be more meaningful to extend the road
from Yurung up to Chimung and connect Nyaskar to Gyalpoizhing-Nganglam Highway at
Sokphurongchu by constructing a separate feeder road via Shinchungri. Construction of the
missing link between Yurung and Nyaskar could be considered at an appropriate time in
future if found justified.

Meritsemo-Bongo-Getana-Bangale-Tashigang (Dagana) Road
A feeder road from Meritsemo to Bongo (17.5 km) is identified to be constructed under
Road Network Project. Construction of Bongo - Tashigang (Dagana) Road via Getana and
Bangale is proposed to be initially constructed to feeder road specifications and later
upgraded to SNH if traffic level justifies its upgradation.

Aimeri-Nimtola-Kerabari-Sama Dhovan
Aimeri (Gesarling)-Nimtola–Kerabari-Sama Dhoban Road is approximately 93.5 km which is
proposed to be constructed as a feeder road. The existing feeder road from Tshendagang to
Gesarling which is 16 km is proposed to be upgraded to SNH in future.

Road Realignment
Many locations exist on the national highway network where there is an opportunity to
construct a new alignment which offers substantial saving in distance. Nangar – Ura bypass is
one such realignment which is under construction on the existing East-West Highway.

Damchhu –Chhukha Realignment
The realignment of TPH between Damchu and Chhukha fits in well with the policy of making
the PNHs provide the shortest and fastest route between any given two destinations. The
travel distance along the proposed bypass between Damchhu and Chhukha after the
realignment will be only about 24 km compared to the existing length of 48 km between

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Damchhu and Chhukha implying reduction in road length by 24 km which is substantial. It is
proposed to be implemented starting from 2009-2010 to 2012-2013.

As the TPH is declared as Asian Highway – AH48, traffic on this road will increase
significantly from the present traffic of over 1,500 vehicles per day because of international
traffic. The idea of implementing the bypass construction as a BOT project should be
explored with participation of national/international firms.

Wangdigang - Tingtibi Realignment
The road length between Wangdigang and Tingtibi can be shortened by at least 39 km by way
of realignment involving construction of about 15 km. The construction of this bypass road is
being taken up and is scheduled for completion during the 10 th Plan. It is proposed to
construct the bypass to SNH standard and later upgrade it to PNH standard.

Road Tunneling
There is a great potential to cut short the highways to reduce travel time by constructing
tunnels taking advantage of our mountainous terrain. However road tunnels are expensive to
construct and operate. Analyses have shown that for a traffic level of 200 vehicles per day
construction of 0.5 km tunnel would have to yield a distance saving of at least 50 km to be
economically viable. However, in the context of Bhutan, tunnels would also provide large
benefits from avoiding landslides and the cost of clearance, delays and diversions and
therefore we need to look beyond the domain of conventional economics to ensure reliability
of the transport network for national solidarity and security.

Southern East-West Highway
Preliminary map studies show that 10 tunnels with lengths ranging from 0.8 km to 7.7 km are
probably feasible to be constructed on the SEWH. It is proposed to conduct detailed studies
during the 10th plan.

Thimphu-Phuentsholing Highway
Jhumja is one of the major problem spots on the TPH. Preliminary studies conducted jointly
by the Norwegian Geotechnical Institute (NGI) and the DGM indicate that about 1 km tunnel
would have to be constructed to bypass the landslide area. The construction of 1 km tunnel is
estimated to cost Nu. 180 million and is likely to reduce the road length by about 6-7 km.
The study also indicates that construction of the tunnel would result in a cost saving of Nu.
18 million annually on driving cost alone. Further, the study indicates that the cost of 1 km
tunnel could be recovered in ten years through driving cost in addition to the cost savings
from maintenance of the existing road.

Construction of Feeder Roads/Farm roads
Increased accessibility means reducing walking time to the nearest motorable road. People in
the rural areas are willing to forego other development programs and social amenities like
water supply and electricity for a feeder road. The notion that road is the harbinger of
economic development cannot be negated.

Over 2,650 km of feeder roads are identified in the RSMP with priority ranking assigned
based on cost per household. Remoteness is a direct measure of poverty – more distant the
rural population from the motorable road, poorer the community.

Presently, the MoA is responsible for planning and implementation of farm roads through the
Dzongkhag Administrations. This mandate should be transferred to the DoR. The

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Dzongkhags should be responsible for planning and identification of the farm roads and
technical backstopping should be provided by the concerned central agency.

Construction and strengthening of Bridges

The construction of SEWH has been identified as a priority by the SGNH for development of
the economic hubs. Since the proposed highway cuts across the full length of the country
along the southern border, it has to cross all the major rivers in the country. The Highway
would therefore require construction of quite a large number of bridges.

Number of bridges, span and proposed type
The SEWH would require construction of about 65 permanent bridges of which 19 are major
ones (span 50mtrs or more).

Loading Class/Capacity and Carriageway width of the bridges
The SEWH is proposed to be connected to the Asian Highway Network and since Class III
(double lane) AH specifies Load Class HS20-44 for the bridges, the same load class is
proposed to be adopted for the SEWH. HS20-44 is the standard live loading for bridges
specified by American Association of State Highway and Transportation Officials (AASHTO)
for Interstate Highways in USA. The HS20-44 loading consists of standard HS trucks and a
uniform lane loading.

As per the proposed alignment, the SEWH passes Shompangkha Zam at Sarpang and
Gelegzam at Aie, Gelephu which have single lane carriageway widths of 4.5m and 3.76m
respectively. The permanent bridges were constructed in 2001 with grant aid from GoI and
despite requests by the then Ministry of Communications, RGoB, for double lane bridges, GoI
constructed a single lane bridge, mainly on the ground that the traffic volume did not justify
double lane bridges at the above locations.

Therefore, for the above two locations, the bridge width would have to be extended to
accommodate two lanes of traffic. The extension would basically mean construction of
another single lane bridge along side as the existing single lane bridges are quite new and it
may not be justifiable to dismantle and replace them. Both the bridges are close to urban
settlements and Gelegzam especially can be expected to have considerable vehicular traffic
once Gelephu starts to develop as an economic hub. Since access at the above locations is
currently being provided by the single lane permanent bridges, there is a visible option to
construct the extensions after 2017 depending on the traffic volume demand. This would,
although in a small way compared to the overall work volume, contribute towards reducing
the work load and also the resource strain on the government.

Between Sipsu – Samtse, Sarpang – Gelephu and Dewathang - Samdrupcholing, the proposed
alignment falls on the existing road. There are fourteen single lane semi-permanent bailey type
steel bridges on these stretches of the Highway which would have to be replaced with doubl e
lane permanent bridges.

There are eleven bridges on the TPH. The two major bridges at Tanalum (span 67m) and
Chhukha (span 67m) have double lane carriageway widths of 7.50m. The other minor bri dges
with spans less than 12m have single lane carriageway widths of 4.50m only. But these bridges
are being replaced / extended by Project DANTAK under the TPH Widening Project.

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All the bridges on this Highway are semi-permanent Bailey bridges. Bridge Division, DoR, has
already conducted a study on the strengthening/replacement of the bridges on this highway in
preparation for the upcoming Punatsangchu Hydro Power Project. Since the Bailey bridges
have a carriageway width of 3.28m only and a limited loading capacity of not more the 24
tons, almost all the bridges on this highway warrants replacement not only on account of the
up-gradation of the Highway to PNH but for transportation of the heavy equipment for the
upcoming power project.

Total of 11 bridges are to be constructed on this Highway. The Wakleytar Bailey Suspension
Bridge is being replaced by a permanent Langer Arch-type of bridge under Phase II of the
‗Project for re-construction of bridges in Bhutan‘ funded by JICA.

Loading Class/Capacity and Carriageway width of the bridges
Since the highway is going to be upgraded to PNH, the bridges are proposed to be designed
for HS20-44 vehicle load specified by AASHTO. This class of loading will cater to the heaviest
of the vehicular traffic and also include provisions for military vehicles.

As this PNH is going to connect the North – Western growth centers to Gelephu and since
the highway has also been identified as the main route for transport of equipment and
machinery for the planned Punatsangchhu Hydro Power Project, all the bridges on this route
shall be double lane. But for bridges with span less than 50m, a slightly restricted double lane
carriageway width of 6.00m is proposed. However, for bridges with span of 50m or more, a
double lane carriageway width of 7.50m would have to be adopted.

Trongsa – Gelephu Highway connects the growth centers to Gelephu. Currently, almost all
the bridges on the highway are single lane. Out of total of 21 bridges on the highway, six are
new permanent bridges and would therefore not require replacement. But the remaining 15
bridges would have to be replaced to upgrade the road to PNH.

Loading Class/Capacity and carriageway width of the bridges
Since the highway is going to be upgraded to PNH, the bridges are proposed to be designed
for HS20-44 vehicle load specified by AASHTO. This class of loading will cater to the heaviest
of the vehicular traffic and also include provisions for military vehicles.

Since the highway is already in operation and being further improved currently under Road
Network Project, the replacement of bridges on this highway may not be considered a
priority for now. The bridge replacement program for this Highway could begin sometime
after 2020.

For now, the traffic volume on this highway is quite low. JICA had, in 1998, conducted a study
on the traffic volume at Mangdechhu, Tingtibi, for planning and construction of Mangdechhu
Bridge. As per the study, the traffic volume projection at Mangdechhu bridge site for the year
2020 is 79 vehicles per/day which is less than 7 vehicles/hour. Since the traffic volume is so
low, even though the span of Mangdechhu Bridge is 96m, the bridge is built as a single lane
with a carriageway width of 5.50m. But the width of 5.50m is a comfortable double lane for
light vehicles.

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However, with the development of Gelephu as a main economic hub and as a result of up
gradation to the Highway to PNH, the scenario is expected to drastically change after 2028.
Therefore similar to Wangdue-Sarpang PNH, while double lane carriageway width of 6.00m is
proposed for bridges with span less than 50m, for span of 50m or more, width of 7.50m
could be adopted.

Gyalpoizhing – Nganglam Highway is currently under construction and therefore all the
bridges on this PNH are going to be new. This highway will be the main trade route for the
eastern part of the country. There are total of 13 new bridges to be constructed on this

Loading Class/Capacity and Carriageway width of the bridges;
Being the main trade route for the East, the highway would need to cater to considerable
traffic volume in due course of time and hence the bridges are proposed to be designed for
HS20-44 vehicle load specified by AASHTO. As for the carriageway width, 6.00m is proposed
for bridges less than 50m span while 7.50m could be adopted for span of 50m or more.

There are total of 13 bridges on the highway. With the up-gradation of the highway to PNH,
all the 13 bridges will require replacement. Some bridges are too old and others do not meet
the width requirement for the PNH. However, except for the 60m span Steel Hamilton
Bridge at Samdrup Jongkhar, all others are minor bridges with span less than 50m.

Loading Class/Capacity and Carriageway width of the bridges
Since the highway is going to be upgraded to PNH, the bridges are proposed to be designed
for HS20-44 vehicle load specified by AASHTO. Like the other North – South PNHs, minor
bridges with span less the 50m, carriageway width of 6.00m could be adopted. But for bridges
with span of 50m and more, carriageway width of 7.50m would be appropriate.

There are total of 31 bridges on the highway. With the up-gradation of the highway to PNH,
23 of them will require replacement. Most of the bridges do not meet the carriageway width
requirement for the PNH. However, most of the major bridges on the highway have in the
recent years been replaced by JICA grant aid and Project DANTAK. Hence the bridges
requiring replacement are mostly minor ones with span less than 50m.

Loading Class/Capacity and Carriageway width of the bridges
Since the highway is going to be upgraded to PNH, the bridges are proposed to be designed
for HS20-44 vehicle load specified by ASSHTO.

Based on their traffic volume count survey conducted for the ‗Bridge Re-construction Project
in Bhutan‘, JICA has made projections for traffic volumes on a number of bridges on the
highway for the year 2020. The highest traffic volume projection of 388 vehicles per day each
was made for Bjee Zam at Trongsa and Wachay Zam at Wangdue. Since this volume of traffic
did not justify 7.50m wide bridges, they have adopted bridge width of 5.50m only for the four
bridges they constructed on the Highway in 2001.

However since the replacement of the bridges on this highway is proposed to be taken up
after year 2020 and more so because of the expected change in the traffic condition scenario

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after full implementation of the SGNH, like in the other PNHs, carriageway width of 6.00m is
proposed for minor bridges with span less than 50m. But for bridges with span of 50m or
more, carriageway width of 7.50m could be adopted.

Since the SNHs conform to single lane standards (with provision for future up gradations),
following general design specifications shall be adopted for the bridges on the SNHs: -

Loading Class/Capacity;
To keep provision for possible up gradation of the SNHs to PNH in future, the same Loading
Class/Capacity of HS20-44 of AASHTO shall be applied for the bridges on these highways.

Carriageway width
Carriageway width of 5.50m shall be adopted for the bridges on the SNHs irrespective of the
span. This width of bridge would be quite restrictive for two heavy vehicles to pass. But
during emergencies such as engine trouble on the bridge, other heavy vehicles can move
beside the stopped vehicle. The 5.50m width is a comfortable double lane for light vehicles.
Hence even if the SNH gets upgraded to PNH in the near future, 5.50m width of the bridge
would serve the purpose unless the heavy vehicle traffic increases many folds, which is highly
unlikely on the SNHs during the design life of the bridges. Therefore it will not be economical
to build double lane bridges on the SNHs for now.


Loading Class/Capacity
For Feeder Roads, Load class H20-44 as per AASHTO is proposed to be adopted. HS20-44
which is heavier than the above class of loading is adopted for highways where heavy truck
traffic is anticipated. Therefore, it will not be economical to adopt HS20-44 class of loading
for FRs. In fact AASHTO had introduced HS trucks only in 1944 and till then, even the
bridges on the Interstate Highways in the US were designed for H trucks. Even if the FR in
future gets upgraded to SNH or even PNH for that matter, H20-44 class of loading would

Carriageway width
In preparation for the project for re-construction of bridges in Bhutan, JICA has conducted a
traffic volume count for a couple of roads in Bhutan and have recommended for single lane
bridges even on the National Highways. Therefore it would be too uneconomical to adopt
double lane bridges on FRs. Hence single lane carriageway width of 4.50m is proposed for FRs
with span less than 50m. However, for major bridges with span of 50m or more, carriageway
width of 5.50m could be adopted.

The road network in the country for 2028 provided in the SGNH would require construction
of a large number of permanent bridges within a short span of 20 years. This is an extremely
huge capital investment for a small country like ours and therefore a comprehensive and
realistic implementation strategy and schedule is of paramount importance. For instance, on
the SEWH alone, there are 65 new bridges to be constructed and the highway has to be
completed by 2017. Planning and construction of so many numbers of bridges within 10 years
will be a unique and unprecedented challenge for our construction industry.

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Proposed implementation strategy
For effective implementation of the SGNH, especially for activities such as roads and bridges
involving longer implementation duration and higher investment, prioritization and proper
distribution of the activities over the 20 years of implementation time is quite critical. The
other important procedure is the judicious contract packaging of the works in relation to the
capacity to implement and the limited time frame.

Prioritization of bridge works
Top priority shall be accorded to the bridges on the SEWH and the Wangdue – Sarpang
(WS) PNHs in preparation for the upcoming Punatsangchhu Project. However, the bridges on
the on-going projects like Gyalpoizhing – Nganglam, Gomphu - Panbang and the FRs planned
for the 10th plan may be carried out as per planned road construction program.

The replacement of the existing bridges on the SEWH and the other PNHs could be taken up
after the new constructions on the SEWH and the replacements on the Wangdue - Sarpang
PNHs are taken up.

Contract Packaging
Considering the number of bridges to be constructed in the next 20 years, it will be
impossible to manage if we have a Contractor and a Consultant each for all the bridges.
Therefore, the bridges will have to be grouped, depending mainly on their span, to form
contract packages. Each package shall be handled by a single or a Joint venture or even a
Consortium of Contractors or Consultants.

Design and construction supervision
The professional services such as topographical survey, subsoil investigation, detailed design
and construction supervision of the bridges shall be outsourced as a single lot as per the
contract packaging discussed above. The outsourcing of the design and the supervision
consultancies as a single package usually make the services cheaper besides avoiding the
conflicts between the designer and the site supervisor during the construction phase. In view
of the highly specialized nature of the job, packages may be invited from reputed international
firms through International Competitive Bidding (ICB) or from Joint Ventures (JV) between
Bhutanese and experienced International Firms. But the local firms would be required to
actually involve in the design and supervision process than just being a signatory in the JV
partnership to ensure that there is transfer of technology from the international to the local

The procurement of professional services for design and construction supervision shall be
carried out by Bridge Division of DoR in consultation with the Management of the Road
Construction/Upgradation Unit under which the bridge(s) falls.

For shorter span bridges across smaller river and shallow valley crossings, concrete bridges
may be the preferred option against steel bridges since the construction materials such as
sand, cement and aggregate are all available locally.

Bridge construction works
The construction works, in keeping with the RGoB‘s policy of private sector development,
shall be outsourced. Bridge construction works, especially for major bridges, is a high-tech job
requiring specialization and experience. Looking at the current situation, it is unlikely that our
construction industry would have the capacity, especially in terms of technical requirements,
to construct bridges as per the packages proposed above. Hence for the initial five to six

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years of the 20-year program, it would be necessary to allow our local contractors to form
JVs with experienced regional/international firms or rely totally on international firms
acquired through ICB.

The regional/international-Local JV is already in practice for construction of major bridges in
the country. The reason for initiating the exercise was two fold – so that the international
partner can provide the technical support to the local partner during construction of the
bridge and that there is transfer of technology from the former to the latter. So far, although
the technical support part had been satisfactory, technology transfer was not very
encouraging. The locals more or less restricted themselves to management and liaison and
the technical part of the job was mostly independently handled by the international partner.
With the implementation of the SGNH, Bhutan will have to construct a huge number of
bridges and it is not only necessary but essential that our own construction industry develops
the capacity to undertake construction of heavier and more hi-tech infrastructures such as
bridges. Hence at least by the end of 2017, we should aim for a full in-house capacity to plan,
design and construct any type of bridges.

Alternative modes of surface transport
The use of ropeways in Bhutan is limited to Trashila Ropeway (length 7 km) near Wangdue
built in the early 1980‘s mainly to transport timber but later used to carry passengers.
Ropeways are generally thought to be a suitable mode of transport as a substitute for roads
in terrain with significant differences in altitude. Any ropeway system to be implemented in
Bhutan would have to be short to serve specific needs. Although it may be less expensive
than a road, a ropeway requires fixed facilities at a substantial cost and therefore it is
appropriate only when there is significant transport demand over a long period.

There is a possibility to construct a ropeway from Zamechu to Gasa Dzong for passengers
and freight once the construction of Damji-Zamechu road reaches Zamechu. It is
recommended to carryout a detailed study for establishing ropeways as a part of the
country‘s surface transport study to carry passenger and freight as well as to promote eco-
tourism for which the potential is very high.

Surface Transport Development Intervention Strategy
Access to regional and global markets
Under the on-going initiatives of the regional bodies such as SAARC, SASEC (ADB),
BIMSTEC and UN-ESCAP, the following transport corridors and gateways are being
developed to enhance connectivity to landlocked countries including Bhutan:

Transport and transit road corridors

i) Thimphu/Paro – Phuentsholing – Hasimara - Siliguri – Kolkata/Haldia (for trade to and
   through Indian ports)

ii) Thimphu/Paro – Phuentsholing – Hasimara - Siliguri – Kakarvita (for trade with Nepal)

iii) Thimphu/Paro – Phuentsholing – Hasimara – Burimari – Khulna or via the Jamuna Bridge
     to Dhaka – Chittagong/Mongla (for trade to and beyond Bangladesh transiting through

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iv) Samdrupjongkhar – Guwahati – Shillong – Sylhet (Bangladesh) – Dhaka – Kolkata alternate
    transport corridor for trade beyond India and Bangladesh, from the eastern part of the

In view of the on-going sub-regional and regional initiatives, it is important to focus attention
for developing the Thimphu – Phuentsholing – Jaigaon – Hasimara – Siliguri – Kolkata/Haldia
corridor for promoting international connectivity. Fortunately for Bhutan, investment
required for improving road corridors are not significant since physical, non-physical and
institutional improvement within these road corridors in India and Bangladesh are expected
to be addressed by the governments of India and Bangladesh for providing access to the
nearest ports in their respective territories. The following activities are however, required
from the Royal Government:

   Establishment of an integrated cross border facility addressing immigration, customs
    processing and quarantine facility at the border towns starting with Phuentsholing and
    gradually replicating these facilities in Samdrupjongkhar, Samtse and Gelephu. It is given to
    understand that the GoI has already initiated the development of 13 such facilities at
    different border crossing points with Bangladesh, Nepal and Pakistan.
   Establishment of a Dry Port at Phuentsholing as a matter of priority with similar facilities
    at Samdrupjongkhar and Gelephu developed gradually.
   Creating physical facilities in terms of adequate parking space at Phuentsholing to facilitate
    faster custom clearance, including the procurement of cranes and forklifts.
   Bilateral transport agreement and multilateral transport transit agreement among
    members of the SAARC region within a regional framework for allowing reciprocal
    movement of vehicles, goods and people across the border.

To further improve connectivity, it will be important to have two other points i.e. Gelephu
and Samdrup Jongkhar connected to the Asian Highway network. Samdrupjongkhar should be
linked to AH1 in Nagaon and Jorabat in Assam. Similar access from Gelephu should be
requested and the route Gelephu – Santaibari – Indian National Highway 31 for traffic
destined towards Siliguri and Guwahati designated in the Asian Highway Network gradually,
so that traffic could move through the Indian National Highway 31, for Bangladeshi and Indian
markets and ports through Guwahati and Siliguri. Consequently, it would be beneficial to
integrate Samdrup Jongkhar –Phuentsholing sector of the SEWH to the AH network as and
when it is complete.

Road connection from the east for trade with Arunachal Pradesh is another possibility since it
is given to understand that Arunachal Pradesh is exploring options for a bypass through
Bhutan without having to use the Assamese national highway.

Trade route from Sikkim for access to Samtse or Haa with the opening of trade between
China and India through Nathula pass, is an area requiring more study.

Maritime gateways
i) Kolkata/Haldia ports
ii) Chittagong/Mongla ports in Bangladesh

With regard to these maritime gateways, the governments of India and Bangladesh would
initiate all actions necessary to improve the efficiency and management of the above ports.
Further study and consultation with the GoI would also be required to study the possibility of
using Jawaharlal Nehru Port in Mumbai for trade to European markets.

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i) Possibility of using the Inland Water Transport (IWT) corridor from Kolkata via
    Sunderbans and bypassing Narayanganj (in Bangladesh) - Brahmaputra - Guwahati (Assam)
    and by road to Samdrupjongkhar, and vice-versa. The IWT is currently available between
    India and Bangladesh on a small scale. However, expert studies have suggested the strong
    possibility of using this IWT corridor through investment by Bangladesh and India. Bhutan
    could request for extension of this IWT corridor as additional trade route from
    Samdrupjongkhar to Bangladesh via Assam 68 , as submitted by the members of the National
    Assembly during the 86th session.
ii) Feasibility of using Manas river for water transport has not been studied and would
    therefore require more investigation through expert study.

Rail corridor
i) Hasimara (West Bengal) – Phuentsholing with bifurcation to Pasakha (18 km). Due to
     unavailability of space in Phuentsholing, the consultants M/S Rites Limited have been
     requested to concentrate on providing link to Pasakha. In such a case, a new site will also
     need to be identified for a Dry Port at Pasakha instead of Phuentsholing.
ii) Kokrajhar (Assam) – Gelephu (70 km)
iii) Pathsala (Assam) – Nganglam (40 km)
iv) Rangia (Assam) – Samdrupjongkhar via Darranga (60 km)
v) Banarhat (West Bengal) - Samtse (16 km)

The first priority should be to complete the physical link to the five border towns.
Consequently, effort must be made to gain membership to the Trans-Asian Railway (TAR)
network at an appropriate time in future. For this purpose however, consultation with the
GoI will be necessary to provide links from the above places (starting from
Phuentsholing/Pasakha) to the Indian railway system for subsequent connectivity to the TAR
Network. This will help international trade to take place through railway system in the region
as well as to other parts of the world. In this regard, the railway networks which are already
designated in the TAR Network in India and Bangladesh, and could possibly provide
connectivity to Bhutan are:

     Radhikapur – Birol –Abdulpur - Kolkata – Haldia – Chennai – Mumbai (India) and onward
      to Sri Lanka via a ferry link. Using the same network or combination of other network in
      India, access to West Asia and Russian federation may also be possible.
     Radhikapur – Birol –Abdulpur (West Bengal) - Tongi – Chittagong (Bangladesh) and
      onward connectivity to countries in the South-East Asia, Korea, Japan, Central Asia and

Passenger transport services
The following strategies are proposed to enhance passenger transport services in the

a) With the improvement of road network, passenger transport services would be provided
   by using comfortable and deluxe buses.
b) Private companies will be invited to provide passenger transport services. This is expected
   to improve the quality of services, improve professionalism and make the services

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                               Annexures to the Strategy for Gross National Happiness

c) Develop integrated transport infrastructure in the form of bus terminals, bus sheds,
   parking and public toilets.
d) De-regulate passenger transport services especially in the capital region, with the RSTA
   concentrating on standards and regulatory aspects.
e) Introduce free pass system for senior citizens (65 years and above) and disabled. The
   private operators would be compensated through a suitable subsidy package.
f) Continuous monitoring of passenger transport services to ensure efficiency, safety,
   reliability and quality services.
g) Introduce ICT and Global Positioning System to assist drivers of the hazards/dangers en-
   route, and monitor and track the movement of passenger buses.
h)     Subsidize transport operators on non-profitable routes.
i)     Develop vehicle standard for taxi and enforce the use of taxi meters.
j)     Identify and develop highway amenities such as eating and resting places, and
       automobile workshops along major national highway.

Urban Transport
Thimphu municipality is served by 14 buses, which is inadequate during the rush hours but
under-utilized during lean hours. With the continuous expansion of urban boundaries,
demand for public transport is growing significantly. In order therefore, to reduce traffic
congestion, environment pollution, and road injuries and death, it has become necessary for
the government to find ways of promoting urban transport, particularly in the capital region.
While options are fairly limited because of the terrain and small size of market, study must
start now for introducing mass urban public transport. The following urban transport
strategies are recommended:

Trolley buses
Trolley buses which run on electricity are widely used in different parts of the world. A
trolley bus is powered by two overhead electric cables, from which the bus draws electricity
using two trolley poles. Trolley buses are considered particularly advantageous on hilly routes
as electric power is more effective than diesel for climbing steep hills and trolley buses‘
rubber tires have better adhesion than wheels on steel rails. Trolley buses are especially
favored where hydropower is abundant and cheap.

Standard trolley buses are 40 to 60-feet long which have carrying capacity of 41 passenger
seats and 42 standees on 40' standard vehicles and 54 passenger seats and 70 standees on 60'
articulated vehicles. The 40‘ buses weigh approximately 31,500 pounds, uses NiCad batteries
for emergency propulsion.

Such trolley buses can be introduced to serve the core municipality of Thimphu. Similar
services should also be explored for other larger towns like Paro, Samdrupjongkhar and
Gelephu. Number of trolley buses, frequency of services and the route coverage within the
urban boundaries for each town will need to be assessed through expert input.

Enhance urban transport
The number of buses operating in urban areas especially in Thimphu should be increased. For
this purpose, the Ministry of Finance should continue to subsidize the urban transport as is
being done presently so that adequate number of buses is available to operate at an interval
of every 10 minutes covering most residential areas, especially during the rush hours. Also, as
a short-term measure, such buses should be introduced in other larger towns like
Phuentsholing, Samdrupjongkhar, Paro and Gelephu.

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Revision and strict enforcement of vehicle emission standards
Emission standards should be revised to international level so that the older and more
polluting vehicles are discouraged from plying on the road, thereby also reducing congestion.

Develop safer and convenient footpaths and dedicated bicycle lane in urban
Such a strategy will encourage people to walk or use bicycle wherever feasible.

Transport safety
The following transport safety strategies are proposed:

(a)         Promote cooperation and collaboration among key stakeholders through the
            establishment of a National Road Safety Board or the Road Safety Council with RSTA
            playing the lead role
(b)         Improve road traffic management and information network system including road signs
            (accident data collection and analysis, road information system, signs and signals)
(c)          Promote safer roads in consultation with relevant agencies (routine and periodic road
            maintenance, road widening and improvement works)
(d)          Educate road users including pedestrians (road safety campaigns and messages, safety
            messages, refresher courses)
(e)          Develop safer vehicle programmes (vehicle fitness program, enforce standards for
            automobile workshops, enforce vehicle standards especially taxis and passenger buses)
(f)       Develop an efficient incident management or post accident management system (capabilities
            and facilities for emergency medical and rescue services)
(g)        Support enforcement agencies with modern equipment and adequate mobility (consistent
            enforcement, communication and road safety equipment, vehicles for mobility of
            enforcement agencies)
(h)         Adequate manpower and training of enforcement and regulatory authorities.
(i)         Establish road safety fund
(j)         Set road safety targets and national road safety plans
(k)         Undertake road safety audits on the entire road system.

Transport service delivery
As an agency which has direct and routine dealings with the general public, it is important for
RSTA to provide services efficiently and at the minimum time possible. For this purpose, the
following strategies are suggested:

           Deploy ICT and promote e-services
           Reduce processing time for driving license and vehicle registration
           Introduce computerized driver testing and licensing system to minimize human
            intervention to the extent possible
           Study and implement Intelligent Transport System (bus movement information, speed
            cameras, CCTV, electronic toll collection, traffic monitoring, emergency communication
           Establish reliable data-bank
           Develop and enforce service standards and basic facilities in passenger transport vehicles
           Develop appropriate skills for efficient delivery of service to the public
           Achieve better compliance to laws, rules and regulations and ensure fair and effective

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Enabling Environment
The following problems and constraints are identified in planning and implementation of road
infrastructure works.

Planning & Design Phase
Non-availability of large scale maps (1:10,000 or larger). Currently topographic maps of only
1:50,000 and 1:25,000 are available which are not accurate for road alignment studies.
Topographic maps of 1:10,000 or less are required which should be produced by the DSLR.
The user agencies should have access to the diapositives of existing topographic maps to
enable them (the user agencies) to produce topographic maps of the required scale. At
present issue of diapositives is restricted.

Shortage of Surveyors and Designers
There is an acute shortage of surveyors and design engineers in the DoR. Many of the
surveyors are due for superannuation. Given the magnitude of road works foreseen during
the 10th plan and beyond implementation of road works will be seriously constrained due to
lack of departmental surveyors and design engineers. To alleviate the problem it is proposed
to outsource road survey and design works.

Forestry Clearance
Typically issue of Forestry Clearance (FC) which is a prerequisite for issuing environment
clearance (EC) takes anything from 3 to 6 months. The procedures for issue of FC require to
be simplified which otherwise seriously hamper road implementation programs. The
clearance should be issued within 1 month.

Use of local materials
Section 8(1) of the Road Act 2004 states that ―The Department and other road agencies shal l
have priority for the use of natural resource available within the road right of way and road
control area over other organizations for collection of resources within the road right of way
and road control area without the express written consent of the Department or other road
agencies‖. On the other hand the Forest Act stipulates that all resources are the properties
of the DoF and approval of the Forest authority is required for collection and utilization of
resources including from areas within the road right of way.

The present Forest Act and Road Act 2004 need to be revised empowering the DoR to
collect and utilize resources from within the road right of way for road works.

Land Acquisition
Land acquisition for roads take considerable time. There is a need for very strong
coordination among the concerned agencies. All agencies should ensure that assessment of
land and other structures is carried out quickly and payment of fair and just land
compensations made within a certain pre-determined period to avoid inconvenience to the
persons affected by land acquisition.

Implementation Modality
Construction of the SEWH is the key to the growth of the economic hubs and hence shall be
accorded highest priority. In view of the importance accorded to the SEWH and other PNHs
in the SGNH, an ambitious work plan has been prepared for the 10 th Plan. However, as the
local construction industry is still in its fledgling stage it is recommended that the road
construction be implemented as a fast track project by involving international contractors or
joint ventures between Bhutanese construction firms and regional/international firms to boost

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the capacity of the local construction industry. Each contract package shall be between 50 to
100 km to make the contract package attractive so that the size and value of each contract
justifies investment in specialized equipment viz. asphalt concrete paver for laying asphalt
concrete, spot mix plant for production of asphalt concrete and pugmill type of mixing plant
required for mixing wet mix macadam for pavement works. The contractor concerned shall
be liable for the maintenance of the road stretch for a defect liability period of five years to
ensure that construction quality is ensured upfront.

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Air Transport

The SGNH recognises the Air Transport Sector as a major contributor to the country‘s rapid
and sustainable economic growth. Developing a safe, efficient and reliable air transport
network within and outside the country has been identified as a priority not only in terms of
sustaining the projected growth of tourism under the new policy, but also to promote the
development of niche and high value manufacturing and service industries that are time
sensitive and command a premium for air cargo.

The development objectives for the Air Transport Sector are:

        To improve accessibility to and within the country and promote development of
         tourism. Priorities identified in the air transport sector include expansion of Druk
         Air‘s operations, encouraging foreign airlines to fly in, building an all-weather
         international airport in Gelephu and establishing domestic air connections to
         Bumthang and to another location in Trashigang. The airport in Gelephu will also
         have the potential to service the international air travel needs of the adjoining areas
         in West Bengal and Assam.
        Good air connectivity – domestic and international, has been identified among
         others, as a critical factor for attracting FDI, accessing international markets,
         fostering a wide range of enterprise activity, employment generation, and achieving
         strong economic growth.
        Paro airport to remain as an international airport as it has latent potential for
         growth through promotion of all-year-round tourism.
        The alternate strategy for third country exports is to develop efficient air
         connectivity and promote cluster industries in potential niche and high value
         manufacturing and services sectors that are highly time sensitive and command a
         premium for air cargo.
        Establish legal and regulatory framework to meet international norms, standards,
         and best practices.

Based on the detailed analysis done, the following are the recommendations for the air
transport sector that would act as a catalyst for the growth of the Bhutanese aviation

   1. Undertake institutional reforms in the Department of Civil Aviation (DCA) and Druk
      Air to achieve the objective of providing a safe, reliable, efficient and sustainable air
      transport services in Bhutan.
   2. Expand Paro International Airport and construct a crossing runway to enhance safety.
   3. Construct an ILS capable international airport at Gelephu that would assist in
      developing Gelephu into the economic hub of Bhutan in the near future.
   4. Develop airline business strategies to respond to changing markets and enhancement
      and renewal of fleet.
   5. Construct domestic air strips in Bumthang and Trashigang to promote domestic air

Institutional Reforms (Civil Aviation)
Developing an efficient air transport network has been identified as a priority not only in
terms of sustaining the projected growth of tourism under the new policy, but also to
promote the growth of cluster industries in potential niche and high value manufacturing and
services sectors. Under the new development strategy, major aviation infrastructure

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development projects are foreseen in the near future involving heavy capital investments. The
ongoing developments call for a detailed review of the present institutional arrangements and
human resources capacity in the air transport sector to identify the critical shortcomings in
the institution and propose remedial measures.

The DCA under the Ministry of Information & Communications (MoIC) is responsible for
civil aviation sector in Bhutan. The DCA‘s broad functions are:

      Promote safe, economical, and efficient development of the air transport sector.
      Provide airport and air navigation services.
      Implement infrastructure development projects.

The present DCA organisation structure, conceived sometime in the early 1990s, does not
sufficiently support the fulfilment of the above functions. The most evident drawback in the
present organisation structure is the lack of clear separation of regulator and service provider
divisions, which has caused ambiguities and overlap between the two functions, and a
resulting compromise in aviation safety standards due to conflict of interests.

As the air transport sector continues to grow the greatest challenge confronting the sector
will be to enhance and maintain safety efforts matching public expectations. Bhutan cannot at
any cost afford to have an aviation accident. The stakes are too high. However, ensuring
aviation safety is not a straight forward issue. It entails deeper understanding and knowledge
about organisation and management issues, and requires initiating reforms targeting the
system as a whole.

The above analysis shows that institutional reforms must be initiated to achieve the ultimate
separation of the regulator and service provider functions. However, the legal instrument that
will empower the establishment of an independent Civil Aviation Authority must be
developed first. This time lag necessitates taking a two-step reform to achieve full regulatory
independence immediately.

As a transitional phase one reform, the DCA should be re-organised. The main feature of the
proposed transitional organisation structure is the clear separation of the regulator
(regulatory division) and the service provider (airports & ANS division). The transitional
arrangement is necessary as the legal, administrative, and technical processes for establishing a
Civil Aviation Authority are expected to take some time.

The proposed transitional structure will offer the following benefits:

      Improved aviation safety and security through separation of regulatory and service
       provider functions and reduced conflict of interest;
      Immediate capacity building in key regulatory and development areas; and
      Reduced administrative and overhead cost through sharing of support services.

 i)  Achieve aviation safety and security standards matching internationally
     acceptable levels through full independence of regulations and regulatory
     processes, sufficient discretionary powers, and professional excellence.
      Undertake functional separation of the regulator and service provider through re-
        organisation of the DCA.

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        Immediately recruit experts to head flight operations section and ANS division
         until such time sufficient local capacity has been built.
        Establish an autonomous Civil Aviation Authority, with the powers to make safety
         regulations and enforcement decisions.
        Establish fair and transparent regulatory procedures.
        Establish fair and transparent selection process for safety regulators, based purely
         on professionalism and merit.

 ii)   Ensure independence of aviation accident investigation process from both the
       regulator and the service providers.
        Establish an Accident Investigation Unit directly reporting to the Minister of
          Information and Communications. The investigation unit may be structured to
          manage all types of public transport accidents – surface, air, water, railways, etc.
        Develop local capacity to lead and manage the investigation processes.
        For air accidents investigation experts may be hired in from outside the country.

 iii) Enable airports and air navigation services providers to operate with greater
       commercial focus and business enterprise.
        Undertake functional separation of the regulator and service provider functions
          through re-organisation of the DCA.
        Consolidate operation and management of all airports, heliports, and air navigation
          services under a single organisation.

Legal and Regulatory Framework
Bhutan ratified the Convention on International Civil Aviation (Chicago Convention) and
became a member of the International Civil Aviation Organisation (ICAO) in 1989. As a
member of ICAO, Bhutan must accept and achieve compliance to the International Standards
and Recommended Practices (SARPs) for aviation safety and security, developed by ICAO.

The Civil Aviation Act 2000, Bhutan Air Navigation Regulations 1999, and other requirements
provide the legal and regulatory framework for safety and security of air transport operations.
The Act and the regulations in the present form do not cover many areas of air transport
critical for ensuring safe and secure operation of flights. Examples of missing regulations
include those for air traffic services, aviation security, aviation meteorology, aeronautical
information services, etc. Those regulations that already exist do not sufficiently reflect the
international standards and require further review and amendment. For flight operations and
maintenance, the European Joint Aviation Requirements (JAR) has been adopted as
regulations in 1999. However, the JAR requirements in the original form, without adapting
them to our local operating environment, have in many ways given rise to implementation

A Capacity Development Project (CDP), jointly funded by the Swedish International
Development Agency (SIDA) and RGoB is currently in progress. Under the CDP project
framework, one major programme is dedicated to legal and institutional (L & I) development.
Under this programme the existing Civil Aviation Act and regulations will be reviewed and
amended to establish comprehensive and forward-looking legal and regulatory instruments
for civil aviation that covers all the 18 technical standards issued by ICAO.

Bhutan must actively take part in the ongoing regulatory harmonization efforts, and propose
the establishment of a regional regulatory agency. The air transport industry is critical for a
developing economy like Bhutan to gain from participation in the global economy. Aviation

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cooperation is essential for successful economic cooperation. The ultimate objective of
liberalizing air transport in South Asia should be the establishment of a South Asian Common
Aviation Market. Given the many barriers to liberalization, a gradual, two-pronged (bilateral
and multilateral) step-by-step approach to liberalization should be pursued.

Liberalization opportunities do exist within the bilateral framework. The existing bilateral
ASAs with countries like Nepal, Bangladesh, and India should be systematically reviewed to
allow the following provisions:

       Remove frequency and capacity limits on 3 rd and 4th freedom;
       Add more 5th freedom points and capacity;
       Allow multiple designations of airlines;
       Open charter markets;
       Open freight markets, etc

Fresh bilateral ASAs should be concluded with countries in the Middle East, HK SAR,
Singapore, Malaysia, China, and other South Asian countries. However, bilateral air services
negotiations are often constrained by direct political interventions, and historically have
resulted in less than optimal outcome for the two parties.

Along with the bilateral initiatives, aviation liberalization shoul d be pursued at the regional
level using the existing institutions like SAARC. Transportation policies facilitate the efficient
movement of goods and passengers in a manner that supports economic growth and trade in
the region. Therefore, the SAFTA Agreement which came into force on 1 January 2006
provides a viable regional framework which can be expanded to include trade in aviation

The following recommendations and strategies are based on the assessment presented above:

 i)     Strengthen the legal and regulatory framework for aviation safety and security.
         Civil Aviation Act revised to enable the establishment of an autonomous Civil
            Aviation Authority.
         A comprehensive set of aviation safety and security regulations developed
            compliant with the ICAO technical standards.

 ii)    With the overall objective of improving aviation safety and security standards,
        enabling growth of air transport business, and reducing cost of aviation services,
        proactively pursue the move towards harmonization/standardization of aviation
        regulations in the South Asia region.
         Actively engage in the ongoing projects on regulatory harmonization.
         Propose the establishment of a permanent institutional framework (e.g. South
           Asian Aviation Safety Agency) for common aviation rulemaking, certification,
           standardization, and enforcement.

 iii)   Pursue progressive and incremental liberalization of air services within the
        bilateral framework.
         Negotiate and conclude more liberal and progressive bilateral agreements with
            Nepal, Bangladesh, India, and other South Asian countries focussing on 5 th freedom
            traffic rights.
         Conclude fresh bilateral air service agreements with China, ASEAN, and Middle
            East countries.

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 iv)   Guided by the common goal to achieve strong economic cooperation through
       free and open trade and investment among the SAARC member states,
       proactively support air transport liberalization in the South Asia region within
       the framework of SAARC / SAFTA.
        Leveraging on the Indian Prime Minister‘s statement at the 13 th SAARC Summit,
           Dhaka in 2005, propose the adoption of a progressive, phase-wise liberalization of
           air transportation in the South Asia region.
        SAARC leaders to chart out a clear vision (establishment of a South Asia Common
           Aviation Market by 2020) for air transportation.
        Include air transport objectives within the framework of SAFTA.
        Institute a regional consultative mechanism (Biennial SAARC Air Transport
           Ministers‘ Meeting).
        Formulate SAARC guiding principles for air transportation and develop a roadmap.
        Establish a permanent institutional framework for aviation rulemaking, certification,
           standardization, and enforcement.

Paro International Airport
Following are the proposed strategies for development of Paro International Airport to
enhance safety and to accommodate the projected rise in passengers for the next twenty

      Expansion of the terminal building and its facilities
      Expansion of the apron and the taxiway to accommodate more aircraft
      Construction of private aircraft parking
      Construction of domestic terminal, apron and taxiway for fixed and rotor wing
      Expansion of the width of the runway
      Construction of turn pads at the ends of the runway
      River protection works with embankment and motor road on top that would reclaim
       land and divert the current road.
      Construction of a cross runway to enhance safety
      Accommodation for security and fire staff.
      Construction of fire station.
      Consolidation of air