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					                      DEPARTMENT OF INDUSTRY
                     MINISTRY OF ECONOMIC AFFAIRS
                       Royal Government of Bhutan
                               Thimphu




Improving Entrepreneurial Skills Development and Access to Finance for
               Cottage and Small Industries in Bhutan
                    Regulatory Impact Analysis




                                   1
                                 DEPARTMENT OF INDUSTRY
                               MINISTRY OF ECONOMIC AFFAIRS
                                   Royal Government of Bhutan
                                               Thimphu




                                             Date: 18 February 2010
                                                 Version No. 12




Prepared by:

          1.   Mr. Penjor, MSME Division, Department of Industry, MoEA
          2.   Mr. Jigme Dorji, Bhutan Development Finance Corporation Limited
          3.   Mr. Letho, Association of Bhutanese Industries
          4.   Ms. Muna Mukhia, MSME Division, Department of Industry, MoEA
          5.   Ms. Binita Lhadon Ghalley, Department of Trade, MoEA
          6.   Mr. Rinchen Dorji, Head of MSME Division, MoEA

Facilitated by:

          Ms. Kathryn Vardy, Consultant (RIA expert and main drafter)
          Mr. Jamyang Sherab, Consultant (Local expert)
          Dr. Cesar Cordova, Consultant (Team leader)


This Regulatory Impact Analysis (RIA) was prepared for project number TA 6337 – REG: DEVELOPMENT
PARTNERSHIP PROGRAM IN SOUTH ASIA. Capacity Building for the Introduction of Regulatory Impact
Assessment in Bhutan [CONTRACT NO.: S/80-090] under the: Kingdom of Bhutan: Micro, Small and
Medium-Sized Enterprise Sector Development Program, funded by the Asian Development Bank.



 This report commits only the RIA Task Force involved in its preparation and does not prejudge the final
                form of any decision to be taken by the Royal Government of Bhutan.

                                                   2
                                                                     Table of Contents
Consultation Undertaken ...................................................................................................... 4
Executive Summary ............................................................................................................... 5
Purpose .................................................................................................................................. 7
Acronyms ............................................................................................................................... 8
Section 1. Problem Definition................................................................................................ 9
1.1 Lack of entrepreneurial culture and skills ....................................................................... 9
1.2 Difficulties accessing finance ......................................................................................... 10
1.3 Existing initiatives and their impacts ............................................................................. 10
1.4 Costs and Benefits of Baseline Initiatives ...................................................................... 13
1.5 Do the benefits of current initiatives outweigh the costs? ........................................... 17
Section 2. Objectives of the RIA .......................................................................................... 19
Section 3. Options Selected ................................................................................................. 19
Section 4. Impacts of the Options ....................................................................................... 20
Option 1: Engage private sector providers to deliver entrepreneurial skills training ......... 20
Option 2: Establish a voucher program ............................................................................... 22
Option 3: Use cash flow analysis where collateral requirements are not met ................... 24
Option 4: Allow existing enterprises access to ‘soft’ loans ................................................. 26
Option 5: Introduce financial leasing .................................................................................. 28
Section 5. Comparison of Options ....................................................................................... 30
Section 6. Recommendations .............................................................................................. 32
6.1 Implementation of the Preferred Options .................................................................... 34
Section 7. Annexes .............................................................................................................. 35
7.0 Background – Private Sector Development in Bhutan .................................................. 35
7.1 Consultation .................................................................................................................. 36
7.3 Changes to EDP Loan Scheme ....................................................................................... 40
7.4 Methodology ................................................................................................................. 40
7.5 Valuing Staff Time.......................................................................................................... 41
7.6 Costs and Benefits – Baseline ........................................................................................ 44




                                                                                  3
Consultation Undertaken
The authors of this document gratefully acknowledge all those individuals and organisations that shared
their time, expertise and experience with members of this RIA task force.
Consultation is a key part of undertaking Regulatory Impact Analysis (RIA) and is an ongoing process by
which the evidence base can be established, verified and improved upon over time. The RIA task force
would like to thank all those that contributed during the following presentations and consultations (See
Annex 7.1 for further details):
      Initial consultation meeting (9 September 2009) – 20 participants
      Presentation to Programme Steering Committee (25 September 2009) – 16 participants
      Passive consultation on preliminary RIA wherein the preliminary RIA with options outlined were
       provided to various stakeholder (October – November 2009) – 6 responses received
      Five individual consultative meetings (10 – 25 November 2009) – 11 participants
      Survey of training participants (10 – 25 November 2009) – 16 responses received




                                                    4
Executive Summary
Since the 6th Five Year Plan, the Royal Government of Bhutan (RGoB) has emphasized the development of
the private sector and its future role as an engine of growth. The realisation of this vision requires, among
other things, an enabling environment for the establishment and development of enterprises. Accordingly,
the RGoB has provided entrepreneurship skills training not only to improve the knowledge and skills of
potential entrepreneurs but also improve their chance of obtaining loans on ‘softer’ terms from major
financial institutions.
Given the importance of making regulatory and policy decisions that promote private sector development
and growth, the Department of Industry, Ministry of Economic Affairs, with assistance from the Asian
Development Bank initiated in the spring of 2009 the undertaking of Regulatory Impact Analysis (RIA) for
the first time in Bhutan. This RIA examines ways to improve existing entrepreneurship training and
associated loan schemes, build capacity for performing RIA within MoEA and also make a meaningful
contribution to the policy debate.
Regulatory Impact Analysis is an evidence based process for making regulatory and policy decisions. It
involves identifying underlying problems and potential options to resolve these. The impacts of these
options are systematically analysed and compared; which supports transparent policy making, and enables
important information to be communicated within government and to stakeholders. Such information
ensures key decisions are made based on a thorough assessment of the costs and benefits of potential
options.
In September 2009, the Programme Steering Committee discussed and accepted a preliminary RIA on
Incentives for Cottage and Small Industries (CSIs).1 The preliminary RIA examined nine possible incentives
for promoting the development of CSIs in Bhutan. During the development of the preliminary RIA, work on
component one of the ADB funded ‘Kingdom of Bhutan: Micro, Small and Medium-Sized Enterprise Sector
Development Program’ began. Under this component an MSME Development Policy, Strategy and
Incentive Framework and Cost Sharing Facility Management Model are being developed. Besides, this work
is also expected to recommend incentives for MSMEs and the means for providing business development
services to both rural and urban enterprises.
Given the considerable time and resources committed to developing the Strategy and Incentive
Framework, the scope of this RIA was narrowed to avoid duplication with this ongoing project. As such, this
extended RIA, while still concerned with issues related to CSI development, examines five options for
improving existing entrepreneurship training courses and related loan schemes. The options are to:
       engage private sector providers to deliver entrepreneurial skills training programs;
       establish a voucher program to encourage market provided training;
       use cash flow analysis where CSIs do not meet collateral requirements for loans;
       provide existing ‘soft’ loans to established enterprises; and
       introduce financial leasing.
Based on an examination of the monetized and non-monetized costs and benefits of each of these options
(section 6), the Task Force recommends that as a matter of priority the RGoB:
    1. Engage private sector providers to deliver entrepreneurial skills training (option 1);
    2. Introduce a voucher program (option 2); and
    3. Introduce financial leasing to improve access to finance for CSIs (option 5).


1
 The pilot RIA follows the European Commission Impact Assessment methodology enhanced and adjusted for Bhutan
context by Jacobs and Associates.
                                                      5
In terms of implementing these preferred options, the Task Force recommends that the RGoB incorporate
these measures in the forthcoming MSME policy, engage on drafting a regulation for implementing the
voucher system and engage in some minor administrative reforms. The support of the Ministry of Labour
and Human Resources and the Royal Monetary Authority will be required (see Table 6.1).




                                                 6
Purpose
The aim of this project was to pilot the RIA methodology in Bhutan in order to enhance local understanding
of the methodology and its practical application to regulatory and policy issues. To achieve this,
International RIA specialists from Jacobs & Associates, Inc. provided the RIA process design, methodology
and ongoing training and guidance to two task forces made up of civil servants from the Ministry of
Economic Affairs, Bhutan Development Finance Corporation Limited and the Association of Bhutanese
Industries.
The five member task force responsible for this report investigated potential options for improving
entrepreneurship development training in Bhutan and associated loan schemes to provide access to
finance for new entrepreneurs. The task force seeks to ensure that these initiatives are well targeted, cost
effective and appropriate, while providing benefits to Bhutanese enterprises, the Royal Government of
Bhutan and the wider community.
The views expressed in this report are those of the task force and associated consultants and are not
necessarily the views of the Asian Development Bank or the Royal Government of Bhutan.




                                                     7
Acronyms
ADB        Asian Development Bank
BEC        Basic Entrepreneurship Course
BCCI       Bhutan Chamber of Commerce and Industry
BDS        Business Development Services
BIT        Business Income Tax
BoBL       Bank of Bhutan Limited
BNBL       Bhutan National Bank Limited
BPS        Business Promotion Section
CEC        Comprehensive Entrepreneurship Course
CIB        Credit Information Bureau
CGS        Credit Guarantee Scheme
CIT        Corporate Income tax
CON        Contract
CSF        Cost Sharing Facility
CSI        Cottage and Small Industries
CSE        Cottage and Small Enterprises
DoI        Department of Industry
DoT        Department of Trade
EDP        Entrepreneurship Development Program
EPC        Entrepreneurship Promotion Centre
FI         Financial Institutions
FYP        Five Year Plan
GDP        Gross Domestic Product
IGSP       Income Generation Support Programme
IPSDS      Improving Public Service Delivery System
IT         Information Technology
MoEA       Ministry of Economic Affairs
MoF        Ministry of Finance
MoLHR      Ministry of Labour and Human Resources
MSME       Micro, Small and Medium Enterprises
NGO        Non-Government Organisation
Nu         Ngultrum (Bhutan currency unit)
PAM        Production and Manufacturing
PPD        Policy and Planning Division
PSC        Programme Steering Committee
RGoB       Royal Government of Bhutan
RIA        Regulatory Impact Analysis
RTIO       Regional Trade and Industry Office
SEDF       South Asia Enterprise Development Fund
SQCA       Standards Quality Control Authority
SVC        Service
TRA        Trade
UNDP       United Nations Development Programme
VTI        Vocational Training Institute
WB         World Bank
WRT        Wholesale and Retail Trade




                                     8
Section 1. Problem Definition
The Royal Government of Bhutan hopes that cottage and small industries (CSIs) will make a significant
contribution to future economic development. Specifically, as it is envisioned that the development and
strengthening of CSIs will promote entrepreneurship, provide employment opportunities, generate income
and reduce poverty, particularly in rural areas. While a number of obstacles need to be overcome to realise
this vision2, this RIA examines two key issues: lack of entrepreneurial skills and access to finance.
These issues are particularly important, because even if an enabling environment for private sector
development exists, if entrepreneurial culture is weak and relevant skills are lacking, individuals may be
reluctant and/or unable to take risks and make the most of private sector opportunities available to them.
Where individuals do decide to pursue such opportunities, obtaining the necessary finance is often a
significant challenge that must be overcome to make their entrepreneurial vision a reality. For existing
enterprises, accessing funds to grow and expand business operations is also a challenge.

1.1 Lack of entrepreneurial culture and skills
The decision to become an entrepreneur is a personal one based on the characteristics of an individual
(their preferences, expectations of success, and appetite for risk) as well as their perceptions of how
socially accepted or desirable their entrepreneurial activities are. Hence, to foster an entrepreneurial
culture requires two key ingredients: 1) an environment where entrepreneurship is highly regarded, and 2)
individuals that have the necessary skills, mindset and appetite for risk to make the most of the
opportunities available to them.
While the number of private sector enterprises in Bhutan is increasing and numbered over 25,000 in 20083,
individuals consulted during the preparation of this RIA typically characterised the entrepreneurial culture
in Bhutan as ‘weak’ for a number of reasons:
       The relatively short history of private sector development in Bhutan
       The relatively small number of private sector enterprises
       Entrepreneurship and related courses are not part of the school curriculum
       Preferences for public sector employment because of the prestige, benefits and certainty that
        accompany employment in that sector
       Public wariness of private sector activities which may be perceived as “profiteering” and
        “exploitative”, or in conflict with Buddhist sentiments such as generosity, compassion and empa-
        thy.4
Given these weaknesses in entrepreneurial culture, it is perhaps not surprising that the establishment of
enterprises by individuals is often hindered by a lack, or low level, of entrepreneurial skills and knowledge.
This includes hard skills like technological know-how, marketing, distribution, business management, and
book keeping as well as soft skills or entrepreneurial competencies such as the ability to think of new and
unique business ideas, and willingness to take risks.
The Entrepreneurship Promotion Strategy published by the Ministry of Labour and Human Resources
(MoLHR) provides a brief explanation as to why these skills may be lacking:



2
  See for example: Moktan, S, 2007 South Asian Survey; Wangyal, T; 2005, ‘Cottage and Small Enterprise Development
in Bhutan: Prospects, Status and Recommendations’; Pohl Consulting & Associates et al., 2009, ‘Inception Report –
MSME Development Policy, Strategy and Incentive Framework, and Management of CSF’.
3
  See Annex 7.0 for further background information on the number and type of private sector industries in Bhutan.
4
  Ministry of Labour and Human Resources, Entrepreneurship Promotion Strategy – Report 2009
                                                        9
        ‘There is a conspicuous absence of institutionalized and a systematic approach to skills development
        of entrepreneurship. Entrepreneurship does not feature in the school curriculum. Even in the tertiary
        institutions, only presently initiatives are being taken to integrate entrepreneurship into the
        curriculum. The vocational training institutions do not engage in training their students to become
        entrepreneurs although increasingly a large number of their graduates are left unemployed in the
        market. (p. 6)
This lack of entrepreneurial skills, particularly as they relate to financial knowledge and literacy are also
some of the reasons that entrepreneurs struggle to access finance to support the establishment of new
enterprises.5

1.2 Difficulties accessing finance
Entrepreneurs perceive that gaining access to affordable finance is key constraint to enterprise
development and growth6. Individuals may not be aware of the financial loan products available to them.
Where they are aware, individuals wanting to establish enterprises (particularly in rural areas) may find it
difficult to physically access lending facilities.
Once the problem of physical access to financial institutions (FIs) is overcome, entrepreneurs also need to
produce sufficient collateral and meet relatively high interest obligations (12-13 per cent).
On the supply side, FIs may be reluctant to lend to cottage/ micro and small entrepreneurs due to a lack of
reliable credit information, and limited capacity to appropriately assess CSI risks. Financial institutions are
also likely to see applications for finance from larger enterprises as less risky and more profitable
alternatives.
The challenges involved in accessing formal sources of finance are often insurmountable, with cottage and
small scale entrepreneurs forced to look for alternative (possibly to more expensive) sources of finance. 7
Where alternative sources of finance are not available or only available in part, fewer enterprises are likely
to be established, and of those that do start-up, their operations are likely to be smaller in size and scope
than originally planned.
In an effort to overcome some of the main challenges to enterprise establishment and growth, the RGoB
has implemented various incentive schemes and programs to improve access to finance, provide
entrepreneurial skills, and encourage business development. These are outlined in the following section.

1.3 Existing initiatives and their impacts
Section Three below looks at potential options for addressing the existing problems of developing
entrepreneurial skills and providing access to finance for cottage and small scale enterprises. However, to
establish the costs and benefits of the potential options, first the ‘baseline’ must be established. The
‘baseline’ describes the situation in place in the absence of any of the proposed options being adopted. It is
necessary to establish this position in order to make a considered assessment of the incremental costs and
benefits of the options.




5
  This was confirmed during consultative meetings with financial institutions such as BNBL, BoBL and BDFCL.
6
  Of those surveyed for this RIA, 73 per cent indicated that access to finance was a major/ severe constraint faced by
their enterprise. Of those surveyed for the Business Start-Up RIA (who all had existing enterprises) around 28 per cent
considered access to finance was a major/severe constraint to the ongoing operation of their enterprises.
7
  For example entrepreneurs without a registered or licensed business cannot access loans relevant to MSMEs/CSIs
and are forced to take out personal loans at a higher interest rate.
                                                          10
The baseline for this RIA is characterised by existing training programs and workshops aimed at promoting
entrepreneurial skills and associated loan schemes that offer ‘softer’ loans for training participants.8 In
establishing the baseline, consideration is given to initiatives that have already been implemented, as well
as any that may be implemented in the near future as the result of current projects. The characteristics of
the baseline scenario and the year in which the changes came about or are expected to come about are
outlined below:
Entrepreneurship Promotion Centre (EPC)
The Entrepreneurship Promotion Centre (EPC) was established in the early nineties under the Department
of Industry. The mandate of the EPC was to provide business development and advisory services to cottage,
small and medium enterprises. The EPC regularly conducted various training courses and workshops for
potential entrepreneurs, as well as provided business support and advisory services to walk in clients:
Comprehensive Entrepreneurship Course (CEC)
The Comprehensive Entrepreneurship Course (CEC) provides training in entrepreneurship and small
business management to prospective entrepreneurs. CEC training involved between 22 and 25 training
days for participants and covered the fundamentals of business management such as marketing,
production, business planning and financial management. To be selected for the CEC, applicants were
required to have a business idea related to the manufacturing or service industries that could be further
developed during the course.
CEC graduates are eligible to apply for a loan under the Enterprise Development Program (EDP) loan
scheme at a lower interest rate9. Collateral requirements are also ‘softer’ with loan applicants allowed to
provide a third party guarantee where they do not meet the requirements.
The EPC held 17 Comprehensive Entrepreneurship Courses (the last conducted in 2007 by the Ministry of
Economic Affairs) before responsibility for this training was moved to the Ministry of Labour and Human
Resources in January 2009; since then no further CEC training has been held.
Basic Entrepreneurship Course (BEC)
The Basic Entrepreneurship Course (BEC) provides training in entrepreneurship and small business
management to unemployed youth with vocational skills. Similar in content and methodology to the CEC,
the focus of the BEC is to assist young skilled individuals to start businesses based on their particular skill
e.g. carpentry, plumbing, hairdressing etc. The first BEC was held in 2004 and the most recent training was
organised by MoLHR and held in mid-2009.
BEC graduates are eligible for collateral free loans as part of the Credit Guarantee Scheme (CGS). In the
event of loan default, the Government covers 60 per cent of the loss and the relevant financial institution
the remaining 40 per cent. These terms were encapsulated in the Memorandum of Understanding (MOU)
signed between the Government, the Bank of Bhutan Limited (BoBL) and Bhutan National Bank Limited
(BNBL).
Business Orientation Workshops (BOWs)
These workshops were most often conducted by EPC staff in Vocational Training Institutes (VTIs) and other
tertiary education facilities. The BOWs aimed to encourage entrepreneurship as an alternative source of
employment among graduating students, and make participants aware of other available training
opportunities, such as the Basic Entrepreneurship Course.


8
  The Basic and Comprehensive Entrepreneurship Courses and associated loan schemes detailed in this section are
typically only provided for entrepreneurs wanting to establish cottage and small scale industries (which in Bhutan are
defined as services, production and manufacturing related enterprises).
9
  Normal term loan interest is 12 per cent but for the EDP it is 10 per cent, and the normal working capital interest is
14 per cent but for the EDP it is 12 per cent.
                                                          11
Entrepreneurship Development Programme Loan Scheme (EDP)
The EDP loan scheme was established in 1992 to meet the financing needs of Comprehensive
Entrepreneurship Course participants. Collateral free loans up to Nu 2,000,000 were available to applicants
provided that the financial institution they were assigned to considered their business plan/idea to be
feasible. Initially, Ngultrum 100 million was set aside by BDFCL (12.5M), BNBL (12.5M), BoBL (50M), and
RICBL (25M) to cover loans offered under this scheme. However, due to a high level of loan defaults10,
numerous changes were made to the scheme (see Annex 7.3) including a requirement that borrowers make
an equity contribution and provide some collateral cover to share in the ‘risk’ associated with the loan.
Monitoring of loans was to be conducted jointly between the Entrepreneurship Promotion Centre and
financial institutions (FIs). While there is some evidence of this happening, FIs consulted in the preparation
of this RIA suggested that monitoring was largely left to them, particularly where significant resources were
required to track down and follow up borrowers that had defaulted. In response, former EPC staff
confirmed they did monitor borrowers, but their efforts may not have met the expectations of FIs. This
could be attributed to a lack of human resources at the Entrepreneurship Promotion Centre and
coordination problems with financial institutions.
Despite the favourable conditions on EDP loans, the high costs of monitoring these loans and the high
number of defaults has made FIs reluctant to lend under this scheme. Where lending does occur FIs
sometimes ask for additional collateral before loans are approved.11
Currently CEC graduates eligible for EDP loans are unable to avail them until a new Memorandum of
Understanding is signed between the FIs and MoLHR, reflecting that MoLHR is now responsible for
providing CEC training rather than MoEA. It is unclear whether this MOU will include a clause that allows
previous CEC graduates training under MoEA to also avail these loans.
Credit Guarantee Scheme (CGS)
Loans under the CGS became available in 2004 after the first Basic Entrepreneurship Course. These loans
are provided based on a MOU between the Ministry of Economic Affairs and Ministry of Finance on behalf
of the Government, and two financial institutions, Bhutan National Bank Limited (BNBL) and Bank of Bhutan
Limited (BoBL). Initially, the maximum loan available to borrowers was Nu 200,000 over a five year period.
To be eligible, applicants must be BEC graduates with a vocational/ indigenous skill, without previous loans
from FIs (no due certificate from all FIs is required) and aged 18–25 years (which later increased to 30
years).
Interest rates on CGS loans are charged at the normal rates for the relevant financial institutions. The
lender is responsible for due diligence and ongoing monitoring. In the case of default by borrowers, the
final loss is shared at the ratio 60:40 between the RGoB and the relevant bank BoBL or BNBL.
In 2006 the maximum loan amount was increased to Nu 500,000 because 200,000 was insufficient for some
projects, but actual disbursement depends on the viability of the project proposal. Despite favourable loan
conditions less than 50 per cent of graduates have availed a loan under the CGS. To date under the CGS
there have only been two defaults (one each for BoBL and BNBL), and one potentially untraceable
borrower.12
The relatively few write-offs under this scheme may be due to the much smaller loans offered relative to
the EDP scheme. It may also be because enterprises started by BEC graduates are relatively cheaper to


10
   RGoB, 1997, Revised Entrepreneurship Development Programme (EDP) Loan Scheme suggests that In the early years
of this loan scheme around 50 per cent of those financed closed their businesses and defaulted on their loans.
11
   Confirmed during consultation with financial institutions.
12
   Confirmation was sought from officers within the Ministry of Finance as to whether there have been any other
defaults for which the RGoB were required to cover 60 per cent of the losses. A response had not been received at the
time this report was prepared.
                                                         12
establish because the main asset of the enterprise is the skills of the graduate (plumber, electrician,
beautician etc.) and fewer funds are required to buy machinery, equipment and other inputs.
Graduates from the last BEC training (July 2009) are currently unable to avail funding under the CGS
because a new agreement between the implementing agency (MoLHR), Ministry of Finance and financial
institutions has not yet been finalised.
A number of financial institutions were consulted with regarding the existing ‘soft’ loan schemes. Common
explanations for why these loan schemes, particularly EDP had limited success were:
        Poor financial literacy and management on behalf of borrowers
        Funds used for purposes unrelated to business priorities
        Lack of responsibility for loan repayments
        Investment in businesses similar to others in that location, whereby the newly established
         entrepreneur struggled to compete with existing enterprises.
Given these issues, all financial institutions consulted during the preparation of this RIA seemed reluctant
to continue lending under the EDP Scheme even if modifications were made. As profit-oriented
organisations except perhaps for Bhutan Development Finance Corporation Limited (BDFCL) which places
greater emphasis on rural development, the financial institutions consulted offered very few, if any,
alternative loans for small scale enterprises. However, all those consulted indicated that if entrepreneurs
present particularly promising business plans/ proposals they are willing to go to additional lengths to
provide financing.
Credit Information Bureau (CIB)
The CIB was expected to be operating at the end of 2009, however at the time of preparing this RIA it had
not yet commenced. The agency responsible for developing the CIB is the Royal Monetary Authority. The
CIB is a central credit registry from which banks can obtain information about potential borrowers and their
credit history more efficiently than in the past13. Having this information easily available with the payment
of nominal fees, may reduce the time and costs incurred by financial institutions when assessing loan
applications, particularly those made by small scale entrepreneurs. The burden on applicants may also be
minimised as they will not have to visit each financial institution in order to obtain a statement declaring
he/she has no outstanding loans/ other matters with that institution, before availing a loan.

1.4 Costs and Benefits of Baseline Initiatives
Every effort was made to identify and quantify the costs and benefits associated with the existing
entrepreneurship training courses and associated loan schemes. As far as possible the costs of government
resources used, and benefits to entrepreneurs from starting their own businesses were calculated (see
Annex 7.4 for further information).
The data gathered and analysed has been organized in a database which is publicly available at the MSME
division, Ministry of Economic Affairs.
Costs
The costs calculations are based on the staff resources utilised to run the Entrepreneurship Promotion
Centre in 2007. This year was chosen because it was the last year that the suite of BEC, CEC, BOWs and
associated support was offered by the Ministry of Economic Affairs.




13
  Each institute had to be contacted individually and would manually search their records to find out if any loans were
outstanding to a specific individual.
                                                          13
The total cost of running the EPC during 2007 was around 2.95 Million Ngultrum (see annex 7.6 for detailed
calculations). Members of the task force some of whom were staff of the EPC provided information on the
resources dedicated to key activities undertaken by the EPC during 2007. The costs of running each
program are:

 Activities – Entrepreneurship Promotion Centre                                       Annual Costs (Nu)

 Comprehensive Entrepreneurship Course (23 days, 18 participants)                     792,272

 Basic Entrepreneurship Course (20 days, 14 participants)                             535,836

 Business Orientation Workshops (12 workshops, 1-2 days, 533 participants)            1,527,133

 Business Plan Support (20 clients, 10 hours each)                                    56,702

 Monitoring (20 days per annum)                                                       38,274

 TOTAL                                                                                2,950,217

The costs to the EPC for monitoring training graduates and their enterprises in coordination with financial
institutions are outlined in the table above. The costs to financial institutions (FIs) of monitoring and
administering loans under the EDP and CGS schemes may vary between institutions depending on their
processes, the salaries they pay, the level of effort put into monitoring loans under these schemes and the
number of loans that have been granted. For simplification it is assumed that officers at financial
institutions spend up to two days of effort when approving each loan reviewing project proposals, checking
credit history, filling out paperwork, one day of effort following up and monitoring existing borrowers and
between five and ten days of effort to recover losses/ litigate a loan (detailed calculations in Annex 7.6):

 Costs to Financial Institutions – Entrepreneurship Development Programme Loan
                                                                               Annual Costs (Nu)
 Scheme

 Cost of administering & monitoring loans (BDFCL, BNBL, BoBL, RICBL)                        34,238

 Financial losses – unrecoverable loans (BDFCL, BNBL, BOBL, RICBL)                          601,507

 TOTAL (Ngultrum per annum)                                                                 635,745



 Costs to Financial Institutions – Credit Guarantee Scheme (CGS)                            Annual Costs (Nu)

 Financial Institutions (BNBL, BoBL)                                                        68,133

 Financial losses – unrecoverable loans (BNBL, BOBL)                                        32,811

 TOTAL (Ngultrum per annum)                                                                 100,945

Training participants are also assumed to have incurred some costs to attend BEC/ CEC training. Of the 16
graduates surveyed, almost half reported having incurred some travel or accommodation costs; however
the magnitude of these costs was not specified. Given that these individuals still participated in the training
despite the personal costs they incurred, suggests that they believed the benefits of participation would
significantly outweigh the costs involved.


                                                      14
Benefits
The direct beneficiaries of entrepreneurship training courses/ workshops and associated loan schemes are
the individual potential entrepreneurs. Not only do they gain skills and knowledge, but in many case
participation in these training schemes provided assistance to access finance through the preparation of
project proposals and business plans as well as opportunities to meet with representatives of local financial
institutions.14
When training participants establish enterprises, there are additional benefits to consumers in terms of
increased availability of goods and services at competitive prices, and the economy when assets are
purchased, and labour is hired. Eventually these benefits may also flow through to the government in terms
of Business Income Tax collected from enterprises, and in a few cases where individual employees earn
more than Ngultrum 100,000 per annum, Personal Income Tax (PIT).
To prepare this RIA, 16 graduates were interviewed (nine BEC graduates and seven CEC graduates) to
provide more detailed information on the benefits that were realised as result of participation in training
provided by the EPC.15 From the survey results and administrative data maintained by MOEA it appears
that around 78 per cent of BEC graduates went on to establish a business enterprise, including graduates
who have taken loans under the CGS as well as those who have self funded their projects. The figure for
CEC graduates is between 60 and 86 per cent, including graduates who received loans under the EDP as
well as those who self funded their projects.16
Of the seven BEC graduates surveyed their businesses employed a total of 14 employees (eight paid staff,
four national apprentices, two non-national apprentices) in addition to the seven working owners.17
Therefore, on average each business employed two people and paid an average salary of 5,000 Nu per
month to each employee. Of the five working owners that reported paying themselves a monthly salary,
the average amount was Nu 7,700 per month. Of those that reported paying BIT, the average amount paid
was Nu 2,160.
Of the six CEC graduates surveyed their businesses employed a total of seven paid employees in addition to
the six working owners. Therefore, on average each business employed one employee in addition to the
working owner and paid an average salary of 6,835 Nu per month to each employee. Of the three working
owners that reported paying themselves a monthly salary, the average amount was 8,333 Nu per month.
Only one enterprise reported paying BIT of Nu 20,000 for the previous year. This is most likely because a
number of the enterprises had only recently been set up and therefore did not have to pay BIT yet. The
2005 tracer study suggested that average BIT paid by CEC graduates that had started a business was Nu
48,920.22 tax paid per CEC graduate (18 respondents). The total annual benefits are shown below (more
detailed information in Annex 7.6).




14
   These findings were confirmed in the survey responses.
15
   A tracer study of 25 CEC graduates was conducted in 2005. Graduates surveyed as part of the tracer study were
from CEC 1 though to 14. Therefore, for the survey conducted as part of this RIA, the focus was on graduates from CEC
15 through to 17.
16
   The 2005 tracer study reported that 60 percent of CEC graduates went on to start a business. Of the seven CEC
graduates surveyed for this RIA, 86 per cent had started a business. Given the small sample of CEC graduates in the
2009 survey, the 60 per cent figure is used (as a conservative estimate) for all further analysis of costs and benefits in
the RIA.
17
   In the 2005 tracer study, 22 interviewees shared information on their employees. Altogether they employed 166
Bhutanese nationals on a permanent basis. On average this works out to about 8 employees per firm (including
working owners) however the tracer study does not differentiate between paid employees and those that are unpaid
family members or paid in kind.
                                                           15
 Annual Benefits – Basic Entrepreneurship Course 200718                            Quantity           Benefits (Nu)

 Investment by new enterprises (78% of graduates start an enterprise)              9 enterprises      990,000

 Employee earnings (average of 2 employees earning Nu 5,000 per
                                                                                   18 employees       1,080,000
 month)

 Owner earnings (average of 1 working owner earning Nu 7,700 per                   9 working
                                                                                                      831,600
 month)                                                                            owners

                                                                                   9 BIT
 Business Income Tax paid (average of Nu 2,160 per annum)                                             19,440
                                                                                   payments

 TOTAL                                                                                                2,921,040



 Annual Benefits – Comprehensive Entrepreneurship Course 200719                    Quantity             Benefits (Nu)

 Investment by new enterprises (60 per cent of graduates start an
                                                                  11 enterprises                        4,383,784
 enterprise)

 Employee earnings (average of 1.2 employees earning Nu 6,835 per
                                                                                   13 employees         1,082,664
 month)

 Working owner earnings (average of 1 working owner on Nu 8,333 per 11 working
                                                                                                        1,099,956
 month)                                                             owners

                                                                                   11 BIT
 Business Income Tax paid (average of Nu 20,000 per annum)                                              220,000
                                                                                   payments

 TOTAL                                                                                                  6,786,404



For financial institutions the benefits accrue from interest earned on new and existing loans (detailed
calculations in Annex 7.6):

 Benefits to Financial Institutions – Entrepreneurship Development Programme
                                                                             Annual Benefits (Nu)
 Loan Scheme

 Interest on new loans                                                                         106,008

 Interest on existing loans                                                                    206,575

 TOTAL (Ngultrum per annum)                                                                    312,583



18
   Assumes total number of BEC graduates is 11 (only includes 2007 participants training under the CGS scheme and
not as part of some other ‘training only’ arrangement).
19
  Assumes total number of CEC graduates is 18. Results of tracer study and survey undertaken for this RIA and the
lowest estimates are used in each case e.g. 60 per cent of graduates start an enterprise, 1.2 employees per enterprise,
20,000 paid in BIT per annum.
                                                          16
  Benefits to Financial Institutions – Credit Guarantee Scheme (CGS)                       Annual Benefits (Nu)

  Interest on new loans                                                                    179,560

  Interest on existing loans                                                               269,341

  TOTAL (Ngultrum per annum)                                                               448,901

 Where graduates repay their initial ‘soft’ loans successfully and establish a good credit history, they may
 choose to avail additional loans on ‘normal’ terms from the same financial institution. This results in
 additional benefits to FIs although these are not estimated here.

 1.5 Do the benefits of current initiatives outweigh the costs?
 The quantifiable costs and benefits of existing training and loan schemes are summarised below:

  Activity                                                          Annual Costs (Nu)    Annual Benefits (Nu)

  Comprehensive Entrepreneurship Course (CEC)                       792,272              6,786,404

  Basic Entrepreneurship Course (BEC)                               535,836              2,921,040

  Business Orientation Workshops                                    1,527,133            Not quantified

  Business Plan Support                                             56,702               Not quantified

  Quarterly Monitoring                                              38,274               Not quantified

  Entrepreneurship Development Programme Loan Scheme
                                                     635,745                             312,583
  (EDP)

  Credit Guarantee Loan Scheme                                      100,944              448,901

  TOTAL                                                             3,686,906            10,468,928



                                                                                                 Year     Present
          Year 1   Year 2      Year 3   Year 4   Year 5    Year 6   Year 7    Year 8    Year 9
                                                                                                 10       Value

          3,528,   3,376,      3,230,   3,091,   2,958,    2,831,   2,709,    2,592,    2,480,   2,374,   29,173,4
Costs
          140      210         823      697      562       159      243       577       935      101      48

Benefi    10,01    9,586,      9,173,   8,778,   8,400,    8,039,   7,692,    7,361,    7,044,   6,741,   82,837,6
ts        8,113    711         886      838      802       045      866       595       588      233      78

Net Present Value (NPV) = Present Value of Total Benefits over 10 years – Present Value of Total 53,664,2
Costs over 10 years                                                                              30

 From the table above it is clear that as a package of training courses and loan schemes, the benefits
 outweigh the costs of providing these services by approximately Ngultrum 6.78 million per annum. Over

                                                          17
ten years, assuming a discount rate of 4.5 per cent20 the benefits are equal to Ngultrum 53.6 million in
today’s currency.21
Most cost-effective entrepreneurial skills programs
It is also apparent that some of the initiatives are more cost effective than others. The Comprehensive
Entrepreneurship Course provides the greatest annual net benefits to entrepreneurs, the Government and
wider community. Interestingly, this program was not run in 2009 because no budget was made available,
however the analysis above suggests that it is the most cost effective of all the current initiatives for which
the benefits are quantifiable.
Recognising that while some of the businesses established as a result of participation in either BEC or CEC
may fail over time, those that continue to operate will continue to provide benefits to employees, owners
and the economy over time. Therefore, these cumulative benefits are likely to be of a significant magnitude
over time. However, information on the failure rate of new enterprises in Bhutan is not included in the
estimate above as it was not available.
The benefits of attending business orientation workshops and obtaining business plan support were also
unable to be estimated. One assumes that where these activities lead to entrepreneurs successfully
establishing enterprises there would be additional benefits. However, information on these activities, and
how often they lead to the establishment of new business was not available during the preparation of this
RIA.
Most cost-effective loan schemes
From the summary table on the previous page it is clear that for financial institutions the costs of
administering, monitoring and recovering EDP loans are almost double the benefits. This is largely because
financial institutions that experienced large defaults under this scheme have been reluctant to provide
further loans under it.22 Since 2005, the number of EDP loans granted has decreased to only one or two per
financial institutions per year, therefore the potential benefits the FIs realise from these loans are relatively
small.
The Credit Guarantee Scheme is the most cost-effective of the two loan schemes, as the benefits of running
the scheme outweigh the costs. This is largely because there are greater incentives for FIs to make loans
under this scheme, as the majority of any losses are covered by the Government. Furthermore, the loans
offered are relatively small (up to a maximum of Ngultrum 500,000) and the repayments seem more
manageable for entrepreneurs, even at prevailing interest rates, so ultimately FIs benefit more than under
the EDP scheme.
Some may argue, that these ‘soft’ loan schemes need to be offered even if the costs outweigh the benefits
because these schemes act as an incentive for entrepreneurs to participate in the BEC and CEC, and thus


20
   This discount rate is what was used by Royal Monetary Authority (the Central Bank) as of October 2009.
21
   It may be argued that the most significant benefits result from the establishment of new enterprises, and that some
of the potential entrepreneurs would have established enterprises even if they had not attended BEC or CEC training.
From the survey carried out for this RIA, 71 per cent of BEC graduates believed that they would not have started a
business if they had not participated in the training; for CEC graduates the proportion was 34 per cent. Adjusting
annual benefits based on these percentages, reduced the annual benefits of the BEC to Nu 2,073,938 and CEC to Nu
2,307,377. Re-estimating the net present value over ten years using these revised figures indicates that the total
benefits are equal to Ngultrum 11.5 million in today’s currency.
22
   From consultation undertaken with financial institutions it seems that most FIs are reluctant to provide EDP loans
given the high number of defaults and large losses that have been incurred under this scheme. For the Credit
Guarantee Scheme, BoBL appeared hesitant to provide further loans as it believed the scheme had not been
particularly successful (although it appears only one of their CGS loans has been written off). On the other hand BNBL,
have also written off one CGS loan but seemed prepared to continue making loans under this scheme provided
borrowers met the necessary criteria and had a viable business case.
                                                          18
enable greater benefits to be realised from these training programs. The survey results suggest that one of
the main reasons two thirds of surveyed entrepreneurs participated in the BEC was to obtain financial
assistance through ‘soft loans’. For the CEC participants surveyed, approximately one third participated for
those same reasons.
Although accessing finance is a strong incentive for some entrepreneurs to participate, failing to obtain
‘soft loans’ does not necessarily mean those entrepreneurs will not successfully establish an enterprise.
While the vast majority of BEC participants who started an enterprise did so with the assistance of a CGS
loan. Of the six CEC participants surveyed i.e. those who had started a business, all had done so without an
EDP loan or other source of formal finance.
In addition, offering these ‘soft’ loan schemes is not sufficient to increase access to finance for CSIs unless
financial institutions are confident they too will benefit from providing these ‘soft’ loans. Currently both the
EDP and CGS loan schemes are targeted at newly established enterprises. While access to finance is a
problem for these enterprises, it is also a problem for cottage and small industries wanting to expand their
operations.23 Given that business start-ups are more prone to failure than existing enterprises (that have
survived their first few years of operation), FIs may be more willing to lend to existing enterprises as they
are relatively lower risk.

Section 2. Objectives of the RIA
Recognising that the promotion of entrepreneurship and access to finance are fundamental to realising the
Government’s vision of CSIs as drivers of employment and income generation, the specific objectives of this
RIA are to:
        Utilise cost-benefit analysis to establish whether the benefits of existing entrepreneurial skills
         training and associated loan schemes outweigh the costs;
        Assist the Government to prioritise options for reducing the costs of these existing schemes;
        Increase the benefits and number of beneficiaries of these schemes by providing entrepreneurial
         skills training to 50 per cent more individuals by 2020; and
        Improve access to ‘soft loans’ or other ‘cheaper’ sources of finance for entrepreneurs unable to
         establish or expand their cottage/ small industry without it.

Section 3. Options Selected
In section 1.5 it was established that the existing entrepreneurial skills training programs (BEC and CEC)
were the most cost-effective of all the initiatives examined. This section examines potential options for
reducing the costs of these training programs and increasing the benefits they generate. The latter aim is
particularly important as increasing the number of potential entrepreneurs trained will directly contribute
to creating an environment where entrepreneurship is highly regarded, and individuals are equipped to
make the most of business opportunities available to them.
The options under consideration include engaging private sector providers to deliver entrepreneurial skills
training programs; and using a market driven approach by providing entrepreneurs with redeemable
training vouchers.
A number of options for improving access to finance are also examined. As identified in section 1.5,
financial institutions are hesitant to loan to entrepreneurs under the existing ‘soft’ loan schemes, EDP in
particular. Thus this section examines ways these loan schemes could be made more attractive to FIs


23
  Of those surveyed for this RIA, 73 per cent indicated that access to finance was a major/ severe constraint faced by
their enterprise. Of those surveyed for the Business Start-Up RIA (who all had existing enterprises) around 28 per cent
considered access to finance was a major/severe constraint to the ongoing operation of their enterprises.
                                                          19
through reducing the risks associated with providing these loans. The relevant options considered are
reducing the size of the loans and expanding the eligibility of the loan schemes to include entrepreneurs
with existing enterprises. Recognising that the negative perceptions FIs have of these loan schemes may
persist, financial leasing as an alternative way to improve access to finance for entrepreneurs is also
examined.
The option of making changes to bankruptcy laws and associated regulations relating to the recovery of bad
loans and selling off assets, were also discussed during consultation. However, the FIs consulted in the
preparation of this RIA felt that the current regulatory framework was adequate to recover funds in this
way. In many cases it seems the assets they recovered from failed enterprises were worth very little when
finally sold at auction, and did not generally cover the outstanding loan amount.

Section 4. Impacts of the Options

Option 1: Engage private sector providers to deliver entrepreneurial skills training
Procuring private sector providers to deliver training courses such as the Basic and Comprehensive
Entrepreneurship Courses would support the development of a private market for entrepreneurial skills
training; could encourage more private sector enterprises to provide skills training and/or raise awareness
among entrepreneurs of enterprises capable of providing such services.
Procuring training in this way encourages competition among providers and ensures that high quality
training can be provided at the lowest possible cost. The Government can clearly indicate the standard of
training to be required in the Terms of Reference for the tender; and private sector providers have
incentives to ensure their training is practical, of high quality and uses current best-practice training
methods, in order to compete for and/or retain the government contract to deliver these training
programs.
Costs to Government
The public procurement of such services has recently been trialled by MoLHR for the provision of one BEC
course. The administrative and other costs incurred to engage a private provider to deliver one BEC were
around Nu 0.5 million. Assuming similar costs are incurred to procure one CEC course the combined
procurement costs are (see Annex 7.6, Tables 11 and 12):

 Resources                                                                                     Annual Costs (Nu)

 RGoB costs involved in procurement, project support, advertising                              90,166

 Amount paid to procure training                                                               528,300

 Stipend paid to trainees                                                                      168,000

 TOTAL                                                                                         786,166

Additional monitoring may be required for the first few courses to ensure the training meets all of the
standards and requirements outlined by the Government. Assuming this monitoring takes one to two days
it is likely to cost around Nu 4,000 per course.24
Monitoring costs would also be expected to increase if different training providers are engaged to provide
training in different areas.




24
     The costs of monitoring carried out by EPC staff were estimated to be Nu 2,000 per day.
                                                            20
A transition costs will be the need to build training capacity in Bhutan in the first few years. Currently many
private providers are from India. However, in due time a strong signal from the government would
encourage Bhutanese providers to raise capacities to deliver the systems with or without foreign
assistance.
Costs to enterprises/ entrepreneurs
The costs incurred by entrepreneurs should not differ markedly from those in the baseline scenario.
Participants would incur some travel and possibly accommodation costs, but the most significant cost
would be the opportunity cost of their time dedicated to training rather than other productive pursuits.
Benefits to Government
Static benefits: When compared with the costs to Government of providing these training courses (Nu
1,328,108) it is almost Nu 542,000 cheaper per year to engage private providers. Where providers are
engaged to deliver multiple courses, these costs would decrease because the time and resources required
procuring these services would be significantly less per course (than in the table above).
Benefits to enterprises/ entrepreneurs
Dynamic benefits: As private sector providers recoup initial investments, benefits of delivering the BEC
training will increase. Conservatively a 15 per cent reduction per year in efficiency is assumed.
As well, over time with regular course evaluation, monitoring and feedback provided by the RGoB and
participants, it would be expected that the benefits to participants, and the wider economy would be at
least as great as those realised under the government provision model.
Any increase in competition among private sector training providers may improve the average standard of
training on offer.
The number of providers offering such training may also increase, which could allow greater access to such
training for potential entrepreneurs.
Different providers could be engaged to provide training in different Dzongkhags, in order to improve
access for entrepreneurs in regional areas.
Summary
The annual costs and benefits of engaging a private provider to deliver entrepreneurial skills training (one
Basic and one Comprehensive Entrepreneurship Course), including monitoring are:

 Activity                                                         Annual Costs (Nu)    Annual Benefits (Nu)

 Basic Entrepreneurship Course (private provider)                 505,083              2,921,040

 Comprehensive Entrepreneurship Course (private provider)         289,383              6,786,404




                                                      21
 Assuming over ten years, procurement of this training is undertaken three times, and there are 15 per cent
 efficiency gains annually, the net present value of this option is Nu 71.84 million:

                                                                                                                           Present
         Year 1     Year 2      Year 3     Year 4      Year 5      Year 6     Year 7      Year 8      Year 9     Year 10
                                                                                                                           Value

         760,25
Costs               535,821     512,748    566,277     469,538     449,319    496,227     411,455     393,737    376,782   4,972,158
         5

Benefi   9,289,4    8,889,3     8,506,6    8,140,2     7,789,7     7,454,3    7,133,3     6,826,1     6,532,1    6,250,8
                                                                                                                           76,812,269
ts       20         97          00         87          49          05         06          30          82         92

Net Present Value (NPV) = Present Value of Total Benefits over 10 years – Present Value of Total Costs over 10 years       71,840,111

 Engaging a private enterprise to deliver entrepreneurial skills training provides the same benefits as the
 baseline scenario in terms of number of enterprises established, investment and employment by
 participants; it also provides significant cost savings to Government to deliver this training. In addition,
 implementation of this option would increase competition among training providers and quality of the
 training they provide.

 Option 2: Establish a voucher program
 Under a voucher program the government provides vouchers to enterprises which they can use to procure
 skills development training and services that best meet their needs. Such an incentive encourages the
 market to respond to the needs of enterprises rather than the government trying to identify these needs
 which could be as diverse as the enterprises are themselves and provide appropriate training programs.
 However, when a voucher program is initially established, providers may supply more generalist services to
 maximise the number of vouchers redeemed with them; hence specialist services may continue to be
 underprovided, unless the government invests in proper monitoring.
 An initial pilot program could target a specific type of skills training, such as book keeping for which there
 may already be a number of private sector providers. The voucher program could then be expanded over
 time to cover other activities or skills. Prior to launching it formally, such a system would also need to be
 piloted in an urban area such as Thimphu where a concentration of smaller scale enterprises exist, and
 entrepreneurs may be more familiar with the benefits of entrepreneurial skills training25. If successful, the
 pilot program could be expanded to other locations over time.
 Costs to Government
 Voucher programs typically involve significant administration and monitoring costs. For example, there
 needs to be a facilitator (individual officer or unit) that provides the vouchers to enterprises, explains how
 the system works, keeps a list of accredited private sector training/ Business Development Service (BDS)
 providers, and arranges for these providers to be reimbursed for the vouchers that have been redeemed
 with them. Evaluations of existing voucher programs suggest that administration costs range anywhere
 from 25 per cent to 100 per cent of the voucher value. One particularly detailed evaluation estimated
 administrative costs (including monitoring) of the program at around 40 per cent of total costs.26


 25
    In relation to Business Development Services more generally, Pohl Consulting and Associates suggest that: ‘On the
 demand side, the major constraints which lead to the low usage of BDS include (but are not limited to): i) small and
 especially micro enterprises are mostly unaware how BDS can help them; ii) the low level of education amongst the
 rural population makes it difficult for rural enterprises to elucidate their needs even when they know them; iii)
 specialist BDS is not normally available domestically . . .(p.9, Inception Report – MSME Development Policy, Strategy
 and Incentive Framework, and Management of CSF, October 2009).
 26
    ECI Africa, Business Development Services Voucher Pilot Programme – Impact Evaluation, July 2005, Ubsobomvu
 Youth Fund.
                                                                  22
To ensure a fair comparison with the baseline scenario, we assume the budget for a voucher program is the
same as that available for BEC and CEC training by the EPC (Nu 1.37 million per year including monitoring
costs). The program would cost Nu 601,208 to administer27 leaving Nu 765,174 for vouchers. The number of
vouchers provided to enterprises would depend on the value assigned to them. To ensure a fair comparison
with the other options under consideration, it is assumed a voucher is worth Nu 12,000 (the equivalent
costs per participant of a private provider delivering BEC training, see option 1), the Government could
distribute 64 vouchers to entrepreneurs.
A voucher program will also involve some unquantifiable costs that may arise if enterprises grow reliant on
these subsidies and they become difficult to phase out; entrepreneurs misuse vouchers; and training
providers are not reimbursed by government in a timely fashion and lack resources to develop and offer
further training courses.
A voucher program is likely to distort the true market by subsidising transactions; however these
distortions could be reduced if enterprises were to contribute to their training costs.28
Such a system may not be feasible in rural areas where there are few cottage and small industries, or where
existing industries are geographically dispersed.
Costs to enterprises/ entrepreneurs
Enterprises that receive vouchers as payment for service would incur administrative costs familiarizing
themselves with the scheme and obtaining cash reimbursements for the vouchers they have received.
Entrepreneurs would also need to familiarize themselves with the program and may incur additional search
costs when trying to locate an appropriate skills provider. They may also incur travel and opportunity costs
attending training.
Benefits to enterprises/ entrepreneurs
As they are able to choose their own training provider, clients can minimise the costs they incur accessing
training services i.e. some travel and accommodation costs can be avoided.
Encouraging private sector provision of entrepreneurial skills training assists to develop the knowledge and
skills of both the providers and participants. In addition, positive experiences with private training providers
may increase entrepreneurs’ awareness of the benefits from training and encourage CSIs to pay for further
training and skills development.
Benefits to Government/ economy
The voucher system will provide a transparent way of delivering subsidies to enterprises.
The magnitude of benefits generated from a voucher program are difficult to quantify as they largely
depend on how well the system is monitored (i.e. less chance of vouchers being misused), and what the
vouchers are used for. However, in the table below it is assumed that the benefits are at least as great as
those generated through participation in BEC training (refer to Annex 7.6 for further detail).




27
   Assumes administrative (and monitoring) costs are 40 per cent of total program costs. In reality, given the small
population of Bhutan and the relatively small size of any voucher program implemented, these administrative costs
are likely to be overstated.
28
   Of the 16 entrepreneurs surveyed for this RIA, 56 per cent indicated they would be willing to share the costs of
undertaking training (the same question was asked of 30 entrepreneurs for the Business Start-Up RIA, in that survey
two thirds of respondents indicated they would be interested in cost sharing) of these, 67 per cent were willing to pay
between 10 and 50 per cent of the costs.
                                                          23
 Summary
 The annual costs and benefits of engaging a private provider to deliver entrepreneurial skills training (one
 Basic and one Comprehensive Entrepreneurship Course), including monitoring are:

   Activity                                                                     Annual Costs (Nu)         Annual Benefits (Nu)

   Voucher program                                                              1,366,382                 12,333,280



 Over ten years, applying a discount rate of 4.5 per cent, the NPV of this option is Nu 86.78 million:

                                                                                                                             Present
           Year 1     Year 2      Year 3      Year 4     Year 5      Year 6     Year 7      Year 8      Year 9     Year 10
                                                                                                                             Value

           1,307,5    1,251,2     1,197,3     1,145,7    1,096,4     1,049,2    1,004,0
Costs                                                                                       960,820     919,444    879,851   10,811,796
           43         37          56          95         55          39         56

           11,802,    11,293,     10,807,     10,342,    9,896,8     9,470,6    9,062,8     8,672,5     8,299,1    7,941,7
Benefits                                                                                                                     97,589,769
           182        954         611         212        53          73         45          79          19         40

Net Present Value (NPV) = Present Value of Total Benefits over 10 years – Present Value of Total Costs over 10 years         86,777,973

 Implementing a voucher program provides additional benefits to those estimated in the baseline scenario
 and for option 1. Thus a voucher scheme appears to be an improvement upon engaging private sector
 providers of entrepreneurial skills training; as entrepreneurs have greater choice over the skills training
 they receive and can ensure it is most relevant to their enterprise development needs. This option could
 also increase competition among training providers and quality of the training provided. However, before
 such a scheme was implemented in Bhutan further research would be required to ascertain whether
 enough private sector training providers existed to support a pilot program.29

 Option 3: Use cash flow analysis where collateral requirements are not met
 Cash flow analysis entails examining the earnings and expenditure of an enterprise, to ascertain whether
 sufficient cash flow exists to maintain business operations over time. When financial institutions carry out
 cash flow analysis they typically look at the expected expenditure and sales for an enterprise over a set
 period of time. Where sales are sufficient to fund planned expenditures such as input purchases and loan
 repayments, cash flow is considered to be positive and financial institutions are likely to look favourably
 upon lending to these entrepreneurs.
 The majority of financial institutions consulted indicated a willingness to use cash flow analysis to assess
 lending potential, as they expect it to be a standard part of loan assessments in future. Where institutions
 were already using this approach, it was typically only applied to very large projects.
 Costs to financial institutions
 The widespread use of cash flow analysis would most likely result in additional training costs for FIs,
 although those consulted appeared to be making preparations to utilise this type of analysis in future.




 29
   Pohl Consulting and Associates aim to establish a register of Business Development Service providers in Bhutan, this
 work may provide some of the necessary information to assess the feasibility of introducing a voucher program in
 Bhutan.
                                                                   24
While unquantifiable these costs would be ‘once-off’ in nature as once the FI staffs has acquired the
necessary skills they would be unlikely to need further training.
Costs to enterprises/ entrepreneurs
Enterprises would need to spend time preparing the documents required for cash flow analysis to be
undertaken. This paperwork requires a relatively high level of financial literacy, in depth understanding of
their enterprises’ potential cash flow and the ability to convey this appropriately to the FI. Given that a
number of smaller enterprises do not keep books of account30 and have limited financial literacy, it is
possible that only a few enterprises would benefit if cash flow analysis were used.31
Benefits to financial institutions
By using cash flow analysis, FIs could further consider offering loans to small enterprises unable to access
finance because they cannot meet existing collateral requirements. However, the incentives for
undertaking this analysis may be weak if cash flow analysis is more time consuming (costly) than existing
loan assessment practices.
Where loans were made and successfully repaid, financial institutions would benefit in terms of interest
repayments, and may also grow their lending base and make additional profits.
Benefits to enterprises/ entrepreneurs
In the medium term, entrepreneurs would be able to develop basic accounting capacities required for
further growth.
Where loans are granted to entrepreneurs who otherwise could not avail them, those individuals will be
able to establish businesses, and possibly generate employment for themselves and others.
The quantified costs and benefits of using cash flow analysis are estimated below. It is assumed that losses
incurred by financial institutions are reduced by 10 per cent when cash flow analysis is used as an
additional 10 per cent of borrowers will be subject to this relatively rigorous analysis. And that an additional
10 per cent of CEC participants (who do not meet collateral requirements) will be offered loans based on
cash flow analysis:
Summary
The annual costs and benefits of using cash flow analysis to are:

 Activity                                                               Annual Costs (Nu)      Annual Benefits (Nu)

 Cash flow analysis – financial institutions32                          575,594                343,841

 Cash flow analysis – entrepreneurs33                                                          678,640




30
   Fifteen per cent of entrepreneurs surveyed for this RIA did not keep books of account. The same question was asked
for the Business Start-Up RIA, and the figure was much higher at 38 per cent. This is most likely because entrepreneurs
in that survey had not been exposed to BEC/CEC or other formal training in enterprise finance and budgeting.
31
   Of the 30 entrepreneurs surveyed for the Business Start-Up RIA, around 60 per cent (18) had never applied for
formal finance. However, of these respondents only 11 per cent (two respondents) indicated they did not apply for a
loan because they did not have the necessary collateral or financial documentation. However, it may be the case that
a higher proportion of individuals wanting to start an enterprise cannot do so because they do not have sufficient
collateral to access formal finance.
32
   Assumes a reduction of costs (losses) to financial institutions of 10 per cent based on the cost and benefit estimates
of the EDP loan scheme; and an increase of 10 per cent of benefits of the EDP loans (more loans are assumed to be
successfully repaid).
                                                           25
   TOTAL (Ngultrum per annum)                                                   575,594                   1,022,481

 Over ten years, applying a discount rate of 4.5 per cent, the net present value of this option is Nu 3.54
 million:

                                                                                                                             Present
           Year 1     Year 2      Year 3      Year 4     Year 5      Year 6     Year 7      Year 8      Year 9     Year 10
                                                                                                                             Value

           550,80
Costs                 527,089     504,391     482,671    461,886     441,996    422,963     404,749     387,320    370,641   4,554,513
           8

           978,45
Benefits              936,316     895,997     857,413    820,491     785,159    751,348     718,993     688,032    658,404   8,090,604
           1

Net Present Value (NPV) = Present Value of Total Benefits over 10 years – Present Value of Total Costs over 10 years         3,536,091

 Cash flow analysis could allow additional entrepreneurs to obtain loans so that flow on benefits associated
 with enterprise establishment could be realized. However, as the sizes of these loans are likely to be
 relatively small, so will be the additional benefits. The summary of costs and benefits to financial
 institutions shows that if cash flow analysis were used as alternative assessment method for EDP loans
 (where collateral requirements are not met) the costs of doing so would continue to outweigh the benefits
 and thus financial institutions would not have sufficient incentives to offer cash flow analysis. Thus the
 benefits that could potentially be realized by entrepreneurs would ultimately not be generated.

 Option 4: Allow existing enterprises access to ‘soft’ loans
 This option involves expanding the existing eligibility criteria for EDP and CGS loan schemes to allow
 established enterprises (particularly those in need of working capital) to borrow under specific conditions.
 Costs to financial institutions
 Incremental costs of assessing and monitoring loans for existing enterprises. Arguably, these costs would be
 relatively smaller than for new enterprises because more reliable information on enterprise running costs,
 assets etc. could be provided by loan applicants.
 Costs to Government
 Development of criteria existing enterprises need to meet to be eligible for ‘soft’ loans.
 Effort required monitoring loan recipients to ensure that only those with the greatest needs or ability to
 generate the greatest economic benefits are funded.
 Costs to enterprises/ entrepreneurs
 If additional funds are not made available to fund these schemes, providing loans to existing enterprises
 may divert funds away from new enterprises. However, it appears a large proportion of the funds set aside
 by financial institutions for the EDP scheme remain as FIs are now reluctant to offer these loans.34 For
 example, BoBL set aside Ngultrum 50 million for loans under the EDP scheme and Royal Insurance
 Corporation of Bhutan (RICBL) Nu 25 million. From current records it would appear that BOBL has provided
 around Nu 5.1 million in loans and RICBL between Nu 12 and 15 million.




 33
    Assumes an additional 10 per cent of CEC graduates can now avail a loan, and thus incremental benefits equivalent
 to 10 per cent of those generated by graduates of the CEC that successfully establish enterprises.
 34
    Since 2005, a total of eight EDP loans have been made; which is less than one loan per financial institution per year.
                                                                   26
 Benefits to financial institutions
 Allowing established enterprises to access ‘soft’ loans should reduce the number of loan defaults and
 spread the FI's risk, as entrepreneurs receiving these loans are likely to have additional assets and
 collateral, relatively more experience in running a business and more detailed information on the operating
 costs and cash flow of their enterprise.
 Where enterprises avail additional loans with the same FI after repaying their ‘soft’ loans there will be
 additional benefits to the FI in terms of interest paid etc. There is some evidence that where there were
 successful borrowers under the EDP loan scheme, these borrowers became repeat customers with the
 financial institution they were originally assigned to and now borrow on the same terms as regular business
 customers.
 Benefits to enterprises/ entrepreneurs
 Providing ‘soft’ loans to existing enterprises allows entrepreneurs to gradually build up a (positive) credit
 history which may enable them to access larger loans on normal terms in future.
 Strengthening existing enterprises may provide greater employment, enterprise growth and tax
 contribution benefits in the short to medium term than supporting only start-ups.
 Financial Institutions may be more willing to lend to cottage and small industries if the loans taken by
 existing entrepreneurs are successfully repaid.
 Summary
 Assuming that an additional 25 per cent of loans are made under the EDP and CGS schemes to existing
 enterprises and that the benefits to both financial institutions and economy increase by 25 per cent, the
 costs and benefits (more detail in Annex 7.6) of this option are:

                                                                                          Annual             Annual
   Activity
                                                                                          Costs (Nu)         Benefits (Nu)

   EDP loan scheme                                                                        490,504            390,729

   CGS loan scheme                                                                        102,962            561,126

   Additional employment, BIT payments generated by enterprises                                              730,260

   TOTAL (Ngultrum per annum)                                                             593,465            1,682,115

 Over ten years, applying a 4.5 per cent discount rate, the NPV of this option is Nu 8.61 million:

                                                                                                                             Present
           Year 1     Year 2      Year 3      Year 4     Year 5      Year 6     Year 7      Year 8      Year 9     Year 10
                                                                                                                             Value

           567,90
Costs                 543,454     520,052     497,657    476,227     455,720    436,095     417,316     399,346    382,149   4,695,925
           9

           1,609,6    1,540,3     1,474,0     1,410,5    1,349,8     1,291,6    1,236,0     1,182,8     1,131,9    1,083,1   13,310,10
Benefits
           79         63          32          57         15          89         66          38          03         60        1

Net Present Value (NPV) = Present Value of Total Benefits over 10 years – Present Value of Total Costs over 10 years         8,614,177

 Allowing some existing enterprises to avail ‘soft’ loans could allow additional entrepreneurs to obtain loans
 so that flow on benefits associated with enterprise establishment could be realized. However, given


                                                                   27
financial institutions’ reluctance to offer loans under these schemes, particularly EDP the number of
additional loans made may be small, thus so would be the additional benefits to FIs.
The summary of costs and benefits to financial institutions shows that existing enterprises were eligible for
EDP loans, the costs of providing these loans would continue to outweigh the benefits due to the
magnitude of historical losses (that are still being pursued and finalised). If this were the case, financial
institutions may still not have sufficient incentives to offer these loans to existing enterprises. Thus the
potential benefits to enterprises and the broader economy may not be fully realised.

Option 5: Introduce financial leasing
Financial leasing describes a commercial situation where an entrepreneur (borrower) selects an asset they
require for their business (equipment, vehicle, computer software etc.) and it is purchased on their behalf
by a financial institution. The entrepreneur pays instalments (rents) to the financial institution in order to
use the asset during the lease period. This is beneficial to the FI because not only do they maintain
ownership of the asset, but they also benefit from the instalments paid by the entrepreneur. At the end of
the leasing period the entrepreneur has the option to acquire ownership of the asset for an additional
payment (purchase price).35
Costs to financial institutions
Significant costs may be involved in establishing a leasing operation and purchasing assets to be leased.
However, the latter costs would be recovered over time once leasing contracts with enterprises are in
place.
Monitoring of enterprises, their repayments and the conditions in which they keep leased assets.
Maintenance costs, although these would most likely be factored in to any lease agreement.
Costs to Government
No significant costs may be incurred with regard to regulatory changes to enable financial leasing as they
are mostly incurred by FIs.
The long-term success of financial leasing institutions requires access to long-term funding. Acquiring this
may require government involvement.
As financial leasing does not currently exist in Bhutan, additional incentives may be required to encourage
private enterprises to set up this type of business.
Money would need to be spent raising awareness of financial leasing among private sector enterprises. The
majority of the 46 entrepreneurs surveyed for this RIA and the Business Start-up RIA had never heard of
financial leasing.
Cost to enterprises/ entrepreneurs
Where very specific assets are required that may not be widely used by other enterprises it may be difficult
to find a FI willing to purchase that asset.
Specialist equipment may not be provided by leasing agencies if it is likely to be required by enterprises for
relatively short periods of time as the agency may find it too difficult to recover their costs of purchasing
the equipment.




35
  Financial leasing has been introduced to many developing countries since the 1970s particularly in countries with a
high proportion of small scale enterprises. The financial leasing industry has grown rapidly in both South Korea and
more recently, China. Shah, M, IFC – Presentation on the contribution of financial leasing to economic and financial
sector development.
                                                         28
Benefits to financial institutions
Ownership of leased assets.
Lower transaction costs (than other financial institutions).
Fewer regulatory requirements as leasing institutions typically are not deposit taking enterprises.
May generate additional benefits for insurance providers if FIs insure all assets before leasing them to
entrepreneurs.
Benefits to Government
Financial leasing through market mechanisms supports smaller scale enterprises and improves their access
to finance, particularly for those unable to avail loans due to lack of collateral or poor credit history.
Increased competition in the financial sector may ultimately result in more loan products being offered
specifically for private sector enterprises at lower interest rates.
Benefits to enterprises/ entrepreneurs
Financial leasing is beneficial to entrepreneurs, particularly those that would not meet the collateral
requirements to obtain finance to purchase specific assets for their enterprise.
Whether a lease is provided to an enterprise depends upon their ability to generate cash, rather than their
credit history. There are also no collateral requirements. Therefore, it is likely to be easier and cheaper for
enterprises to obtain a lease than loans through FIs.
There can be additional benefits to lessees if the Government allows lease payments to be deducted from
the enterprise’s income before tax.
Summary
The costs and benefits of financial leasing are not quantified here because they depend largely on the
design of the institution. However, if introduced in Bhutan financial leasing is likely to have a more
significant impact on increasing access to finance for MSMEs than tinkering with existing ‘soft’ loans
schemes (options 3 and 4) under which FIs are reluctant to lend.
Given the limited influence of the Government on financial institutions (apart from BDFCL) and their
lending practices, supporting financial leasing may exert greater influence on existing financial institutions
through increased competition, and provide additional indirect benefits to enterprises and economic
development more broadly.




                                                      29
            Section 5. Comparison of Options
            Summary results of each option considered in this RIA:
                                                                                                                                        Monetize
                       Monetize                                                                                                                      Net
                                                                                   Monetiz                                              d      Net
                       d                                                                                                                             Present                                       Final
                                                                                   ed Costs                                             Impact             36   Other                important
                       Benefits                                                                                                                      Value                                         Assessmen
                                   Non-monetized Benefits                          (Million   Non-monetized Costs                       (B-C)                   considerations
                       (Million                                                                                                                      (Million                                      t
                                                                                   Nu per                                               (Million
                       Nu per                                                                                                                        Nu per
                                                                                   annum)                                               Nu     per
                       annum)                                                                                                                        annum)
                                                                                                                                        annum)
Promote private sector provision of entrepreneurial skills training
                                   Increased number of private sector                                                                                           Lowers costs to RGoB of
Option           1:
                                   providers                                                                                                                    providing entrepreneurial skills
Engage private                                                                                Additional monitoring costs
                                   Greater access to training for rural                                                                                         training
sector providers                                                                              Transition costs of developing
                       9.71        entrepreneurs                                   0.79                                                 5.28         71.84                                         
to          deliver                                                                           Bhutanese service providers
                                   Improved quality of training and services
entrepreneurial
                                   Civil servants can dedicate more time to
skills training
                                   other tasks
                                   Increased number of private sector                                                                                           Potentially high administrative
Option            2:                                                                          Specialist or technical training be
                                   training providers                                                                                                           costs
Establish          a                                                                          under provided
                       12.33       Improved quality of training                    1.37                                                 10.97        86.78      Entrepreneurs choose training      
voucher                                                                                       Subsidies distort true market
                                   Civil servants can dedicate more time to                                                                                     that best meets their needs.
program                                                                                       Vouchers may be misused
                                   other tasks
Promote access to finance
Option 3: Use
cash        flow                                                                              Additional training costs for financial                           A relatively small number of
                                   Additional CSIs can avail loans
analysis where                                                                                institutions                                                      additional enterprises are
                  1.02             Increased lending base for financial            0.58                                                 0.45         3.54
collateral                                                                                    Cost to CSIs of preparing relevant                                likely to be able to access
                                   institutions
requirements                                                                                  documentation                                                     finance
are not met
Option 4: Allow                    Reduce the number of loan defaults                         Need to ensure funds provided to                                  To meet the RGOB’s aim of
                  1.68                                                             0.59                                                 1.09         8.61
existing                           Encourage financial institutions to make                   existing enterprises are not diverted                             providing employment for



            36
                 Estimated over ten years using a discount rate of 4.5 per cent.
                                                                                                        30
                                                                                                                             Monetize
                     Monetize                                                                                                             Net
                                                                          Monetiz                                            d      Net
                     d                                                                                                                    Present                                       Final
                                                                          ed Costs                                           Impact             36   Other                important
                     Benefits                                                                                                             Value                                         Assessmen
                                Non-monetized Benefits                    (Million   Non-monetized Costs                     (B-C)                   considerations
                     (Million                                                                                                             (Million                                      t
                                                                          Nu per                                             (Million
                     Nu per                                                                                                               Nu per
                                                                          annum)                                             Nu     per
                     annum)                                                                                                               annum)
                                                                                                                             annum)
enterprises to                  more loans available to CSIs                         from start-ups                                                  young      skilled  individuals,
access     ‘soft’               Investment and employment generation                 Develop criteria existing enterprises                           sufficient funds need to
loans                                                                                must meet to avail ‘soft’ loans                                 remain available for loans to
                                                                                     Monitoring costs                                                start-up entrepreneurs
                                                                                     Additional incentives may be required                           May        generate     greater
                                Benefits entrepreneurs unable to avail
                                                                                     to encourage financial leasing                                  economic benefits because a
                                loans to purchase assets
                                                                                     operations                                                      greater         number       of
Option          5:              Financial institutions have a regular
                                                                                     Legal/ regulatory changes may be                                entrepreneurs may be able
Introduce            -          stream of income from owning specific     -                                                  -            -                                             
                                                                                     required                                                        acquire assets at lower cost
financial leasing               assets
                                                                                     Specialist equipment may not be                                 In the case of enterprise
                                Insurance providers may also benefit as
                                                                                     provided                                                        failures, leasing agencies face
                                leased assets will need to be insured
                                                                                     Monitoring costs                                                smaller losses




                                                                                              31
Section 6. Recommendations
From the analysis presented in this RIA it is clear that the benefits of providing training such as the Basic
and Comprehensive Entrepreneurship Courses significantly outweigh the costs. In particular the CEC
provides greater economic benefits than the BEC (interestingly the RGoB funded the BEC in 2009 but not
the CEC) although these courses do serve different policy imperatives – private sector development for the
former and employment of skilled youth for the latter. Not only do entrepreneurs gain valuable skills from
these training courses, but economy wide benefits are generated through the establishment of enterprises,
investment in assets, and employment.
However, additional benefits can be realised from private sector provision of entrepreneurial skills training
(option 1) and establishing a voucher program (option 2) under which entrepreneurs can select training
offered by private providers that best meet their needs.
While the latter option provides the greatest net benefits over time, it is based on the assumption that a
supply of sufficient private sector trainers – in particular from Bhutan – will develop quickly to meet
enterprises’ demand. Given the fundamental nature of this assumption, further research into the number
of private sector entrepreneurial skills training providers is required (some of which is currently being
carried out with MoEA) and explore the possibility of providing incentives.
In the interim, there are significant benefits to implementing option 1 and engaging private providers to
deliver entrepreneurial skills training courses. Not only would new enterprises continue to be established
(as under the Baseline scenario) but the number of private sector training providers, and the quality of the
training they provide would also be expected to improve.
Furthermore, the costs to government of funding this training are likely to decrease; and additional staff
resources can be used for other purposes. The RGoB would need to monitor the delivery of this training on
an ongoing basis to ensure standards are being met. If the RGoB also chooses to provide ongoing assistance
to training participants as was previously the case under the EPC, the most appropriate agency to provide
this support would need to be carefully considered.
In terms of improving access to finance for CSIs, the RGoB could urge banks to continue to provide ‘soft’
loans to CSIs, or use alternative methods to assess borrowers potential where collateral requirements are
not met (option 3), but these options are unlikely to be implemented where they are not consistent with
the profit-making imperatives of the FIs (except perhaps BDFCL for which the RGOB is the majority owner).
Even if they were implemented, improvements in access to finance are unlikely to be significant. Therefore,
to improve access to finance, particularly for CSIs the most promising option is number five – introducing
financial leasing.
Financial leasing services are particularly beneficial to smaller scale enterprises unable to access finance
through formal channels. Leasing institutions maintain ownership of assets while earning a regular stream
of income through leasing them to entrepreneurs. Introducing financial leasing would not only promote
economic development but also financial sector development by providing additional competition for
existing FIs. This could result in the provision of alternative or cheaper financial products specifically for
CSIs.
While financial leasing appears to be a promising option, the costs and benefits largely depend on the
design and implementation decisions, so further information is required to confirm this, some of which will
be verified through consultation on this RIA.37



37
  It is expected that further research into financial leasing will also be completed under component one of the Asian
Development Bank funded ‘Kingdom of Bhutan: Micro, Small and Medium-Sized Enterprise Sector Development
Program’, for which one key activity is ‘identify appropriate policy and incentives to improve the bankability of SME
projects and examine existing institutional mechanisms and financing modalities for SMEs to improve aspects of
                                                         32
The following table summarise the assessment.

                           NPV                  Unquantified                 Recommendation          Selection
                          million                    B-C


1. Engage      Private    71.5      Positive but supply of trainers need                              
Sector                              to be considered


2. Voucher system         86.8      Positive but difficult to monitor                                 


3. Cash flow Analysis     3.5       Positive but small number of             
                                    beneficiaries


4. ‘Soft Loans’ for       8.6       Positive but can create diversion of     
existing firms                      funds


5. Financial Leasing      n.c.      Positive but complex to get traction                              
                                    by FIs




financial services for the SME sector.’ Asian Development Bank, Technical Assistance to the Kingdom of Bhutan for
Small and Medium Enterprise Development, October 2004.


                                                       33
6.1 Implementation of the Preferred Options

Preferred options                      Legal changes                      Administrative changes     Budgetary needs                  Responsible entity

Engage private sector providers to No legal changes needed.               Set up a quality           Around 400,000/- per course      Ministry of Labour
deliver entrepreneurial skills training                                   assurance system to                                         and Human
                                        To be addressed this through
(option 1)                                                                monitor private sector                                      Resources
                                        the MSME policy
                                                                          providers
                                       Current private sector providers
                                       work under contracts based on
                                       public procurement bids

Introduce a      voucher    program To be addressed this through          Create a Division at the   Cost of the Voucher Division:    Ministry of Labour
(option 2);                         the MSME policy                       MoLHR to administer the                                     and Human
                                                                                                     520,000/- [40 % of 1.3 million
                                                                          system                                                      Resources
                                       Establish a new regulation                                    per year]
                                                                          Set up a quality
                                       No amendments requires                                        It’s budgetary neutral
                                                                          assurance system to
                                                                          monitor private sector
                                                                          providers

Introduce financial leasing to To be addressed this through               Royal Monetary             (to be studied)                  Royal Monetary
improve access to finance for CSIs the MSME policy                        Authority will regulate                                     Authority
(option 5).
                                   FIs empowered to adopt                                                                             Financial
                                       internal policies and                                                                          Institutions
                                       procedures for its credit
                                       activities and prepare a credit
                                       Manual




                                                                             34
Section 7. Annexes

7.0 Background – Private Sector Development in Bhutan
Private Sector development has been an important priority since the 6th Five Year Plan (1987-1992) and
this is evident from the Vision 2020 document which identified the private sector as an engine of future
economic growth and employment generation. As micro/cottage and small scale enterprises account for
approximately 98 per cent of private sector enterprises in Bhutan, it is clear that their development is
fundamental to the realisation of this vision.
In this RIA ‘cottage’ and ‘micro’ are used interchangeably to identify the smallest of enterprises.38 The focus
here is on registered, licensed and regulated enterprises in the industry (excluding contractors) sector.
Enterprises operating in the informal sector are not considered within this RIA.
As of December 2008, a total of 24,343 cottage/ micro and small enterprises were licensed/registered in
Bhutan. Of these, 11,239 (45 per cent) are cottage and small industries (CSIs) which are the focus of this
RIA:
Table 1: Number of operational licenses (excluding construction contractors)

      Sector           PAM           SVC             Micro             Retail          Wholesale           TOTAL
                                                                       Trade*           Trade*
                                                     Trade

       Large              54            30               -               51                  18                153

      Medium              51            61               -               267                 48                427

       Small             180           1,369             -              2,477               203               4,229

       Micro/            569           9,121          10,424              -                   -               20,114
      Cottage

        Total            854          10,581          10,424            2,795               269               24,923

      Source: MoEA, *Break down by size estimated using relevant proportions of new licenses issued in
       2006-2008. PAM – production and manufacturing; SVC – services.

In order to support the development of CSIs and the private sector more generally, the RGoB has designed
and implemented a number of policies, programmes and other reforms. Changes have been made to
business registration and licensing procedures. Basic and comprehensive training on entrepreneurship
development was provided through the Entrepreneurship Promotion Centre; and financial schemes such as
the Entrepreneurship Development Program Loan scheme and Credit Guarantee Scheme were facilitated
through existing financial institutions.
During the 9th Plan, the Ministry of Economic Affairs (MoEA) also initiated Rural Enterprise Development
Projects with support from the United Nations Development Programme (UNDP) and the Dutch
cooperation agency (SNV). These projects supported the promotion of cottage based industries such as
bamboo crafts, textiles and vegetable dyeing, through training and the development of market linkages for
these products. These projects also helped to strengthen business promotion services in RTIOs and develop


38
  For trade enterprises, the term ‘micro’ is used to classify those with turnover less than Ngultrum 1 million. For the
industry sector the term ‘cottage’ is applied to enterprises with investment less than Ngultrum 1 million.
                                                          35
appropriate material for business information dissemination with the establishment of the Business
Promotion Section.
Existing Problems with CSI Development in Bhutan
Despite impressive economic growth over the past decade and persistent government efforts to encourage
private sector growth in Bhutan, several challenges remain for private sector enterprises, particularly those
that are smaller in scale. During the preparation of this RIA, task force members researched a number of
specific factors inhibiting the development of cottage and small scale enterprises in Bhutan including:
Existing rules and regulations that do not support enterprise development
Difficulties accessing markets
Lack of land/appropriate locations for specific enterprises
Information problems
Different definitions of MSMEs across agencies
Complex taxation environment
Lack of well targeted incentives
(Further details on these identified issues can be found in the preliminary RIA and associated consultation
document).

7.1 Consultation

 Consultation meeting on preliminary RIA - 9 September 2009

         Sangay Wangdi, Director, Department of                  Kunzang Tobgay,         PPD,    Ministry       of
         Industry, MoEA                                          Agriculture
         Dophu Tshering, Joint Director, Department              Dongtu, Regional Director, Regional Trade
         of Trade, MoEA                                          Industry Office, MoEA
         Chia Hsin Hu, Economist, Asian Development              Sherab Zangmo, Assistant Industries Officer,
         Bank                                                    MSME Division, Department of Industry,
                                                                 MoEA
         Simon Armstrong, Team Leader, MSME
         Development Policy Project                              Kunzang, MSME Division, Department of
                                                                 Industry, MoEA
         Edwin   Nelson,      Consultant,        MSME
         Development Policy Project                              Sonam T. Dorji, Policy and Planning Division,
                                                                 MoEA
         Lok Nath Chapagai, PDSD, MoEA
                                                                 Ugyen Dorji, Registrar of Companies,
         Karma Thinley, Chief Planning Officer, IPSDS,
                                                                 Department of Industry, MOEA
         RCSC
                                                                 Mindu Dorji, PDSD, Department of Industry,
         Ugyen Gyeltshen, IPSDS, RCSC
                                                                 MoEA
         Gyeltshen, IPSDS, RCSC
                                                                 Kinley Yangzom, Business Promotion Officer,
         Tashi Tshering, IPSDS, RCSC                             RTIO, MoEA
         Chador Wangdi,          BAFRA,   Ministry   of          Phub Dorji, Department of Trade, MoEA
         Agriculture

 Presentation to Programme Steering Committee – 25 September 2009



                                                      36
       Secretary, MoEA- Chairman                            Director, Department of Industry, MoEA
       Secretary, Ministry of Agriculture (MoA)             Managing Director, Bhutan Development
                                                            Finance Corporation Limited (BDFCL)
       Managing     Director,     Royal     Monetary
       Authority (RMA)                                      Karma Choden, DGM, BDFCL
       Jamyang Sherab Wangdi, Local Consultant              Rinchen Dorji, Chief Industries Officer, MoEA
       Ugyen Dorji, Legal        Officer,   Company         Sangay Dorji, Alternative Project Manager,
       Registrar, MoEA                                      RMA
       Letho, General Secretary, Association of             Simon Armstrong, Team Leader
       Bhutan Industries
                                                            Edwin Nelson, BDS Specialist
       Muna Mukhia, Asst. Industries Officer,
                                                            Nick Freeman, CSF Specialist
       MSME Division, MoEA
       Ugyen Lham, National Consultant

Consultation document – comments received

       Regional Trade & Industry Office (RTIO) -            Karma Thinlay, Improving Public Service
       Gelephu                                              Delivery System
       RTIO Trongsa                                         Norbu, Dealing Person for EDP Loans, Bhutan
                                                            National Bank
       Tshering, RTIO Samdrup Jongkhar
                                                            Sonam, RTIO Phuentsholing

Consultative meetings 10 November 2009 – 25 November 2009

       Sonam Tobgay, Deputy Managing Director,              Ugyen Dendup, Deputy Managing Director,
       Bhutan National Bank Limited (BNBL)                  Bhutan Development Finance Limited
                                                            (BDFCL)
       Gap Tshering, Entrepreneurship Promotion
       Division, MoLHR                                      Karma Choden, Officiating General Manager,
                                                            BDFCL
       Sonam Penjor, Planning Officer, Ministry of
       Finance (MoF)                                        Sonam Letho, Credit Risk Manager, BDFCL
       Tshering, Statistical Officer, MoF                   Pema Wangdi, Head of Treasury, BDFCL
       XXXX, Bank of Bhutan Limited                         Jigme Dorji, Project Officer , BDFCL

Survey of past Entrepreneurship Development Programme Participants

       Former BEC participants (9)                          Former CEC participants (7)




                                                  37
7.2 Enterprise Classifications
Trade

 Category             Turnover (Nu)

 Large                More than Nu. 10 Million

 Medium               5 Million – 10 Million

 Small                1 Million – 5 Million

 Micro                Less than Nu. 1 Million

Source: Bhutan Micro Trade, Retail Trade and Wholesale Trade Regulations




                                                  38
Industry – Production and Manufacturing

 Category             Investment (Nu)

 Large                More than Nu. 100 Million

 Medium               10 Million – 100 Million

 Small                1 Million – 10 Million

 Cottage              Less than Nu. 1 Million



Industry - Services

 Category             Investment (Nu)

 Large                More than Nu. 100 Million

 Medium               10 Million – 100 Million

 Small                1 Million – 10 Million

 Cottage              Less than Nu. 1 Million




                                                  39
7.3 Changes to EDP Loan Scheme
August 1996 - loan scheme put on hold until review conducted.
Review concluded that the key issues were: the calibre, experience, motivation of entrepreneurs; inadequate risk-sharing because entire investment
provided by FIs; 50 per cent of those financed were running satisfactorily.
In 1997 the loan scheme was revised (Revision I) so that: entrepreneurs were to provide up to 10 per cent of project costs in equity contribution and 10 per
cent in collateral or a third party guarantee for that same amount, 15 per cent was provided by FIs for equity financing (in order to meet RMA guidelines) but
free of interest for the first three years; loan ceiling was revised down to Nu. 1,000,000.
August 2003 - EDP Committee directed EDP Technical Committee to conduct a review.
In early 2005 the loan scheme was revised again (Revision II) so that: applicants needed to be at least 20 years of age; the interest rate was set at 10 per cent
(previously it was according to RMA guidelines); it was specified that loan repayments were to be made over a maximum period of 10 years in accordance
with RMA guidelines; in the event of default, penalty charges would apply, in accordance with RMA guidelines; borrowers were required to cover 15 per cent
of fixed investment cost by way of owner’s equity (in the form of cash, machinery, tools, equipment, raw materials directly related to the project); no equity
financing, 10 per cent (required to make up 25 per cent minimum required by RMA) now part of term loan and charged interest at 10 per cent; a CEC
graduate allocated to one FI cannot approach another FI and another FI shall not provide finance to a graduate who is not allocated to it; CEC graduates can
change project/ business if a particular project is rejected by the FI; CEC graduates shall approach their allocated FI within five years of graduation.

7.4 Methodology
To measure the costs to the RGoB of providing training and workshops under the Entrepreneurship Development Program, officers in the relevant agencies
were interviewed by the task force in order to understand the resources used, the average amount of time taken to implement and monitor various training
programs and loan schemes, and the salary grade of the officer responsible for performing each task. In this way the total cost to government of running the
Entrepreneurship Promotion Centre could be estimated.
Similarly, to ascertain the costs borne by financial institutions in establishing and administering loans under the EDP and CGS loan schemes, consultative
meetings were held with representatives from BDFCL, BoBL and BNBL.
To ascertain the costs and benefits to businesses of participating in BEC or CEC and/or the EDP/ CGS loan schemes, a survey was carried out by members of
the RIA task force. The aim of this survey was to find out from CEC/ BEC participants their perceptions of the quality and value of the training provided; the
proportion of participants that went on to start their own enterprise; and any difficulties encountered while trying to access finance through the EDP/ CGS
loan schemes or other sources.
Where data was not available, assumptions were made using the best available evidence. These assumptions are clearly outlined in the text.


                                                                               40
7.5 Valuing Staff Time
Earnings
The basis for this information is the present (2009) RGoB pay scale. Where salaries for officers at a specific Grade are estimated, the middle of the grade
range (stage 8) is used as the basis for calculations (where the actual stage was unknown) assuming that across government, all stages of a particular grade
are occupied equally over time.
On-costs
On-costs are additional non-earnings labour costs borne by employers and include payments made by the government (on top of base salary) to employees
provident funds, and other allowances such as Leave Travel Concession (the 35 per cent allowance was not included in the cost estimates as it was not paid in
2007 – the year assumed in the baseline scenario). As a percentage, on-costs vary slightly across the Grades due to the way LTC is paid (one month salary to a
maximum of 15,000 Ngultrum).
Overhead costs
Overhead costs include building costs (rental of floor space, fixtures & fittings maintenance, services etc), equipment, consumables, IT, telephones and other
support services. The overhead costs were estimated based on information provided by task force members. Where information was unknown an average
(across six Regional Trade and Industry Offices) of the overhead costs was used as these estimates were considered to be similar to those incurred by other
divisions within MoEA. The methodology used here adopts a fully distributed cost approach in respect of overhead costs (i.e., overhead costs are averaged
across labour inputs or relevant outputs), rather than a marginal cost approach (which would focus on the additional overhead costs that needed to be
incurred due to specific activity).




                                                                             41
Table 7.5.1 Annual costs of employing civil servants (salary, overheads, on-costs)

                                                                                                                               Maintenan
                               Provident      Leave                       Furniture   Telephon
                                                            Travel                                                   Stationer ce              TOTAL
                   Earned     Fund            Travel                      /           e/           Utilitie
 Grade    Salary                                            Allowance                                         Rent   y       & (Equipment
                   Leave39    Contribution    Concession    42            Equipme     Internet/    s                                           (Annual Cost)
                              40              41                                                                     Printing  /
                                                                          nt          Fax
                                                                                                                               Computer)

 (All figures are provided on a ‘per month’ basis except for the total)

 Grad
          19435    1619.8     2137.85         1,250         1250          1122.50     833.33       141.67     NA     583.33     241.67         343,379.20
 5

 Grade
          17050    1420.3     1875.5          1,250         1250          1122.50     833.33       141.67     NA     583.33     241.67         309,226.00
 6

 Grade
          15160    1263.3     1667.6          1,250         1250          1122.50     833.33       141.67     NA     583.33     241.67         282,161.20
 7

 Grade
          12430    1035.3     1367.3          1035.83       1250          1122.50     833.33       141.67     NA     583.33     241.67         240,497.60
 8

 Grade
          11455    954.58     1260.05         954.58        750           1122.50     833.33       141.67     NA     583.33     241.67         219,560.60
 9

 Grade
          10370    864.17     1140.7          864.17        750           1122.50     833.33       141.67     NA     583.33     241.67         202,938.40
 10



39
   Equivalent of one month’s salary.
40
   Government contribution is 11 per cent of base salary
41
   Equivalent of one month’s salary to a maximum of Ngultrum 15,000.
42
   Estimated by task force members who worked in the EPC during 2007. Grades 4-8 = Ngultrum 500 per day up to a maximum of 50 days. Grades 9-14 = Ngultrum 300 per
day up to a maximum of 50 days per annum.
                                                                               42
Grade
        9480   790.00   1042.8   790.00   NA   1122.50   833.33   141.67   NA   583.33   241.67   180,303.60
11

GSC I   6025   502.08   662.75   502.08   NA   1122.50   833.33   141.67   NA   583.33   NA       124,473.00




                                                    43
7.6 Costs and Benefits – Baseline
During 2007 the EPC had two Grade 5, three Grade 9, and two support officers (one Grade 11 and one GSC
1):
Table 7.6.0 Entrepreneurship Promotion Centre – Costs (2007)

 Resources – Entrepreneurship Promotion Centre                               Quantity       Annual Costs (Nu)

 Grade 5 officers                                                            2              686,758

 Grade 9 officers                                                            3              658,682

 Support staff (one Grade 11 officer and one GSC-1 officer)                  2              304,777

 EDP Budget expended (does not include staff costs)                          NA             1,300,000

 TOTAL                                                                                      2,950,217

Task force members (some of whom were EPC staff during 2007) provided information on key activities
undertaken by the EPC during 2007 and resources dedicated to each activity: one 23 day CEC for 18
participants; one 20 day BEC for 14 participants; four, two day Business Orientation Workshops for a total
of 265 VTI participants; eight, one day workshops for a total of 268 CTC and ATP graduates; assisting
approximately 20 walk in clients for up to 10 hours each to prepare a business plan; spending up to 20 days
to monitor the progress of training participants.
Table 7.6.1 Entrepreneurship Promotion Centre – Training Provided (2007)

                                                                                  Days         Total    days
                                                      Quantity    Trainees
                                                                                  trained      training
 Training                                                                                      provided
                                                      (A)         (B)                          (B X C)
                                                                                  (C)

 ‘One on One’ Business Plan Assistance                Ongoing     20              1.48         29.63

 Comprehensive Entrepreneurship Course                1           18              23           414

 Basic Entrepreneurship Course                        1           14              20           280

 Business Orientation Workshops (VTI graduates)       4           265             2            530

 Business Orientation Workshops (CTC and ATP
                                             8                    268             1            268
 graduates)

 Monitoring                                           Ongoing     NA              20           20

 TOTAL                                                                                         1,541.63

Multiplying the total number of trainees by the number of days training they were provided by EPC staff
suggests the EPC provided a total of 1,542 days training in 2007. Dividing the total costs of running the EPC
during 2007 (Ngultrum 2,950,216.80) by the total days of training provided (1,541.63) generates the cost



                                                      44
per trainee, per day of training of Ngultrum 1,913.70. Multiplying this figure by total days training provided
for each type of training course/ workshop/ other activity provides an estimate of the total activity cost43:
Table 7.6.2 Entrepreneurship Promotion Centre – Costs of Training Provided (2007)

                                                          Total        days Cost per trainee Overall costs
                                                          training          per day
 Training                                                 provided
                                                                               (D)
                                                                                                    (B X C X D)
                                                          (B X C)

 ‘One on One’ Business Plan Assistance                    29.63                1,913.70             56,702.23

 Comprehensive Entrepreneurship Course                    414                  1,913.70             792,271.85

 Basic Entrepreneurship Course                            280                  1,913.70             535,836.03

 Business Orientation Workshops (VTI graduates)           530                  1,913.70             1,014,261.06

 Business Orientation Workshops (CTC and ATP
                                             268                               1,913.70             512,871.63
 graduates)

 Monitoring                                               20                   1,913.70             38,274.00

 TOTAL                                                    1,541.63                                  2,950,216.80



Table 7.6.3 Costs to Financial Institutions – EDP Loan Scheme

                                                                    Existing           Loans
                                       New                Effort to                                        Effort to
 Costs to Financial Institutions – EDP                              loans to Effort to to
                                       loans              approve                                          recover
 loan scheme44                                                      monitor monitor    litigate
                                       p.a.45             loan      46                 47                  loan

 Bhutan       Development            Finance
                                                1         2 days      6.66           1 day      0.33       10 days
 Corporation Limited

 Bhutan National Bank Limited                   1         2 days      3.33           1 day      0.33       10 days

 Bank of Bhutan Limited                         0.33      2 days      1              1 day      0          10 days

 Royal Insurance Corporation of Bhutan
                                       0.33               2 days      1              1 day      0          10 days
 Limited


43
   As it was not possible to ascertain the level of effort put into each training course/ workshop this method ensures
that higher overall costs are assigned to those workshops that ran for longer periods of time, or had a higher number
of attendees.
44
   Estimates are based on administrative information kept by the EPC as well as consultation with each financial
institution. Updated information was requested from BoBL, but had not been supplied at the time this report was
written.
45
   Annual average number of EDP Loans issued over three years between 2005 and 2007.
46
   Annual average number of loans monitored each year between 2005 and 2007.
47
   Annual average number of loans under litigation between 2005 and 2007.
                                                         45
                                                             5.32                     11.99                  6.66
 TOTAL (effort per activity)
                                                             days                     days                   days

 TOTAL COST (23.97 days at Grade 8
                                   Ngultrum 34,237.97 per annum
 equivalent )

Financial institutions incur additional financial costs when loans cannot be recovered. Of the loans
disbursed between 2004 and 2009, BDFCL wrote-off or litigated Nu 220,766 worth of loans per annum
(while some proportion of this amount may have been recovered through asset sales. This information was
not available to the taskforce, so it is assumed the full amount was lost). The total amount of EDP loan
write-offs for RICBL is unknown, however correspondence supplied indicates that in 1998, Nu 79,987 was
allocated each year to cover ‘allocated provisions & write-offs’, so this figure is used. The amounts written
off by BoBL and BNBL are also unknown, so an average of the annual amounts for BDFCL and RICBL is used.
Table 7.6.4 Costs to Financial Institutions – Credit Guarantee Scheme

                                                                            Existin
                                                                  Effort               Effort
                                                                            g                     Loans     Effort
                                            New                   to                   to
 Costs to Financial Institutions – CGS loan                                 loans                 to        to
                                            loans                 approve              monitor
 scheme                                                                     to                    recove    recover
                                            p.a.                  each                 each
                                                                            monit                 r         loan
                                                                  loan                 loan
                                                                            or

 Bhutan National Bank Limited                          4.648      2 days    13.849     1 day      0.1750    5 days

 Bank of Bhutan Limited51                              4.6        2 days    13.8       1 day      0.17      5 days

                                                                  18.4                 27.6
 TOTAL EFFORT                                                                                               1.7 days
                                                                  days                 days

 TOTAL COST (47.7 days at Grade 8 equivalent
                                             Ngultrum 68,133.13 per annum
 salary)

As the RGoB guarantees 60 per cent of these loans under the CGS scheme, it also incurs costs when loans
cannot be recovered. Between 2004 (when the CGS scheme began) and 2009, BNBL wrote off one loan
worth Nu 98,434. This equates to an average financial loss of Nu 16,406 per annum. Information on the size
of the loan written off by BoBL has not yet been supplied. For simplicity it is assumed the same financial
loss applies. It is possible that actual losses are higher as data provided by BNBL suggests that 18.06% of the
total amount dispersed between 2004 and 2009 is currently under default, however as these loans are still
being paid off this percentage may improve over time.


48
   Average number of loans approved by BNBL between 2004 and 2008.
49
   Assumes 4.6 loans approved each year between 2004 and 2007 – the year for calculating the Baseline Costs. As the
CGS scheme began in 2004, 2005 there are assumed to be 4.6 existing loans, in 2006 there are 9.2, in 2007 there are
13.8 etc.
50
   Both BoBL and BNBL have written off one loan between 2004 and 2009. It is assumed that approximately one week
of full time effort is required to try and recover the loan by selling assets etc and request that MoF cover 60 per cent
of any remaining losses.
51
   The figures for BoBL are assumed to be the same as for BNBL because upon completion of the BEC, graduates an
equal number of graduates are assigned to each of the financial institutions. Whether, they are ultimately successful
in obtaining finance depends on the lending decisions of those institutions. More detailed information on CGS loans
supplied by BoBL was requested, but a response has not yet been received.
                                                             46
Table 7.6.5 Basic Entrepreneurship Course – Benefits

 Annual Benefits – Basic Entrepreneurship Course 2007*                         Quantity          Benefits (Nu)

 Number of enterprises established (78 per cent of graduates start an
                                                                      9 enterprises              990,00052
 enterprise)

 Employee earnings (average of 2 employees earning Nu 5,000 per
                                                                               18 employees      1,080,000
 month)

 Owner earnings (average of 1 working owner earning Nu 7,700 per 9     working
                                                                               831,600
 month)                                                          owners

                                                                               9        BIT
 Business Income Tax paid (average of Nu 2,160 per annum)                                   19,440
                                                                               payments

 TOTAL                                                                                           2,921,040

Table 7.6.6 Comprehensive Entrepreneurship Course – Benefits

 Annual Benefits – Comprehensive Entrepreneurship Course 2007*                 Quantity          Benefits (Nu)

 Number of enterprises established (60 per cent of graduates start an
                                                                      11 enterprises             4,383,784.1753
 enterprise)

 Employee earnings (average of 1.2 employees earning Nu 6,835 per
                                                                               13 employees      1,082,664
 month)

 Working owner earnings (average of 1 working owner earning Nu 8,333           11    working
                                                                                             1,099,956
 per month)                                                                    owners

                                                                               11       BIT
 Business Income Tax paid (average of Nu 20,000 per annum)                                  220,000
                                                                               payments

 TOTAL                                                                                           6,786,404




52
   Based on figures provided by BNBL which detail amounts loaned to CGS graduates for working capital and term
loans. It is assumed that money borrowed under ‘term loans’ is used for purchasing assets and other start-up
investment. Of the 18 term loans provided between 2005 and 2007, the average amount was Ngultrum 110,000.
53
   Based on administrative data kept by EPC which shows that of the EDP loans provided between 2005 and 2007, the
average amount was Ngultrum 398,525.83. It is assumed this is the average amount invested by enterprises when
starting their business.
                                                       47
Table 7.6.7 EDP Loan Scheme – Benefits from new Loans

                                          New
 Benefits to Financial Institutions – EDP                  Average          Interest
                                          loans                                        Total interest earned
 loan scheme54                                             size56           rate
                                          p.a.55

 Bhutan       Development           Finance
                                               1           204,285.00       10%        20,428.50
 Corporation Limited

 Bhutan National Bank Limited                  1           592,766.67       10%        59,276.67

 Bank of Bhutan Limited                        0.33        398,525.83       10%        13,151.35

 Royal Insurance Corporation of Bhutan
                                       0.33                398,525.83       10%        13,151.35
 Limited

 TOTAL (new loans)                                                                     106,007.87



Table 7.6.8 EDP Loan Scheme – Benefits from existing loans

 Benefits to Financial Institutions – EDP Existing                          Interest
                                                           Average size                Total interest earned
 loans57                                  loans                             rate

 Bhutan       Development           Finance
                                               6.66        102,142.50       10%        68,026.91
 Corporation Limited

 Bhutan National Bank Limited                  3.33        296,383.33       10%        98,695.65

 Bank of Bhutan Limited                        1           199,262.92       10%        19,926.29

 Royal Insurance Corporation of Bhutan
                                       1                   199,262.92       10%        19,926.29
 Limited

 TOTAL (existing loans)                                                                206,575.14




54
   Estimates are based on administrative information kept by the EPC as well as consultation with each financial
institution. Updated information was requested from BoBL, but had not been supplied at the time this report was
written.
55
   Annual average number of EDP Loans issued over three years between 2005 and 2007.
56
   The average amount disbursed under the EDP scheme by each institution between 2005 and 2007. As loan amounts
were not available for BoBL and RICBL, an average of the BDFCL and BNBL amounts is used.
57
   Estimates are based on administrative information kept by the EPC as well as consultation with each financial
institution. Updated information was requested from BoBL, but had not been supplied at the time this report was
written.
                                                      48
Table 7.6.9 Credit Guarantee Scheme – Benefits from new loans

 Benefits to Financial Institutions – CGS New                  Average          Interest
                                                                                            Total interest earned
 loans                                    loans p.a.           size58           rate

 Bhutan National Bank Limited                    4.6           150,134.09       13%59       89,780.19

 Bank of Bhutan Limited60                        4.6           150,134.09       13%         89,780.19

 TOTAL (new loans)                                                                          179,560.37

Table 7.6.10 Credit Guarantee Scheme – Benefits from existing loans

 Benefits to Financial Institutions – CGS Existing                              Interest
                                                               Average size                 Total interest earned
 loans                                    loans                                 rate

 Bhutan National Bank Limited                    13.861        75,067.045       13%         134,670.28

 Bank of Bhutan Limited62                        13.8          75,067.045       13%         134,670.28

 TOTAL EFFORT                                                                               269,340.56

Table 7.6.11 Procurement of Private Sector Provider of BEC training

 Resources                                                                                  Annual Costs (Nu)

 RGoB costs involved in procurement, project support, advertising63                         45,082.93

 Amount paid to procure training (Nu 9,000 each for 38 trainees)64                          342,000.00

 Stipend paid to trainees (Nu 3,000 each for 38 trainees)                                   114,000.00

 TOTAL                                                                                      501,082.93




58
   The average amount disbursed under the EDP scheme by each institution between 2005 and 2007. As loan amounts
were not available for BoBL and RICBL, an average of the BDFCL and BNBL amounts is used.
59
   Assumes interest rates of 12-14 per cent are charged, so the average of 13 per cent is used.
60
   Figures for BoBL are assumed to be the same as BNBL because upon completion of the BEC, an equal number of
graduates are assigned to each of the FIs. Whether, they are ultimately successful in obtaining finance depends on the
lending decisions of those institutions. More detailed information on CGS loans supplied by BoBL was requested, but a
response has not yet been received.
61
   Assumes 4.6 loans approved each year between 2004 and 2007 – the year for calculating the Baseline Costs.
62
   The figures for BoBL are assumed to be the same as for BNBL because upon completion of the BEC, graduates an
equal number of graduates are assigned to each of the financial institutions. Whether, they are ultimately successful
in obtaining finance depends on the lending decisions of those institutions. More detailed information on CGS loans
supplied by BoBL was requested, but a response has not yet been received.
63
    Assumes a total of two months effort for an officer at Grade 8 level to prepare terms of reference, complete
tendering process, advertise for (Nu 5,000) and interview potential participants, monitor training delivery.
64
   (and 52) Information provided by the dealing officer in MoLHR.
                                                          49
Table 7.6.12 Procurement of Private Sector Provider of CEC training

 Resources                                                                                   Annual Costs (Nu)

 RGoB costs involved in procurement, project support, advertising65                          45,082.93

 Amount paid to procure training (Nu 10,350 each for 18 trainees)66                          186,300.00

 Stipend paid to trainees (Nu 3,000 each for 18 trainees)                                    54,000.00

 TOTAL                                                                                       285,383.00



Table 7.6.13 Benefits generated by voucher recipients

 Annual Benefits - Voucher program (64 voucher recipients)                     Quantity               Benefits (Nu)

 Number of enterprises established / grown
                                                                               38 enterprises         4,180,000
 (60 per cent of graduates start or further invest in their enterprise)67

 Employee earnings (average of 2 employees earning Nu 5,000 per
                                                                76 employees                          4,560,000
 month)

 Owner earnings (average of 1 working owner earning Nu 7,700 per 38     working
                                                                                3,511,200
 month)                                                          owners

 Business Income Tax paid (average of Nu 2,160 per annum)                      38 BIT payments        82,080

 TOTAL                                                                                                12,333,280



Table 7.6.13 Allow existing enterprises access to CGS loans - costs

 Costs to Financial Institutions – Credit Guarantee Scheme (CGS)68                 Annual Costs (Nu)

 Financial Institutions (BNBL, BoBL)                                               78,353.10

 Financial losses – unrecoverable loans (BNBL, BOBL)                               24,608.61

 TOTAL (Ngultrum per annum)                                                        102,961.71



65
   CEC training is often 2-3 days longer than BEC training so the stipend is increased by 15 per cent to reflect this.
66
   The estimates in the baseline are based on a CEC program where there were 18 participants.
67
   Conservative estimate used in baseline costing of CEC, remaining estimates are based on the benefits generated by
participants of BEC training programs.
68
   Assumes it is 10 per cent cheaper to assess/monitor loans to existing enterprises so although the number of loans
provided to existing entrepreneurs increases by 25 per cent, the costs of assessing/ monitoring these increases by only
15 per cent. Assumes the financial losses incurred reduce by 25 per cent as existing entrepreneurs are lower risk
borrowers.
                                                          50
Table 7.6.14 Allow existing enterprises access to CGS loans - benefits

 Benefits to Financial Institutions – Credit Guarantee Scheme (CGS)69         Annual Benefits (Nu)

 Interest on new loans                                                        224,450.47

 Interest on existing loans                                                   336,675.71

 TOTAL (Ngultrum per annum)                                                   561,126.18



Table 7.6.15 Allow existing enterprises access to EDP loans - costs

 Costs to Financial Institutions – EDP Loan Scheme70                          Annual Costs (Nu)

 Cost of administering & monitoring loans (BDFCL, BNBL, BoBL, RICBL)          39,373.67

 Financial losses – unrecoverable loans (BDFCL, BNBL, BOBL, RICBL)            451,130.05

 TOTAL (Ngultrum per annum)                                                   490,503.72



Table 7.6.16 Allow existing enterprises access to EDP loans - benefits

 Benefits to Financial Institutions – EDP Loan Scheme                         Annual Costs (Nu)

 Interest on new loans                                                        132,509.85

 Interest on existing loans                                                   258,218.89

 TOTAL (Ngultrum per annum)                                                   390,728.74

Table 7.6.17 Allow access to ‘soft’ loans for existing entrepreneurs – costs and benefits

 Activity                                                      Annual Costs (Nu)       Annual Benefits (Nu)

 EDP loan scheme                                               490,504                 390,729

 CGS loan scheme                                               102,962                 561,126

 Additional employment, BIT payments generated by
                                                                                       730,260
 enterprises71

 TOTAL (Ngultrum per annum)                                    593,465                 1,682,115




69
   Assume benefits increase by 25 per cent as 25 per cent more loans are made to existing entrepreneurs.
70
   Assumptions are the same as for CGS scheme above.
71
   Conservative estimate, assumes an incremental increase of benefits generated by way of employment, BIT
payments, working owner salaries of 25 per cent (based on BEC benefits estimated for the baseline scenario)
                                                       51