Hydropower energy production and the bhutanese economy

The Bhutanese Economy has undergone significant changes since the inception of planned economic development in the 1960’s. Within a span of 40 years the country has transformed itself from predominantly subsistence agrarian to a modern trading economy with expanding regional and global economic ties. Agriculture is still the main source of livelihood for about 79 percent of the people who live in rural areas. Agriculture sector, including horticulture and livestock rearing contribute to about 39.5 percent of the GDP. Bhutan is endowed with enormous hydroelectric potential. With an estimated potential to generate about 30,000 MW of electricity, this sector is expected to contribute substantially to the economy.

Hydropower energy production is Bhutan’s singular comparative advantage which has been tapped effectively through a mutually beneficial and highly successful partnership with India. The revenue earned from Chukha (336MW), Tala (1020MW), Kurichu (60MW) and Basochho (64MW) has enabled the country to be economically more self-reliant. During the fiscal year 2006-2007, the GDP contribution from the energy sector was 12.4 percent and the revenue contribution from the energy sector alone was 45 percent of the revenue contribution from the electricity sector alone was 45 percent of the national revenue.

The government approved the Foreign Direct Investment Policy (FDI) in December 2002 and the FDI Rules and Regulation in 2005. The policy adopts a positive list approach that encourages investment both in the services and manufacturing sectors. It is envisaged that with the opening of the economy to FDI, it will stimulate private sector investment and contribute to industrialization of the economy.

1Bhutan’s philosophy of Gross National Happiness (GNH) guides our long-term vision of sustainable development.

INTRODUCTION:

Bhutan is landlocked by China from the north and India from the south and west with half the country’s population that is 691141 living in remote area. Bhutanese economy is significantly underdeveloped since its late entry to the modern world. Bhutanese economy is mostly based on agriculture and horticulture but in recent years it has highly depended on Hydroelectricity and tourism. Since economy of our country is little back warded and is not well blended with global economy. This isolation with low intellectual human resource means there is no enough push given to PRIVATE SECTOR.

The economy of the country has been largely depended on the India since 1960, with aid amounted to 50% of Bhutan’s GDP until recently it has come down to 20 %. This indicated the strong growth of our economy which was brought about by hydropower generation and its export to India. Thus Hydropower generation was a driving force behind Bhutan’s ability to create employment and sustainable growth in following years to come.

BCCI (Bhutan Chamber of Commerce and Industry) was initiated in 1980 to promote socioeconomic development and to provide information and bring upon well coordinated public-private activities. Royal Government of Bhutan playing a central role with an aim to balance the pace of development and sustainable use of environment, cultural preservation and good governance through developed strategy of ‘GNH’ (Gross National Happiness). With the liberalization of government’s policy especially in the field of economic, there has been significant witness of transition of public to private, commonly known as Privatization of public sector. Therefore it is important to keep an account about what is happening in our economy for good and sustainable development.

This paper highlights on the role played by Public and Private sector in economic development of Bhutan which will also briefly cover:

A brief history of both private and Public sectors of Bhutan and its employment contributions and what are all the economic indicators of Bhutan.

PRIVATE SECTOR

Concept:

Private sector is the sector where most of the jobs are held and it differs from country. It is a part of national economy made up of and resources owned by Private enterprises. Private sector includes the personal sector (households) and corporate sectors (firms), and is responsible for allocating most of the resources within an economy.

Background:

Private sector in Bhutan is immature, underdeveloped and unrecognized. Prior to opening up of economy the only private sector one could see was in agriculture. The FYP (Five Year Plan) of until fifth gave more importance to public sector but with the beginning of the 6th FYP(1987-92), Private sector or development got much attention and received a major push with the establishment of BDFC (Bhutan Development Finance Corporation) (BDFC) which rendered financial support to farmers and young entrepreneurs in the form of soft loans.

Recently, private sector is operating far greater than public but yet the public sector continues to dominate when it comes to creation of employment. With development of tourism and hydropower sector, the Bhutan’s economy has gone a steady change and it has in turn fostered the development of private sector..

PUBLIC SECTOR

Concept:

“it means an enterprises where there is no private ownership, where its functions are not merely confined to the maximization of profits or the promotion of the private interest of the enterprise, but are government, public or social interest and where the management is responsible to the government either directly as in departmental undertaking or indirectly as in government companies and corporations”(Dhingra,1986).

Public sector is the part of the economy concerned with providing basic government services. The composition of the public sector differs by country, but common to all country, it includes services such as the military, police, public roads, public transit, primary education and healthcare for the poor public sector might provide services that non-payer cannot be excluded from (such as street lighting), services which benefit all society rather than just the individual who uses the services and services that encourage equal opportunity.” (Investor Words.com, 2010)

Background:

According to Planning Commission (2009), development of government sector took place in 1961 with the establishment of five year development plan. This also marked the end of isolation in Bhutan leading to fostering of foreign relations RGoB (Royal Government of Bhutan) had issued over several licenses – 9000 for industrial, about 12,000 for trading, etc.

However government is approaching private sector for investment and for curbing the unemployment issues in the country by letting more public sectors to privatize and letting the existing private ventures to invest more in order to create more employment.

Today Bhutan is in the mid progress of the 10th FYP (Five Year Plan) and the country has achieved so much progress within half a century. In modern Bhutan the public sector has contributed so much to the growth of economy since Bhutan is welfare oriented country

ROLE OF PUBLIC AND PRIVATE SECTOR

Improve the quality of human lives through a sustained and professional health care system.

Provision of free education up to the tenth standard and enhance accessibility to quality education.

Construction of hotels and tourism related infrastructure.

Developing overall capacity of the tourism sector.

Implementation of urban structural plans.

Provision of basic urban amenities and services.

Initiating activities which help in attaining the goal of 100 percent rural electrification by 2013.

Planning and surveying for new potential revenue generating activities, such as hydro-power projects.

Construction of feeder roads or farm roads

Creating employment and fostering economic growth.

INDICATORS OF ECONOMIC DEVELOPMENT IN BHUTAN

An economic indicator provides the status of the economic performance of the country and projects the future images and prospects of the country’s economic development. Indicators of Economic development of Bhutan are given below:

TABLE 1.The following are the key indicators of Bhutan (2004-2007):

Economic indicators

2004

2005

2006

2007

GDP in current market prices (Million Nu.)

32320.3

36462.6

40448.0

51521.6

GDP in current market price (million US$).

713.5

826.8

892.9

1244.5

GNI in current prices (Million Nu.)

31569.8

35921.9

40316.0

50363.0

Real GDP growth rate (%)

6.8

6.5

6.3

21.4

Implicit GDP deflator (Base yr. 2000)

115.1

118.5

125.3

131.3

Exchange rate (calendar) Nu/US%

45.3

44.1

45.3

41.4

(Source: National Accounts Statistics Report 2000-2007)

GDP- Gross Domestic Product, it is a total number of all final goods and services produce in a country in a given year at current prices.

As per ODA & Financial Flows, 2003, GNI- Gross National Income, it is a sum of value added by all producers net receipts of primary income from abroad + product taxes which is excluded in the estimation of output.

Table 1 represents the economic indicators for the development of Bhutan of fiscal year 2004 to 2007. There has been observed increase in real GDP that is 6.3% to 21.4% in the year 2006 to 2007 respectively. This increase was brought mainly due to the successful commissioning of Tala Hydro Power Project. These lead to increase in nominal Gross National Income (GNI) in the year 2006 to 2007 as shown in the table above.

According to National Account Statistic, Government of Bhutan has immensely put huge effort in hydropower as it is the only source of large sum of revenue generating sector. It has the potential to build up a capacity of 23,760 MW, of which only 5% has been tapped so far. With installation of 114 MW Dagachu hydropower project power generation capacity is projected to 1,602 MW in 2013. By 2020, Bhutan and India have agreed to build up 10 hydropower projects together adding up 10000MW of additional power there by capitulating revenue and growth of economy in the future.

Capital formation of Private and Public sectors of Bhutanese

TABLE 2. Gross domestic capital formation for the current price

In Current Prices

2000

2003

2004

2005

2006

2007

2008

2009

Government sector

3081

2648

3236

3670

5190

6303

6729

7038

Private sector

6786

14259

16842

14360

13586

13235

14435

18263

(Source: National Accounts Statistics; 2000-2007 & Statistical Yearbook of Bhutan 2010).

According to National Account Statistics, There has been shown, increasing trend in the rate of capital formation in both the sectors with private sector growing relatively higher. This has been brought about by setting up of hydro projects such as Tala hydro projects, PunaTshangchu projects, tourism hotels namely Tashi Taj, and Punjab Banks, T- Bank. This shows significant economic development taking place especially the private sectors.

Employment contribution by both the sectors (private and public sector):

Employment data is very vaguely given but still as per the data given in the table 3 and 4 given below shows that there is approximately 5494 (682 female and 4812 female) people employed in private sector and 9452 people (7264 males and 2188 females) in public sector. The data shows that there is more employment in public sector. This is because most of the sectors are owned by public authorities and private sector is having insignificant role. Private sector has not yet recognized as major source of employment as most of the youth including graduates and school dropouts always prefer to work in civil service for it provide job securities. Moreover vast majority of highly qualified human resource are absorbed by government sector.

The large number of employment we witness in public sector is occupied almost by immigrant workers while only few are constituted by national worker. At present with more number of in country graduates rising, it has put serious implication on government sector which are not growing any further. Creation of an additional 90,000 jobs appears as a formidable challenge. The government has came to realization The role of private sector hence private sector is given much more push and encouragement, indirectly creating employment opportunities for this increasingly labour force.

Table.3.. Number of person engaged in industrial sectors by employment status and sex, Bhutan, 2000

Female

Sector

All female

proprietor

Employee

Casual

Skilled

Unskilled

Private company

341.0

0

40.0

149.0

83.0

69.0

Government Company

1,094.0

0

201.0

383.0

88.0

422.0

(Source: Statistical Yearbook of 2010)

Table.4. Number of person engaged in industrial sectors by employment status and sex, Bhutan, 2000. Source: (Statistical Yearbook of 2010)

Male

Sector

All male

Proprietor

Employee

Causal

Skilled

Unskilled

Private Company

2,406.0

7.0

601.0

648.0

707.0

443.0

Government Company

3,632.0

–

1,607.0

566.0

789.0

670.0

PERCENTAGE

Figure 1. Private sector employment.

Based on data retrieved from (Labor Force Survey, 1999) (look figure 1). 75 percent of employment is provided by agriculture sector. Likewise services sector provide 12 percent and manufacturing industry provide only 5 percent as mining and manufacturing industries are owned by limited private sector.

Agriculture remains the dominating with high proportion of workforce under its influence since Bhutanese economy is agriculture oriented. But over the years we have observed the significant growth in agriculture productivity as more agriculture sector are being privatized.

There has been drastically low employment in transport sector that is only 3 percent. Most of the road constructions responsible is taken up by government because private sector don’t have enough capacity in terms of financial resource to construct roads. The roads linking all regions of the country is made possible through financial assistance from outside country, in our case its mostly funded by India.

Constraints faced by public sectors in Bhutan:

1. Insufficient Budget /budgetary Constraint:

Bhutan has not reached at that level where it could develop by its own. Most of the development activities are made possible through foreign aid. This is also the reason why our balance of payment is low or negative.

2. Rescheduling / lagging development activities:

Most of the public development activities has to go under series of process under law and order before actual development work is executed. This delays the growth of public activities, most of gets rescheduled or either cancelled leading to inefficient and insufficient public sectors.

3. Certain policy bars the way of development

One of our policies to maintain 60 percent forest cover makes it difficult for expanding or setting up of income generating infrastructure such as tourism center, huge agro-based industries which would otherwise generate income if such exist.

Geographical factor:

Most of our roads are built in such site where it gets wear and tear easily by flood, landslide and other natural disasters. During such incident, government spent most of its budget in repairing and maintaining those infrastructures. This leads to low allocation of budget in other development activities.

Constraint faced by private sectors in Bhutan:

4. Immature capital market.

For instance, recently DHI (Druk Holding Investment) and RUB (Royal University of Bhutan) has been jointly working on project for creating education city development. This project is long term goal and now it is facing major challenge as there is no budgetary support from Government. This shows capital in the country is not matured(strong) enough. (Kuensel, 2011.p.5)

5. Credit accessibility:

Access to credit has always remained the major constraint for small business ventures mainly because financial institutions demand substantial collateral security.

There has been not much upcoming of small ventures since banks are driven by capital rate of return. They exclude small enterprises and concentrate more on well established companies. (Kuensel, 2011.p.5)

6. Shortage of Entrepreneurial skill

There is extremely less proportion of people having entrepreneurial skill which is the reason that our private ventures are small, underdeveloped and less.

7. Outdated equipment and processes

If firms are to perform better, there need to be advancement in processes and technologies they use. Finding and introducing such well equipped technologies is very expensive for firms to import from abroad as they have financial constraint. Moreover international link of our country makes the situation worse.

8. Change in policy

Examples; companies in Bhutan which have invested in log export and wood products was shut down in 1999. This sudden imposition and variation in the policy brought heavy losses upon companies. This causes underdevelopment of private sector as it distorts the expectation of people for future investment. (Economy & Social Life in Bhutan).

9. No proper auditing and accounting

In absence of proper auditing and accounting has lead to prevalence of corruptions within the sector. There has been no clear guidance and system to guide the efficiency of private firms until recent establishment of ACC (Anti-Corruption Corporation).

Other factors such as lack of completion and lack of human resource, inadequate financial access, lack of information about the market situation and relatively small sized market constraints the development of both private and public sectors. 

CONCLUSION:

The main thrust for the economic development of a country is the growth of private sector. Private sector is cross cut by many obstacles although it has been given high priority for its development in 9th Five Year Plan(2002-2007). Still the government is struggling to develop financial sector by issuing credit cards, installing Automated Teller Machines (ATMs) in order to encourage private sector through providing low interest rate, more access to loans, etc.

Although at present the private sector in Bhutan is small and lacks absorptive power, the government

places considerable emphasis on its role as the engine of Bhutan’s future growth and – even more

importantly – as a growing source of employment opportunities for a rapidly growing number of school

dropouts. It is expected to be vibrant enough to generate resources to sustain and diversify Bhutan’s

economy and provide employment for the growing number of entrants into the job market. With the recent entry of FDI there is a little spark for privatization.

For fostering the both the private and public activities towards positive side, some recommendations are suggested below:

Stimulate small and medium enterprises. Higher private sector is known to absorb more human resource.

Rationalizing the tariff structure, streamlining industrial licensing procedure

Announcing tax holiday as an incentive to encourage private sector.

Expanding eco-tourism, opening Bhutan to multiple country to increase country’s revenue and strengthen the international link.

Establishment of village based tourism to generate income and employment in the country.

Setting up more number of commercial oriented farms.

Removing administrative control over financial section pertaining to interest rate, loans accessibility.

Just like ADB (Asian Development Bank), government could introduce private partners from foreign state to facilitate growth of small ventures.

Introducing DCRA (Domestic Credit Rating Agency) in the country. According to Santiago F. Dullao (credit rating economists) this agency play crucial role in financing small and medium public-private participation. Such rating will help the firms to identify the area of improvement. As credit rating system requires entrepreneurs to update their information regarding tax payments, loan servicing, credit card payment and trade data. Such updates will help banks in making lending decision. This also enables to diversify the economy through greater private sector and development of capital market.