Bhutan Policy Notes Doing Business Reform Key issues and challenges Bhutan has been reforming its doing business environment in recent years as part of a policy shift to improving its investment climate and economic performance. Overall, it is ranked 75 out of 190 countries and is the highest ranked country in the South Asia region, significantly outperforming Bangladesh and Pakistan. In the last decade, as part of a Government policy agenda to improve competitiveness, Bhutan has launched across the board reforms in many areas. Specifically, there have been reforms in several metrics, including starting a business, getting credit, registering property, and enforcing contracts. Fifteen years ago, it cost more than 90 percent of the value of a claim to enforce a contract in Bhutan; now, it takes less than 25 percent, placing the country in the top 25 globally in this area. However, there has been some inertia since 2014, and a decline in DB ranking. During the DB 2018 period, there was not a reform momentum in Bhutan. The very slight downgrading of the ranking can be attributed to reform inertia after a decade of success. Another factor for the lack of improvements in DC in 2018 has been Government focus on other reforms, especially involving hydropower, cottage and small industries and SOE’s. The trend in DTF indicates Bhutan is not improving or falling behind but is maintaining the status quo. Reforms clearly need acceleration after a decade of strong reform momentum, spurred by desire to see improvements in Bhutan’s overall ranking has not moved significantly in ei ther direction. There has been significant improvement in dealing with construction permits and in enforcing contracts but deterioration in protecting minority investors and registering property. The lack of forward momentum reflects slippages in reform momentum due to policy environment and shifting government priorities. There are several key areas where there are important ongoing reforms that should pay dividends in the years to come. First, access to credit in Bhutan is improving due to the expansion of the scope of collateralizable assets and the deepening of the credit bureaus. Second, the National Land Commission, a competent and responsible public agency managing land administration, has made progress in terms of land registration and online portals. According to the National Land Commission (NLC), the average days to register property declined from 54 days in 2016 to 42 days in 2018. Finally, recent Government attempts to streamline regulations and dismantle administrative complexities should help reduce transactions costs for private operators. On top of these areas, Bhutan’s business climate remains constrained by imperfections in factor markets, limited access to product markets, and state dominance. Factor imperfections include an improperly functioning land market, constrained credit markets, and geographical challenges for labor mobility. Driven by the capital-intensive hydropower sector, the country achieved impressive growth rates, but created few jobs. The public sector has the capacity to absorb only about 1,000 graduates per year. The 2017 Investment Climate Assessment (ICA) survey revealed that employment remains concentrated in agriculture and the public sector, and that many firms are struggling to grow due to obstacles that hinder investment, productivity, and international trade. Limited access to finance — caused by both supply- and demand-side factors — constrains the growth of firms, especially small firms. The Bank Group, together with IFC, has started working with the new Government team responsible for DB reforms. In 2019, a new Government has committed to improving Bhutan DB reforms and set up a special committee. The focus has been on ways to set up businesses, improve construction permits, improve credit bureaus, ensure better land registration, and protect minority investors. The Bank/IFC team is working in close collaboration with this new team and providing relevant international experience and support. Policy Recommendations To address these issues, in the short term, the government needs to: • Ensure regular meetings of Bhutan Private Sector Development Committee, entrusted with the Doing Business reform agenda • Ensure interagency coordination between technical team and concerned ministries, including RMA, MOEA, NLC, and Ministry of Energy. • Make property registration electronic and online. • Ensure that the new collateral registry is in line with international best practices. In the medium to long term, the government needs to: • Ensure long-term institutional structure for Doing Business reform program • Amend Companies Act to ensure greater legislative protection for minority investors including: (a) corporate governance rules and regulations; (b) corporate social responsibility (CSR) guideline; are (c) procedural regulation on merger and acquisition (M&A). • Set up a corporate dispute settlement body • Coordinate with Bhutan Development Power Board for better electricity access for companies Doing Business Reforms in Bhutan - Draft Action Plan 10-May-19 UPDATE Agency responsible WBG Recommendation Action May Comments for implementation 2019 Starting a Business - Perform a legislative review of the BICMA Act (2009), RMA Act, and the e-Money regulation to This work has been started in verify whether the digital signature and electronic MoIC but there is still much to be progress payment provisions done. Introduce Electronic Signature Law and - Draft legislative changes as needed Electronic Transaction Law Will take at least a year or Submit the draft legislation to Cabinet MoIC two for legislation to be approved by Parliament Submit the draft legislation to Parliament Cabinet Approve the proposal Parliament - Develop the software needed to manage the electronic records (database) - Input all the paper-based records into the MoEA to take more electronic database Company Registry Make the Company Registry electronic on track leadership role on the - Purchase the necessary equipment to manage Division (MoEA) submission of documents the database online - Build capacity of the personnel which manages the database - Operationalize the single business identification MoEA to review the actions number required to operationalize Introduce a single window for business - Connect databases of the Company Registry and Company Registry on track the single business registration the Tax Authority Division (MoEA) identification number, and - Set up the single window develop the details of the - Create standardized documents implementation. Introduce online registration for all Company Registry Develop the online registration portal on track businesses Division (MoEA) Dealing with Construction permits Develop an online application to facilitate the Operationalize the electronic registry for building Building Section, processing of construction permits and on track Mostly done by NLC permits Thromde connection to utilities Establish an expedited approval process in the - Draft new regulations for expedite approval Building Section, municipality for low-risk commercial buildings process based on risk Thromde to obtain construction permits - Operationalize the new procedures Registering Property Complete the digitization of the paper-based Land Records Digitize the records at the Property Registry MoEA to follow up records Section, Thromde Land Records Make the Property Registry electronic NLC needs to verify Section, Thromde Issue of implementation of Operationalize the access to the land database via Land Records Introduce online registration on track e-Sakor due to the free land e-Sakor Section, Thromde given to people Getting Credit Revise the law to allow for distribution of Estimates will be based on credit information from utility companies and Draft the required regulations Implement the whether the utility retailers required interoperability IT system to connect the on track RMA companies have paper- utility companies to the credit registry based or electronic registries Ensure that the priority scheme ranks secured MoEA to check with Conduct a legal review of the Bankruptcy Act creditors as high as possible, while respecting on track Attorney General Attorney General on the (1999) and the Company Act (2000) other critical national policy objectives timeline - RMA introduced a flat fee - Introduce flat and reasonable fees for structure by range of loan registration and searches Ensure that the new collateral registry is in values - Introduce the possibility of non-cash payments RMA line with international best practices - MoEA to check with - Implement a disaster risk management system Deputy Governor on the of the database timeline Protecting Investors Draft amendment to the Civil and Criminal MoEA To be verified Procedural Code, Art. 45 Ease the requirements governing the Submit the draft amendments to Cabinet MoEA identification of documents requested in Court by one party to another Submit the draft amendments to Parliament Cabinet Approve the new amendments to the Civil and Done Parliament Criminal Procedural Code MoEA to check whether capacity exists with Draft amendments to the Evidence Bill of Bhutan, RMA Government lawyers to make the necessary Allow direct examination by the plaintiff of amendments the defendant and witnesses during trial Submit the draft amendments to Cabinet MoEA Submit the draft amendments to Parliament Cabinet Approve the new amendments to the Evidence Parliament Bill of Bhutan Paying Taxes Introduce electronic filing and payment of DRC - Income Tax Roll out the software RAMIS, which include MoEA to check with PMU of direct and indirect taxes, including corporate Done and Sales Tax provisions on electronic filing and payments ADB-funded project income taxes Division Provide tax education and training to small and medium enterprises to ensure Trainings to SMEs on tax compliance DRC - Income Tax compliance, and carry out an extensive Communication campaign, including awareness and Sales Tax Still not started communications campaign workshops Division Trading Across Borders - Complete the migration to RAMIS Increase the automation of customs-related DRC - Customs and Verification needed of - Operationalize RAMIS, including giving the procedures Excise Division progress opportunity to traders to pre-submit documents DRC - Customs and Conduct a diagnostic report Excise Division DRC - Customs and Introduce risk-based cargo inspections Set in place the regulatory system Excise Division DRC - Customs and Operationalize changes as required Excise Division DRC - Customs and Conduct a feasibility report Excise Division Evaluate the option of introducing a single DRC - Customs and Set in place the regulatory system window for trade Excise Division Operationalization of the single window, including DRC - Customs and harmonization of existing legislation Excise Division Enhance border cooperation with authorities - Conduct a diagnostic report to find out the most Government will need DRC - Customs and of neighboring countries to simplify border pressing cross-border issues funding and analyticla Excise Division clearance process - Mutual recognition of import/export documents support Resolving Insolvency Bank/IFC will provide Conduct a legislative review of the Bankruptcy Act on track RMA guidance Consider reforming the 1999 Bankruptcy Act Draft legislative changes as needed RMA Consider establishing an expedited Submit the draft amendments to Cabinet RMA framework for SME insolvency Submit the draft amendments to Parliament Cabinet Approve the new amendments to the Bankruptcy Parliament Act, as necessary