Improving the Investment Climate

 most investors agree that doing business in Bhutan is not easy

most investors agree that doing business in Bhutan is not easy

The reputation of Bhutan is justifiably immaculate in many international circles. Its stable democracy, low corruption, abundant supplies of clean energy and high levels of education make it a target for many foreign investors. In addition, Bhutan has unfettered access to one of the largest markets in the world, unhindered by the bureaucracy, corruption and political sloth that plague many of our neighbors. The charm of Gross National Happiness is just icing on the cake.

There is enormous potential in selling “Brand Bhutan” to India, the world’s second largest market, as well as to upscale markets in Europe and North America. The investments to make this happen have the potential to bring with them private sector jobs, social stability and a more diversified economy, but will require the right set of policies to make them happen.

 

On Jobs, Growth and FDI

As Bhutan continues its rapid pace of development, the private sector will play a critical role. According to the International Finance Corporation (IFC), 90% of jobs in emerging economies come from the private sector. With a rupee crunch that is not disappearing any time soon, and the next Five Year Plan calling for 122,000 new jobs, foreign direct investment into the private sector will be a critical catalyst for economic diversification, jobs and growth. Already last year, 2/3 of the new jobs in Bhutan came from the private sector, and this ratio will only increase in the coming years. Currently, however, the number of these jobs generated through foreign investment is minimal, though the trend is increasing.

The 2010 FDI policy published by the Ministry of Economic Affairs highlights priority focus areas and sectors for foreign investment. With its usual foresight, the Government is encouraging investment in areas that contribute to the country’s long-term well-being. These include contributions to green growth, industries that are environmentally and socially responsible as well as culturally and spiritually sensitive, promotion of ‘Brand Bhutan’ and creation of a knowledge society. However, having examined the FDI Policy closely, it seems to be more about protecting the interests of Bhutan than it is about encouraging cash flows into the country for the creation of jobs and economic growth. That foreign investors are not being tempted is evidenced by the small number of investments – fewer than 60 over nearly a decade. The figures are not very encouraging.

Bhutan can become an easy place to do business, with easy access to talented employees, the right tax incentives and simple repatriation of investments and dividends. Small countries like Singapore do not rely on their domestic market for investments, Switzerland has nearly as many mountains as Bhutan, and Ireland is an island that has used its local talent and business friendly taxation to encourage some of the world’s leading companies to invest.

 

Where to start

Three areas of focus can help Bhutan to attract more foreign investors: creating a better enabling environment for business, both domestic and foreign; matching the talent requirements of the private sector with the skills and attitudes of graduates; and making financial structures and regulations that are both simple and transparent for investors to understand.

 

An Enabling Environment

The rules and regulations that define the environment in which business operates are one of the most critical factors to the success or failure of the private sector as a whole. The procedures and processes to acquire land, set up a business, hire employees, and pay taxes will make or break any business, especially a foreign one new to the country. Unfortunately, Bhutan lags behind its neighbors on many of these indicators, according to the IFC’s annual Ease of Doing Business report, in which Bhutan ranks 148 out of 185 countries.

While this ranking is not entirely comprehensive, as many of the numbers reported are not reflections of the actual time and effort required to perform many of these steps critical to setting up and operating a business, most investors agree that doing business in Bhutan is not easy. One shortcoming of the IFC’s assessment is that it does not take into account the opinions and experiences of foreign investors. To complement studies such as this, I have been going through the list of foreign investments made in Bhutan, about half of them in the hospitality industry, and interviewing senior management to understand their experience. The examples that follow, gathered with interviews with foreign investors and their domestic counterparts, tell a story of complications and cultural barriers.

Another assessment of the business landscape is being undertaken this year for the first time, through collaboration between the World Economic Forum and the Bhutan Chamber of Commerce & Industry (BCCI). Looking at the experience of a wider range of business operations, this World Economic Forum Global Competitiveness Report will incorporate the experience of foreign investors, family businesses as well as state owned enterprise. By looking at the policies, institutions, and infrastructure that enable a business, this report will provide apolitical insight into the enablers and barriers that are helping and hindering the private sector as a whole.

Combined with the ambitions of the 11th Five Year Plan, this analysis can help map out exactly how the enabling environment can be made more friendly to foreign (and domestic) investors, and where the 122,000 jobs will come from. The experience of long time delays, obscure permitting processes and redundant permissions from several ministries and local authorities can become a thing of the past.

Several trends in Bhutan point to changes in the right direction. Already, the Government-to-Citizen portal and the newer Government-to-Business website are making it easier to find out the facts on setting up and operating a business. Enabling such portals to be transactional will accelerate and simplify the processes to start and run a business for domestic and foreign investors alike.

 

Tempting Talent:

At a time when there is growing concern over youth unemployment, especially in the towns, creating a match between the supply of talent and demand of jobs should be at the top of the government’s agenda, for the benefit of both potential employees and employers.

After speaking with over 100 business leaders in seven dzongkhags, one of the most concerning issues facing business leaders – both foreign and domestic – is access to employable talent. This appears to be particularly tricky in service industries such as hotels, where graduating youth show a reluctance to apply themselves. It was also highlighted as a challenge in technical jobs, where employers I spoke with have had a hard time hiring Bhutanese with the computer and IT skills they require for more technical jobs. In addition, the highly desirable skills of master electricians, plumbers, and builders tend to be shunned by both the education system and youth alike.

The fix for talent can only take place at two levels. The first fix for talent requires taking a long-term view to ensure that the skills of the nation’s youth match the demand from businesses. This will involve shifting the skills being developed in the nation’s education and training systems as well as the culture that dictates what jobs are desirable to youth. In addition, while secondary and tertiary education levels in Bhutan are the highest in the region, the teaching of vocational skills is actually the lowest. This difference means that almost all technical jobs must be outsourced to expatriate workers while graduates with expertise in liberal arts are simply not attractive to employers. Overcoming this mismatch will require long term coordination between Ministries of Education, Labour and Economic Affairs, alongside real-time input from the business community on the skills and talent they are looking for.

The second fix is regulatory, by making it easier to hire workers, especially foreign ones to fill the gaps that cannot (yet) be met domestically. I am conscious that I do not want to be an expatriate worker promoting more expatriates as a solution to employment gaps, however one of the most prominent complaints by foreign investors is the difficulty of bringing in and retaining foreign workers to fill senior and technical roles for which there is a short supply of domestic experience. While the FDI Policy allows a ratio of “one expatriate permit for every five Bhutanese employed in the business”, managers I spoke with complain that this is not often honored, and that after multiple rejected applications, they often give up and leave critical senior positions vacant. On top of this, the difficulty for expatriate workers to move about the country and complexities of extending contracts beyond three years are another hurdle to foreign investors.

 

Fiscal Fixes

On top of burdensome regulations and a difficulty to find the right talent, financial hurdles add to this problem. Speaking to hoteliers at a selection of five star hotels, one hears of a very complicated and arduous taxation system that is not favorable to investors. In particular, the meager tax holidays offered are not enough to make a meaningful difference to any of the business leaders with whom I spoke. Investors who spoke to me were mainly investing in Bhutan because they had been charmed by its beauty or serenity, but none were convinced that they would be generating profits any time soon.

While there are tax exemptions designed to promote the construction of luxury establishments, many hotel owners complain about the complexity of benefitting from these. For example, it was pointed out that furniture destined for hotel lobbies is exempt from taxes, but that which will furnish hotel rooms is not. For the import of fixtures in bathrooms, commodes are tax exempt, but the cisterns are not, and showerheads are tax-exempt, while the piping is not. Piecemeal regulation like this adds complexity and headaches for foreign investors and local partners alike.

One of the most critical areas for foreign investors is the ability to make money off their investments. In the event that a company is able to overcome the above obstacles and turn a profit, repatriation of this money is an additional step requiring further paperwork and processes. While the FDI policy offers investors the right to repatriate dividends in the currency of earnings, there is no mention of how this actually works in practice, in particular for an industrial or manufacturing investment.

Additional hurdles imposed by the Royal Monetary Authority since the publication of the FDI Policy make this even more complicated. For example, in the 2012 Foreign Exchange Regulations, The FDI Policy does state that for ‘service activities in the priority list’, the investor is allowed to purchase up to USD 5 million in convertible currency per annum for repatriation of dividends. What does this mean for service activities outside of the priority list, or for industrial activities? Why is there a USD 5 million cap, and is the amount of allowable currency conversion not dependent on the amount of profits made? These questions are certainly not going to be encouraging more and larger investments to be flowing into the country any time soon. In one example, it is publicly known that the G4S security company had trouble repatriating profits, as its activities do not fall under the Government’s priority list, despite being the largest foreign employer in Bhutan.

Two other fiscal challenges not addressed in the FDI Policy are access to finance and external commercial borrowing. Access to foreign investment is only allowed if a company is expanding or is declared to be ‘sick’ a subjective measure decided by the Government. It is not currently possible to sell a piece of a local company to a foreign investor to bring them in as a partner. Similarly, despite revisions in December of the external commercial borrowing guidelines, borrowed money is still heavily restricted and cannot be used for investment in capital markets, on-lending or purchase of real estate. That the State should define how a private company uses a loan is surprising and certainly not a catalyst for a more dynamic private sector.

 

Enabling Improvement

In conclusion, each of these three areas: doing business, talent development, and fiscal policy, will require conscientious attention from across the Government. None can be overhauled by a single ministry, but can be addressed with careful coordination across several government ministries, as well as incorporation of structured and systematic input from the private sector. Additionally, despite research and many deep conversations, I was unable to locate conclusive numbers around the actual amounts for foreign investment or number of jobs created by these investments – it appears that the exact numbers have been lost somewhere along the way between the Ministries of Economic Affairs, Finance and Labor, and the Royal Monetary Authority.

One of the conclusions coming out of a conference on sustainable economic development hosted by Royal Thimphu College last year was that “Bhutan is a great place for foreign investors – unless you want to make money”. The cynical statement starkly highlights room for improvement on the policies and practicalities of investing in Bhutan and points to the difference between the views of the Bhutanese government and the perspective of potential investors scrutinizing the country as a place to put their money.

Making Bhutan a better place for foreign investors will also make it a better place for local businesses and all of the country’s future employees and employers. An FDI Policy that is focused solely on protecting the domestic market will not provide temptation to lure in desperately needed foreign funds that will create the jobs, skills, and diversity of economic growth that is waiting for Bhutan to shift from an economy based on resource use, to one based on efficiency and innovation. The proven ability of the government to overcome its inherent silos (for example in the GNHC’s Environment Climate Change and Poverty Reference Group) should now be applied to foreign investment and private sector development more broadly.

Ultimately, the policies and regulations that allow foreign investment in Bhutan need to clearly show the benefits for investors, and make it simple for them to invest, create jobs, build infrastructure and, of course, make profits.

 

The writer is a Strategic Advisor for the Druk Holding & Investments on Private Sector Development. He maintains a blog at www.bhutanchronicles.com.

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3 Responses

  1. I thank and congratulate Randall Krantz for the article. The article outlines the shortcomings of Bhutan’s FDI policies, and no denying these are correct. However, since Randall is working in DHI, the investment arm of the government of Bhutan, I have a suggestion for him. Since he has identified all the problems he should make the suggested amendments in the FDI, fiscal and monetary areas, discuss them in DHI and DHI should in turn propose/move these with Finance Ministry, GNH Commission, RMA, and MoEA.

    • Lyonpo,

      I fully agree that finding faults in a system is only a first step to fixing them. I look forward to working with my colleagues in DHI and collaborating with various ministries to explore how the existing FDI policy can be amended and the investment climate in Bhutan can be improved!

      Randall

  2. Randall,
    This is a wonderful analysis and I hope the policy makers will read this although I personally think the issue of expatriate workers must be seen in the broader context of non-Bhutanese demography in the country than just that of FDIs. While it may be agreeable to have highly skilled and top level employees in the initial years of a business, in order to both fill the gap and groom local capacity, in the long run increment in import of labour would only exacerbate local unemployment and further swamp the country with more foreigners. With 200 thousand tourists that the previous government wants to rope in by 2015, we will have easily 1 tourist for every 3 adult Bhutanese. One drastic measure in reducing local unemployment seems to me a total ban on non-skilled migrant labourers.

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