Backdrop on Bhutan's Private Construction Sector

Every aspect of development is predicated to the ability to gain access to goods & services. The geomorphology of a country continue to function much as it did a century & half ago, except in those areas where roads have reached, resulting to a widening gap between the have and have not. This is because, rural infrastructure cannot be divorced from the provision of roads, nor can the provision of roads be divorced from the advocacy of equitable development, as the remote areas will fall behind in term of food security, income generation & school enrolment. There is a kind of natural law that says, that economy in time is a necessary condition for an increase in productivity & livelihood. Accessibility is therefore one of the central necessities of development to promote equity. Much of development is fundamentally based on finding ways & means to do a task in less time. Construction of road is & will be a priority, as other infrastructure of social & economic development will remain limited without road access.

Road building was therefore a priority, and still is, since the launch of 1st five years planned development activities beginning in 1961. But side by side with the road access, facilities & service stations were built for education, health and agricultural activities, market outlets for the farm products followed by rural enterprise development and industrialization policy & programs. Construction sector contributed 19% to GDP in 2002 with growth rate of 25% in the year. Its contribution to GDP in 1980 to 2001 was in the range of 8.1% to 15.5% and absorbed 50% to 70% of the Gross Fixed Capital Formation (refer table below). It is recognized as the major economic growth sector.

The Royal Government of Bhutan, like all other governments, has been playing the primary role in building infrastructures from the very beginning of our development process. However, it shifted from the provider's role to an enabler role for the private sector to participate in the developmental activities and recognized the development of private construction sector for sustainable development of public infrastructure and economic growth, as crucial process in the whole socioeconomic development strategy. The development of domestic construction sector is an integral part of the process for the growth of the national economy. Over the past decade, policy & programs were geared towards private construction sector development beginning with gradual privatization process for the construction activities, followed by mechanization schemes and HRD support programs for the private construction sector. Today Bhutan has 2000 construction companies carrying over 7000 licenses for four work categories namely building, traditional painting, road & bridges and power & telecommunication.

Current Scenario in the Private Construction Sector

The current formal sector work force is around 60,000 persons (of which about 30,000 are thought to be non-nationals & employed mostly in the construction activities) the creation of an additional 90,000 jobs in private sector appears as a formidable challenge. Vibrant private construction sector to create employment opportunities for this increasingly literate workforce has been recognized by the Royal government as a high priority issue and now forms a central tenet of the Ninth Five Year Plan.

Increase productivity of workers through a mixture of management training, worker's training, and technology transfers that raise worker productivity and permit Bhutan to compete on a cost effective basis with foreign firms - initially within the region and later, internationally, is a another challenge. In this respect, training emerged as an area of considerable weakness in the developing private sector. Given the linkages between worker training, work productivity and firm growth it is important to ensure that a correct set of incentives are put in place to encourage firms to undertake more training. Such activities could include: more transparent tax regulations on the write off of training expenses; use of training levies; and the use of matching grant schemes and retired executive officers to assist in training.

Management capabilities in most construction firms in Bhutan are weak with most managers being technically unqualified and inexperienced. Around about half of all managers came from a civil service background and only a very small share of the total had had any work experience with a foreign firm - and those, mainly in India. As a result management practices are weak, they frequently do not know what skills to employ to support their business activities, they do not value worker training, and they are often unfamiliar with best practices and relevant technologies required for their line of operation.

Equipment and processes used are also weak. Most companies operated with out-dated and ineffective equipment. If firms are to become competitive and grow they need to be able to plug into international best practice equipment technologies. This probably implies that these firms will need to leap frog the simpler and "easier" technologies. Finding and absorbing technology is an expensive and difficult task and the mechanisms that help firms do this are not well developed in Bhutan. There are no networks of suppliers or international buyers regularly visiting Bhutan to teach firms about new technologies. There are few consultants or technical experts and Bhutan's isolation makes it difficult to find them. Even foreign direct investment - which is one of the most powerful ways of transferring technology - has just recently entered in the hydropower and bridge works. Strengthening and supporting learning mechanisms is therefore extremely important through activities such as matching grants schemes, providing easier visa arrangements for technical experts, providing tax incentives for technical improvements and, most importantly, liberalizing FDI. All of these activities will help firms improve their technological base, raise productivity and make industry more competitive.

Cross-Cutting Issues

1. Despite the desire to nationalize employment in the private construction sector, the literate youth seeming unwillingness to join the workforce and the bountiful supply of low-cost Indian labor has plunged the private sector into quite often into a situation where there is a general perception that the firms are hiring less expensive workers. As a result the government is concern about mechanization, while the private is reluctant due to numbers of disadvantages in terms of technology, finance, infrastructure, regulatory environment, privatization and government's continued activities in self-mechanization, etc.
2. Business activities have traditionally grown up based upon personal relationships and ad hoc arrangements and, to date, this has not served Bhutan poorly. However, as the private sector grows and as business becomes increasingly more complex, it is extremely important that business policies and regulations become more systematized and clear. Precise policies on, for example, the employment, taxes, licensing policy, auditing of companies, and a range of other issues were all considered to be unclear to many members of the private sector. Leaving these policies opaque creates room for rent seeking practices to creep into an otherwise clean system of governance. Instances of discretionary or ad hoc treatment of important business issues - and a lack of transparent guidance on matters of considerable importance to firms, are also not exception. This situation is not surprising given the small size and short history of the private sector in Bhutan. Addressing these problems now, on the other hand, ensures that these potential problems do not fester while also imposing order and discipline on private sector activities.
3. Changes in policy can have a pernicious impact upon the private sector - for example in Bhutan in the case of the ban on log exports followed by the ban on semi-finished wood products in 1999 and 2000, respectively. Companies which invested in semi-finished processing after the log ban was imposed, where severely penalized by the sudden imposition of the subsequent ban on semi finished products.
4. Lack of clarity and systematization is not only a problem for the public sector. It is also rampant in the private sector. A lack of good information systems - particularly robust and believable financial data - opens the same doors to corrupt and other bad business practices. A systematic approach to auditing and accounting not only clarifies the true financial position of companies for the tax authorities but it should also serve as a useful management tool to guide the operations of private sector firms.
5. With real interest rates of between 7 to 10 percent the cost of capital is exceedingly high in Bhutan. This has serious implications for any policy, which seeks to promote increased capital intensity and mechanization in production processes. A further interesting feature of the financial sector is the large number of companies, which were credit constrained. Although this is partly a result of a lack of financial sophistication among firms which did not wish to carry any debt - it is also a reflection of a lack of sophistication of the banking system which, despite access to large amounts of liquid resources, did not (or could not) reach out to private sector enterprises to try and help them develop bankable projects.

Issues of Focus

There are dimensional issues and concerns and multi-facet in its impacts for the fast growing construction sector that prioritization of the focus is vital to achieve time bond targets. For the construction industry in Bhutan, the issues of focus currently in the top of the agenda are:

• Harmonization of contract system
• Harmonization of evaluation system
• Establishing effective and transparent points of enquiry
• Synchronization of lending mechanism
• Development of vocational qualification and standards
• Development of vocational qualification and standards
• Harmonization of skills and training of workmen and their certification
• Developing access to reliable construction cost index
• Harmonization of standards, quality, safety and environment norms and effective mechanism for monitoring
• Development of risk mitigation instruments and mechanism

Impediments & Challenges

By its nature the construction industry is constrained by the social, economic, political & geographical environment of the locale where it operates. For that reason, every site needs a confluence of favourability of all these factors. The impediments & challenges are therefore many, however the specific ones are:

• Absence of comprehensive regulatory body, specifically for the construction industry (Construction Development Board is just recently reconstituted)
• Diversity of standards of engineering, qualifications and practicing engineers
• Divergence of evaluation standards & practices including disclosure norms
• Divergence of quality, safety & environment standards
• Divergence of accounting, standards, norms & regulation
• Divergence of financing system for the industry
• Multiple clearance system
• Lack of certified skilled workers in construction industry

Development Strategies/Approaches

Given the constraints and concerns of the private construction sector in Bhutan, a dual track development approach plan is important. Within such a dual track approach to private sector development, it is presumed that the government will be able to deal with dimensional issues related to policy, regulations and bureaucracy, promote the private sector, address constraints imposed by the financial sector, and gradually seek alternative methods of addressing the inhibitive factors.

The six broad parameters of developing approach pertinent to the development of private construction sector, may be explained as follows:

• POLICY ENVIRONMENT. Develop a clear, consistent, and transparent policy environment for the private sector. Ensure proper and clear systematization, codification, harmonization, standardization and regulation of the private sector strategy, laws and regulations;
• AUDITING AND ACCOUNTING. Increasingly include a wider group of private sector companies in the auditing net to encourage the greater use of financial management information as a tool of MIS for firms - as well as to assist the tax authorities;
• DIALOGUE. Immediately put in place support mechanisms for private construction sector industry interests such as the Construction Development Board as well as Construction Association of Bhutan - by bringing in experienced professionals from external chambers and the private sector.
• LABOR. Pursue/Conduct assessment on the availability of national workforce and match with the requirement for development of a transparent time-bound policy for recruitment of non-national workers to ensure cost competitiveness of private construction industry;
• TRAINING. Assess training needs and non-training intervention measures. Pursue system of tax relief for industrial levy to support management training in an effort to increase overall productivity;
• TECHNOLOGY. Encourage & support technology transfer to propel the mechanization initiatives for absorbing literate youth into gainful employment. Pursue for matching grant schemes, system for technology incentives, tax-break on research & development, etc.
• FINANCE. Create access to excess liquidity with the financial institution through more customer friendly process and simplified procedural requirement.