Bhutan - Forestry Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4831-BHIU STAFF APPRAISAL REPORT BHUTAN FORESTRY DEVELOPMENT PROJECT March 15, 1984 South Asia Projects Department General Agriculture Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$ 1 = Nu 10 Nu 1 = US$.10 FISCAL YEAR April - March WEIGHTS AND MEASURES 1 kilometer (km) = 0.62 miles 1 meter (m) = 1.09 yar s 1 hectare (ha) = 10,000 ml (0.01 km2) 2.471 acres 1 cubic meter (m ) = 35.315 cu ft 1 kilogram (kg) = 2.2 pounds 1 metric ton (t) 1,300 kg = 2,205 pounds ABBREVIATIONS AAC - Annual Allowable Cut ADF - Assistant Director of Forests a.s.l. - Above Sea Level DDF - Deputy Director of Forests DFO - District Forest Officer FAO - Food and Agriculture Organization of the United Nations FD - Forest Department GDP - Gross Domestic Product IDA - International Development Association ICB - International Competitive Bidding LCB - Limited Competitive Bidding MEU - Monitoring and Evaluation Unit Nu - Ngultrum OCC - Opportunity Cost of Capital PM - Project Manager RGOB - Royal Government of Bhutan SCF - Standard Conversion Factor SOE - Statement of Expenditures Sps - species UNDP - United Nations Development Program  FOR OFFICIAL USE ONLY BHUTAIN FORESTRY DEVELOPMENT PROJECT STAFF APPRAISAL REPORT Table of Contents Page Number I. INTRODUCTION ............................................. 1 11. BACKGROUND ..................... .. , , ..............*.*....... 1 I3I. THE FORESTRY SECTOR ... .. .. . . , *0 * *.........*... 3 A. The Forest Resource ....... ... ... . ................. 3 B. Forestry in the Economy 4 C . Forest Policy ..*. . .. , * ,..***. *... a . 6 D. The Forest Department 7 E. Project Rationale 8 IV. THE PROJECT ........................ , 9 A. Project Area 9 B. Brief Description ....................... , , 11 C. Detailed Features ..................... .. . 12 D. Project Costs ...... , e . **.* 16 E. Financing 17 F. Procurement ..e .....*.. o **************.* ...... 18 G. Disbursements 19 H. Budget, Accounts and Audit 02a V. ORGANIZATION AND MANAGEMENT 21 A. Project Organization 21 B. Monitoring and Evaluation ............................ 22 VI. PRODUCTION MARKET AND PRICES ..........22 A. Production 22 B. Markets and Prices ..................... ... 23 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -i.i- Paste ]Nmb3r VII, BENEFITS. JUSTIFICATION AND RISKR ....................... 25 A. Project Benefits * * * *X ........ 99999999999 *g* 9 25 B. Financial Benefits . ... *......... ,, ... , .* ,,. .. . . 26 C. Economic Analysis * , , , , * ..... *** * 26 D. Risks and Sensitivity Analysis ... , . 28 VIII. RECOMMENDATIONS ............. 9@**e 9* 9 , . 9. , , 9,* , 30 TABLES Table 3.1 - Total Wood Resource ..............................* , 4 Table 3.2 - Logging Volumes and Forestry Revenue, 1976!77-1982/83 .................s. . 4 Table 3.3 - Incremental Log Demand for Commercial Operations by FY 1986/87 ......... * 6 Table 4.1 - Project Implementation Program 12 Table 4.2 - Project Cost Summary 17 Table 4.3 - Financing Plan is9999.....9....969..9.469 s 18 rable 4.4 - Procurement is.99.99.9..99............. , ,.,99 18 Table 6.1 - Total Project Production ............................ 22 Table 6.2 - Financial Market Prices ........................ 24 Table 7.1 - Other Project Beneficiaries ........................ 25 Table 7.2 - Switching Values 9 99969 9699999996999999 96999,999 29 AANNEXES ANNX 1 - Project Cost Tables ANNEX 2 - Organization and Implementation Charts ANNEX 3 - Financial and Economic Analysis ANNEX 4 - Special Disbursement Procedures ANNEX 5 - Other Project Information ANNEX 6 - Project File MAPS World Bank Number 17664 World Bank Number 17665 World Bank Number 17666  BHUTAN FORESTRY DEVELOPMENT PROJECT STAFF APPRAISAL REPORT 1. INTRODUCTION 1.01 To support an increased development effort and to expand its sources of economic asaistance, the Royal Government of Bhutan (RGOB) in 1981 joined the Int:er:national Monetary Fund arLd the World Bank, and in 1982, the Asian Development Bank. With forests being the country's largest renewable natural resource, R.OB has placed high priority on this sector for development. First attention is to be paid to developing wood related industries and to initiating a systematic program of plantation establishment. In May 1983 RGOB prepared, with assistance from FAO, a report on reforestation near two of the high population areas in the foothill region. That report formed the basis for a request to IDA for assistance in financiug a forestry plantation project. This report is based on the findings of an IDA appraisal mission consisting of Messrs. W.B. Johnson (IDA), M.I. Aitken and D.W. Wright (Consultants), which visited Bhutan in October 1983. II, BACKGROUND 2.01 The Kingdom of Bhutan comprises an area of approximately 47,000 sq km situated in the Himalayan region, and lying between 26.5 and 29 degrees north latitude and 88.5 and 92 degrees east longitude. The country is land locked, bordered in the North and Northwest by China (Tibet), and by India to the South, West and East. The country can be divided into three distinct zones. The Southern zone adjoining India consists of foothills rising to an altitude of about 1,000 meters a.s.l. This area has a hot, humid, tropical climate and the natural vegetation and forests are dense. The central zone consists mainly of steep hills and narrow valleys at elevations from 1,000-3,000 meters a.s.l., and has a temperate climate and vegetation. The nation's capital, Thimphu, is located in this zone. The Northern zone comprising snowy ranges above 3,000 meters is the region bordering China, and is of an alpine character. 2.02 Except for a narrow strip of lowlands along the southern border, the country is entirely mountainous. High ridges divide the region, and the country is traversed by numerous streams and rivers which flow in a generally north-south direction. Of the total land area, it has been estimated that about 60-70 percent is covered by forest (no accurate records are available), 9 percent is under cultivation, and the rest is classified as alpine pasture or mountain wilderness and is mainly above the tree line.  -2- 2.03 The mountainous terrain makes 3hutan accessible only with great difficulty. Transportation therefore presents considerable problems. Although roads now link Bhutan with the Indian plains to the south, geographical factors limit this access. The first paved road of 175 km from the border town of Phuntsholing to Paro and Thimphu, the capi-al, was constructed in 1962. The main road network now totals about 2,000 km and generally follows the main river systems. One east-west main road has been completed linking Thimphu with Tongsa, near thie geographic center of the country and Tashigang in the east. There are no railways; the nearest railhead is about 40 km south of the southern '.vrder entry town of Phuntsholing. The nearest seaport is Calcutta about 750 km by road to the south. RGOB recently initiated commercial flights between Paro (about 40 kl from Thiuphu) and Calcutta. 2.04 Although no accurate statistics are available the total popula- tion, 95 percent of which is rural, is currently officially estimated at 1.2 M and believed to be growing at around 2 percent per annum. With the low population, pressures on land, food and housing appear to be much less than elsewhere in South Asia and the standard of living appears to be better than the calculated per capita income of about US$120, one of the lowest in the world. Literacy and life expectancy, however, remain low. 2.05 Agriculture and animal husbandry account for about half of GDF, and provide the main livelihood for about 95 percent of the population. The forestry sector accounts for some 16 percent of GDP, industxy for only 6 percent due to the small domestic market, services account for some 30 percent and tourism, 1 percent. 2.06 The official currency is the ngultrum (Nu) which the Governmemt began issuing in 1974. As there are no controls on trade and payments with India, the Indian rupee circulates freely and is interchangeable with the ngultrum on a one-to-one basis within Bhutan. 2.07 His Majesty, Jigme Singye Wangchuck, the present king and fourth of the line, is the head of state and head of the Royal Government. The National Assembly, which comprises about 150 members (of which about 100 are elected on a one-household/one vote basis), is the main legislative and policy making body. The Cabinet is the main executive body and is composed of members of the Royal Advisory Council; heads of the Ministries of Foreign Affairs, Home Affairs, Communications, Development, Finance, Industry, Trade and Forests, and heads of important departments and the district administrations. 2.08 Administratively, the country is divided into 18 dzotgkhags (districts); three in Eastern Bhutan, five in Central Bhutan, seven in Western Bhutan, and three in Southern Bhutan. The district administration report directly to the Ministry of Home Affairs through appointed district administrators (Dzongdag). The Dzongdag is primarily responsible for  -3- revenue collection and more recently, following decentralization, for implementation of much of the development effort at the district level. Law and order are the responsibility of the Thrimpon (magistrate). 2.09 Only limited information is available on land ownership pat- terns. Most cultivated land is owner-operated, although monasteries traditionally have supported themselves through land farmed by sharecrop- pers, and there is some absentee ownership, especially in the west. Landholdings are fairly equitabLy distributed, being legally litited to 25 acres (10.1 hectares) but seldom exceeding 4 ha. Farm sizes are believed to be somewhat larger than average in the south and somewhat smaller in the east. Most grazing land is commuaally owned with access governed by traditional rights. Some grazing areas are within classified Reserve Forests and grazing rights have been acquired from Government. Legisla- tion is, however, under consideration to encourage private enclosure to establish a system of independent smallholders with an incentive to invest in land improvement. III. THE FORESTRY SECTOR A. The Forest Resource 3.01 The size of the forest resource is impressive and represents the largest renewable resource in the country. Efforts to regulate the exploitation of forest begatn in the early 1960s with a number of surveys. None of the early efforts, however, supplied aata about land use patterns, forest types and their extent, growing stock, increments of growth, yield, etc. The first comprehensive survey of Bhutan's forest resources was undertaken witb the assistance of the Indian Government between 1974 and 1979. This reconnaissance inventory, known as the Pre-Investie-nt Survey of Bhutan Forest Resources, was conducted in four phases over about 3 million ha. Forests covered 74 percent of the area surveyed. The area outside the survey is mainly the northern high Himalayan region. The demarcation of forests began in 1974 and, by 1981, about 11,000 sq km had been surveyed and boundaries demarcated. 3.02 Up to about 1,000 m elevation, broadleafed tropical forests are dominant and in unexploited stands, very dense. Between 1,500 and 3,000 m temperate forests of pine and oak dominate along with indigenous species of rhododendrons. Oak tends to grow on southern slopes, which receive most of the monsoon rains, while on the drier northern slopes, coniferous forests predominate. Above 3,000 m and to the treeline at about 4,000 m, the forests tend to be entirely coniferous and include valuable quantities of pine, spruce, and fir. Forests are generally restricted to the slopes as the valley bottoms are mostly cultivated.  -4- 3.03 According to the above survey the following table summarizes the growing stock and the estimated theoretical annual allowable cut (AAC) for the country. Most of this resource is currently inaccessible due to physical constraints such as a lack of roads. Table 3.1: TOTAL WOOD RESOURCE Broadleaved Conifers Total