Why Invest in Bhutan

The Kingdom of Bhutan, a tiny Himalayan nation with a population of just under 800,000, has long remained isolated from global trade and foreign investment. Although Bhutan’s economy is one of the world’s smallest, it posted 9.9% GDP growth in 2012 and is forecasted by the IMF to achieve 13.5% GDP growth in 2013. This economic expansion is being driven by Bhutan’s sizeable hydropower potential, agriculture and forestry products, and tourism appeal. The country has also pioneered the concept of ‘Gross National Happiness’ and has taken measures to ensure that its economic development aligns with its goals for environmental conservation, social well-being, and educational attainment. With duty-free access to the vast Indian market and comparatively cheap energy costs, Bhutan is a compelling frontier economy with a unique focus on sustainability.

  • Hydropower Potential
    • Prioritized in Bhutan’s Five-Year Plan, hydropower exports to India have steadily grown
    • Hydropower generates over half of the government’s annual revenues and accounts for 12% of GDP
    • Current installed capacity is only 6% of Bhutan’s total potential hydropower capacity
  • Duty-Free Access to India
    • Bhutan is surrounded on three sides by India, with 190 million people living near its southern border
    • Treaty of Friendship allows free trade between India and Bhutan and duty-free exports to the Indian market
    • History of close bilateral economic, political, and military ties
  • Advantageous Location & Geography
    • Bordered by India, one of the world’s economic engines and a key trade partner
    • Growing regional trade ties with Bangladesh, Hong Kong, Japan
    • Extensive hydropower potential; movement to brand Bhutan as an organic producer
    • 71% of the country has forest cover; opportunities to export medicinal plants, oils, and nuts
  • Attractive Destination for High-End Tourism
    • Bhutan’s tourism policy of “low volume, high quality” attracts well-heeled travelers
    • Average tourist spending is $1,300 versus the world average of $982
    • Prime destination for groups focusing on ecological, cultural, and religious attractions
    • Government aims to attract 100,000 tourists by 2013; opportunities for boutique hotels and eco-lodges
  • Favorable Policies towards Foreign Investment
    • Liberal foreign ownership laws; 10-year corporate tax-holiday for exporters
    • Repatriation of invested capital and capital gains
    • Historic lack of FDI; government is eager to attract investment in priority industries
  • Positive Political and Demographic Signs
    • Transitioning to democracy; stable government (monarchy is still loved)
    • Good governance, low corruption (ranked in world’s top quartile on Corruption Perceptions Index)
    • Proponent of Gross National Happiness Index; defense expenditure <1% of GDP
    • Free public education and healthcare; all schools are taught in English

The Role of Private Equity

Bhutan has historically been isolated and its economy has been constrained by a lack of foreign investment. Although small and medium enterprises (SMEs) have accounted for 93% of newly-established businesses in Bhutan over the past five years, financing is hard to come by – Bhutan ranks in the bottom 1/3 of all countries in terms of access to credit. This shortage of financing makes it difficult for local firms to achieve economies of scale and capitalize on the duty-free access Bhutanese producers have to the huge Indian market.

However, private equity firms can address these problems by working as strategic partners and serving as catalysts for greater capital inflow. PE firms can provide attractive funding alternatives – such as risk sharing equity positions – that are often preferred by entrepreneurs over exorbitantly high debt rates. In addition, optimal capital structures help create sustainable business models. In the case of Bhutan, private equity firms can facilitate knowledge transfers and support SMEs by providing capacity development, strategy coaching, and management and technical assistance.