NRDCL’s Nu 400 mn quarries flop has lessons for SMC

The 68th cabinet meeting on 6th April 2010 decided that the Natural Resources Development Corporation (NRDCL) should establish and set up stone quarries and crushing units to provide high quality stone chips at affordable prices to the construction industry.

Subsequently the Ministry of Finance on 12th April 2010 wrote to the Druk Holdings Investment asking the NRDCL to establish quarries and stone crushing units in six areas to meet the shortages of stone chips.

However, today the NRDCL is staring at more than Nu 400 mn in losses and potential losses with one site shout down, another not producing, three others on the verge of a shutdown and one with an uncertain future. The sites producing some stones are producing so at high losses with little or no buyers.

The losses have even managed to The DPT’s main grounds of asking for the withdrawal of the case was its argument which the sedition aspect of the case brought against DPT was not relevant and would not be good for the larger interest of the nation.

In submission to the court the defence counsel said that the plaintiff be ordered, to submit explanations on the looming consequences that eat into the NRDCL’s profitable sand and timber business ensuring that NRDCL has only minimal profit.

According to a NRDCL official there were three major issues that led to the failure of the whole venture and these mistakes could be repeated in the upcoming and much bigger State Mining Corporation (SMC) if the company does not learn from them.

One was no proper market study; another was not enough experienced people running the mines and finally the 2011-2012 economic crisis.

“The biggest problem was that there was no proper market study done to see the demand for the stones and possible buyers before establishing the quarries and crushing plants,” said the official.

As a result the final location of the quarries and crushing plants were in locations that were either not near any demand centers or were economically not feasible.

Of the six sites, stone quarries with crushing plants were established at Tingzham in Gyelpozhing, Homdar in Tingtibi and Ngangshing in Pemagatshel. The remaining three were surface collection centers with crushing plants established at Bhur in Gelephu, Kencholing in Trashiyangtze and Golanti in Jomostangkha. These were established in between 2011 to 2013.

Though the NRDCL chose the final sites it was also acting on the advice of the Ministry of Finance which gave certain broad directions.

The MoF asked for the establishment of a unit to meet the needs of Pemagatshel, lower Trashigang and Samdrup Jongkhar and another to meets the needs of eastern Mongar, upper Trashigang and Trashiyangtze and also the Kholongchu hydropower project. It also asked for a unit to meet the needs of Trongsa and Zhemgang including the requirements of Mangdechu and Singkhar-Degola hydropower projects. Two units were asked to meet requirements of the Punakha, Wangdue Phodrang, Tsirang, Dagana and Punatsangchu I and II projects and a unit to meet the requirements of Thimphu, Paro and Chukha Dzongkhags.

Furthermore the government also asked NRDCL to examine the possibility of establishing stone-crushing units in southern Bhutan for the purpose of exporting them to India and Bangladesh.

Though the above looked good on paper the lack of market research for such theories would make all the established units commercially unviable and cause huge losses.

Moreover, the final sites were chosen by regional NRDCL managers who apart from not having any quarrying background were not provided with any market studies.

The NRDCL on receiving the instructions of the government went about procuring and installing six tone crushers, six loaders and various other equipment worth around Nu 154 mn at the six sites.

However, from the very start of the plants it was realized that the potential markets are just not there or too far away. The quarries also failed to compete with the private suppliers.

One of the biggest plants which is Tingzham in Gyelpozhing was found to be too far away from its potential markets. Since the site elected was too close to the Kurichu dam no major drilling and blasting was allowed. Also the stone crushing unit had to located 4.5 km away from the quarry site pushing up costs. The quarry recently stopped production as it has too much stock which it can’t sell.

Golanti in Jomostangkha which was supposed to export stones to India and Bangladesh could not compete with the cheaper products there. The whole plant had to be shut down. It has currently been relocated to the construction site of the Royal Academy project in Paro.

Homdar in Tingtibi is also operating under heavy losses and the NRDCL is contemplating closing it sometime this year.

Ngangshing in Pemagatshel is unable to compete with a private quarry nearby and is also operating under major losses. Here too the NRDCL is contemplating closure.

Kencholing in Trashiyangtze being a surface collection site is running out of the raw materials to make it feasible beyond a year or two.

NRDCL officials have some hopes pinned on Bhur in Gelephu but here too the future is uncertain.

With the quarries and crushing plants operating in losses all the six units have incurred Nu 215 mn in running costs like salaries, cost of production etc till December 2014 but only earned revenue of Nu 72 mn. This would mean an operating loss of Nu 143 mn so far. Further it has unsold raw stock worth Nu 57 mn.

To make matters worse the NRDCL may have to cough up a minimum of Nu 125 mn to compensate three contractors for its three stone quarries in Gyelpozhing, Tingtibi and Pemagatshel.

The NRDCL official said that the company to save costs had drawn up five year contracts with three contractors for the three quarries so that they can mine and supply the stones to the crushing plants. However, with NRDCL now planning to close all quarries the contractors are asking compensation for the Nu 120 mn in investment made so far as well as the loss of earnings that the five year contract would have given them.

Despite the cabinet in 2010 establishing a high powered committee to fast track clearances for the NRDCL units the fastest one in Tingtibi took 18 months while last one in Gyelpozhing took close to three years.

One major problem also has been the lack of experienced people running the quarries and crushing plants at the various locations. A NRDCL official said that given the lack of experience the stone crushers have only been operating at only 15 percent of its capacity while it should ordinarily be operating at 60 to 65 percent of its capacity.

“Even if tomorrow there is a market demand then these units will not be able to go beyond 15 percent of the total capacity,” said the official. While the cost of production is Nu 40 per cft the selling price is only Nu 20 per cft.

The official also highlighted the problem of the ‘bureaucratic nature’ of the employees saying that unlike private quarries they could not work at odd hours and would have fixed timings.

The NRDCL official said that one additional factor was the 2011-2012 economic crisis which slowed down all construction activity and lead to lack of any demands. This was time period when the quarries and crushing plants were just getting established.

Despite the potential on paper the NRDCL could not establish quarries in Wangdue Phodrang to supply the P I and P II projects as the project contractors already were given a quarry each by the project and there were also competitive private operators.

NRDCL applied for a quarry in Chimthangkha near Bjemina but the stone was found to be of low quality and thus abandoned.

It applied for a 100 acre site above the Gidakom hospital in 2011 and got local and Dzongkhag clearances with it being forwarded to the National Land Commission. However, when the NLC asked the Dzongkhag for some additional information the Thimphu Dzongkhag has not responded so far delaying this quarry.

The NRDCL is also hoping to establish a plant at Bumthang to meet the demand for stones there. The NRDCL is also exploring the potential of the SMC buying some of its equipment given that both are under DHI.

In the meantime the employment of around 54 people in NRDCL hired specifically for the quarries and stone crushers is in doubt. Around 31 people will either be relocated or retrenched once the quarries close down.

A NRDCL official said that it will be important for the SMC to avoid the mistakes made in NRDCL over the stone quarries and crushing plants and learn from them. He said that SMC should first of all do a proper and through market study on mining before investing anything or establishing any plant.

The other important tip was that people with actual mining experience should also be there in the Management helping make decisions. So far both the managing director and the general manager of SMC do not having any mining experience.

He said that if SMC should also avoid the bureaucratic culture and regime that affected the NRDCL quarries otherwise it would again affect the company.

Both the DHI Chairman Dasho Sangay Khandu the SMC management said there would be proper market studies done for SMC before commencing operations.

The NRDCL CEO Karma Dukpa who joined in July 2013 said, “We are in the process of negotiating with the three contractors at the three quarry sites as we have to provide them with compensation after which we may sell all the machines to interested private companies.” He said NRDCL would also try to make use of the raw materials already excavated.

He admitted that the quarries business of the NRDCL was incurring heavy losses.

The CEO said that in the long term the NRDCL would like to withdraw from this business and focus on its core areas of timber, sand and other stones due to the market conditions and also the inability to compete with the private sector.

 

In the red

154 mn in equipment investment

143 mn in operating losses

120 mn in compensation for contractors

57 mn unsold stock

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