Economic Analysis of Brick Industry in Kathmandu Valley

Submitted to

Vertical Shaft Brick Kiln Technology Transfer Programme In collaboration with Swiss Agency for Development and Co-operation

Study Team:
G. B. Banjara - Study Team Leader Vinod Prakash - (FCA) Financial Analyst Prabhakar Shrestha - Civil Engineer Tashi Penzom - Research Assistant

March 2004

ABBREVIATIONS: BDS: BEP: BTK: DCSI: FC: FGD: FY: MOF: MOPE: ROI: SDC: SPSS: SWOT: TOR: VDC: VSBK: Business Development Services Break Even Point Bulls Trench Kilns Department of Cottage and Small Industries Fixed Chimney Kiln Focus Group Discussion Fiscal Year Ministry of Forest Ministry of Population and Environment Return on Investment Swiss Agency for Development and Co-operation Statistical Package for Social Sciences Strength, Weakness, Opportunity, Threat Terms of Reference Village Development Committee Vertical Shaft Brick Kiln

Definitions of Key Terms

Break Even Point: The level of sales at which total revenue equals total costs incurred; the point at which the venture is meeting expenses with no profit, no loss. BTK: Bulls trench kilns is an open type brick firing structure which consists of the temporary elliptical trench shaped kiln (size ranging from 23-32 feet wide and 6.5-7.5 feet deep) and a pair of movable sheet metal chimneys (40-50 feet high). BTKs have been in existence in the Kathmandu valley since the early 1950. Cost Benefit Analysis: Any process by which organizations seek to determine the effectiveness of their spending, in relation to costs in meeting their objectives. Direct Labour: The labour involved exclusively in the production of the output. Economy of Scale: The concept that as a plant gets larger and volume increases, the average cost per unit of output drops. Fixed Chimney: Fixed Chimney consists of open type kiln similar to BTK, usually in larger dimensions than BTK. They have fixed type chimney with height larger than BTK (65 120 feet). Two types of Fixed Chimneys are in operation. FCs with Natural Draft and FCs with Forced Draft. In Natural Draft FCs there is no extra supply of air in the kiln, whereas in the Forced Draft FCs the air is passed mechanically for better combustion. Indirect Labour: The labour not involved directly in the production but other activities such as sales, marketing, administration, accounts etc. Payback Period: The time period by which the investments are paid off from the profits generated Pug Mill: The mechanical device used to mix the soil Return on Investment: The amount earned in relation to the capital invested, usually stated as a percentage. VSBK: A vertical Shaft Brick Kiln (VSBK) is an energy efficient technology for fired clay brick production; the technology was originally developed in China. It essentially consists of one or more rectangular, vertical shafts within a kiln structure. Rectangular arrays of dried green bricks and crushed fuel (coal) are carefully stacked into batches, which are continuously loaded into the top of the shaft. At the bottom of the shaft, batches of fired clay bricks are continuously removed. As the procession of batches gradually passes through the shaft, the green bricks encounter pre-heating, firing and cooling zones before they reach the shaft exit.

Executive Summary
After the installation of a few pilot VSBK kilns and successfully operating them in the Kathmandu valley, VSBK programme felt the need to know more about cost benefit aspects of different brick making process and firing technologies. In this regard, the project decided to do an economic analysis of Fixed Chimney, BTK and VSBK. This study has following four objectives. 1 To have a comparative economic picture on following brick making technologies a) VSBK b) BTK c) Fixed Chimney natural draft and forced draft Explore economies of scale in VSBK Interlink the VSBK firing technology, with other steps of mechanization along with the profitability analysis with respect to the Pug mill. Explore a realistic share for VSBK technology in Kathmandu in a dynamic business environment

2 3 4

Main Findings Objective 1 Comparatives financial summary for the different technologies is shown in the table below. BTK Items KEY FINANCIAL RESULTS Saleable Brick Production nos 4,500,000 Sales Turnover - Rs Rate per 1,000 bricks - Rs Gross Profit to Sales - % Net Profit to Sales - % Return on Investment Break Even Point Pay Back Period 34.44 31.94 134.87 12.02 8 months 9,450,000 2,100 25.71 21.11 79.71 21.80 1 Year 2 Months Rs. Fixed Chimney ND Rs. VSBK 4 Shaft Rs.

8,100,000 17,010,000 2,100

4,552,000 9,559,200 2,100 36.20 26.40 39.87 27.43 2 Years 2 Months

As seen above, the profit to sales 36.20 % is highest in the case of VSBK. However, in comparison Return on Investment is lowest due to higher investment cost. Breakeven and Payback Period are highest in BTK among the three technologies because of low investment cost. Nevertheless, VSBK is a highly viable technology from the economic point of view. VSBK shows fundamentally strong profitability, ROI of 40 % and payback period of just over 2 years is much better than in most other small/medium sized industries. Objective 2 When number of shafts is increased from two to four in VSBK the profit before tax increases from Rs. 618,200 to Rs. 2,523,600. This improvement in the profitability results from the "economies of scale" in producing larger quantity of bricks. When shaft number is increased from four to six, profit margin increases to Rs 4,135,000. Thus there is strong economy of scale in operating multiple shafts of VSBK. Objective 3 Our calculations show that when pug mill is used for 4 shaft VSBK, the annual profit reduces by nearly Rs.447 thousands compared to manual mixing of soil. This may lead one to think that there is no economic benefit of having a pug mill. However since there is apparently a premium of Rs 200 per thousand bricks from the pug-milled soil it is advantageous to have a pug mill. Objective 4 There is a demand of approximately 1.140 billion brick in the Kathmandu valley in the current fiscal year 2003/04 compared to the estimated 1.102 billion of supply from the local production. Thus the demand exceeds the supply. Brick demand in the Kathmandu valley is growing at an average of 11 % per annum. BTK is going to be banned from the next production season. Most of the BTK entrepreneurs have already switched to FC from BTK and more are likely to follow suit. Thus VSBK market share is not expected to grow rapidly to replace the existing technologies in a big manner in the next few years. The market share of VSBK may reach to about 22 % by year 2007/08 under an optimistic scenario. Key conclusions Brick demand in the Kathmandu valley is increasing rapidly. Supply side of brick in the Kathmandu valley is going through a very uncertain period. In terms of profitability, VSBK works out less profitable in case VSBK bricks are sold at the same price as BTK. However, bricks made in VSBK kilns are being sold at a price higher by Rs 200 per thousand showing a gross profit margin of 38.64 compared to 34.44 for BTK and 25.71 for Fixed Chimney ND. The ROI and BEP seem less favourable, Pay Back Period is also longer due to a higher fixed investment cost in VSBK. It is more profitable to run 4 or 6 shafts compared to two shafts VSBK kilns. This profitability is due to economies of scale in increasing volumes of the production. Using Pug mill mechanization is profitable as entrepreneurs can charge some premium for the bricks made using pug milled soil. VSBK faces unique challenges, but there are prospects for its success in the Kathmandu valley.

Recommendations In order to enhance the competitiveness of VSBK, initiative should be taken by both the VSBK, Project as well as the Government. Based on the findings of the study, following recommendations have been made to VSBK project and the Government. Recommendations to VSBK project Improve the output Quality of bricks from VSBK kilns Reduce the investment cost of VSBK Increase awareness among the consumers on VSBK bricks Promote the VSBK on the merits of its strong economic/financial performance. Work in greater collaboration with the contractors, engineers and construction sector people Encourage entrepreneurs to invest in minimum of four shafts or above to gain economies of scale in VSBK Integrate the mechanization with the overall value addition of the product: Widen the scope of the VSBK project:

Recommendation for the Government Monitor the kilns and their stack strictly Safeguard the investment of brick entrepreneurs. Promote VSBK technology more actively. Simplify the legalization process of the VSBK.

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Table of Content
1. 1.1 1.2 2. 2.1 3. 3.1 3.2 3.3 3.4 3.4.1 3.4.2 3.4.3 4 4.1 4.2 4.3 5. 5.1 5.2 5.3 Introduction Why this study? Objectives of this study Methodology: Detailed design of research Key findings Objective 1: comparative economic picture of selected technologies Objective 2: Economies of scale in VSBK Objective 3: Interlink the VSBK with other steps of mechanization Objective 4: Market Share of VSBK Estimation of Brick demand Estimation of Brick supply: Market share of VSBK: SWOT Analysis of alternative technologies: BTK Fixed Chimney VSBK Conclusions and recommendations Key conclusions Recommendations for VSBK project Recommendation for the government 1 1 1 2 2 5 5 10 13 15 15 18 18 23 23 24 25 26 26 27 29

Annexure
1 2 3 4 5 Abbreviation Questionnaire List of survey participants Non Financial Report Photographs

1.

Introduction

Brick industry in Nepal in general and particularly in the Kathmandu valley is going through turbulent times. The economic boom of early 1990's saw a rapid increase in the construction activities in the Kathmandu valley as a result brick making too expanded by leaps and bounds. The problems started to surface with this fast expansion of activities in brick making. Several reports indicated that brick industry in Kathmandu valley is responsible for almost 1/3rd in the valley's air pollution. Similarly other reports attributed the rapid depletion of agricultural land and farm productivity due to increase in number of brick kilns. There are several brick industries in the open spaces of Bhaktapur and Lalitpur, though lesser in Kathmandu. There is a constant tussle between the kiln owners and the rapidly expanding settlements nearer these brick industries. In this context, it has become essential to regulate brick industry so that demand of brick for the valley's growing construction industry is met at the same time existing problems and constraints of the industry are addressed. Realizing this situation, government has already intervened by fixing the stack emission standard and announcement to ban the traditional BTK kilns from next season. VSBK brick making technology has been endorsed by the government as one of the promising alternative to fulfill the future demand of brick in the valley. VSBK programme is being implemented with financial and technical assistance of SDC Nepal since January 2003. The project has already facilitated design, construction and operation of two pilot VSBK's in Imadol, Lalitpur. Process is underway to construct a few more kilns. 1.1 Why this study?

In spite of apparent benefits of VSBK in terms of minimization of air pollution and saving of energy over the conventional BTK kilns, entrepreneurs are still reluctant to adopt this technology in a big manner. Thus the project felt that it needs more information regarding the attitudes of entrepreneurs towards VSBK and more importantly the cost benefits of VSBK compared to other existing technologies. In this regard, the project decided to do an economic analysis of Fixed Chimney, BTK and VSBK including mechanization in brick making. 1.2 Objectives of this study The study has 4 objectives as stated in the Terms of Reference (annex 1) 1 To have a comparative economic picture on following brick making technologies a) VSBK b) BTK c) Fixed chimney natural draft and forced draft

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2 3

Explore economies of scale in VSBK Interlink the VSBK firing technology with other steps of mechanization along with the profitability analysis with respect to the Pug mill. (Though in the original TOR mention of other mechanisation such as Extrusion, Green brick Storing, Green Brick Transportation and Mechanical Lifting of Green Bricks was made, these were later dropped in the absence of reliable financial figures).

Explore a realistic market share for VSBK technology in Kathmandu in a dynamic business environment

2. 2.1

Methodology: Detailed design of research In order to meet the objectives outlined above, following design for the research was followed. Objective 1: To get a comparative economic picture on different brick making technologies To obtain comparable economic information of the three types of technologies, a structured questionnaire survey was conducted with 24 entrepreneurs. (See questionnaire in annex 2) Population of registered kilns in each categories of brick kiln types was collected and from this population, an appropriate sample number of entrepreneurs was taken for the purposes of study. Population of brick kilns in the Kathmandu Valley in different categories: Number of entrepreneurs Bhaktapur Kathmandu Lalitpur Area area Area 25 6 47 50 75 15 21 18 3 2 70 Total

BTK Fixed Chimney natural draft Fixed Chimney Forced Draft VSBK Total

78 83 3 2 166

Source: DCSI statistics and information from VSBK project and FGD with entrepreneurs
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The compiled list of brick entrepreneurs obtained from VSBK project and member of study team has been attached in annex 3. Sample size of entrepreneurs: In total 24 entrepreneurs were surveyed in Bhaktapur, Lalitpur and Kathmandu area. The distribution of respondents representing different categories is outlined below. Number of samples surveyed Bhaktapur area BTK Fixed Chimney natural draft Fixed Chimney Forced Draft VSBK Total Sample type: Simple random Sample (using probability sampling method) was followed for BTK and Fixed Chimney. Quota sampling (using non probability sampling method) was followed for VSBK and Fixed Chimney Forced Draft. The quota sampling for fixed chimney (Forced Draft) and VSBK was followed as there were very few kilns in each of these categories. A large proportion of total population of brick kilns in these categories have been covered with these sampling techniques. Design of questionnaire: A structured questionnaire was developed for the purpose of the study. The questionnaire was pre-tested with two entrepreneurs before finalizing. The fieldwork for the survey was conducted by four enumerators, who conducted the survey in a team of two, during the 4th week of December 2003. Validation of results: The outcome of survey was validated through separate Focus Group Discussions with BTK, FC and VSBK entrepreneurs respectively. 5 6 11 Kathmandu Area 1 3 4 Lalitpur Area 5 1 1 2 9 11 10 1 2 24 Total

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Objective 2

Explore economies of scale in VSBK

Relevant baseline information was drawn from the filled in questionnaire from the entrepreneurs who are already operating VSBK kiln. The consultants visited one of the sites of VSBK and BTK for observation. Further data was obtained from the field visits, focus group discussion and the VSBK engineers for the purpose of studying "economies of scale in VSBK" that accrue with increase in number of shafts (for 2, 4, and 6 shafts). The outcome from analysis with different number of shafts were compared with the results from BTK and FCs cost per 1000 brick basis. Objective 3: Mechanization and its effect in brick making Financial data on the mechanization technologies was collected by the VSBK project staff. The financial analysis of mechanization for pug mill has been carried out on this basis. Objective 4: Explore a realistic market share for VSBK technology in Kathmandu in a dynamic business environment Following approach was followed for this objective: Demand analysis: 1. House registration trend of past five years from three municipalities i.e. Kathmandu Metropolitan, Lalitpur Sub Metropolitan and Bhaktapur was collected as a base line data to find the number of house constructed in the valley during this period. Forecasting of house construction for next five years (2003/04 through 2007/08) was carried out using best fitting regression line using regression analysis. Forecasting of total brick demand for the 5 years was done based on the number of house construction and following realistic assumptions for public constructions.

2.

3.

Supply analysis: Eventually demand of brick has to match with the supply in the market. This supply must be met either through the production inside the valley or net import of bricks from the outside or by shifting to other alternative construction materials Assessments were done to see how different scenarios affect the overall brick production and growth of VSBK technology in the Kathmandu Valley in the coming years.
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3. 3.1

Key findings Objective 1: comparative economic picture of selected technologies The highlights of key assumptions and basis, which have been assumed/followed in the process of comparison of the technologies are as follows.

1. The costs and revenue are based on the figures for the fiscal year 2002/2003. 2. The costs and revenue and resulting financial analysis figures represent in general the whole of Kathmandu Valley. Though in there were variations in each case (technology) among Kathmandu, Lalitpur and Bhaktapur and even between one unit to another within the same location, attempts have been made to adjust these variations. 3. The median figures obtained from the field survey have been considered with some adjustments based on the result of FGD and expert opinions. 4. Four shafts VSBK has been taken for the purpose of comparing the different technologies. For BTK and Fixed Chimney an average size single unit kiln has been taken as the unit of comparison. 5. Number of days kiln is in operation: BTK and Fixed Chimney: 165 days VSBK: 210 days 6. Annual production: BTK: 4.0 million FC: 8.1 million VSBK: 4.552 million 7. Price of Bricks (per thousand): Rs.2100

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Comparative Analysis of Source and Application of Funds BTK, FC and VSBK Table: Comparative study of BTK, Fixed Chimney and VSBK: Sources and Application of funds
BTK Items
APPLICATION OF FUNDS FIXED INVESTMENT Land Own Land - Development Cost of Kiln Sheds & Wells Office Building Preliminary & Pre-Operative Expenses Advances Paid Total Fixed Investment SOURCES OF FUNDS Own Capital Borrowings - Bank Others

Fixed Chimney ND Rs.

Rs.

VSBK 4 Shaft Rs.

280,000 200,000 175,000 100,000 183,000 1,300,000 2,238,000 2,100,000 138,000 2,238,000 37,500 15,180

625,000 145,000 1,200,000 760,000 125,000 310,750 1,340,000 4,505,750 2,000,000 1,000,000 1,505,750 4,505,750 196,000 275,633

2,225,000 150,000 2,600,000 45,000 125,000 185,000 1,000,000 6,330,000 1,899,000 4,431,000 6,330,000 264,500 487,410

Calculation of Depreciation - 10 Yrs. Calculation of Interest - 11%

As the figures above show that fixed Investment is highest in the case of VSBK, followed by FC and BTK respectively. It is worth noting that fixed investment in the case of VSBK is highest because the land requirement for VSBK has been taken as per the directive issued by DCSI.

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Comparative analysis of Profit and Loss BTK, FC and VSBK Table: Calculation of Profit and Loss: BTK Rs
Sales of Red Bricks Rate Sales Turnover 4,500,000 2,100 9,450,000 Rate per 1000 2,100

Fixed Chimney ND Rs
8,100,000 2,100 17,010,000 Rate per 1000 2,100

VSBK 4 Shaft Rs
4,552,000 2,100 9,559,200 Rate per 1000 2,100

SALES TURNOVER Less EXPENSES Power & Fuel - Coal Power & Fuels - Others Direct Labor Indirect Labor Consumables Sub Total Lease / Rent Preliminary & Pre-Operative Expenses Depreciation Interest

9,450,000

17,010,000

9,559,200

587 9 608 51 78 1,332 44 41 4 3 1,425

2,640,000 41,840 2,734,800 227,520 351,680 5,995,840 200,000 183,000 37,500 15,180 6,431,520 3,018,480

651 45 657 53 100 1,506 54 38 24 34 1,657 443

5,273,100 364,500 5,321,700 429,300 810,000 12,198,600 437,500 310,750 196,000 275,633 13,418,483 3,591,518

470 5 652 99 74 1,299 41 41 58 107 1,546 554

2,137,500 22,900 2,965,850 451,000 335,900 5,913,150 185,500 185,000 264,500 487,410 7,035,560 2,523,640

Profit

675

Above calculations show that, profitability of BTK is highest (Rs. 675 per thousand brick) followed by VSBK (Rs. 554 per thousand brick) and Fixed Chimney (Rs. 443 per thousand bricks).
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Comparative analysis of Break Even Point: BTK, FC and VSBK Table: Calculation of Break Even Point:
BTK
BREAK EVEN POINT SALES TURNOVER Variable Cost Power & Fuel - Coal Power & Fuel - Others Direct Labour Consumables Total Contribution Fixed Cost Indirect Labour Lease / Rent Interest Total Break Even Point Depreciation & Amortization Preliminary & Pre-Operative Expenses Depreciation 9,450,000 2,640,000 41,840 2,734,800 351,680 5,768,320 3,681,680 227,520 200,000 15,180 442,700 12.02 17,010,000 5,273,100 364,500 5,321,700 810,000 11,769,300 5,240,700 429,300 437,500 275,633 1,142,433 21.80 9,559,200 2,137,500 22,900 2,965,850 335,900 5,462,150 4,097,050 451,000 185,500 487,410 1,123,910 27.43

Fixed Chimney ND

VSBK 4 Shaft

183,000 37,500 220,500

310,750 196,000 506,750

185,000 264,500 449,500

BEP for VSBK is found to be highest among the three technologies. This is mainly because of VSBK has higher fixed investment cost compared to BTK and Fixed Chimney in proportion to the output.
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Comparative analysis of key Financial Indicators BTK, FC and VSBK Table: Calculation of Key Financial Indicators:
BTK
CALULATION FINANCIAL INDICATORS Gross Profit to Sales Net Profit to Sales Return on Investment Payback Period Net Profit Depreciation and Amortization Total Funds Invested 3,018,480 220,500 3,238,980 2,238,000 3,591,518 506,750 4,098,268 4,505,750 2,523,640 449,500 2,973,140 6,330,000 % % % 34.44 31.94 134.87 25.71 21.11 79.71 36.20 26.40 39.87

Fixed Chimney ND

VSBK 4 Shaft

Payback Period

8 months

1 Year 2 Months

2 Years 2 Months

VSBK has the highest payback period amongst the three technologies. Payback period for BTK is lowest (only 8 months). For Fixed Chimney and VSBK it is 1 year and 2 months and 2 years 2 months respectively. ROI of BTK is highest at 135 % while ROI for FCs and VSBK are 80 % and 40 % respectively. The ROI in BTK is high as the investment cost is very low.

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3.2

Objective 2:

Economies of scale in VSBK

Comparative investment analysis of 2, 4 and 6 shaft VSBK Table: Investment figures for 2 shafts, 4 shafts and 6 shafts in VSBK
2 SHAFT Ref. Particulars Price x Qty SOURCES AND APPLICATION OF FUNDS FIXED INVESTMENT Land - Own Cost of Kiln Wells Preliminary & Pre-Operative Expenses Advances Paid 250000x6 1,500,000 1,600,000 45,000 185,000 700,000 4,030,000 SOURCES OF FUNDS Own Capital Borrowings - Bank 30 % 70 % 1,209,000 2,821,000 4,030,000 1,899,000 4,431,000 6,330,000 2,707,200 6,316,800 9,024,000 15000x3 250000X10 2,500,000 2,600,000 45,000 185,000 1,000,000 6,330,000 15000x3 250000X15 3,750,000 3,744,000 45,000 185,000 1,300,000 9,024,000 Rs. Price x Qty Rs. Price x Qty Rs. 4 SHAFT 6 SHAFT

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Profit Loss analysis of 2, 4 and 6 shaft VSBK Analysis of economies of scale shows an interesting picture. When number of shafts is increased from two to four, the gross profit (before tax) increases from Rs. 618,200 to whopping 2.52 million. This dramatic change in the profitability picture comes from the saving on the kiln construction and reduced per unit pre-operational and indirect expenses due to spread of these costs over a larger number of bricks produced compared to two shaft VSBK. When shaft number is increased from four to six, profit margin increases to approximately 4.13 million Rupees. This shows strong economies of scale in operating multiple shafts of VSBK kiln. The calculations for economies scale in VSBKfor 2, 4 and 6 shafts are given in table below. Table: Profit and loss statement for 2 shaft, 4 shaft and 6 shaft kilns.
VSBK Two Shafts operation SALES TURNOVER Less EXPENSES Power & Fuel Coal Power & Fuel Others Water Direct Labour Indirect Labor Consumables Maintenance Temporary Sheds for Labour sub total expenses Lease / Rent Preliminary & Pre-Operative Expenses Depreciation Interest total costs Profit (revenue less costs) Rate per 1000 2100 475 9 29 690 198 58 5 17 1,480 59 81 72 136 1,829 271 Rs. 4,780,650 1,080,468 19,400 66,000 1,571,060 451,000 131,400 11,000 39,000 3,369,328 133,300 185,000 164,500 310,310 4,162,438 618,212 VSBK 4 shafts operation Rate per 1000 2,100 470 5 14 652 99 48 3 9 1,299 41 41 58 107 1,546 554 Rs. 9,559,200 2,137,500 22,900 66,000 2,965,850 451,000 219,400 11,500 39,000 5,913,150 185,500 185,000 264,500 487,410 7,035,560 2,523,640 VSBK 6 shafts operation Rate per 1000 2,100 470 4 27 651 66 42 2 8 1,270 40 27 55 102 1,494 606 Rs. 14,338,800 3,206,900 28,620 182,000 4,448,000 451,000 290,000 13,000 52,000 8,671,820 273,000 185,000 378,900 694,848 10,203,568 4,135,232

Note: Income Tax and dividend payments are not included in this analysis.

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Key financial indicators for VSBK The ROI from two shafts VSBK is 15.3 percent whereas in case of four and six shafts VSBK it is approximately 40 and 46 percent. Analysis of key financial figures show that with the increase in shaft numbers from two to four, BEP in percentage goes down to 27.43 % from 48 %. Similarly pay back period for 4 shafts reduces to 2 year and 2 months compared to 4 years and 2 months in the case of two shafts. This shows impressive gain in profitability index when number of shafts is increased from two to four and more. Table: Economies of Scale Key Financial Indicators for 2, 4 and 6 shafts.
2 SHAFT Particulars Rs. Gross Profit to Sales Net Profit to Sales Return on Investment Break Even Point Payback Period Net Profit Depreciation and Amortization Total Funds Invested Payback Period Payback Period 618,212 349,500 967,712 4,030,000 4.16 4 years 2 months 2,523,640 449,500 2,973,140 6,330,000 2.13 2 years 2 months 4,135,232 563,900 4,699,132 9,024,000 1.92 1year 11 months % % % % 26.73 12.93 15.34 48.04 Rs. 36.20 26.40 39.87 27.43 Rs. 37.62 28.84 45.82 23.19 4 SHAFT 6 SHAFT

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3.3

Objective 3: Interlink the VSBK with other steps of mechanization

Table: VSBK without and with the pug mill

4 SHAFT Rs. PROFIT AND LOSS STATEMENT SALES TURNOVER Less EXPENSES Pug mill soil cost Power & Fuel - Coal Power & Fuel - Others Water Direct Labor Indirect Labor Consumables Maintenance Temporary Sheds for Labor Sub total Lease / Rent Preliminary & Pre-Operative Expenses Depreciation Interest Profit Rate per 1000 2,100 9,559,200 Pug mill Costs 1,000 3,600 60.42 470 5 14 652 99 48 3 9 1,299 41 41 58 107 1,546 554 2,137,500 22,900 66,000 2,965,850 451,000 219,400 11,500 39,000 5,913,150 185,500 185,000 264,500 487,410 7,035,560 2,523,640 19.14 14.74 124.18 68,900 53,053 447,033 39.88 (10.00) 217,500 143,580 (36.000) Rate per 1000 _____2,100 48 470 37 14 644 99 48 3 9 1,370 41 41 73 119 1644 456 9,559,200 217,500 2,137,500 166,480 66,000 2,929850 451,000 219,400 11,500 39,000 6,238,230 185,500 185,000 333400 540,463 7,482,593 2,076,607 Pug Mill Rs. 4 SHAFT + Pug Mill Rs.

Particulars

90.30

325,080

The contribution per 1000 bricks is lower by Rs 98 in the pug milled soil. However the bricks made out of pug milled soil are sold at a price higher by Rs 200 per thousand. The monetary value of benefits of lesser physical strain to labor due to mechanization, improved quality of the bricks, savings from lower process losses and effective use of fuels (coal) etc. have not been reflected in these calculations.

Table: Change in key financial indicators from the use of pug mill:
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Particulars KEY FINANCIAL INDICATORS Saleable Brick Production - nos Sales Turnover - Rs Rate per 1,000 bricks - Rs Gross Profit to Sales - % Net Profit to Sales - % Return on Investment Break Even Point Pay Back Period Pay Back Period

4 SHAFT Rs.

4 SHAFT + Pug Mill Rs.

4,552,000 9,559,200 2,100 36.20 26.40 39.87 27.43 2.13 2 Years 2 months

4,552,000 9,559,200 2,100 32.80 21.72 29.59 31.20 2.70 2 years 8 months

The above figures do not reflect any additional economic benefit of having pug mill. However, since there is apparently a premium of Rs 200 per thousand bricks from the pug milled soil it is advantageous to have a pug mill.

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3.4
3.4.1

Objective 4: Market share for VSBK in a dynamic technology and business environment Estimation of Brick demand

Total number of house construction permission issued by the three municipality authorities of Kathmandu valley is as given below. Table: House registration trend from FY 98/99 2002/2003 FY98/99 FY99/00 FY00/01 FY01/02 Kathmandu 1,787 2,387 3,319 5,111 Lalitpur 702 808 1,016 1,339 Bhaktapur 202 229 265 393 Total 2,691 3,424 4,600 6,843 Source: municipality records from Kathmandu, Lalitpur and Bhaktapur FY02/03 4,441 1,413 453 6,037

Though total number of houses construction including all the VDC's could not be obtained, it has been seen that there is a growing trend of new houses being built in the peri-urban areas and VDCs of Kathmandu valley. This increase in house construction outside the three municipality is taking place because, the inner city areas of all these three municipalities are suffering from growing congestion and increased price of land compared to the outskirts. This explains why number of new houses built inside the municipality area decreased in FY 02/03 compared to the previous year (FY 01/02). A regression equation was run based on above data and these data were extrapolated using SPSS to forecast the total construction demand of Kathmandu valley for next 5 years (year 2003/04 through 2007/08). Regression equation: using linier forecasting method: Y= 1686 +1011 X Table: Estimation of House registration from 2003/2004 - 2007/2008 in Kathmandu, Lalitpur and Bhaktapur. Year (Ref in chart) Total estimated number of house construction permission by 3 municipalities 2003/04 2004/05 2005/06 2006/07 2007/08 year 6 year 7 year 8 year 9 year 10 7,752 8,763 9,774 10,785 11,796

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Chart 1: house registration trend from 1998/99 to 2002/03 and forecast for 2003/04 to 2007/08
12000

No. of house permit in KTM, BKT, LTP

10000

8000

6000

4000
Trend 98/99-02/03

2000 0 1 2 3 4 5 6 7 8 9 10 11 12

Forecast thr 07/08

Year
Actual permit rate: X axis 1998/99 (noted by 1) to 2002/03 (noted by 5) Forecasted value from 03/04 (noted by 6) thr. 07/08 (noted by 10)

Calculation of brick demand: in Kathmandu valley Demand variable (a) Total number of house construction permission (b) Brick number (million)
(c) **Smaller Basis of 98/99 99/00 calc.

00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08

2,691

3,424 4,600 6,843 6,037 7,752 8,763 9,774 10,785 11,796

*75000 bricks per house

@ 40 % (b)

202

257

345

513

453

581

657

733

809

885

municipalities
and VDCs (mln bricks) (d) Total brick demand for (b)+(c) construction of house 81 103 138 205 181 233 263 293 324 354

283

360

483

719

634

814

920

1026

1132

1239

(e) ***Public @ 40 % of construction total house const.

Total demand mln. of bricks b+c+e

113 396

144 503

193 676

287 1,006

254 887

326 1,140

368 1,288

411 1,437

453 1,585

495 1,734

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Note: * Calculation of bricks is based on average figures for a two and a half story residential building with built in space of 2600 square feet. ** This covers construction of private houses built in all the VDCs surrounding the three municipalities as well a construction in the Thimi and Kirtipur Municipality. Public construction involves construction of road, pavements, boundary wall, drainage, public utilities and all other public construction for which there is no need to take permission from municipality

***

Chart 2: Estimate of Brick demand (million bricks)

1800

Total brick demand of the year Mln bricks

1734

1600
1585

1400

1437 1288

1200
1140

1000

887

800

600 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08

Year

As shown on chart above, brick demand is expected to grow at an average annual growth of 11 % over the next 5 years in the Kathmandu valley.

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3.4.2

Estimation of Brick supply:

Current level of supply: (2003/2004) is estimated below. Table: Supply scenario of brick (2003/04) Total production (mln) BTK kilns 351.0 Fixed chimney kilns 696.6 Hoffman kilns 50.0 VSBK (shafts) 5.0 Total 1,102.6 * Number of kilns mentioned here includes both registered and unregistered kilns. Number of kilns are obtained from the newspaper source and also verified with the entrepreneurs from Kathmandu, Lalitpur and Bhaktapur during focus group discussion. The above assessment of supply and demand of Brick indicates that this year (2003/04) there will be shortage of bricks by almost 37.4 mln. If alternative measures are not taken to fulfill the additional demand, one can foresee average brick price to increase by at least 4 percent, not accounting for the inflation, during this year compared to the previous year. 3.4.3 Market share of VSBK: No. of kilns* (operating in current season) 78 86 3 4 Per kiln per year avg. production (mln bricks) 4.5 8.1 1.25

It is not easy to predict the future scenario of brick industry in the Kathmandu Valley. It is clear that existing BTKs will be phased out from the next season. In the short run, most entrepreneurs have opted to convert to Fixed Chimney. But it is not yet clear, which technology will replace the existing BTKs in the long-run. How will VSBK fare in the dynamic market scenario? Probably the best answer to this question would be; "that depends on situation. We have considered three scenarios for VSBK's growth depending on the situation (conditions) Optimistic Growth scenario, Normal Growth scenario and Pessimistic Growth Scenario. Before attempting to estimate the market share of VSBK, we have to look at few key issues, which directly influence the future market share of VSBK. Situation of BTK: Government has strongly issued a regulation banning BTK effective from September 2004. Already department of cottage industry has started to demolish and penalise the illegal BTKs in Bhaktapur and Lalitpur. We can, more or less, see that there will be no BTKs effective next production season. In the survey, overwhelming number of entrepreneurs (68 %) said they are willing to shift to Fixed Chimney in the event of government completely banning BTKs. Only 8 percent entrepreneurs expressed willingness to shift to VSBK.
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Situation of Fixed Chimney: According to entrepreneurs, already there are 86 Fixed Chimneys operating in the Kathmandu valley. Many of the existing BTK entrepreneurs have switched to Fixed Chimney. More are planning to switch in the next season. It is envisaged that existing BTK's will be fully replaced by the Fixed Chimney kilns by the next production season. According to entrepreneurs who have already installed FC kilns, Fixed Chimney life lasts for 5 years subject to availability of land and other factors remaining the same, entrepreneurs who have recently shifted to FC from BTK will not change to VSBK until 2008. Only those entrepreneurs will adopt VSBK, who want to try out this technology on experimental basis at least for next two years. In addition to VSBK, they will also simultaneously run other types of chimney's as in the case of the current VSBK entrepreneurs. In this sense, it will be a slow adoption of VSBK by the entrepreneurs initially and demand of VSBK kilns will pick up only at a later stage probably after 2008. The future of Fixed Chimney heavily relies on the government's regulation and the attitude of surrounding community towards FC surrounding the kilns. Though entrepreneurs claim the emission level of Fixed Chimney will be lower than the standard set by the government (900mg/nm), the concerned experts opine that existing fixed chimney Kiln's emission easily exceeds the limit. If this claim is true and the Government strictly monitors the emission level of fixed chimney and takes punitive measures for the kilns exceeding the limit, it will be difficult for entrepreneurs to continue operating their FC kilns. Beside this, relatively large amount of land requirement (100 to 200 ropany1 per kiln) will make most of the FC unviable once land price go up. Community factor also plays major role in the future survival of Fixed Chimney. Thus even though FC seems to be the favored option among the entrepreneurs for now, in few years time, FC too will suffer the same fate as BTK today. Current situation of VSBK: Our survey shows that, nearly 82 % of the surveyed entrepreneur are aware of VSBK technology. Only 8 % are unaware of VSBK. 61 % of respondents (BTK and Fixed Chimney respondents) have already visited the existing VSBK production sites. 29 % have not visited the VSBK sites. This indicates that there is a high level of awareness among the entrepreneurs about VSBK. Nearly 90 % entrepreneurs (comprising both BTK and Fixed Chimney) want to know more about VSBK technology. Nearly 55 % entrepreneurs (BTK and fixed chimney) want to convert to VSBK, provided they receive some support from the project and the Government. The main support they are expecting from the VSBK project is know-how and technology transfer, where as from government, they expect hassle free registration and future assurance that VSBK kilns will not be pressurized to close down for the life of their operation.
1

1 ropany=509 square meters

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Import of brick from Terai to Kathmandu: Brick being a product with low value and high dead weight, it is not highly suitable product for long distance transport. Currently, there is almost negligible amount of brick coming from Terai. However, scenario may change once Banepa Bardibas highway is completed in 2006, which will shorten the transport route to Kathmandu valley from eastern lower regions to a great extent. In the event of scarcity of brick in the Kathmandu valley, it is not ruled out that brick demand will be fulfilled from areas nearby Kathmandu Valley such as Kavre, Panchkhal, Naubise and Trishuli. It has come to notice that during the current season (FY 2003/04), there are 7 kilns operating in these areas including 2 in Naubise, 1 in Trishuli, 1 in Panauti, 3 in Bhakunde of Kavre. Enterpreneurs claim that the quality of soil in these areas is not as good as that of Kathmandu Valley for brick making. Whatever current production is happening in these areas, most of it is being consumed locally. Thus there is less likelihood of brick coming in Kathmandu from outside at least for next few seasons. Alternative materials to brick: Unlike in places like Pokhara where stone is more easily available and is cheaper, such a situation does not exist in the Kathmandu valley. Other alternatives too do not seem feasible to replace predominance of brick as the main construction material. Even if there are good alternatives available, it takes years to prove a new technology and usually it is most difficult to change the habits of people, owing to historical, cultural and attitude factors. Keeping pace with the modernity, people will eventually switch to glass and steel structure but most of the residential construction will still be based on traditional materials such as bricks and concrete. It was confirmed during FGD that entrepreneurs do not see threat from alternative materials to brick. The success or a failure of a new technology depends a great deal on how the issues is addressed and constraints of growth of that technology in a dynamic market. Thus growth of VSBK is contingent upon many factors. Some of the key factors, in order for VSBK to succeed have been identified from the survey questionnaire responses as well as FGD with entrepreneurs. In order to clearly visualize the future of VSBK, three scenarios have been discussed in detail below. Conditions for Optimistic Growth Scenario. 1. 2. 3. 4. 5. "Quality" of bricks produced from VSBK is proven superior to that produced from BTK and Fixed Chimney. Government strictly enforces emission regulation on all types of brick kilns. Kilns not meeting emission and other regulations are penalised. Fixed Investment Cost of VSBK is lowered substantially. VSBK license procedure is easy and hassle free. Construction industry continues to grow at the current pace in the Kathmandu valley in future.

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6.

Technology know-how for VSBK is readily available to entrepreneurs. And there are multiple suppliers of VSBK technology know-how in the market. Under this scenario we envisage VSBK kilns in the valley to grow exponentially as given in the chart 3, 4 and 5 optimistic scenario below.

Conditions for Normal Growth Scenario: 1. 2. 3. 4. 5. There is a high pressure on fixed chimney kilns by the local community and also government enforces emission regulation effectively for brick kilns. VSBK license procedure is hassle free. Quality of brick produced from VSBK kilns is at par with BTK/ Fixed chimney Construction demand in the valley does not decrease. Technology know-how for VSBK is readily available to the entrepreneurs.

Under this scenario VSBK kilns in the valley is envisaged to register a constant growth rate as given in the chart normal scenario below. Conditions for pessimistic growth scenario: 1. 2. 3. 4. 5. Demand of brick declines. Govt. does not monitor the emission level of BTK and FC and pollution is not an issue. Quality of brick by VSBK does not improve substantially. Registration of VSBK is simplified and less cumbersome compared to Fixed Chimney. Current Fixed investment requirement for VSBK is not lower.

Under this scenario VSBK kilns is envisaged to grow only marginally as given in the chart: pessimistic scenario.

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Chart 3: total estimated number of VSBK shafts

400 350

Total number of VSBK Shafts

300 250

200 Total no. of shafts 150 100 Optimistic Scenario Total no. of shafts Normal Scenario 50 0 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 Total no. of shafts Pessimistic scenario

Year

Chart 4: Number of new VSBK kilns installed under three scenarios.

140

Number of new VSBK kilns installed

120

100

80 No. of new shafts added this year OS 40 No of new shafts added this year NS 20 No of new shafts 0 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 added this year PS

60

Year

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Chart 5: Projected percentage market share of VSBK under thee scenarios.

32 28

% market share of VSBK

24 20

16 % market share 12 8 optimistic scenario % market share normal scenario 4 0 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 % market share pessimistic scenario

Year

SWOT Analysis of alternative technologies:

SWOT analysis of BTK, Fixed Chimney and VSBK are given below.

4.1

BTK

Strength Proven technology- fully understood and adopted by entrepreneurs Low per unit cost compared to VSBK and FC Quick and High profit compared to the two other technologies High ROI and Payback compared to the other two technologies Opportunity Brick demand in the Kathmandu Valley is increasing

Weakness High level of emission High level of land requirement More labor intensive thus lower productivity Unprofessional production results in low productivity Threat Community threat is high to BTKs Government has already passed regulation to ban BTKs from the valley 23

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4.2

Fixed Chimney

Strength Entrepreneurs have currently favored this technology over VSBK Lower initial investment (per 1000 unit production capacity basis) compared to VSBK

Weakness Relatively new technology compared to BTK Emission level is still high

Opportunity Growing demand of brick can be fulfilled by this technology as high volume production is possible from the same kiln Being labor intensive technology, it employs more number of people in firing compared to VSBK for the same volume of brick production

High land requirement for brick making and kiln operation High fuel consumption compared to VSBK Threat If FC's do not meet emission norm of government (which is quite likely scenario) they will meet the same fate as BTK after few year. Increased land price and reduced land availability will make FCs unviable in most of the Kathmandu valley Community near the kiln will exert more pressure against Fixed Chimney more than VSBK due to larger scale production and high level of emission

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4.3

VSBK

Strength VSBK can be run for longer production duration (up to 10 months compared to FC and BTK) Low land requirement Low fuel (coal) consumption Being a closed type kiln less hazard to community health nearby the kiln Low manpower requirement in firing Better working conditions for the employees (workers) Profit margins of VSBK is better than that of Fixed Chimney Kilns Opportunity There exists an opportunity to modernize and enhance the professionalism of brick industry in the valley if entrepreneurs adopt VSBK technology as VSBK operation requires a more professional set up than BTK and FC Demand of Brick is increasing in Kathmandu. VSBK is the only available small scale technology to meet the growing demand of brick as a socially responsible business Other available technologies including BTK, Fixed Chimney can not provide long term solution to brick industry related problems such as air pollution, and shrinking land availability for brick making in the valley Opportunity to address social, environmental problems of brick industry in the Valley Opportunity to mechanize brick making and firing including brick loading and transportation

Weakness Per shaft volume of production is low

Quality bricks from VSBK kilns needs to improve High initial fixed cost More complex technology to operate Low ROI and longer Payback compared to BTK and FC

Threat Entrepreneurs are still not fully convinced to VSBK technology

VSBK is completely a new technology for existing BTK and FC kiln operators, thus adoption of this technology may take long time. Increasing land price in the Kathmandu valley may result in high opportunity cost of land, which may make even VSBK kilns unfeasible in the Valley in the long run

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5. 5.1

Conclusions and recommendations Key conclusions Brick demand in the Kathmandu valley is increasing rapidly. Brick demand is expected to grow at an average annual growth of 11 % over the next 5 years in the Kathmandu valley. This is a healthy growth considering the overall economic slowdown owing to growing political uncertainty in the country.

Supply side of brick in the Kathmandu valley is going through very uncertain period. Our calculations show that in 2003/2004 there will be shortfall in brick supply by nearly 37.4 million units in terms of local production vs. local demand. On the other hand, demand of brick is increasing at the average rate of 11 percent per annum as mentioned above. If more new kilns are not built, it will result in a situation of acute shortage in 2-3 years time.

VSBK is financially more profitable compared to FC though less so compared to BTK. From our financial calculation based on available data and some projections, it is found that VSBK is more profitable compared to FC however, less profitable compared to BTK. Profitability of BTK is highest at Rs. 675 per thousand brick followed by VSBK Rs. 554 per thousand brick and Fixed Chimney Rs. 443 per thousand bricks.

It is more profitable to run 4 or 6 shafts compared to two shafts VSBK kilns. This profitability is due to economies of scale in increasing volumes of the production. The ROI from two shafts VSBK is 15.3 percentage whereas in the case of four and six shafts VSBK, it is approximately 40 and 46 percent respectively. Analysis of key financial figures show that when shaft numbers are increased from two to four, BEP in percentage goes down to 27.43 % from 48 %. Similarly pay back period for 4 shafts reduces to 2 year and 2 months compared to 4 years and 2 months in the case of two shafts. This shows impressive gain in profitability index when number of shafts is increased from two to four and more.

Using Pug mill (mechanization) is more profitable as entrepreneurs can charge a premium price for the bricks made using pug milled soil. Our calculations show that when pug mill is used for 4 shaft VSBK the annual gross profit reduces by nearly Rs. 447 thousands (from Rs. 2.523 mln down to 2.076 mln). However, the use of pug milled soil also enhances quality of bricks and

Economic Analysis of Brick Industry in Kathmandu Valley

26

entrepreneurs are apparently charging up to Rs 200 per thousand bricks more for bricks made from pug milled soil. With this higher price the gross profit to sales goes up to 38.64 % compared to 36.20 % and the net profit to 28.53 % from 26.40 % and the ROI to 42.56 % from 39.87 %.

VSBK faces unique challenges, but there are prospects for its success in the Kathmandu valley. The profitability figures from our analysis of VSBK shafts is healthy. There is a good money to be made in VSBK brick kilns. Though ROI in VSBK is lower compared to BTK and FC, the 40 % ROI of VSBK is extremely good for any business. Also it is seen that there is high level of awareness about VSBK. 82 % of respondents are aware on VSBK technology. However this enthusiasm has not yet translated into their adoption of this technology. They have some key concerns of entrepreneurs on VSBK such as economies of scale, quality of brick, easy registration and assurance of protection of investment of entrepreneurs. Addressing to these concerns is central to the success of VSBK technology.

5.2

Recommendations for VSBK project Improve the output Quality of bricks from VSBK kilns Much of success of VSBK technology in the Kathmandu valley depends on this factor. VSBK is still in introduction phase, thus quality and other technology related issues have to be tackled with the support of the project.

Reduce the investment requirement of VSBK: We have found that one of the snags of VSBK is its high fixed investment compared to BTK and Fixed Chimney. The reason why VSBK is so popular in China is probably because of its lower investment cost. It is learned that in China VSBK is almost like a cottage industry. However, the improved VSBK that is promoted in Nepal by SKAT is very highly capital intensive. The fixed capital requirement for 4 shaft VSBK is nearly 300 % higher than BTK and 40 % higher than Fixed Chimney (double the production capacity of VSBK). This is a big hurdle for the multiplication of VSBKs in the Kathmandu valley. Thus VSBK Project must explore ways to lower the cost of the kilns by using appropriate technologies and adopting more cost effective kiln construction techniques.

Increase awareness among the consumers on VSBK bricks There is a need to increase awareness amongst the consumers and encourage them to buy VSBK bricks. When consumers are convinced with the VSBK product, then suppliers will be encouraged to install more VSBK kilns. For this social marketing campaign can be launched by the project together with the concerned VSBK entrepreneurs or brick association.

Economic Analysis of Brick Industry in Kathmandu Valley

27

Promote the VSBK on the merits of its superior economic/financial performance The usual tendency for any ecology friendly technologies is to promote them based on the social and environment appeal. This may bring a lot of publicity but if the technology is not based on the merits of economic superiority, it can not take off on commercial grounds. Over emphasizing on the ecological aspects sometimes give a wrong impression to the investors that the technology is not competitive on commercial grounds. Whereas highlighting ecological benefits is certainly beneficial but over emphasizing them may sometimes be counterproductive. Since, VSBK's profitability, four shaft and above, is healthier than FCs, the message must go out strongly along with message of ecological benefits.

Work in greater collaboration with the contractors, engineers and construction sector people There is a need to increase awareness among the engineers, contractors and people involved in the construction sector in general towards the VSBK produced bricks. The project can help entrepreneurs to promote and market their products to these clients through Business Development Services (BDS approach).

Encourage entrepreneurs to invest in minimum of four shafts or above to gain economies of scale in VSBK Running only 2 shaft VSBK is not profitable as has been discussed earlier. Thus VSBK project should market the VSBK in a size of four or above in order to benefit from the economies of scale.

Integrate the mechanization with the overall value addition of the product: Our study shows that mechanization such as installing pug mill will not be economically more profitable compared to using the manual labor, primarily because labor is so cheap. Thus promotion of mechanization should also add value in the products quality so that the premium price can be charged from the customers. Currently VSBK entrepreneurs are charging premium of average of Rs. 200 per thousand bricks for pug mill and machine extruded bricks.

Widen the scope of the VSBK project: Information is power. Entrepreneurs are always trying to have access to relevant information so that they can make better economic decisions to maximize their wealth. Rather than narrowly focusing on the project around the construction of new VSBK kilns, it is recommended that the project widen its scope to cover the overall brick market in the Kathmandu valley and construction material in general. It is clearly seen that VSBK will only remain a small player in the overall brick market

Economic Analysis of Brick Industry in Kathmandu Valley

28

of the Kathmandu valley within the next 5-6 years. Our study findings indicated that even in the case of optimistic scenario, market share of VSBK will not exceed 25 %. Project can play an instrumental role in providing information on the supply, demand and other technological aspects of making brick and other alternative construction material in the valley. 5.3

Recommendation for the government Monitor the kilns and their stack strictly Much of the success of VSBK depends on how government deals with the existing BTK and FC kilns. If government adopt measures to close the unregistered kilns and penalise the kilns exceeding the emission standard, then this will pave way for VSBK.

Safeguard the investment of brick entrepreneurs. VSBK kiln lasts for up to 15 years. Contrary to existing BTK kilns, VSBK is a long term investment. Thus government has to make sure that as long as VSBKs are operating as per the regulation and they meet the emission norm, they should be allowed to operate their kilns. Often haphazard change of decision by the government creates frustrating situation to the entrepreneurs who want to invest on long term basis.

DCSI and other concerned government agencies should promote VSBK technology more actively. In order to reduce the valleys air pollution problem and systematize valleys chaotic brick industry, governments active initiative in the promotion of VSBK is essential. Government and local authorities such as VDCs Municipalities can give higher priority to VSBK bricks while purchasing bricks for public construction. This will encourage existing brick entrepreneurs to shift to VSBK technology.

Simplify the registration process of the VSBK. Currently entrepreneurs have to go through a lengthy process for the registration of VSBK. To install a kiln, they have to get clearance from many offices including the local VDCs. Because of this, entrepreneurs are discouraged (which came out quite clearly during the FGD with entrepreneurs). It is recommended that DCSI co-ordinate with the concerned ministries (such as MOPE, MOF) and local bodies (such as VDCs) and follow a policy of one window clearance for VSBK. Government should also simplify the registration process of the VSBK kilns so that entrepreneurs do not have to wait months to get the license to operate new kilns.

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29

Annexure

Annexure

Abbreviations
BTK IEM Lakh NGO SIP-P SDC SPM SWOT VSBK Bulls Trench Kiln Institute for Environmental Management 100000 Rupees (1850 CHF) Non governmental organization Small Industries Promotion Project (Swiss Contact) Swiss Development Cooperation Suspended Particulate Matter Strengths, Weaknesses, Opportunities, Threats Vertical Shaft Brick Kiln

Annexure

Section A: Basic Information

Description 1. Name of the Unit: 2. Location of the unit: (Place, VDC, District) 3. Name of entrepreneur /respondent: 4. Mailing Address: 5. Phone No: 6. Fax No: 7. Email: 8. Age of entrepreneur: 9. Education: 10. Kiln Type (Please tick in appropriate box): 11. Number of kilns operating currently: (give number in the box at the right side) Name Enumerator 1 Enumerator 2 Situation of questionnaire 1. Fully completed the questionnaire 2. Partially filled in 3. Did not answer: 4. Other (please specify) 5. Personal Assessment of the enumerator:

a. BTK

b. Fixed Chimney, natural draft

c. Fixed chimney forced draft:

d. VSBK

a. BTK b. Fixed Chimney natural draft c. Fixed chimney forced draft d. VSBK Nature of work Interview using structured questionnaire Date of interview Day Date Month Signature

Description of the enumerator:

Status (please tick appropriate one)

This is the end of Section A

Economic Analysis of Brick Industry in Kathmandu Valley

Annexure

Section B: Economic information:

1. Total Land Area for the industry: 2. Type of land (Pls put ropani in box): 3. If land is rented or on lease, Rate Time period of lease/rent: : a. Own Ropani b. Rented/lease.

Nrs ..per ropani/month..

..months/year

4. What is the present market value of land (in Nrs. per Ropany) .. 5. Production period: (please draw a line for each items) Month Chaitra(12) Falgun(11) Bhadra (5) Baisakh(1) Shrawn(4) Mansir(8) Magh(10) Ashad (3) Aswin (6) Kartik(7) Jestha(2) Paush(9)

Items 5.1 Green Brick Making 5.2 Brick Firing 5.3 Brick selling

6. Records of Production: Description Last season This season (estimate)

6.1 Green bricks made (Number of bricks) 6.2 Loading of green bricks in the kiln (Number of bricks) 6.3 Bricks sold/saleable no. of red bricks (number of bricks) 6.4. Number of days kiln in operation (days)

Economic Analysis of Brick Industry in Kathmandu Valley

Annexure

7. Price information: Description Last Season Highest price Lowest Price This season (expected) Highest Lowest

*Sales Price (per 1000 bricks exsite price) * w/o transportation cost 8. Fixed Investment: (The purpose of this part is to obtain the information regarding the initial fixed investment at the time of starting the factory.) Item Description (unit) Year of Nrs. Investment (when?) 8.1 Land (if bought) Ropani 8.2 Site development including road, electricity 8.3 Cost of kiln (total) 8.4 Sheds for drying Number of sheds 8.5 Green brick storage shed Number of sheds 8.6 Temporary huts for workers Number of huts 8.7 Wells Number of wells 8.8 Office Building 8.9 Advance paid to worker Nrs Moulders (this season) Loaders Firemen Others 9. Sources of Funding: (Purpose of this question is to find how the entrepreneurs have acquired funding for starting and operating their business?) Description Year of investment Total Nrs. 9.1 Own capital (equity) 9.2 Bank Loan 9.3 Others (specify)

Economic Analysis of Brick Industry in Kathmandu Valley

Annexure

10. Preliminary and Pre-operative costs: (Purpose of this question is to find what were the pre-operative costs before the start of the factory) Description Year when costs Nrs. incurred 10.1 IEE report 10.2 Financial Scheme to DCSI 10.3 Land acquisition statement 10.4 License fee/excise fee 10.5 VDC tax 10.6 Consultancy costs (if any) 10.7 Donations (yearly) 10.8 Lump Sum total Cost (optional) 11. Power and fuel expenditure (for the last season) (The purpose of this question is to find the actual amount of money spent in electricity and other fuel sources for kiln operation during the last season). Description Unit Rate Total for the season (Nrs.) 11.1 Electricity Monthly cost consumption 11.2 Coal MT (whole season) 11.3 Diesel Ltrs. (whole season) 11.4 Firewood Quintals (whole season) 11.5 Other fuels (if any) 12. Human Resource: (The purpose of this part is to find the number and cost of labor expenditure for an entire production season) (Note: In the case of VSBK it is "per batch" production, while in the case of fixed chimney and BTK "per round" production is the basis for calculation of direct labor costs) If VSBK, go to QN. 12.1 through 12.3, if BTK, Fixed Chimney go to QN. 12.4 through 12.5 12.1 How many "batches" do you unload in 24 hrs?................................ 12.2 How many "bricks" do you produce per "batch" of production on average?............................................................. 12.3 How many days did you operate last season? . 12.4 How many "rounds" did you make in the last season ?.............................................. 12.5 How many "bricks" do you produce per round?..........................
Economic Analysis of Brick Industry in Kathmandu Valley

Annexure 12.6 Direct Labor (Evaluation of cost for the last season) Process Unit Rate of No. of labor labor (Nrs) Quantity /duration (month) Total cost (Nrs)

a. Water management b. Brick making Molders c. Loaders

Per month or if using pump's lumpsum cost Per 1000 bricks (including Naike cost) Per 1000 bricks (including Naike cost) Per month

d. Firing (foremen)

e. Stacking of Per 1000 bricks bricks f. Reclamation- Per ropani leveling 12.7 Indirect Labor: (per production season) Titles a. Site manager b. Chief Supervisor c. Supervisor green brick d. Supervisor loading e. SupervisorFiring f. Selling/marketing staff g. Accountant h. Office staff (administration)
Economic Analysis of Brick Industry in Kathmandu Valley

Number of staff Permanent Temporary

Total number

Monthly salary (Nrs)

Total Nrs.

Annexure 13. Consumables What are the consumable materials required per season of production? Item Requirements (Quantity per season) Nrs. (total for each item)

13.1 Wooden mould for molding 13.2 Tools & accessories (dokos, kodali etc) 13.3 Water buckets 13.4 GI sheets ( jasta pata) 13.5 Plastic coverings 13.6 Silt (pango mato) 14. 14.1 Soil Characteristic of the site

How do you describe the soil in your brick production area? Type Color Brick quality Remarks

14.2

Which type of coal do you use during firing? (Note: grades of coal are usually expressed in terms of A, B, C, D) Grade Name Place of quarry Remarks

This is the end of the Section B

Economic Analysis of Brick Industry in Kathmandu Valley

Annexure

Section C: Mechanization
15. Have you introduced mechanization in any part of the production process? (please tick) Yes 16. No

If "Yes" to Q.1 Description of Equipment Remarks

(note down accordingly) Production process a. Excavation of soil b. Mixing of soil c. Green brick making d. Drying e. Transportation of bricks f. Firing g. Others (if any)

17. Please fill in following information regarding the mechanization: (applicable to only those unit,s where the mechanical equipment has been reported above in Question no. 16) 17.1 Excavation of soil Personally owned or rented. If personally owned; Amount of Initial investment: (Nrs.). Capacity... Is the machine in use currently (please tick)? Yes No If the machine is not in use currently, Why? If being used currently, what is the current level of capacity utilization? Is it an additional cost to brick making or it reduces the production cost? 17.2 Mixing of soil Amount of Initial Investment Capacity... Is the machine in use currently (please tick)? Yes No If the machine is not in use currently, Why? . If being used currently, what is the current level of capacity utilization? ..... Improvement in the quality of green bricks. Does it increase the selling price of brick ? If yes by how much percentage ?............ Does it decrease the cost of brick making in terms of amount paid to the moulders ? If yes by how much percentage ?........ Is their an increase in brick production by mechanical mixing of soil ? if yes how How? ...
Economic Analysis of Brick Industry in Kathmandu Valley

Annexure

Green brick making Amount of Initial Investment Capacity... Is the machine in use currently (please tick)? Yes No If the machine is not in use currently, Why? . If being used currently, what is the current level of capacity utilization? ..... Improvement in the quality of green bricks. Drying Please describe

Firing Please describe

Others Please describe

This is the end of the section C

Economic Analysis of Brick Industry in Kathmandu Valley

Annexure

Section D: Legal/Regulatory
18. Status of company: b) Partnership firm d) other

a) Proprietorship firm c) Private limited 19.

Please provide following information regarding registration:

a) Registered (mention authority) .. b) Unregistered (tick) 20. 21. 22. Are there any unregistered bhattas in your area? A) Yes b) No

If yes, how many unregistered bhattas exist? (approximate number). Have you received any notice from the local body or government regarding conversion, closedown of the bhatta? b) No

a) Yes

This is the end of Section D

Economic Analysis of Brick Industry in Kathmandu Valley

Annexure

Section E: Supply-demand/Social/Environmental/others
23. Has there been any threat/pressure/complain given to you by anybody to close down your bhatta? a) Yes 24. S.No. b) No If yes to QN. 1 then please fill in following: Nature of threat/pressure/complains By whom?

1 2 3 25.Are you satisfied with your business in general (please tick)? a) Yes b) No 26. Please give reason for your answer in Q. No. 25. 27. In view of governments regulation to close BTKs, what are your future plans? (to ask to only BTK entrepreneurs) a) To continue with BTK b) To shift to Fixed Chimney c) To convert to VSBK d) To close down the business e) Move out of Kathmandu Valley 28. Please give reason for your answer in Q. No. 27: . 29. If reply is e) above: Where do you prefer to move? (location).. 30. Why do you want to move to this location? .. 31. In your view demand of brick in Kathmandu valley during current season in comparison to last season is: a) Increasing d) Remaining same b) Decreasing e) Do not know/Can't say

32. In you view, what are the characteristics of a good quality brick? Please mention points. a . b.. c. . d. . 33. Are you satisfied with the quality of bricks you are producing now? a. Yes b. No 34. What problems are you facing currently in producing high quality bricks ? a..

Annexure b.. c.. 35. In your view, are customers ready to pay higher price for "high quality" bricks? a. Yes 36. b. No

In your opinion, please indicate the scenario by giving your estimates in the next 5 year's time (by BS 2065). increase by ..% decrease by.% Remain same

Scenario in BS 2065

a. Brick making in Kathmandu valley in next 5 years time will b. Brick demand in Kathmandu valley in next 5 years time will c. Brick import to Kathmandu from outside the valley will d. Number of BTK operating in the valley will e. Number of Fixed Chimney operating in the valley will f. Number of VSBK operating in the valley will g. Market demand for the high quality brick will h. The involvement of traditional brick makers "awale's" in the valley will i. The average price of "bricks" in the Kathmandu valley will 37. Are you aware of VSBK technology? a) Yes b) No 38. Have you visited any existing VSBK kilns? a) Yes b) No 39. Are you interested to know more about VSBK technology? a) Yes 40. Are you interested to convert to VSBK? a) Yes b) No 41. Please give one most important reason for your answer to Q. No 40 ..

b) No

42. If you are interested to switch to VSBK, what help would you require for this. This is the end of the Questionnaire: THANK YOU !!

Economic Analysis of Brick Industry in Kathmandu Valley

Annexure

List of Survey Participants

S. No Name of Entrepreneur Name of Kiln Location of Kiln Age of Education of Entre. Entrepreneur Type of kiln surveyed Name of Enumerator

1 Rajesh Twana Basu 2 Mahesh Singh

Shri Mahakali

Bhaktapur

Shri Manakamana Lalitpur

3 Krishna Gop Koju Mahamanjushree Bhaktapur 4 Shyam Lakhe Maru 5 Rukesh Machamari 6 Shir Narayan Gwacha 7 Ram Kaji Awale Jaya Maji Bhairab Bhaktapur JB Itta Bhaata Shri Krishna Chimney R.K. Itta Bhatta Bhaktapur Bhaktapur Lalitpur Lalitpur Lalitpur

8 Nuchhe Maharjan Bhairabh Itta Bhatta 9 Bijaya Maharjan Shiv Shakti Itta 10 Bekha Man Maharjan 11 Rajendra Maharjan 12 Binod KC

Lalitpur Chimney Lalitpur

Ganesh Itta Lalitpur Bhatta BK Chimney Lalitpur Bhatta 13 Mahendra Uma Maheswor Kathmandu Chitrakar Chimney 14 Raju Bhai Sainju Kadambini Itta Bhaktapur Udyog 15 Hira Kaji Maharjan Dachhin Barahi Bhaktapur Itta 16 Krishna Bhakta New Champak Itta Bhaktapur Duwal 17 Bishnu Prajapati Saraswoti Mata Bhaktapur Itta 18 Shri Ram Koju Shri Maheswori Bhaktapur Itta 19 Ram Krishna Jaya Maheswori Bhaktapur Chawol Itta 20 Raj Man Awale Bhola Ganesh Itta Kathmandu 21 Bishnu Bhakta Jaya Hanuman Kathmandu mareku 22 Shyam Maharjan Satya Narayan IttaLalitpur 23 Rajendra Maharjan 24 Bal Krishna Maharjan Trishakti Itta Panchabuddha Lalitpur Kathmandu

Binu and Saurav 33 Intermediate Fixed Binu and chimney (ND) Saurav 60 Illiterate BTK Tashi and Sadip 33 BA BTK Binu and Saurav 29 Intermediate BTK Tashi and Sadip 35 Intermediate BTK Tashi and Sadip 51 SLC or below VSBK Binu and Saurav 39 Intermediate BTK Binu and Saurav . . BTK Tashi and Sadip 35 SLC or below BTK Tashi and Sadip 27 SLC or below BTK Binu and Saurav 34 Intermediate BTK Binu and Saurav 40 Intermediate BTK Binu and Saurav 34 Intermediate Fixed Binu and chimney (ND) Saurav 41 SLC or below Fixed Binu and chimney (ND) Saurav 41 illiterate Fixed Binu and chimney (ND) Saurav 36 illiterate Fixed Tashi and chimney (ND) Sadip 40 SLC or below Fixed Tashi and chimney (ND) Sadip 35 SLC or below Fixed Tashi and chimney (ND) Sadip 42 SLC or below Fixed Tashi and chimney (ND) Sadip 49SLC or below Fixed Binu and chimney (ND) Saurav 29 SLC or below VSBK Tashi and Sadip 32 BA Fixed Tashi and chimney (FD) Sadip 35 SLC or below Fixed Tashi and chimney (ND) Sadip

26

Intermediate BTK

Annexure

Analysis of The Brick Entrepreneur Survey- Non Financial Part

1. Type of Kiln Surveyed
Out of the 24 kilns surveyed, 11 were BTK, 10 Fixed Chimney Natural Draft type, 1 Fixed Chimney Forced Draft and 2 VSBK kilns were covered. Out of the 24 respondents, one entrepreneur refused to give information, 23 entrepreneurs responded to the questionnaire. Type of Kiln BTK Fixed chimney (ND) Fixed chimney (FD) VSBK Total Frequency 11 10 1 2 24 Percent 45.8 41.7 4.2 8.3 100.0

Type of kiln surveyed

12
11

10

10

Frequency

2
2 1

0 BTK Fixed chimney (ND)

Fixed chimney (FD) VSBK

Annexure

2.

Location of firm surveyed:

Out of 24 firms surveyed 11 were from Bhaktapur, 9 from Lalitpur and 4 from Kathmandu.
Location of Bhatta
12

11
10

9
8

Frequency

4
2

0 Kathmandu Lalitpur Bhaktapur

Location of Bhatta

Status of the Firm:

Out of 23 persons who responded to this question, 13 were proprietorship firm, 8 partnership firm and only two were registered as private Ltd.
Status of firm
14 12 10
13

Frequency

8 6 4 2

Frequency Status of firm

0 propritorship firm partnership firm private ltd

Status of firm

Annexure

4.

Education Level of Entrepreneurs:

Education level of entrepreneurs involved in brick making appears to be relatively low. Nearly 13 % are illiterate, 40 % are SLC or below and only 8 % respondents have graduate (bachelor) degrees. None have completed master degree.

Education of enerpreneur
12

10

10

Frequency

3
2

2
0 illeterate SLC or below Intermediate Bachelor

Education of enerpreneur

5. 5.1

Findings of Survey: Threat, Pressure in Operating Business:

67 % respondents said they have not received any complain or threat from anybody till now in the process of operation of their kilns. However, 30% of them mostly from Bhaktapur reported that they have faced some problem and received complain or threat from others (army, community, school or the government).

Annexure

20

19

Frequency

10

0 yes no

Has there been any threat pressure complain from anybody?

5.2

Business Satisfaction:

Overwhelming number of entrepreneurs (87%) entrepreneurs said they are satisfied from their business. Only 13 % reported not satisfied with their business. This very high level of satisfaction probably indicates of the high profitability of brick making business in the Kathmandu valley.
30

20

20

Frequency
10

3
0 yes no

Are you satisfied with your business in general?

Economic Analysis of Brick Industry in Kathmandu Valley

Annexure

5.3

Preferred Options Among Entrepreneurs:

Overwhelming number of entrepreneurs (68 %) said they are willing to shift to Fixed chimney in the event of government's ban on their existing BTK. (This question was also asked to those entrepreneurs who have already converted to Fixed Chimney from their existing BTK kiln (bhatta) from this season.) Only 8 % entrepreneurs said they want to convert into VSBK from their existing BTK kilns. Interestingly none of the entrepreneurs said they want to relocate out of Kathmandu. When asked in FGD why they do not want to relocate, they gave two reasons. 1. 2. The quality of soil outside Kathmandu is not good for brick making. Almost all the existing entrepreneurs who are operating kilns in the valley are the local residents, shifting their kilns outside Kathmandu will be difficult as in this case they have to even shift their residences. They unanimously said, in view of the current security environment in the country, they do not want to shift outside the valley.
16 14 12 10 8 6 4
4

14

Frequency

2
2 2 1

0 Shift to Fixed Chimn Convert in to VSBK

Close down the busin

Not applicable

Other (e.g. not deci

In view of govt. decision to close BTK what will you do?

5.4

Entrepreneurs Perception Regarding Demand of Brick:

Nearly 55 % said the brick demand is going to increase in this season compared to the last. Whereas, 32 % entrepreneurs said the demand will decrease. This shows general optimism of the entrepreneurs in their business despite of all the current problems this sector is facing.

Economic Analysis of Brick Industry in Kathmandu Valley

Annexure

14

12

12

10

Frequency

2
0 increasing decreasing

1
remaining same DK/CS

In your view demand of brick in Kathmandu valley during current season c

5.5

Perception Towards Quality of Brick:

Nearly 90 % respondents are satisfied with the quality of brick they are producing. Only 10 % seem to be unhappy with the quality of brick (one of them happens to be VSBK entrepreneur). That shows in general entrepreneurs apathetic attitude towards producing quality bricks. This is not very encouraging in view of current poor quality brick being produced in the valley (by all, BTK, VSBK and FC) entrepreneurs. However, entrepreneurs seem to agree almost unanimously, they can charge higher price for high quality brick. Nearly 86 % entrepreneurs agree to this view. This indicates potentially high level of demand for high quality bricks. (supply and demand gap)

Economic Analysis of Brick Industry in Kathmandu Valley

Annexure

30

20

Frequency

19

10

0 yes

2
no

Are you satisfied with the quality of bricks you are producing now?

5.6
20

Future Scenario as Envisaged by Entrepreneurs:

19

Frequency

10

0 yes no

Are customers ready to pay higher price for "high quality" bricks?

Series of questions were asked to find what the entrepreneurs think about the future of their business 5 years down the line. Responses are given below.
a. Brick making in Kathmandu valley in next 5 years time Increase Frequency Percent 6 26.1 Decrease 14 60.9 Don't know, Can't say 3 13.0 Total 23 100.0

71 % respondents said that brick making activity in the Kathmandu valley will decrease in next 5 years compared to now.

Economic Analysis of Brick Industry in Kathmandu Valley

Annexure
b. Brick demand in Kathmandu valley in next 5 years time Increase Decrease Frequency Percent 13 56.5 4 17.4 Remain same 2 8.7 Don't know, Can't say 4 17.4 Total 23 100.0

Interestingly nearly 57% respondents said that brick demand in the Kathmandu valley will increase substantially in next 5 years time. c. Brick import to Kathmandu valley from outside the valley in next 5 years time Increase Decrease Frequency Percent 9 39.1 2 8.7 Remain same 6 26.1 Don't know, Can't say 6 26.1 Total 23 100.0

39 % respondents said brick import to the valley is going to increase in next 5 years from outside the valley. 26 % thought it will remain at the same low level as now.

d.

Number of BTK operating in the valley in the next 5 years Increase Decrease Frequency Percent 1 4.3 17 73.9 Remain same 1 4.3 Don't know, Can't say 4 17.4 Total 23 100.0

Nearly 74 % entrepreneurs said existing BTK will reduce or will not remain in existence in next 5 years. Probably this is due to the government's strong message to close the existing BTK by the next production season. e. Number of VSBK operating in the valley in the next 5 years Increase Decrease Frequency Percent 13 56.5 4 17.4 Remain same 2 8.7 Don't know, Can't say 4 17.4 Total 23 100.0

Nearly 57 % entrepreneurs believe that number of VSBK kilns are going to increase substantially in the next 5 years.

f.

Market demand for high quality brick Increase Frequency Percent 15 65.2 Remain same 6 26.1 Don't know, Can't say 2 8.7 Total 23 100.0

65 % entrepreneurs believe, market demand for high quality bricks will increase in next 5 years. This gives indication of the growing market of high quality brick in future.

Economic Analysis of Brick Industry in Kathmandu Valley

Annexure
g. Average price of Bricks in the Kathmandu valley in the next 5 years Increase Frequency Percent 22 95.7 Don't know, Can't say 1 4.3 Total 23 100.0

Nearly all the entrepreneurs believe, price of brick is going to increase substantially in the next 5 years compared to now. 5.7 Awareness of VSBK Technology:

Nearly 82 % of the surveyed entrepreneur are aware of VSBK technology. Only 8 % are unaware of VSBK. 61 % of respondents (BTK and Fixed Chimney respondents) have already visited the existing VSBK production sites. 29 % have not visited the VSBK sites. This indicates that there is a very high level of awareness among the entrepreneurs about VSBK.
30

20

Frequency

19

10

0 yes

no

Not applicable

Are you aware of VSBK technology?

Economic Analysis of Brick Industry in Kathmandu Valley

Annexure

16 14

14

12 10

Frequency

8 7

6 4

2 2 0 yes no Not applicable

Have you visited any existing VSBK kilns?

5.8

Interest and Readiness Level of Entrepreneurs to Covert to VSBK.

Nearly 90 % entrepreneurs (comprising both BTK and Fixed Chimney) want to know more about VSBK technology of brick making. Nearly 55 % entrepreneurs (BTK and fixed chimney) want to convert to VSBK provided they receive some support from the project and government. The main support they are expecting from the project is know how and technology transfer support from the VSBK project, where as from government, they are expecting support on registration (for VSBK plants) and future assurance that VSBK kilns will not be pressurized to close down for the life of its operation.

Economic Analysis of Brick Industry in Kathmandu Valley

Annexure

30

20

Frequency

19

10

0 yes

2
no

2
not applicable

Are you interested to know more about VSBK technology?

14

13
12

10

Frequency

9
8

2
0 yes no not applicable

Are you interested to convert to VSBK?

Economic Analysis of Brick Industry in Kathmandu Valley

Annexure-5

BULLS TRENCH KILN (BTK)

Annexure

CLAMP-KILN

Annexure

FIXED CHIMNEY NATURAL DRAFT

Annexure

FIXED CHIMNEY FORCED DRAFT

Annexure

VERTICAL SHAFT BRICK KILN

Annexure

FOCUS GROUP DISCUSSION BULLS TRENCH KILN

Annexure

FOCUS GROUP DISCUSSION FIXED CHIMNEY FORCED DRAFT