PAC investigate £3.5 million profit at Falklands' Government quarry

“Whether by luck, judgement or whatever, over the past seven years, the quarry has managed to have a £3.5 million total surplus including depreciation of capital assets,” said the Public Accounts Committee chair Andrea Clausen on Tuesday.
She added: “I think that for the customers it must seem a little bit harsh, that such a level of surplus has been compiled by a non-profit making organisation, when Government has a policy of user-pays principle.”

The Public Accounts Committee met to investigate aggregate prices and the profits the Government Quarry at Pony’s Pass had made in recent years with Director of Public Works Colin Summers attending to answer questions.
Mrs Clausen said she appreciated Mr Summers had only been in the department for two of the seven years in question.
He explained that costs were calculated by expected tonnage in a year (usually between 70 - 80,000 tonnes) and needed to be sold at an average of £26.99 to break even at the quarry. If more was sold then it was likely a profit would be shown as the fixed costs would not have changed.
He said that while it was relatively detailed what FIG would use, the private sector was an area, “where we really struggle to define our annual budget,” and pointed out how variable sales had been over previous years ranging from 65 - 120,000 tonnes per annum.
He cited examples as the oil yards which had only taken half of what they had predicted, whereas Project Shackleton (MPA runway works) had doubled their prediction which had caused a spike in the revenue. Responding to a question he confirmed that FIG purchased aggregate and supplied it free of charge to construction partner Morrison (Falklands) Ltd.
Prices vary with sands sold at a reduced price which is averaged out over the different grades of aggregate. Mr Summers explained that this was so as not to impact on construction when the removal of large quantities of sand from the Yorke Bay area had been stopped.
A comparison with prices from a quarry in Orkney was offered to the committee which showed much lower prices, however Mr Summers explained that the types of rock were not comparable. In Orkney he said the product was much softer, “you could probably take a shovel to it,” while in the Falklands the material was hard and very abrasive which required blasting and caused more wear and tear on the machinery, resulting in an overall higher production cost. Depreciation on machinery (over 20 years) was calculated at £4.60 alone for every tonne produced at Pony’s Pass. He also flagged up the need to purchase up to more than a year’s supply of explosives, which was a fairly unique situation.

Mrs Clausen asked if when working out an average price was what was, “already in the bank [aggregate stocks] taken into account?”
Mr Summers said the budget was based on a year by year basis. 
He added: “Submissions this year would be based on how much we think we will produce and how much we think we will sell regardless of any profits made in the past.”
Stock was taken into account in a no more scientific way than, “we know we will use it up,” said Mr Summers.  
Any profit goes into the Consolidated Fund and was not held over  for the quarry.
2015/16 was Mr Summers’ first budget and, “it looks like we got it right,” he said adding that there was a small surplus at the end of the year (£3,458.00). This had been boosted by the fact some local companies had been aware of the 7.5 per cent increase in price and had bought in bulk in advance. This was however having a detrimental effect on this year with sales 30 per cent less than predicted to date.
Committee member Steve Dent said the interesting thing for him was that in 2013/14 (£1.1million surplus) and 2014/15 (£574,306 surplus) according to FIG policy, no changes were made in prices, however in both the following years (2015/16 and 16/17) there was a 7.5 per cent increase. He said he had no problem with the quarry making a minor surplus or deficit, but did have a problem with the sole supplier of an essential product for the development of the Falkland Islands making a £3.5 million surplus. 
He asked why a straight year on year 7.5 per cent increase had been requested.
Mr Summers said in fact a straight 15 per cent increase had been asked for, but MLAs had opted for 7.5 over two years.
It was seen as being needed in 2015/16 as a drop-off was predicted with a lot of projects coming to an end. Fixed costs hadn’t changed and it was looking like we would not break even, Mr Summers told the committee.
Access to the actual figures were not available at that time and it later transpired that a small surplus was achieved in 2015/16.
Mrs Clausen asked if predicted sales were always used to set prices or if the Government had ever looked back to balance it out over a period of time. “That may be why members of the public had not been entirely happy when all they can see is that money has been made but not passed back to the customer.” 
Mr Dent said the fundamental issue was that Government had made money, “hand over fist” out of the economic development of the Falkland Islands, “through the only place that stone can be purchased from.”
Mr Summers said he did not know what had taken place in the past, but they were now trying to look both back and ahead to set the prices using a five year plan so that prices did not fluctuate too much.
He pointed out that Pony’s Pass as the sole provider had to be able to provide the product, unlike commercial quarries such as he had worked on in the UK.
Mr Dent said he appreciated Mr Summers was not there at the time, adding, “ But I just don’t get it.” A surplus had been predicted for 2015/16, yet the cost was still increased by 7.5 per cent; where did that decision come from?
Mr Summers said he thought asphalt sales may have been included at that time, but would research the matter and supply a written answer along with some comparisons on FIG pricing policy from other departments.
PAC chair Andrea Clausen said that once they had formed a report it would be made public.