Material issues

This year we increased the granularity of the materiality determination process, which was framed by the Group’s annual strategic planning process. This enabled the mapping of issues at business platform level to those of the Group.

The executive team considered and confirmed the material issues, which are those deemed to substantively affect the Group’s ability to sustain its strategic, operational and financial performance, particularly as it grows its multinational operating base. The material issues and the corresponding sub-issues are not ranked in order of importance, given their inter-dependence.

ACCELERATING THE DIVERSIFICATION OF OUR BUSINESS TO SUPPORT GROWTH THROUGH THE CYCLE


Our strategic focus on global natural resources market sectors exposes the Group to the cyclicality in these markets. Subdued global economic conditions and weak demand for commodities have persisted, which have impacted on our financial performance and impeded the pace at which we are able to implement our strategy. However, as our business platforms achieve the same level of maturity in their multinational business models by expanding their geographic scope and ability to deliver services across the full project lifecycle, this will provide increasing protection against these cycles. While conditions are likely to remain difficult in the next 18 months, we will need to remain responsive to short-term market dynamics, employing tactics that support our profitability and hence our ability to invest in our strategic priorities. Furthermore, resolving the legacy issues that continue to inhibit our strategic and financial flexibility will enable us to accelerate the diversification of our business portfolio, and position our business platforms for the long-term demand growth we expect in our market sectors. In this regard, we continue to focus on resolving legacy claims and realising uncertified revenue, which will free-up capital for accelerated acquisitive growth and remove the uncertainty around the settlement of these claims. This will support the growth acquisition required in the medium term to sustainably grow the Group’s earnings profile.

Group chief executive’s and financial director’s report
Business platform reviews

SUB-ISSUE:

  • Anticipate and respond to market dynamics.

GROUP ASPECT

  • Focus on larger developed and developing markets showing the highest growth potential, with a primary focus on the USA, Canada, Australasia and South East Asia, followed by sub-Saharan Africa and other tertiary markets.
  • Acquisitions will focus on establishing a presence and capacity in chosen markets.

PLATFORM ASPECT

  • Oil & Gas is planning acquisitions in Asia and the USA to position it for international LNG projects over the medium term. It is also looking to secure work on smaller petrochemical plants downstream from constructed LNG facilities.
  • Underground Mining is wellpositioned for increased capital project activity in commodities in the Americas, Asia Pacific and sub- Saharan Africa.
  • Power & Water is focused on developing and building power generation plants, including coal, gas, solar, hydro and nuclear in sub- Saharan Africa, and selected international markets including the USA, where two potential acquisitions have been identified. In the water sector, it will focus on desalination and wastewater treatment, expanding its water treatment services in sub-Saharan Africa and entering the Australian market.

SUB-ISSUE:

  • Accelerate the diversification of the Group’s business model.

GROUP ASPECT

  • Expand further into project development, engineering, commissioning, operations and maintenance, and decommissioning.
  • Grow niche capabilities of acquisitions made in the previous year.
  • Invest in selected concession opportunities to develop and operate projects, to generate annuity income.

PLATFORM ASPECT

  • Oil & Gas is growing its specialist engineering and asset support capabilities, and is focused on securing commissioning, maintenance and brownfields opportunities in Australia and internationally.
  • Underground Mining, which is active across the full project lifecycle, is focusing on growing its contract mining portfolio to generate annuity income.
  • Power & Water is growing its operations, maintenance and shutdown capabilities and aims to secure maintenance services as the power programme in South Africa moves out of the construction phase. It continues to grow its water treatment sales network into Africa, and is also looking to secure a concession to operate a biomass plant.

SUB-ISSUE:

  • Focus executive attention, business development and capital allocation on long-term growth.

GROUP ASPECT

  • Continue to focus on resolving major claims.
  • Dispose of, or discontinue non-strategic operations.
  • Clarify the role and capacity requirements of the corporate office to support long-term strategic focus.
  • Develop client relationships to position the Group to access opportunities as they come to market.

PLATFORM ASPECT

  • Proposed sale of Infrastructure & Building in an empowerment transaction. Operations in the Middle East will be discontinued after completing current projects.
  • Oil & Gas implemented regional structures and strengthened business development capacity in key regions to drive international expansion, and is maintaining positive relationships with clients to secure LNG projects coming on stream in the medium to long term.
  • Underground Mining is developing ‘life-of-mine’ relationships with longstanding top and mid-tier mining clients in preparation for an upturn in activity.
  • Power & Water is actively engaging clients developing new projects, and the potential sale of Genrec, its steel manufacturing business, is well advanced.

MAINTAINING PROFITABILITY THROUGH THE CYCLE

MAINTAINING PROFITABILITY THROUGH THE CYCLE


The focus on cost reduction in the corporate office and across our business platforms continues, and we have restructured operations where necessary. Our focus on contract, risk and project management excellence over the last few years has contained loss-making and distressed projects, but they still had a material impact on the Group’s profitability in the year. These projects and claims arising from contractual disputes cause internal disruption and divert management’s attention away from strategic execution. Our future profitability depends not only on the size, but also on the quality of our order book. It also depends on geographic, market sector and project lifecycle diversity, which will improve as we implement our strategy. With limited organic growth potential in difficult markets, and with margins under increasing pressure, operational excellence in project delivery is essential, and this requires continued investment in productivity and efficiency initiatives.

Group chief executive’s and financial director’s report
Summarised financial report
Business platform reviews

SUB-ISSUE:

  • Reduce costs and restructure operations in line with market conditions.

GROUP ASPECT

  • Rationalise corporate office costs further and optimise capacity requirements.
  • Dispose of non-performing operations.
  • Leverage information systems to drive operating efficiencies.

PLATFORM ASPECT

  • Oil & Gas has significantly reduced its corporate overheads and rightsized its operations, eliminating duplication. This will lead to an annual saving of AUD30 million to AUD40 million. It will also improve its ability to be price competitive in smaller-scale opportunities, particularly in the highly competitive brownfields LNG markets.
  • Underground Mining has implemented initiatives to restore tendered margins on distressed projects in South Africa, and has closed the Santiago, Chile office, which will now be managed from the office in North Bay, Canada. In the Australian operations, resource management systems have yielded efficiencies.
  • The commercial turnaround in Power & Water after the restructuring in the previous year was offset by legacy project losses, which have been written off, and an impairment in Genrec. The sale of Genrec is underway.

SUB-ISSUE:

  • Maintain strategic flexibility to support profitability at the bottom of the cycle.

GROUP ASPECT

  • Employ short-term tactics, mostly in the Oil & Gas platform, to capture profitable growth opportunities in complementary markets, based on existing competencies and client relationships.

PLATFORM ASPECT

  • Oil & Gas is pursuing selected civil infrastructure development projects in Australia to mitigate against the limited oil and gas opportunities in the short to medium term.
  • Underground Mining has entered into bulk material handling of metals and minerals.

STRENGTHENING DIFFERENTIATION IN COMPETITIVE MARKETS


The Group’s reputation as a leading contractor is fundamental to strengthening our relationships with clients, securing repeat business and negotiating more favourable contractual terms, all of which support profitability and the ability to achieve our strategy. This requires that we understand what matters most to our clients. The key enablers of operational excellence include continual investment in our health and safety performance and people practices, especially training and development, irrespective of the impact of weak markets on our current profitability. Safety performance, in particular, is a differentiating factor for clients in all our business platforms. We continuously improve our health and safety programme and performance by better understanding our risk exposure, benchmarking our practices against those of clients and peers, and implementing lessons learnt from incidents and audits. All our businesses are required to carry out self-assessments on the entrenchment of Group safety initiatives, and are subjected to independent assurance by internal and external experts. These assessments show a maturing level of compliance, especially with respect to fatal risk control standards aimed at preventing major accidents.

Group chief executive’s and financial director’s report
Business platform reviews
> Safety, health and wellness

SUB-ISSUE:

  • Focus on Engineered Excellence.

GROUP ASPECT

  • Continue to improve project management systems and align training and development to support excellence in project delivery.

PLATFORM ASPECT

  • Oil & Gas rolled out a new assurance system to optimise governance and productivity on projects, and a governance module was introduced into the Clough Project Management Academy training programme.
  • Underground Mining continued to increase the capacity of its project management office in South Africa, which drives project management excellence.
  • Power & Water has implemented more robust project review governance processes and organisational adjustments to strengthen project delivery.

SUB-ISSUE:

  • Manage employee, contractor and community safety to maintain benchmark safety performance.

GROUP ASPECT

  • Continue to embed frameworks and share best practices in safety management, including MAP.
  • Continue to shift focus to leading safety indicators, including Visible Felt Leadership engagements as the focal point of leadership’s commitment to continual improvement in safety performance.

PLATFORM ASPECT

  • Oil & Gas maintained an industry-leading LTIFR with no fatalities recorded. The platform continued to apply its award-winning MAP initiative, while aligning its health and safety management system to the Group framework.
  • Underground Mining maintained an industry-leading LTIFR. Regrettably, one fatality was recorded. The platform started implementing MAP.
  • Power & Water increased its LTIFR and started rolling out MAP, as well as a pilot programme to shift behaviour to support improved health, safety and environmental results.

SUB-ISSUE:

  • Deepen, replicate and secure specialist competencies.

GROUP ASPECT

  • Employ new technologies to support differentiated service offerings.
  • Enter into appropriate JVs and partnerships with technology providers.

PLATFORM ASPECT

  • Oil & Gas is leveraging its specialised engineering and asset support capabilities across its operations. Its ability to preserve biosecurity in sensitive marine areas is a differentiator. JVs remain critical for the platform in matching capability to market opportunities.
  • Underground Mining continues to leverage its leading technological capabilities across the platform to enhance its competitive position, which includes employing Canadian shaft sinking technology in the South African operation, and an ongoing investment in trackless mechanised mining and other automated mining technologies.
  • Power & Water has secured agreements with internationally respected technology partners in its strategic focus areas of desalination and water treatment, which are a key differentiator in this market sector. It is also looking to acquire and commercialise technology to treat acid mine drainage.

REMAIN RESPONSIVE TO LOCAL REQUIREMENTS IN THE COUNTRIES IN WHICH WE OPERATE


As the Group grows its multinational operating base, it is essential that we retain our commercial and social licences to operate. To this end, the Group’s leadership continues to ensure compliance with the applicable regulatory frameworks in the sectors, jurisdictions and territories in which we operate. In South Africa, the Group is focused on accelerating its transformation performance, notwithstanding the difficulty that constraints on growth place on our ability to drive employment equity, where we have not achieved our targets. An important aspect of effective project delivery is strong local management teams that understand the imperatives and cultural nuances in the regions in which we operate. The Group therefore aims to develop local leadership and skills, and enters into JVs with local contractors in compliance with local contracting conventions. Ensuring that our JV partners and subcontractors are aligned to our values and principles, and the high standards we set as a responsible employer and corporate citizen, is essential in ensuring excellent project delivery and mitigating risk, particularly in respect of safety.

Group chief executive’s and financial director’s report
Business platform reviews
> Safety, health and wellness
> Our employees, transformation and local economic development
> Community development

SUB-ISSUE:

  • Accelerate transformation in the South African operations.

GROUP ASPECT

  • Establish a world-class black-owned infrastructure and building business in the construction market through the sale of the I&B platform.
  • Maintained Level 2 BBBEE contributor status against the old Construction Sector Charter.
  • R3,1 million was spent developing the leadership capability of 142 individuals in South Africa, with 46% and 30% spent on black and women employees respectively.
  • R120,5 million was spent training 9 080 employees in South Africa, of which 79% and 81% was spent on black and women employees respectively.
  • Spent R23,3 million on community development initiatives in South Africa: R15,2 million on education and R5 million on community skills development programmes.

PLATFORM ASPECT

  • Underground Mining’s South African operations retained a Level 4 BBBEE rating against the Construction Sector Charter. In total, 234 employees, client employees and community members obtained national certificates through the Murray & Roberts Cementation Training Academy.
  • Power & Water’s South African operations achieved a Level 3 BBBEE rating against the Construction Sector Charter, and 60% of its promotions to middle management levels were black (African, Coloured and Indian) employees with black representation at junior management level at 74%.

SUB-ISSUE:

  • Meet localisation requirements in all markets.

GROUP ASPECT

  • Enter into JVs with local contractors to access opportunities in target markets and geographies.
  • Continue to invest in community development initiatives in the areas in which we operate.

PLATFORM ASPECT

  • Oil & Gas awarded four scholarships to top engineering students in its Clough Scholars Programme.
  • Underground Mining has seen market share gains in its Indonesian operations due to the hiring and training of local employees.
  • Power & Water has appointed respected national business leaders in Ghana and Mozambique to company boards in non-executive director roles.

MANAGING HUMAN CAPITAL


The capability and capacity of our employees are fundamental to achieving our strategic objectives, and our guiding principle of Engineered Excellence. We strive to be recognised as an employer of choice in all our markets, which enables us to attract and retain top talent and manage our human capital requirements through the cycle, especially in retaining the capacity needed to win work. Our performance management system ensures accountability for team and individual objectives, and aligns these to our strategic objectives and the integrated performance dimensions on which leadership are remunerated. It also assists with identifying development needs, which are satisfied through extensive education and training programmes. Our health and safety performance directly impacts on our reputation as an employer of choice, and is supported by a range of programmes focused on continual improvement. Our health and wellness programme provides employees with access to integrated healthcare, which aims to prevent disease and poor health conditions and limit the safety risk of not being fit for work, as well as the impact of absenteeism on productivity. Our contribution as a fair employer to the societies we serve, especially in developing countries, is important in driving socio-economic development and mitigating levels of unemployment and inequality. Ethical business practices are also of importance to the Group’s reputation and ability to win work. The Group mitigates the risk of unethical behaviour through its Code of Conduct, internal audit, the oversight of compliance and an anonymous fraud reporting and investigating function.

Business platform reviews
> Safety, health and wellness
> Our employees, transformation and local economic development

SUB-ISSUE:

  • Ensure leadership depth through improved succession planning.

GROUP ASPECT

  • Consolidated the top leadership structures and made key appointments across the platforms.
  • Each executive committee member mentors up to two individuals to build leadership capability.

PLATFORM ASPECT

  • A new chief executive was appointed in Oil & Gas and the executive committee was strengthened. The platform established an external coaching panel to support selected leaders and managers.
  • A new chief financial officer was appointed in Underground Mining and leadership and senior management succession was assessed.
  • A new chief executive and chief financial officer was appointed in Power & Water, with a mandate to communicate and deliver strategic objectives and set key performance indicators.

SUB-ISSUE:

  • Provide training and development opportunities to support a culture of learning.

GROUP ASPECT

  • R155 million (FY15: R93 million) spent on training and development.
  • Enhance areas highlighted for improvement in employee survey feedback.
  • Continued focus on relevant training and development initiatives despite industry slowdown.

PLATFORM ASPECT

  • Oil & Gas launched an online talent management tool and the first group of employees participated in the online Project Management Academy. All employees completed Code of Conduct training. The platform is focused on refining its approach to learning and development to maximise effectiveness.
  • Underground Mining continued to provide a range of skills development programmes at its training facility in Bentley Park, Gauteng.
  • Power & Water renewed its focus on performance management and development programmes. In total, 1 305 (FY15: 1 209) apprentices have completed training on the power programme projects in South Africa.

SUB-ISSUE:

  • Achieve employer of choice status in all markets through best people practices.

GROUP ASPECT

  • The South African business and Australian mining operations were rated as employers of choice by 88% of employees in the Deloitte Best Company to Work For survey.
  • Ranked sixth in the Engineering and Technology category of the Universum survey, which measures the South African employers that are most attractive to talent.
  • Voluntary employee turnover was 4,3% (FY15: 4%), indicating that talent is being retained.

PLATFORM ASPECT

  • Underground Mining’s Canadian operation is consistently recognised as one of the country’s top employers in various surveys. The Australian operation participated in the Deloitte Best Company to Work For survey for the first time, with good results. In its South African operations, the platform implemented components of the Employee Relations Framework and concluded a three-year wage agreement with industry unions.
  • Power & Water rolled out revised communication structures and processes on the power programme projects in South Africa, and engaged extensively with unions. While no strike action took place, the effects of unprotected strike action in the previous year continued to be felt into FY2016.