Annual Integrated Report

2019

Gathering
Momentum

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Underground Mining + Oil & Gas + Power & Water

Overview

The Power & Water platform operates predominantly in South Africa and sub-Saharan Africa. Its service offering includes feasibility studies, detailed engineering, procurement, construction, commissioning, and repairs and maintenance work.

The platform’s businesses are:

1
AQUAMARINE WATER TREATMENT
2
MURRAY & ROBERTS COSMOS MOZAMBIQUE LIMITADA
3
MURRAY & ROBERTS POWER & ENERGY (MRPE)
4
MURRAY & ROBERTS WATER (MRW)
5
OPTIPOWER PROJECTS.

Given the challenging state of the South African power and water sectors, the platform is extending its service offering to other markets, including petrochemicals, metals and minerals, and paper and pulp. There is also substantial growth potential in the transmission, distribution and substation sectors in South Africa and sub-Saharan Africa.

Performance

With the Medupi and Kusile power station projects nearing completion and in the absence of large replacement projects, revenue for FY2019 decreased to R2,5 billion (FY2018: R4,8 billion) and the order book declined to R0,9 billion (FY2018: R1,5 billion). The platform incurred an operating loss of R32 million compared to a R134 million operating profit in the prior year. This was primarily due to losses incurred at Sasol’s CTFE project in Secunda, a dispute has been declared. Operational performance was satisfactory on all other projects.

Overhead costs were reduced in line with the anticipated lower future revenue stream. The restructuring was undertaken without compromising the platform’s ability to deliver on its strategic objectives, service the current order book and develop its project pipeline.

MRPE’s work on the Medupi and Kusile power station projects is nearing completion and focus has shifted to provide repair and maintenance services to Eskom’s ageing fleet of power stations. There is substantial growth potential in the transmission, distribution and substation sectors in South Africa and sub-Saharan Africa and to position the business for this opportunity, specialist contractor OptiPower Projects was acquired for R38 million on 1 July 2019. OptiPower Projects owns specialised plant and equipment needed to undertake transmission and refurbishment projects.

In line with the platform’s strategy to pursue opportunities in complementary markets, structural, mechanical and piping construction contracts were secured from Anglo Platinum at its Polokwane smelter and from SAPPI at its SAICCOR complex at Umkomaas.

MRW remains small and needs to develop critical mass, but is well positioned to take advantage of opportunities in the water and wastewater treatment sector, driven by water shortages. During FY2019, the benefits of the Organica Water technology were successfully proven at the Verulam wastewater treatment plant in the eThekwini Municipality. The demonstration facility hosted visits from prospective public and private sector clients, funding institutions, consulting engineers and other key water sector stakeholders. It is important that the business achieves a breakthrough in securing wastewater treatment projects that apply this innovative technology.

Murray & Roberts Cosmos Mozambique Limitada, a subsidiary of Murray & Roberts Mozambique Limitada, was formed in the year to position the platform for opportunities in Mozambique, especially in LNG.

Business Model Resilience

Given market uncertainty and the lack of transparency in procurement processes for local government projects, the platform continues to refine its strategy to ensure its future sustainability. Some of the initiatives aimed at accessing broader market opportunities include:

  • Geographic diversification
  • Diversification into new market sectors
  • Right-sizing in line with market demand
  • Leveraging digitalisation in execution.

Implementation plans include a focus on project development and investment through an EPC model with funding options where appropriate. Platform leadership continues to develop the necessary capacity and strategic partnerships with local and international service providers to offer turnkey project solutions. A key differentiator in the sub-Saharan Africa market is the ability to offer funded turnkey EPC solutions. A formalised relationship with project development finance institutions and commercial lenders has been established and term sheets are under discussion with energy ministries in several sub-Saharan Africa countries.

For MRPE, the best opportunity in the short term is in the transmission sector. The primary driver for transmission and substation demand is low electrification rates and access across African economies including South Africa and Angola. The secondary driver is cross-border interconnectivity to enable power trade between countries in sub-Saharan Africa. The platform’s acquisition of OptiPower procured entry into the high and medium voltage transmission, distribution and substation sectors in South Africa and sub-Saharan Africa. OptiPower’s technical capability combined with MRPE’s capacity, make for a compelling combination to unlock market potential.

Notwithstanding the ailing water infrastructure in South Africa, the water sector remains very inactive with few opportunities coming to market. However, it should be only a matter of time before the platform’s licensed Organica Water technology will achieve a breakthrough for the first time in Africa. Aquamarine Water Treatment has been relocated from the Western Cape to Gauteng with expectations for considerable geographic growth, albeit from a low base. Along with its traditional design and assembly business, a new focus on chemical sales and components was established with several distribution agreements signed. During FY2019, MRW operated and maintained small water treatment plants to treat borehole water to potable standard (SANS 241) at two Life Healthcare hospitals and five additional projects are expected to commence in FY2020.

The ageing refining and petrochemical infrastructure in South Africa presents an opportunity for the platform to diversify into other market sectors. The platform is engaging with satellite operations of the large oil and gas majors, to offer a value proposition for the long-term sustainability of their operations in refining, fuel storage and distribution. Opportunities are being explored in renewable energies, as well as structural, mechanical and electrical services for mining projects.

In Mozambique, emphasis is on the LNG developments in the Rovuma Basin. MRPE is working with the Oil & Gas platform and various partners to respond to opportunities in what promises to be the single largest potential investment in the southern hemisphere.

The platform provides project services to market sectors which, domestically and internationally, are characterised by complex commercial relationships between clients and contractors, often leading to disputes and litigation. Platform leadership is committed to engage with prospective clients with the objective of proposing alternative but established contracting models that require a more collaborative approach to project delivery. These models include alliance-type contracts, which establish closer cooperation between clients and contractors with the ultimate objective of enhancing project outcomes.

CONTRACTOR OF CHOICE

Towards Zero Harm

Safety is paramount and the platform is committed to the Group’s vision of Zero Harm. A safety culture survey undertaken during the year showed improved levels of safety maturity on major projects. A Neuroleadership programme has been rolled out at Anglo Platinum’s SO2 Abatement Project in Polokwane. Further application of this programme will be aimed at improving an already impressive safety performance.

The platform’s health and safety performance for FY2019 was industry leading. The LTIFR increased to 0.40 (FY2018: 0.12), primarily due to a significant reduction in hours worked as the Medupi and Kusile projects come to an end. This rate equates to three lost-time injuries incurred over more than eight million work-hours. The TRCR at 1.19 (FY2018: 0.98), was a world-class result. The MAP/CRM programme is fully entrenched and all projects continue to show a significant improvement in their total incident rate.

All businesses are ISO 45001, ISO 9001 and ISO 14001 certified. In FY2019, the platform maintained the prestigious South African Institute of Welding ISO 3834 accreditation.

Project delivery

MEDUPI AND KUSILE POWER STATION PROJECTS

Construction work is complete at Medupi, with units 2, 3, 4, 5 and 6 generating power. Unit 1 is expected to be synchronised to the grid during the first quarter of calendar year 2020. Electrical and instrumentation services at Medupi continued throughout FY2019. At Kusile, units 1, 2 and 3 are providing power to the grid and planned maintenance outages on these units were successfully executed during the year.

SAPPI VULINDLELA AND ANGLO PLATINUM SO2 ABATEMENT PROJECTS

Both projects are under construction with scheduled completion for FY2020.

RIO TINTO IRON ORE KOODAIDERI PROJECT

Awarded in April 2019 to the Acciona Clough JV, the project involves the civil works for the construction of the northern rail formation of this greenfield mine development in the East Pilbara mining region. Site mobilisation commenced in July 2019 and completion is expected by November 2020.

SASOL CTFE PROJECT

Commercial challenges resulted in significant project losses. The project is in the handover stage and should be completed by October 2019.

Technology

The engineering and construction industry has been a late adopter of digital technologies, but digitalisation will be a key requirement for future success. The platform has developed a digital strategy, which will be executed in two phases over the next two-and-a-half years.

The first phase is focused on digital enablement – the implementation of an integrated digital/software platform to enable core project and support functions, which will also provide the opportunity to critically re-engineer certain processes. Mobile solutions, particularly in the field, will replace inefficient paper-based systems. Benefits will include productivity improvements and cost reductions.

The second phase will focus on digital transformation. This will add digital technologies to the integrated software platform to improve project delivery, increase productivity, flexibility and adaptability, and more efficient asset management. Furthermore, innovative client solutions have been identified.

EMPLOYER OF CHOICE

Leadership and succession

During FY2019, a comprehensive talent review was undertaken at senior and middle management levels. High potential employees have been identified and will participate in specific development programmes, with an emphasis on leadership and management development. A mentorship programme has been implemented for talented black employees, with specific plans to develop them for leadership positions.

Best people practices

As the power programme comes to an end, there has been a significant reduction in the workforce, mainly due to the demobilisation of project employees.

The platform’s employment model provides for flexibility and a high proportion of employees are engaged by way of project-specific limited duration contracts. In FY2019, R18,5 million (FY2018: R42,2 million) was invested in skills development, of which 96% was allocated to these employees. The majority of the platform’s training investment has been focused on technical training of artisans.

The platform intends to develop a core group of artisans and supervisors, who will benefit from ongoing investment in their career advancement. These permanent employees will be supplemented by employees with limited duration contracts to meet project requirements.

REPUTATION

Diversity and localisation

MRPE achieved a Level 3 BBBEE rating in FY2019 and is targeting Level 2 in FY2020. This is an outstanding performance and the improvement will be primarily achieved in areas such as preferential procurement, skills development and CSI.

The platform’s employment equity profile improved during the year, particularly at middle management level. Representation of black employees was stable or improved across all levels: senior management at 27% (FY2018: 25%); middle management at 57% (FY2018: 47%) and junior management at 93% (FY2018: 93%). The platform continues to develop young black talent through its talent management programmes.

Localisation is a strategic imperative and although it presents significant challenges, innovative solutions are employed. Major challenges relate to experience and skills in local communities, as well as employment and economic investment expectations. The platform works closely with clients, local community forums and leaders to manage expectations and to provide support for local suppliers.

PROSPECTS

While the Medupi and Kusile power stations were under construction, platform leadership worked hard to establish a sustainable business that could make a meaningful contribution to Group income. Unfortunately these efforts have not yet yielded the desired outcome, mainly due to a lack of investment and therefore project opportunities in the South African economy. Consequently, the platform has had to prepare itself for becoming a smaller business by rationalising cost structures, while maintaining growth capacity for the future.

The platform has strategically positioned itself for identified shortto medium-term project opportunities, and its future performance will be largely determined by the extent of investment in its target market sectors. These opportunities include:

Considering its capacity to deliver projects in the South African power and water sectors, and with both sectors in dire need of investment, the platform should return to profitability in the medium term, making a more meaningful contribution to Group income.