Construction Africa and Middle East

JEROME GOVENDER OPERATING PLATFORM EXECUTIVE

CONSTRUCTION AFRICA AND MIDDLE EAST A KEY ACHIEVEMENT WAS THE AMALGAMATION OF THE CONSTRUCTION BUSINESSES INTO A UNIFIED PLATFORM. THIS INTEGRATION IS ALREADY PAYING DIVIDENDS IN TERMS OF GREATER SYNERGIES, SHARING OF EXPERTISE AND MARKET KNOWLEDGE AS WELL AS COST SAVINGS.

Some solid performances in extremely trying conditions were entirely overshadowed by the substantial losses sustained on the Gorgon Pioneer Materials Offloading Facility (“GPMOF”) at Barrow Island, Australia, and a disappointing performance by the Middle East.

LEADERSHIP

Several key executive appointments were made in order to strengthen the platform and its various entities. Jerome Govender was appointed as the new platform executive. Jerome has been the managing director (“MD”) of Bombela Concession Company since 2007, having joined Murray & Roberts in 2002. Chris Botha, previously MD of Concor Roads & Earthworks, was appointed chief operating officer overseeing the civils companies and Gavin Taylor was recruited from VINCI Construction UK to become the chief operating officer heading up the Building and Africa operations.

Mark Andrews was appointed MD Middle East, Cobus Snyman was promoted to the position of MD Concor Roads and Earthworks and Alex Boyazoglu was appointed MD of Buildings. Andy Fanton assumed the position of MD Marine and Dave Heron was named MD Western Cape, with Mark Johnston focusing on Namibia.

PERFORMANCE

Losses sustained on fulfilling Marine’s contractual GPMOF obligations amounted to some R1,2 billion this year while the Middle East recorded a loss of R454 million.

The Group’s commitments on GPMOF were discharged, although later and at a greater cost than had been anticipated. Similarly in the Middle East, cost overruns on projects largely completed in previous years, were accounted for this year.

There were positive developments on realising uncertified revenue claims relating to GPMOF. While there was little progress on arbitration of the Dubai International Airport claim, we are optimistic that this will be settled in our favour while remaining open to the possibility of reaching an amicable settlement.

Within the South African civil engineering and construction sectors, conditions remained challenging and margins were extremely low.

Concor Opencast Mining recorded an overall satisfactory performance but challenges experienced at a single project caused it to post a net loss of R27 million.

Building work disappointed with orders falling well short of budget, most notably in Gauteng.

Positives for the year were solid performances by Murray & Roberts Botswana, Concor Civils and Concor Roads & Earthworks.

During the year the St Regis resort development in Abu Dhabi was delivered on time and to widespread acclaim. In the Western Cape, the Aurecon office development became the first local building to be awarded a Green Building Council of South Africa five-star green rating, its construction boosting Murray & Roberts’ green building credentials and expertise. Also in the Western Cape, the awarding of the high-rise Portside building to Murray & Roberts Western Cape was a notable highlight.

On the power project the value of the Medupi civils contract grew exponentially to over R8 billion.

A resolution of all major commercial issues with Eskom relating to the civil engineering contract at the Medupi power station was reached during the year. The agreement settled all commercial disputes on the project to date, with the remaining R3,0 billion of civils work on this project carrying no more than normal construction risks at acceptable margins.

The platform did not suffer any fatalities during the year and the lost time injury frequency rate (“LTIFR”) improved slightly from 0.90 to 0.71.

Operating loss for the platform was R1,3 billion (2011: R1,4 billion) on turnover of R8,1 billion – which represents a 11% decline on the previous year. Excluding losses on GPMOF and in the Middle East, the platform returned a small profit.

MURRAY & ROBERTS MIDDLE EAST

In a most challenging year, the company had to account for losses on projects that had either been completed in previous years or which were substantially completed this year. This was because the costs involved in seeing these projects through to completion and the defects liability periods were found to have been underestimated.

At the same time the construction sector in Abu Dhabi ground to a virtual standstill. This was after the company had ended the previous year with serious prospects of securing work worth at least R5 billion in the following year, none of which materialised. After construction activity in Dubai collapsed in 2008, the Abu Dhabi standstill highlighted the company’s over-reliance on UAE capital.

The net result of these developments was that stated revenue for the year was less than half of that budgeted for, and a net loss of R454 million was incurred. The only major contract being executed at year-end was the R6,5 billion Mafraq Hospital for the Abu Dhabi health authority. Arbitration of Murray & Roberts Middle East’s claims relating to the Dubai International Airport work, completed in 2008, was suspended earlier this year. This was after an issue around the identity of the contracting entity within the Dubai Government was disputed. Despite this, efforts continue to reach an amicable settlement.

Developments this year also revealed Murray & Roberts Middle East’s over-reliance on its relationship with joint-venture partner, the Al Habtoor Leighton group. A significant investment is now being made by the company in Qatar where work ahead of that country’s hosting of the 2022 FIFA World Cup™ is expected to begin in earnest in FY2013. In Qatar, Murray & Roberts Middle East has established a local joint-venture company but will retain management control.

The company performed well on safety, achieving a LTIFR rate of 0.53, better than other parts of the Group. Senior HSE managers with responsibility and the authority to ensure compliance with Murray & Roberts systems and standards are appointed to all projects.

Work opportunities will be followed up in various North African and Middle East countries and even some in the Far East where the company’s expertise translates into reasonable prospects of securing and executing work at acceptable margins. Such opportunities could include, in addition to the Middle East’s traditional building projects, civils and roads work and will not be restricted to the company’s typical profile of only working on so-called mega projects.

Prospects at the end of the year were at least as good as those at the same time a year previously, with several projects, notably in Qatar, expected to be announced shortly.

CONCOR CIVILS

Concor Civils returned satisfactory operational, financial and safety performances this year.

The Eskom power generation work runs until 2015, ensuring a secured income stream. A major achievement this year was the settling of all outstanding commercial issues relating to work at Medupi, a landmark development that will have lasting benefit for the Group. The successful Ngqura Container Terminal contract has grown significantly in scope, and will continue in FY2013.

The impact of lower margins, experienced on a majority of projects, was offset by an excellent performance on the Medupi chimneys and Coega contracts.

Excluding Medupi, revenue rose by a third over the previous year. However, a notable trend is that whereas in the past most work was sourced from the mining sector, today Concor Civils is overwhelmingly dependant on public-sector projects, which carries some risk. Opportunities in the private sector remain scarce and several of those awarded to our competitors were undertaken at unsustainable prices.

In the immediate future Concor Civils will remain focused on power generation, water and waste water treatment. There are however significant opportunities in mining, including opportunities in Zambia and Mozambique. In addition to traditional coal-fired energy, Concor Civils is well positioned to secure work in the fields of wind and solar power. An increased focus in the short term will be on concrete repair, a market in which Concor Civils currently has no presence but which has the potential to contribute to turnover with good margins.

Safety performance was satisfactory, with no lost time injuries being reported at Coega, Kusile or the Zeekoegat Waste Water Treatment Works. A LTIFR for the year of 1.23 was commendable.

CONCOR ROADS & EARTHWORKS

The division performed satisfactorily this year, posting pleasing turnover and profits in a depressed market.

Public sector projects remained few and far between with no large contracts being put out to tender and the impasse over urban tolling casting a pall over the sector. At the same time, private sector spending slowed significantly. The bitumen shortage impacted negatively on road construction work and fierce competition translated into pressure on margins, raising the risk profile of several projects. Mining infrastructure contracts continued to deliver better than expected.

Towards the end of the reporting period there were indications of an upturn in public sector spending with a healthy order book reflecting a 40% rise in projected turnover for FY2013. Almost half of this budgeted income however, will be derived from South African road contracts where margins remain tight. An increasing proportion of next year’s work is expected to come from the rest of Africa, an area which remains buoyant and very promising.

Concor Roads & Earthworks performed well on a number of non-financial indicators, notably on human resource development. Seventeen bursaries and 56 learnerships were awarded this year. Two employees were enrolled for BCom degrees in operational risk management. Performance on enterprise development was particularly pleasing with no fewer than 18 initiatives being supported within the platform during the year. On safety the business is driving towards a 0.5 LTIFR using the 1 million hour benchmark.

MURRAY & ROBERTS BUILDINGS

Market conditions continued to be extremely difficult this year with limited opportunities becoming available and Murray & Roberts Buildings succeeding in securing only a small proportion of these.

Several tendered and negotiated opportunities envisaged at the beginning of the year failed to materialise. These included a number of projects for which Murray & Roberts Buildings had been identified as the preferred contractor. Two significant loss-making projects in the petrochemicals sector impacted negatively on the division.

On a more positive note however, several key projects were completed in the year for premium clients whose satisfaction has already translated into the successful award of new work.

While revenue was 36% down on budget, towards the end of the financial year, two important projects worth more than R650 million were secured. In addition, it is expected that key negotiated projects will materialise in the first half of the new financial year. Business won towards the end of the year was furthermore at improved rates relative to those achieved earlier in the year, giving further reason for guarded optimism. Towards the end of the year, recruitment of talented staff began in earnest, in anticipation of an upturn in orders.

One response to the constrained market conditions of recent years has been to seek and execute work in geographic areas in which Murray & Roberts Buildings has not recently operated. This is expected to have the effect of diversifying the division’s risk and revenue sources. In addition to operating in more outlying areas within South Africa, opportunities in neighbouring states are being actively pursued.

Murray & Roberts Buildings’ LTIFR was 0.73 which is in line with the Group standard of less than 1.

MURRAY & ROBERTS MARINE

Following the large losses sustained on the GPMOF in Western Australia, a new management team, headed by Andrew Fanton, was appointed at Murray & Roberts Marine in late 2011. Subsequently the company was restructured to support its engineering, procurement and construction (“EPC”) focus and to support the goal of doubling its size within three years to a R1 billion business. Apart from organisational restructuring, new business processes were put in place while a project control department, focused on providing management with detailed and dynamic project information, was established.

To achieve the objective of doubling turnover, Murray & Roberts Marine will prioritise Southeast Asia and West and East Africa. A dedicated office headed by a general manager was established in Kuala Lumpur and relationships in key markets will be either established or cemented, in some cases leveraging off the local presence of other members of the Construction platform. While there are few prospects within South Africa, considerable opportunity, from a variety of customers and sectors, is seen in the new target markets as well as in the traditional markets of Australia and the Middle East.

A key future focus will be on forging joint-venture partnerships with companies that have proven resources and expertise in marine work which complements the EPC strengths of Murray & Roberts Marine.

In FY2012 a dedicated safety, health, environment and quality team was established. This team will be tasked with developing detailed safety, health, environmental and quality (“SHEQ”) protocols and reporting matrixes for the company.

The company’s financial performance in the past year was disappointing, with only 50% of budgeted revenue being achieved. This was largely ascribable to the deferral or even cancellation of several tenders. Excluding GPMOF, gross profit margins remained healthy. Management remains extremely focused on vigorously pursuing a substantial GPMOF commercial recovery schedule. Towards the end of the year, the arbitration process ruled in favour of Murray & Roberts Marine’s position on Change Order 18.

At year-end, only 25% of the budgeted order book had been secured. However, bids for six projects with a total value of R2,5 billion and due to commence in FY2013 had been or were in the process of being submitted.

CONCOR OPENCAST MINING

The business continued to experience strong growth but returned a disappointing profit. This was the result of challenges experienced at a single project, without which Concor Opencast Mining would have recorded a satisfactory profit.

Overall performance on safety improved from the previous year, however several injuries contributed to an LTIFR of 1.72 compared to 2.02 the year previously. The division has prioritised safety in line with Group policy and its own commitment to keeping employees and subcontractors safe. While strong growth potential exists both within South Africa and, especially, elsewhere in southern Africa (for coal, platinum, diamonds, copper and uranium projects), the business has done little to market itself. This will be rectified as Concor Opencast Mining positions itself to achieve revenue of R1 billion by 2015. Another key objective will be to reduce the company’s dependence on South African platinum, a sector which is experiencing welldocumented stresses at present.

Management depth and access to market intelligence will be bolstered in the new year to enable Concor Opencast Mining to realise its ambitious expansion plans. At year-end the order book showed a substantial increase on FY2011.

MURRAY & ROBERTS NAMIBIA

Dramatically increased competition resulted in a disappointing performance by Murray & Roberts Namibia after the record achievements of 2011.

The operation only achieved breakeven but the outlook for FY2013 is considerably more promising. Material risks include the heightened level of competition, especially from Chinese contractors, with resulting pressure on margins.

While there is much expectation around uranium investment and an upswing in civil engineering work, the bulk of Murray & Roberts Namibia’s income in the near term is likely to be derived from the building sector, where there are some promising prospects.

MURRAY & ROBERTS WESTERN CAPE

The regional market remained flat, even deteriorating during the year with calls for tender declining by some 50%.

A major breakthrough for Murray & Roberts Western Cape was winning the tender to build FirstRand and Old Mutual’s landmark Portside building in the Cape Town CBD. This boosted turnover by 50% over projections and resulted in a small operating profit.

The budgeted order book for the next year was 90% secured at the end of the year. However, margins remain extremely low and, at about 2.9%, are expected to be at around the same levels recorded in FY2012.

THE FUTURE: SOME CONCRETE FACTS Concrete is not what it used to be – not since Murray & Roberts scientists set about changing almost everything we all thought we knew about this basic building material. The strength of concrete is measured in megapascals (MPa). In theory, a cubic metre of concrete that is rated 30 MPa (a typical standard for structural concrete) is able to withstand the weight of six bull elephants. Traditionally, 30 MPa concrete requires between 300 kg and 350 kg of ordinary cement per cubic metre. But now scientists working for Murray & Roberts have developed a technology that meets the 30 MPa standard using just 25 kg of cement or even less. Not only does it meet the standard, it far exceeds it. To date strengths of up to 52 MPa have been achieved using Murray & Roberts’ patented ARC (“Advanced Recrystallisation”) technology and only 25 kg of cement per cubic metre. Best of all, the ARC process uses large amounts of recycled waste products. The most common recycled ingredient is slag from the steel manufacturing process. However, at the 102 Rivonia Road project, now under construction in Johannesburg, Murray & Roberts Buildings is using up to 64% fly ash, a recycled by-product from coal-burning power stations for which there is usually no use. Research scientist and head of Murray & Roberts’ Concrete Centre for Excellence, Cyril Attwell, says: “Not only does the process require less ordinary cement and is environmentally friendly, but also, because the concrete can gain higher strengths, we can build faster; sometimes a lot faster.” Cyril, whose official job title is Group Concrete and Research Manager, adds that the typical specification for waste water treatment plants requires concrete that uses 420 kg of binder per cubic metre. His team of scientists has now developed techniques that can meet the specification but use only 330 kg. “This gives a distinct cost saving advantage to our clients.” Cyril and his two colleagues at the Concrete Centre for Excellence in Amalgam on the West Rand, Warren McKenzie (Group Concrete Technologist) and Andries Magale (Laboratory Technician) have developed some remarkable concrete technologies, several of which are world firsts. Just one is a smart concrete involving the introduction of a particular type of bacteria into the mix. “Under certain conditions of chemical attack, which are usually bad for the concrete, these bacteria thrive, reproducing rapidly and consuming the chemicals that attack the concrete. In addition, as they eat up the threat, the bacteria defecate calcrete. These deposits fill up cracks that would normally weaken the structure.” The team is also investigating an ingenious electrochemical system that makes marine concrete more resilient to both wave action and chemical degradation. The system draws carbon dioxide from the sea water, encouraging the growth of a layer of coral that protects the undersea concrete. Such is the effectiveness of the coral that the concrete does not have to be treated with expensive chemicals – and it is almost completely maintenance free. In 2010 Murray & Roberts’ southern Africa operations used some 1,8 million tonnes of concrete. The benefits derived from the advances being pioneered by Cyril and his colleagues are significant. For example, through the use of ARC processes, cement consumption on the Gautrain Rapid Rail Link was cut by about 110 000 tonnes. However, such benefits are not just measured in monetary terms. Cape Town’s Portside development, Cyril believes, will be the first building project to receive a full three-star Green Star eco-friendly rating for construction materials. The concrete being poured contains up to 70% waste materials and as much as 10% of the aggregates consumed (typically sand and stone) are waste materials. “Recently the consulting engineer working on Portside asked us to supply even more waste material because it just makes such a strong concrete,” says Cyril. “This technology means we can save money and time, deliver a superior result and at the same time, do our bit to save the environment.”

Controlling costs remains a key management concern in an exceptionally low-margin environment. There has been no significant increase in overheads since the restructuring exercise carried out in 2010.

MURRAY & ROBERTS BOTSWANA

A satisfactory year saw revenue approach the R500 million mark (a 34% increase on the previous year) while the operation also performed well on profit and cash generation.

At 0.8 Murray & Roberts Botswana’s LTIFR was largely unchanged from FY2011. Tragically, one employee, supervisor Gosekamang Kheru, was killed by lightning while working at De Beers’ Jwaneng Diamond Mine where the business is raising the walls of a slimes dam.

Significant work undertaken during the year included the Rail Park Shopping Mall for key clients where Eris Properties is a shareholder, FNB’s Gaborone office block for Eris Properties and various construction projects for De Beers including the first phase of the two-tower i-Towers development for City Skypes, Botswana’s tallest buildings.

With R300 million of the order book secured at year-end and another R100 million at an advanced stage of negotiation, all indications are that FY2013 will be a record year for the business. Driving this will be an expected upsurge in office building in the Gaborone CBD. However, building activity in the capital is expected to slow down in FY2014.

To offset this, management of Murray & Roberts Botswana intend targeting civils and infrastructure work for the country’s booming mining and minerals sector. This is expected to mean that, whereas 80% of revenue is currently generated from building work and 20% from civil and related contracts, in future the mix may be in the region of 70/30 in favour of the latter. In the new year, opportunities in Zambia will also be explored.

MURRAY & ROBERTS PLANT

This division provides plant and equipment to the Civils Construction and Building Africa businesses. The business has successfully concluded the merging of the old Concor Plant and Murray & Roberts Plant and Equipment businesses.

With a turnover exceeding R400 million, the division’s spread of internal clients ensured that Murray & Roberts Plant had the best utilisation rates and the most superior technical backup service in its sector. The business was also comfortably ahead of its peers in terms of the safety of the plant and equipment it supplies.

An initiative launched last year was the creation of a special cost code for safety. In this way it should be possible to measure the direct financial costs involved in supplying, maintaining and operating safe plant and equipment.

TOLCON GROUP

The Tolcon Group performed to expectations in the past year, securing the tolling operations-and-maintenance contracts for the N1 North, the N2 South (Oribi) and the N17 (Leandra plaza).

Tolcon and the rest of the tolling industry face various challenges including mooted changes to labour legislation, more onerous contracting terms, high labour turnover and increased competition resulting from the advent of several new entrants to the market.

ISO 9001 quality accreditation with regard to toll collection processes was achieved by Tolcon Lehumo and PT Operational Services.

With its extensive portfolio now bedded down, the Tolcon Group is well positioned to explore additional opportunities within the transport infrastructure management arena.

MURRAY & ROBERTS CONCESSIONS

The Group’s 33% investment in Bombela Concession Company performed well with the service enjoying growing support from the travelling public and the Rosebank Station to Park Station link being successfully opened during the year. By the end of June 2012 passenger numbers had reached 800 000 per month, 65% growth in patronage in the 11 months since the Tswane-Rosebank service was opened. Arbitration rulings relating to water ingress and the Group’s delay and disruption claims are expected by the end of calendar year 2013, and calendar year 2014 respectively.

Entilini Concessions responsible for the operations at Chapman’s Peak attracted negative attention over local concerns about the visual impact of the toll plaza, now under construction. Legal challenges failed however and work is on schedule for completion in the second quarter of FY2013.

Murray & Roberts Concessions is the designated standby bidder on the N1/N2 Winelands toll route but no decision has been taken on awarding this contract. The R300 route redevelopment, for which the Group was the scheme developer, has yet to be put out to tender.

Similarly no decision has been taken on public-private partnership bids to build and operate prisons. The Request for Quotation (“RFQ”) to build, finance and operate the long-awaited upgrade of Chris Hani Baragwanath Hospital is eagerly anticipated.

PROSPECTS

The significant losses incurred on the GPMOF Project and in the Middle East have now been taken to book, allowing the platform to focus strongly in the new year on its continuing recovery. Measures are in place to accelerate this process and to prepare for growth, including stabilising operations, securing a quality order book and strengthening risk management processes.

Proceeds from the large-project claims processes are unlikely to provide a significant windfall during the new financial year but the process of pursuing these claims will be prioritised by the platform leadership.

At year-end almost 75% of budgeted order book had been secured – a satisfactory achievement – but at margins that were generally lower than those secured a year previously. The Buildings business (which recorded a number of pleasing project wins late in the year) will explore creative methods of engaging with clients to achieve solutions that will address the historically low margins achievable on most projects.

Co-operation between Buildings businesses within the platform will be emphasised to exploit opportunities.

Across the platform, rail and oil & gas have been identified as particularly promising growth opportunities while the business is increasingly positioning itself as a leader in environmentally-friendly building solutions.

In the Middle East opportunities in Qatar ahead of that country’s hosting of the 2022 FIFA World Cup™ will be explored with new joint-venture partners as will opportunities in other markets within the region.

The platform’s expansion into sub-Saharan Africa will be accelerated, building on the strength of the Murray & Roberts brand, particularly in the SADC region. Closer liaison with other Group platforms will be prioritised.

Management will lead various safety initiatives in the new year including Visible Felt Leadership.