Engineering Africa

FRANK SAIEVA OPERATING PLATFORM EXECUTIVE

ENGINEERING AFRICA This operating platform continued to focus on the Eskom power programme, performing well on contract delivery. Most operations posted good performances.

Leadership

Alistair Neely was appointed as commercial and financial executive at the operating platform level and Steve Harrison became the managing director of Murray & Roberts Projects, joining from Aveng in November 2011. Mile Sofijanic was appointed managing director of Concor Engineering.

Performance

A much improved safety performance was the result of an increased focus on both employee and subcontractor safety, implementing several Group-level recommendations including Visible Felt Leadership and World-class Leadership Thinking.

Operating platform EBIT for the year was R200 million compared to a R51 million loss last year. Revenue of R5 213 million was up from R4 094 million. This improved performance was marginally below the industry average.

The platform’s order book reduced by some R6,2 billion in terms of de-scoping provisions in the settlement agreement reached with Hitachi in June 2011 on the Medupi and Kusile mechanical contract. However, the effect of the project de-scoping was countered by the terms of the agreement, which stipulate that Hitachi will reimburse Murray & Roberts Projects for all agreed costs plus a performance related fee, effectively de-risking the balance of the contracts.

A number of milestones were reached in the work at Medupi. The work at Kusile attained a more predictable rate of implementation after significant delays.

Genrec continued to operate at full capacity, producing and installing product for Medupi and Kusile. Concor Engineering returned disappointing results but changes at senior management levels should result in an improved performance.

Much of the focus this year was on the successful creation and functioning of an integrated operating platform. The objective is to position the platform as a centre of engineering excellence and capability. Leveraging the experience, expertise and talent of senior executives within the platform will be key to ensuring the platform’s ongoing ability to create value for all its stakeholders.

People management issues, including low morale in some instances and friction with organised labour, revealed the extent of the platform’s human resources challenges and the need to bolster skills in this most important area.

Murray & Roberts PROJECTS

In the past year, work at Medupi passed 3 million man hours worked without a lost time injury. Murray & Roberts Projects’ overall lost time injury frequency rate (“LTIFR”) in June 2012 declined from 1.18 to 0.75, testimony to the success achieved in ingraining a safety culture across the company.

The business recorded a significant improvement in operating profit in the year, mainly due to its Medupi and Kusile mechanicals projects and the successful delivery of a tank farm for Transnet’s New Multi-Product Pipeline (“NMPP”) at Heidelberg.

On the Eskom power project, the new commercial arrangement with lead contractor Hitachi was bedded down. At both Medupi and Kusile a new working arrangement, in terms of which Murray & Roberts Projects and Hitachi management operate in an integrated team, bodes well for the successful execution of outstanding work.

Medupi’s Boiler 6 (the first boiler to be completed) was successfully hydraulically tested in June 2012 and should deliver power to the national grid in 2013. Boiler 5 is scheduled for hydro testing in October 2012. With project work at Kusile ramping up in the new financial year, Murray & Roberts Projects will be involved in the construction of no fewer than six boilers at the same time, four at Medupi and two at Kusile.

The massive scale of the work being undertaken at Medupi and Kusile (involving more than 6 500 employees and contractors) and the experience and skills gained, put Murray & Roberts Projects well ahead of its competitors in terms of proven capability to execute new power projects of various types as envisaged in the South African Government’s Integrated Resource Plan 2010.

The cementing of relations with joint-venture partners (in the case of the NMPP work with CB&I) positions the company well for work expected to be announced soon on government’s clean fuels programme.

Skills shortages remain a material risk for the company. Mitigating this risk through concerted investments in skills development was a major achievement in the year. At Medupi, 541 of 700 apprentices have already been trained while 167 of another 700 have so far received recognised artisan training at Kusile. At both sites the transfer of skills from expatriates to locals is constantly emphasised. In addition, 17 bursaries were awarded this year while total training spend increased 155% over the previous year.

External consultants conducted a culture value assessment in the year. The results of this extensive surveying and mapping of individual and company values are being used to create a company culture and value set that are aligned with employees’ values and the desired company culture.

In the past year the company’s overriding concern with delivering the power programme meant that there was insufficient focus on general project opportunities. This will be rectified in the new financial year. Key targets include growing the power projects business and penetration of the mining and minerals and oil & gas markets as well as developing a significant presence in the operations and maintenance sector.

Strong prospects for the 2013 financial year exist in independent power projects (also working with joint-venture partners), oil and gas, petrochemicals and the relocation of Exxaro’s Hillendale mineral sands processing plant to Fairbreeze in northern KwaZulu-Natal. This R300 million engineering, procurement and construction (“EPC”) implementation project involves detailed technical design and planning, and the deployment of super loads on a scale not previously seen in South Africa.

In future project delivery will be according to the EPC model, which gives Murray & Roberts Projects access to world-class technology partners and strong joint-venture relationships. This construction-constructiondriven model of EPC implementation will ensure greater certainty around delivering projects on time, within budget and to specifications. A strategy for expansion into sub-Saharan Africa is well advanced with a focus, as is the case with the rest of the Engineering Africa platform, on using Ghana as a launch pad and hub.

During the year, Murray & Roberts Projects improved its Broad-Based Black Economic Empowerment (“BBBEE”) rating from Level 5 to Level 4.

CONCOR ENGINEERING

A significant improvement in safety performance was the highlight of the year.

The division returned a weak financial performance on revenues that rose from the year before. A number of under-performing projects limited Concor Engineering’s earnings ability. It also became apparent that internal management capabilities needed to be improved.

Experience gained through the first venture into Africa, the ARM/Vale Konkola copper development in Zambia, will be used as a basis from which to grow business in Africa, as will synergies with other companies in the operating platform.

Concor Engineering’s new management will continue to focus on minerals processing but target a greater range of potential clients and sectors than in the past. Apart from winning new contracts and improving systems and processes, a key determinant of future success will be the extent to which management succeeds in securing organised labour’s buy-in to the business vision.

GENREC

A record safety performance was achieved with a LTIFR of 0.65 compared to 1.83 the year before. In July 2012 a milestone of 2 million lost time injury free hours was achieved.

Genrec did well this year with turnover at over R1 billion and EBIT according to budget. Output was maintained at over 2 000 tonnes a month from September 2011 while a product reject rate of 0% was achieved over the last seven months of the year, whereas a year previously this figure was 3,5% and, a year prior to that, 35%.

Cost of sales and overheads were both reduced. In the new financial year efforts will be made to reduce the cost of steel – the one input cost on which the company failed to achieve significant savings in the year. To this end, alternative suppliers will be investigated. Reductions in headcount – from 1 800 to below 1 400 at the end of the year – and increased mechanisation (achieved despite a capital expenditure of under R10 million) improved productivity and quality while reducing costs.

This year the quality of engineering competence was consolidated with the appointment of several senior structural engineers and the recruitment and on-site mentoring by these veterans of younger engineering graduates. Working with the Department of Labour, 12 unemployed individuals were recruited and given three-month intensive on-the-job training during which they were able to contribute to the fabrication of end product in the main works. The unruly labour disruptions of the previous year are unlikely to be repeated after management secured a three-year wage settlement with union NUMSA.

The Eskom power programme work was changed this year from a cost-plus agreement, to a pure contracting model, which has resulted in the securing of 16 months’ work at current output levels.

While this work is carried out, a key objective will be to identify and secure non-power work. The dependence on a single client is the company’s biggest strategic risk. To reduce the risk, a senior business development executive was employed and senior management have all been involved in securing new business.

Some 150 customers were identified this year and the company has registered itself on more than 40 potential customers’ vendor lists. Obtaining work elsewhere in Africa will be pursued in tandem with companies in the Engineering Africa platform and elsewhere in the Group.

The addition of value-added services this year resulted in additional income amounting to more than 10% of total revenue. These services included the deployment of some 40 to 50 Genrec personnel at each of the Medupi and Kusile sites where they are engaged in logistics, pre-planning and aspects of fabrication work.

EXXARO HILLENDALE/ FAIRBREEZE RELOCATION In 2013 the N2 highway in northern KwaZulu-Natal will be shut down for a whole week. Bridges and power lines will be torn down and bypasses built. A national road is being closed and bridges removed to make way for the transit of super-heavy loads, a massive operation that would not be out of place on TV show Mega Moves. It will in fact be the biggest, heaviest and most complicated industrial relocation in South African history. Mining giant Exxaro is moving its mineral sands processing plant at Hillendale to Fairbreeze 32 km away near the town of Mtunzini because the ore body in the vicinity of the plant’s current location has been mined out and has to be moved closer to resources that will be mined in future. Murray & Roberts Projects has been involved in the ambitious plan to move the plant almost since inception, undertaking the pre-feasibility and feasibility studies and then, in the past year, engineering the big move. This year a Murray & Roberts Projects design team was formed to undertake the project. This involved breaking the very large, very complex Hillendale plant into large components which will be dismantled and trucked – in loads of up to 800 tonnes at a time – to Fairbreeze. Dividing up the plant was done by 3D laser scans of the entire structure which were then transferred to CAD drawings. In total, more than 16 000 design hours were spent on the project, the work including a detailed logistics plan, plant layout and engineering and a completely new electrical and instrumentation design. The actual relocation will entail the temporary removal of seven bridges on the N2 (and then replacing them after the enormous loads have passed through). Seven high-voltage Eskom lines will be removed and relocated and some 2 km of bypasses will have to be built. The route taken during the relocation exercise will cross rivers which will entail propping a large multi-span bridge by means of a sunk barge. Murray & Roberts Projects managing director Steve Harrison says the successful engineering of the Hillendale/Fairbreeze relocation demonstrates his company’s ability to win and deliver complex work other than Eskom’s Medupi and Kusile power project. “The fact that the client has entrusted us with the engineering phase shows the merit of being involved from an early stage,” Harrison says, adding that Murray & Roberts Projects is now positioned to undertake the implementation phase.

WADE WALKER

Wade Walker’s LTIFR improved from 0.62 to 0.43 in the year, with one lost time injury.

In a difficult market the business returned an almost 70% increase in turnover compared to the previous year. However margins were under pressure in the face of stretched and delayed contracts. A number of senior management changes added to the challenges.

Although the business remains a small contributor to profits, its performance was commendable in the face of intense competition. Integration within the Engineering Africa platform opens up additional markets in the combined mechanical/electrical construction market, previously inaccessible unless in joint venture.

At the end of the year orders worth some R250 million had been secured. These include a number of significant contract wins. A key challenge however remains the need to obtain a base load of smaller but still profitable projects so as to retain skills within the business between major projects. Condition assessment and maintaining electrical infrastructure on behalf of clients are seen as important opportunities, as are petrochemicals, water and renewable energy.

Wade Walker continued to succeed in the face of serious skills challenges. Chief among these is retaining skilled staff on South African projects in an environment of active poaching for work elsewhere in Africa. Scarce skills within the sector include not only technical but also project, contract management and supervision skills. A keen focus on adding depth in contract management will enable the business to win more work while protecting and even growing margins. Offering a greater suite of technical services is considered essential to growing the business.

The Ghana operation succeeded in obtaining the main gold plant electrical and instrumentation construction contract, following the award of the early works at Newmont’s Akyem and is projected to have a sustainable regional order book by the end of the 2013 financial year. This will link with the Engineering Africa platform’s initiative to set up a Murray & Roberts regional office servicing the rest of the Group.

The company achieved OHSAS 18001 accreditation to complement the ISO 9001 accreditation achieved in the previous year.

PROSPECTS

Lessons learnt in recent years in the areas of cost containment and project management will need to be applied rigorously to support profitability.

Minerals processing is expected to display sustained but slow growth both in South Africa and elsewhere in Africa, where the potential to secure work at more satisfactory margins is greater than in the crowded, low-margin local market. Wade Walker and Concor Engineering will require concerted marketing efforts to show growth in this area.

In the short term, the operating platform will co-operate extensively with other Group operations to accelerate our African penetration, prioritising mining and minerals processing as well as power, an area in which public sector spending of over $62 billion is anticipated in Africa and more investment is expected in South Africa.

Substantial opportunities exist across Africa for the operating platform in water infrastructure, waste water, acid mine drainage and desalination with an estimated South African public sector spend of some R230 billion over the next decade. Another area for potentially significant growth is in operating and managing infrastructure for clients, again both within South Africa and elsewhere on the continent.

To align management focus and resources more closely to the opportunities identified, it is envisaged that a revised functional operating model will be implemented in the new financial year. This new model will emphasise the need for companies in the operating platform to work together to present clients with holistic solutions and single points of contact.