MARCH 2011
PDF PDF format [1.92MB]  

Cover story


Power of Acquistion

In the decade to 2010, Murray & Roberts experienced significant growth through expansion of its business footprint. However, the global recession and a slow economic recovery in South Africa have taken their toll on the construction industry. For Murray & Roberts, this has been compounded by challenges experienced on major projects. How will the Group recover in time for the next growth phase?

“We’re again at Ground Zero,” admits group CE Brian Bruce as he looks towards retirement after 44 years with Murray & Roberts. Even though the Group has entered a turbulent environment, it has journeyed a long way over the past 10 years under his leadership and a solid platform has been established for the next growth phase.

The South African construction industry, having rallied in recent years, primarily due to World Cup infrastructure investment, has descended into its worst slump in decades. The combination of slow economic recovery and delays in promised public sector fixed investment spending are at the heart of the industry’s problem. In addition, Murray & Roberts is particularly exposed to a niche where it has proved difficult to find value – the mega project market.

Rather than paper over the challenges Murray & Roberts faces, Brian chooses to be realistic and open about them. He says that difficult contracting conditions have been compounded by slow progress with the resolution of claim entitlements and final accounts on existing major projects in South Africa and the Middle East. Without exception, all the Group’s major projects over the past five years have been subjected to significant increases in their scope of works, over and above what had originally been designed and contracted. This has resulted in additional costs associated with delay and disruption, recoverable only through a formal claims process.

Referring to a recent cautionary announcement, Brian notes: “I think it is fair to say that while Murray & Roberts is challenged by the cash flow consequences of this state of affairs, the company and its people have risen above these challenges and continue to deliver diligently on their contracted responsibilities.” Notable achievements are the on-schedule opening of Concourse 2 and Terminal 3 at Dubai International Airport (valued at USD1,5 billion) and the commissioning of phase 1 of the Gautrain Project ahead of schedule for the 2010 FIFA World Cup.

“We believe in our capability and resilience to deliver a final outcome that includes the recovery of our payment rights under the contracts over time.” This is in response to the outstanding recovery of the investment made by Murray & Roberts and its partners to overcome significant scope increases and deliver these achievements. He adds that it is a core value of Murray & Roberts to seek resolution of disputes through direct personal discussion.

Brian says that group management has worked tirelessly to refine the organisation and position it for growth when the cycle turns. However, the cycle itself is a disappointment, as much of the diversification strategy over the past 10 years was aimed at breaking Murray & Roberts out of the debilitating cycle of boom and bust that has always typified the construction industry.

Commenting on a recent Competition Commission statement that implicates the entire sector in collusive behaviour, Brian notes that he has championed the Group’s mission to eliminate all forms of collusive behaviour from the Group and to ensure that its employees do not breach competition legislation, as may have been the case in the past. “Murray & Roberts,” he says, “has never denied the possibility that some individuals within the organisation may act collusively. But we have been adamant that the ‘Mind of the Organisation’ as represented by the board and management is clear of conscience and absent of guilt.”

Murray & Roberts is well diversified with the strength and resilience to deal with its current challenges and to engage the future potential in all its markets.

Murray & Roberts has worked with the Competition Commission since 2007. It continues to support the Commission and has committed to assist with any of its current and future investigations. The Group monitors all of its operations in the context of Competition Law. Where irregularities have been uncovered, the Group has cooperated with the Competition Commission and placed leniency markers as appropriate.

Fundamental market shifts

Brian says that Murray & Roberts has always tried to be transparent about its current position, notwithstanding the disclosure risks this might bring. At this juncture, it is important to “clear the decks” in a difficult current market.

“We’ve had a good 10 years, but we have to be realistic about the challenges for the immediate future,” he says. “The global financial and economic crisis has been a catalyst for fundamental shifts in some of our core markets, especially the Middle East, where there is suddenly less capital available for major projects and what is being put out to tender is increasingly being awarded to local rather than foreign-owned companies.”

He emphasises, however, that the current circumstances are limited neither to Murray & Roberts nor the domestic construction industry, but are in fact, a global problem.

Compounding the crisis in the hard-hit South African market was its unexpectedness, says Brian. “There is a massive socio-economic demand for infrastructure, including the thousands of jobs created through construction. This was clearly evident over the years ahead of the 2010 FIFA World Cup. These skills have rapidly dissipated, where they could have been redeployed into municipalities for instance, to better roll out their programs.”

The comment follows a recent statement by the South African Association of Consulting Engineers, which expressed the industry’s deep concern with the quality of capital project planning within the public sector and warned that the problems of budget overruns and poor service delivery could grow unless departments take active steps to recruit and retain a better cadre of technical professionals.

At a time when skills are still available and there is a need for infrastructural development, new major projects are simply not coming to the market in South Africa, says Brian. He adds that Murray & Roberts is not looking for excuses or scapegoats, but it is important to have a market to maintain the growth of its order book which is currently valued at R50 billion.

Focus and consolidation

One way this will be achieved is through focused consolidation of its business operations. “For instance, we will rationalise our presence in the Middle East, a market which is not what it was a few years ago and not as accommodating to foreign companies as it once was.”

In the time that Murray & Roberts has been based in the United Arab Emirates (UAE), local contractors have developed the capacity to undertake major contracts in a market which has become highly competitive. The number of large projects has declined rapidly since 2008. “The global financial crisis changed the dynamic totally, and we have to question the future value proposition of this market for Murray & Roberts.

“While we’re reducing our Middle East exposure, we are simultaneously expanding our reach by engaging new markets from there,” adds Brian. This includes looking into Africa from the UAE.

The attraction of Africa scarcely needs to be spelled out any more. With 30% of the world’s natural resources, it is the last great undeveloped region of the world. The growth rate of these ‘frontier markets’ is set to outstrip even the current batch of emerging markets, and the focus is most likely to be on the initial establishment of infrastructure for the extraction of natural resources.

“The continent has 20% of the world’s land mass, 15% of its population but only 2% of the global economy, so it has a lot of untapped potential. Furthermore, I believe the Middle East will over time become much more geared to the African story and become a logical gateway to the north and eastern continent.”

South Africa is another logical gateway which will allow Murray & Roberts to unlock the continent from both aspects.

Brian notes that despite the Group’s current difficulties, many of its companies have continued to deliver solid performances. He describes Murray & Roberts as well diversified with the strength and resilience to deal with its current challenges and to engage the future potential in all its markets. Eamonn Ryan

Positioning for growth

Brian Bruce offers a summary of the Group’s various operations and their readiness for the next growth phase.

Cementation Group
This business unit will continue to benefit from the demand for resources and our leading expertise in deep-level mining and is under stable and experienced leadership. All commodity prices, world market indices and mining stocks have also recovered well from the global financial crises and now indicate a positive sentiment, which most analysts and commentators believe will last for at least two to three years. This can only bode well for Murray & Roberts and the Cementation group of companies.

Clough is a great Australian business. We exercise our influence through the board and work with the excellent management team to deliver a value proposition to all shareholders.

Our key domestic market is the construction economy in all its forms, embracing construction, engineering and industrial activities. We are in the process of consolidating the business of Concor and Murray & Roberts Construction to redefine our construction offering. The company will then also access the Africa market in concert with the International operations from Middle East.

South Africa’s power program, including the pending nuclear program, is core to our engineering operations and Murray & Roberts Projects’ business will for the foreseeable future be dominated by the power program. The current thermal power station projects – Medupi and Kusile – are both major projects which unfortunately had a difficult start due to delays and significant scope and design changes. It is in the national interest that these projects be delivered as efficiently as possible and the company is working tirelessly to overcome these challenges, which include significant commercial issues.

We are planning to consolidate the various industrial operations into a single business entity, Murray & Roberts Industrials, which will create a much more focused platform for future growth beyond its local market and expanding its geographic footprint into Southern Africa. We would also look at expanding its asset base through the acquisition of complementary assets. This restructuring will result in a stable structure within which the management of each business unit will be freed to assert itself and assume full responsibility for the growth of individual operations.

A consequence of this reorganisation is that Corporate Office will shrink as various layers of management devolve into focused operational teams. However, the corporate team will be enhanced to ensure good corporate governance standards across the Group. This includes key functions such as operations safety, risk management, internal audit and accounting leadership, investor relations and commercial management.

“This is a structure that makes sense for a different future. It is a refinement of our federal structure, better suited to the global nature of the business,” says Brian.

He explains that an important attitude in Murray & Roberts is to ‘remain the master of our own destiny’ and in so doing, avoid being victims of external circumstances. Our fundamental essence has been brought forward in our DNA over many decades. Nothing is beyond the control of Murray & Roberts, even in the current challenging environment.

“We acknowledge that the working capital challenges we are experiencing in our major projects, competition concerns in our industry and skills capability in our environment are the direct or indirect result of our own past actions and behaviour. We are responsible for creating our own future.

“I am confident that Murray & Roberts as it is today has the leadership, the business platform and the core capability to grow and compete with the best in the world,” Brian concludes.