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Civil Engineering
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* F2012 (F2011) secured order book. |
Civil Engineering contributed 38.5% (2010: 41.6%) to group revenue and 46.5% (2010: 35.4%) to group total operating profit.
Civil Engineering undertakes a broad range of contracts for both private and public clients in heavy civils, large concrete structures, mining and industrial infrastructure, roads, rail and earthworks and marine civils and pipelines.
| Private vs public Civil Engineering | Civil Engineering revenue by sector | Civil Engineering revenue by contract type |
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Market review
South Africa
In South Africa, expenditure in the public sector was underpinned by some of the major infrastructure contracts which were awarded in previous financial years. These include Eskom power station contracts, the Gauteng Freeway Improvement Project (GFIP) and the Transnet multi-fuel pipeline.
Although the Trans Caledon Tunnel Authority has launched a series of major water storage and transportation contracts, the overall quantity and size of contracts this year was much lower than in recent years. Public spending levels have reduced and are expected to remain at lower levels in the short term. Power, transport and water will continue to be the main areas of expenditure, mostly at a national level.
In the private sector, the main spend has been in the mining and industrial sectors. The need to improve South Africa’s power generation capacity is providing impetus to expanding coal mining capacity, where some large contracts are being carried out which require civil infrastructure works. In the industrial sector, companies such as Sasol
proceeded with further expansion contracts which also involve civil works. The private power market, although much needed, has been slow to develop. Unless the contract is essentially a captive power plant intended to supply most of its power to the owner, the agreement on the sale of power to the national utility Eskom is fundamental to the
success of the contract. Few contracts have been successful to date.Stateof ordwer books 9per quarter)
Rest of Africa and Indian Ocean Islands
In the rest of Africa, although several opportunities are becoming available for partnership with government on major contracts (mostly road and rail), these are very slow to mature. Funding andthe subsequent recovery of debt will be key to the success of these contracts. Mauritius is the exception, as there has been a number of public road and airport upgrade contracts awarded in the last year, with further significant contracts currently under adjudication. In the water sector, a number of major dam contracts are being developed, some with hydro-electric capacity. These should commence over the next few years.
The key private spend in other African countries continues to be on mining contracts, which are now rolling out again. Although some of these contracts are influenced by concerns over access to funding and political stability, many will proceed as planned. A potential source of activity is the possibility of long term PPP concessions for road and rail developments.Middle East
Based on our strategy of regional diversification in the Middle East and North Africa (MENA), we are focusing on new infrastructure contracts in the United Arab Emirates (UAE), Jordan, Qatar and Saudi Arabia, whilst attending to commercial and financial close out on old and cancelled contracts in Dubai.
The market in the UAE has been slow to recover from the downturn and remains very competitive. New contract focus has not been in Dubai, but has moved to the Abu Dhabi region.
Saudi Arabia provides an attractive market for the group as the infrastructure programme is extensive.
Qatar is undergoing large-scale development which will provide long term construction opportunities.
Despite being a small market, we continue to pursue opportunities in Jordan, which will be targeted on a contract by contract basis in the infrastructure sector.
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Delivery
Find below how we delivered on our objectives outlined in our F2010 integrated report.
Key focus areas Desired results Status South Africa Although spending might be slower than anticipated, we will continue to focus on tapping into the planned local expenditure, which will be led by power, water, roads, ports and harbours. Certain spending areas, such as power and water, are crucial. Our track record of competence and delivery in these sectors positions us well for awards. Award of public sector contracts continued to be slower than expected. Despite this, we have remained committed to procuring work in these sectors. Tender activity is increasing. We have recently secured a contract for the construction of the R600 million Spring Grove dam in KwaZulu-Natal. We expect private sector spending to remain constrained, although we are seeing some large enquiries being issued for mining and petrochemical industries. These markets are aligned to our skills. Regain market share in the recovering private sector markets. We have procured a number of smaller contracts in mining and petrochemical industries whilst awaiting the larger contracts. We have seen some increase in tender activity. Support the group’s strategy to participate in private investment in electricity-generating capacity, such as captive power plants and the much-anticipated independent power producer (IPP) contracts. With our recent successful commissioning of the Sasol gas turbine power plant, follow-on work in this sector is expected. Institutional complexities and government delays have prevented the IPP contracts from finding traction. We remain well positioned to participate in the work in this sector. Focus on supporting the Construction Materials and Manufacturing businesses of our group. Adding to their secured order books for the year and increasing inter-group spend. While we continue to source products and services from our internal supply chain, the reduction in our revenue has had a corresponding reduction in the amount of business we are able to procure internally. Rest of Africa and Indian Ocean Islands Following a quiet period of mining developments and expansions, we are seeing budgets for contracts in numerous countries in Africa being placed for pricing. Secure contracts based on our established geographic presence and experience in the mining sector. We priced numerous budgets and several tenders for new mining contracts, but awards have not been finalised to date. Driven by a recovery in mining and broadening economic activity, demand for infrastructure will be boosted further when contracts in water, power, roads and marine commence. Broaden the target geographies and secure
the kind of work where Civil Engineering has
a proven competence in public infrastructure.We are targeting several major contracts, the first of which has been secured through the Development Bank of South Africa (DBSA) for major road infrastructure in Zimbabwe. Large marine and water contracts were slow to materialise. On the power side, we bid for a contract in Kenya. Middle East Continue to work with our partners in Dubai
to successfully close out terminated
contracts.Finalise outstanding issues. The two cancelled contracts’ final values were
concluded in the period and payment regimes
are being negotiated.Continue to develop the established relationships with General Electric and other key suppliers and partners. Successfully develop joint power, water and transmission and distribution (T&D) opportunities. The UAE market has been weak, but business
in power, transmission and distribution and water opportunities will be developed further as we establish in more active markets.Develop key relationships in the region with
other international businesses.Expand geographic footprint with partners in
defined focus areas matched to our skills.We have established new relationships in both
Saudi Arabia and Qatar and continue to support our joint venture relationships in Jordan and the UAE. -
Financial overview
Year ended
30 June 2011Year ended
30 June 2010Revenue (R'000) 3 548 4 713 Total operating margin (%) 7 6 Core operating margin % 3 577 5 575 Revenue was 25% lower from R4,7 billion (83% local) to R3,5 billion (85% local), while core operating profit decreased by 20% to R231,9 million from R290,0 million. Very pleasingly, the core operating margin improved from 6.2% in the prior year to 6.5%.
The improvement was due to the successful execution and effective commercial management of large contracts in both the public and private sector despite additional costs incurred in rectifying a pipeline contract in Jordan. Although tendering activity is high and increasing, awards are still infrequent.
In the Middle East, the group remained conservative in its treatment of the cancelled contracts which continue to progress slowly to resolution. During the year, some cash flow commenced. Geographic expansion in the region is progressing, while taking due cognisance of the risk imposed by the recent political unrest in the region.
The secured one-year order book stands at R2,5 billion (57% local), compared to R3,0 billion (85% local) as at 30 June 2010. The full order book is at R3,7 billion (58% local) (2010: R3,8 billion (80% local)). This is the largest order book of our Construction businesses.
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Material issues within the business and how these have been managed
Increased competition
The most material issue affecting the cluster is the increase in competitive bidding on most contracts, with the associated reduction in margins. The current levels of industry pricing are not sustainable, with many players offering lower prices to keep resources busy. As far as possible, we have preferred to adopt these measures as a last resort and to rather focus on more technical contracts and over-border work which still offer a reasonable, although reduced, return. Although this has been at the expense of revenue in the short term, we believe this is the more responsible option for the long term.
Contract delays
The industry suffers continually from delays in contract timeframes. The past year was no different. Many tenders were postponed and several contract awards were made later than planned. This impacts both the industry which anticipates a certain level of workload, as well as the preferred bidder who must hold resources in expectation of an award. As a business, we accommodate this by targeting more contracts than required and by adjusting the release of resources to suit anticipated late awards.
Return to Africa
The mining sector in Africa, which has formed the backbone of civil contracts in recent years, was not a significant portion of the group’s Civil Engineering revenue this year. It is therefore important that this sector is rebuilt in the coming year. With the reduction in activity in South Africa, there has been a drive in the industry to seek work in Africa, including firms not familiar with the construction environment outside South Africa. This has led to a tightening of prices over-border. As the rest of Africa is known to have more difficult trading conditions, our challenge will be to develop adequate volumes of work without compromising margins. Our previous experience in the rest of Africa positions us well for this.
Successful close out of mega contracts
The successful close out of some of the group’s mega contracts in South Africa which are due to be completed this calendar year is a key focus area. These include the Gauteng Freeway Improvement Project (GFIP) Package E contract, which is due for completion by November2011 in line with the original programme. A portion of the contract is set to be finalised in time for the implementation of the planned Gauteng Open Road Tolling scheme. Another contract set for completion is the pipeline and pump station components of the Transnet New Multi Product Pipeline (NMPP) contract, due to be handed over in July and September 2011 respectively. The entire construction contract is to be completed by 2013.Tough conditions in the Middle East
Resolving the legacy of completed and terminated contracts in Dubai has been a significant challenge and has required the application of additional resources to achieve timeous closure. We reached a settlement agreement on the terminated Dubai Police Force Accommodation (DPF) contract with the outstanding debt scheduled to be paid in terms of an agreed payment plan. Pleasing progress was made on the agreement of value on the group’s second terminated contract and on the close out of all completed contracts in Dubai. The group is satisfied with its progress in this regard.
Over the course of the year, we had to supply additional unplanned resources to a pipeline contract in Jordan which was running behind schedule. The intervention was successful, although the additional cost was material and had to be expensed and might not be recovered.
Furthermore, due to contract cancellations and weak markets, the group had to deal with severe reductions in its order book and its revenue base. It continued to carry overhead costs in the year to address the timeous closure of the completed and cancelled contracts, which negatively impacted performance in F2011. However, even against these challenges, the Middle East countries continue to invest heavily in infrastructure and the group therefore maintains its strategy of responsibly expanding in the region.
Key achievements 
Mega contract completions are advancing well and on track for successful handover. The pipeline and pump station components of Transnet’s New Multi Products Pipeline is set to be handed over progressively from July 2011 through to 2012. The Gauteng Freeway Improvement Project (GFIP) Package E contract is due for completion in November 2011 in line with the original programme Securing a number of new contracts in target sectors, including the R600 million Spring Grove dam in KwaZulu-Natal, a R1,4 billion roads infrastructure contract in Zimbabwe and a number of smaller contracts in mining and petrochemical industries while waiting for both the public and private sectors to roll out planned contracts in the year ahead Reaching a settlement agreement on the terminated Dubai Police Force Accommodation (DPF) contract with the outstanding debt scheduled to be paid in terms of an agreed payment plan. Pleasing progress was made on the agreement of value on the group’s second terminated contract and on the close out of all completed contracts in Dubai Establishing new relationships in both Saudi Arabia and Qatar and continued support from our joint venture relationship in Jordan -
Looking forward
Key focus areas for F2012 Desired results South Africa Following a year of contraction in the sector, a key focus will be to reverse the downward trend in revenue and to start rebuilding the order book.
Significant presence in the rest of Africa and capitalising on the expected growth in activity on the continent without losing capacity in the South African base Successful completion of the remaining mega contracts, whilst adapting the business to suit a market which offers larger numbers of smaller contracts, with their associated challenges and differing levels of competition.A more flexible business which is sustainable in an environment that consists of a wider range of contract size Rest of Africa and Indian Ocean Islands Implement a new regional and product-based business development strategy, designed to further improve knowledge across geographies and the full suite of
products.An order book which is less reliant on South Africa and which reflects an expanded geographic footprint and covers more of the group’s targeted sectors Middle East Rebuild the Middle East order book in selected territories and sectors.Secure risk and market-related positive margins and cash fl ow from a lower
revenue and operating base within new territoriesContinue to work with our partners in Dubai to successfully close out terminated contracts.A satisfactory financial outcome to all outstanding contract-related issues Develop our new business in Saudi Arabia.Establish our brand in Saudi Arabia and secure our first contract with good returns and cash flows Develop our new business in Qatar.Further enhance the reputation we established on the first contract in Doha and secure cash enhancing and profi table contracts for the newlyestablished business
Private vs public Civil Engineering Civil Engineering revenue by sector Civil Engineering revenue by contract type 
