The group had to manage several material risks during the year.
Fortunately, none of these were unanticipated as our established risk
management system had identified these threats. However, although
we anticipated poor conditions in our Construction Materials business
and continued difficulty in the Middle East, the extent of the materials
downturn was underestimated and the impact of holding costs in the
Middle East was larger than anticipated.
The continued recessionary pressures and the uncertainty of the timing
around an eventual market recovery were obviously key focus areas for
management. As this is covered in the review from the CEO and in the
review from the chairperson of the risk committee, I will not address it
here, but will focus on the company-specific material issues identified.
The Construction Materials cluster has operated under very difficult
market conditions in which both volumes and prices have declined
materially. This cluster also experienced a number of operational
inefficiencies. The market conditions, combined with internal issues,
had a severe impact on results, which included a large impairment
of the cluster’s asset value. Against this, management acted to
rightsize the cluster both in terms of people and mothballing
certain underperforming and uneconomical plants and quarries.
The extent of the measures required to reduce losses and marginalise
cash outflows within the business were extremely invasive and difficult
on employees, which in itself became a risk to manage. Another area
which required significant management attention was compliance.
South Africa is a highly regulated environment and the group has spent
an extensive amount of time and resources to ensure that we adhere to
the various regulations that govern the cluster, including stringent mining, environmental, safety and health regulations. We have
appointed a specialist team to ensure full compliance at all sites.
As communicated previously to stakeholders, we have contract
resolution risks to resolve in Dubai following the market collapse.
There are two main exposures from contract terminations by our clients
Meraas and the Department of Civil Aviation (DCA). We have now
concluded and signed a formal settlement agreement with Meraas
with a payment schedule spanning five years commencing in June
2011. No amendment to the previously certified value of the debt was
required in the year although a discounting adjustment to record the
debt in present date value was done. We increased engagement with
DCA in terms of the commercial resolution of legacy contracts, with
constructive steps towards finalisation. The group is satisfied with its
progress in this regard.
Furthermore, our strategy of accessing new markets in the region
to replenish order books has been done with a strong awareness of
the recent political uncertainties of some territories in the broader
Middle East and North Africa (MENA) region. We have approached new
territories with due care and consideration. Although we have had some
successes in terms of new contracts, this has been at a slower than
expected pace and hence in the short term, the group has had to support
an overhead in the region to attend to the close out of legacy contracts
and to bid for new work without an immediate return on this investment.
About two years ago management made a decision to proactively
cooperate with the Competition Commission in its anticipated
investigation into the construction sector. This decision was made in
line with the group’s zero tolerance to unethical behaviour, its culture
of transparency and to proactively manage the potential impact of fines
and penalties which could be levied against offending companies. As a
consequence, we approached the Commission with a view to mitigate
the financial and reputational risk by utilising its leniency policy on
companies willing to first report non-compliance. We have spent the
last two years cooperating with the Commission in submitting a record
of our findings. We have recently been granted conditional leniency
pending the finalisation of the broader industry investigation. We are
confident that our decision to proactively manage this risk will have the
best possible outcome for the group.
Despite having maintained our lost time injury rates and other
health and safety statistics at low levels, we unfortunately had
six fatalities this financial year. The losses of life have been exclusively
within our sub-contractor base. Although the sub-contractor employees
are not employed by Group Five, they operate within our sphere of
responsibility. Therefore, to reverse this trend, we are implementing a more vigorous sub-contractor selection and management programme
which will assist our sub-contractors to align to our values and
standards to ensure the protection of people.