R230-million to wreck a building company
Construction group Murray & Roberts (M&R) recorded a massive R1.735-billion loss for the financial year due to losses on projects, including the Gautrain, and possible penalties for collusion over World Cup stadium projects.
M&R’s share price has collapsed from about R10 400 before the global financial meltdown to R26.50 this week. Chief executive Brian Bruce and chief financial officer Roger Rees earned a combined R230-million between 2007 and 2009.
M&R is one of several construction companies that have applied to the Competition Commission for leniency in respect of bid-rigging over the stadiums. M&R is being investigated for several offences, including its Greenpoint stadium contract.
The fines are still to be determined but, because M&R applied for leniency, the amount will be significantly lower than the maximum 10% of annual turnover that can be imposed in these cases.
Executive pay is in the spotlight worldwide and rising concerns over economic inequality have led billionaire investor Warren Buffet to suggest higher taxes for the super-rich. At home, Standard Bank chief executive Jacko Maree has said he is donating 10% of his after-tax income to educational projects for the underprivileged.
An analysis by an anonymous author, “Muggers and Robbers—Collusion—Executive Pay—Dodger Accounting”, has been circulated to news media and to M&R. The writer claims that responsibility for the loss of almost R2-billion lies with Bruce and Rees.
They both retired at the end of June this year, but it is not known what packages they received. The writer suggests that they were effectively pushed out of the company and paid to retire.
Bruce, who has read the document, said: “It’s a pretty ranting letter. I don’t know what to comment on. It’s a very one-sided view.”
Out of context
Bruce said he could not imagine what sort of person would sit down for hours to write such a letter. He did not know who the writer was but did not think it was someone in the company.
“Everything was taken totally out of context — Everybody, including myself, has put a lot of effort into the company and it’s just unfortunate this [the loss] is what has happened.”
Rees could not be reached for comment.
Ed Jardim, group communications executive at M&R, said an unhappy employee had drafted the letter. He said the company believed that parts of it defamed M&R and that former executives were being criticised for issues unrelated to the organisation.
Jardim did not dispute the factual soundness of the letter’s contents. “We did not say that the issues related to Murray & Roberts raised in the letter are inaccurate. [But] these issues are written in a style that suits the opinions/views of the writer—they are one-sided. These views only disclose limited information on the issues and do not tell the full story.”
Preliminary financial results released in August showed losses of R1.15-billion from M&R’s involvement with the Gautrain and a provision for fines for collusion. Another R580-million is budgeted for completion of a marine project in Australia, R160-million went towards a write-off of legacy debtors in the Middle East and R710-million was lost in write-downs in assets and trading losses for discontinued operations.
The “Muggers and Robbers” document notes that Bruce’s remuneration in 2007 was R99-million, making him the country’s highest paid executive that year. He was awarded R47.8-million in 2008 and R9.5-million in 2009. Rees earned R60.9-million in 2007, R6.75-million in 2008 and R6.45-million in 2009.
Jardim couldn’t provide details of possible exit packages for Bruce and Rees. “[They] were remunerated in terms of their employment contracts with Murray & Roberts. Details of their packages will be disclosed in the 2011 annual integrated report.”
The anonymous writer claimed collusion had been embedded in the M&R group for many years and “at least for the majority of the period under Bruce’s and Rees’s leadership”.
The Competition Commission has investigated five different cases of alleged collusion involving M&R. The company first applied for leniency on behalf of its subsidiary, Rocla, in 2007.
The commission said in February that, regarding World Cup stadium projects, most of the leniencies were granted to M&R and two other groups.
It is not known how many applications for leniency M&R submitted, but a total of 65 bid-rigging cases in the construction industry are under investigation.
Jardim said that, to date, the group had received leniency in all matters except one. “We were a 42% shareholder in a company called National Scrap Metal. NSM received a penalty of R17.7-million.”
He said the group was still reviewing the matter and discussions were under way with the commission.
Oupa Bodibe, manager of advocacy and stakeholder relations at the commission, said it was not possible at this stage to release information uncovered by the commission relating to bid-rigging over the World Cup stadiums. “We are in the process of verifying the information with the companies and will in due course make a public announcement in respect of the number of firms that have applied for settlement and leniency, the projects that are implicated and the way forward.”
Report queries risk-management strategies
In 2010, Murray & Roberts Marine was awarded a subcontract to design and construct a material offloading facility in Australia. But only after the 2011 interim results, was it disclosed that a R580-million loss was experienced on a short-term contract due for completion only next year.
“[It] begs the question as to the risk-management policies and procedures in the organisation,” stated an anonymous document titled “Muggers and Robbers”, circulated to the media and the company.
M&R has acknowledged that it was a loss-making contract spurred on by late site access, logistics and quarantine, scope growth and weather conditions.
The writer of the document said management seemed incapable of forecasting the losses of their discontinued operations. A write-down in assets worth R330-million and trading losses of R380-million prompted questions, the document said. “One has to query the logic in continuing to trade a business and make a R380-million loss, unless of course the losses were already made in prior years and the bad news just bubbled to the surface once [top executives] Bruce and Rees had left.”
The document also strongly criticised the decision to provide R164-million against legacy debtors in the Middle East when stakeholders were assured last year of M&R’s confidence that it would retrieve the money.
Given the large loss, the writer questions whether last year’s results should be restated.
Group communications executive Ed Jardim said the unexpected losses did not mean the 2010 financial year accounts were incorrect. “The accounts were audited and approved based on the available information at the time. The 2011 financial statements reflect certain unusual charges and impairments.” Therefore, he said the 2010 accounts did not have to be restated.
An M&R press release said that managing risk effectively was at the heart of the group’s sustainability. “The setbacks during the year on certain major projects have necessitated a renewed focus on identifying and evaluating risk within the group. An increase in staffing of the legal and commercial teams is in progress, the group’s bespoke opportunity management system is being upgraded and improved project processes and systems are being implemented.”
M&R said that while future revenue flows were anticipated, the funding required to complete the Gautrain and Australian materials offloading facility over the next six months was likely to place the group in a net debt position again by December 31 2011.