Dealing in the downturn

By Huw Thomas, Editor

MENA Infrastructure talks to Brian Bruce, CEO of global engineering giant Murray & Roberts, about how his company has dealt with the recession and what the future holds for the firm in the Middle East’s construction sector.

“Our brand is effectively one of our greatest assets in the Middle East, and we've been able to pick up new work as a consequence”
-Brian Bruce

Some firms have handled the recent economic crisis better than others, but even so the resilience of South Africa-headquartered Murray & Roberts, a major player in the Middle East's construction sector, has been remarkable. As a result of the termination of a number of high-profile projects – including the Trump International Tower and Hotel in Dubai, the Salam Resort Project in Bahrain and Abu Dhabi's Tameer Towers, to name just a few – the value of the firm's order book plummeted 40 percent from the US$8.2 billion peak that the group reported last year, a process that also resulted in the company shedding significant numbers of jobs.

For most firms this would have been a crippling blow. But Chief Executive Brian Bruce believes the company has weathered the storm well and is now firmly focused on expansion. "The order book has since settled at a level of US$5.4 billion, which means that over the past four months we have been winning as much work as we are doing on an ongoing basis," he says. "We are now looking at further acquisition opportunities, and our international operations have plans to expand their markets in the Middle East, South America and Asia."

Significantly, Bruce is backing his words with positive results; earlier in the summer, the company announced it had won a joint venture contract worth about US$5.5 million to develop a major resort on Saadiyat Island in Abu Dhabi – its biggest deal since the series of project cancellations and postponements that came about in the wake of the Wall Street meltdown – and expects more contracts in future in the Middle East. "Clearly the economic circumstances at the moment have brought additional challenges into the marketplace," he says. "But we're confident we'll get through those. One of the tenets of good contracting is to be flexible, to be able to go where the opportunities are, to not get stuck in one marketplace. And I think in that respect, we're very well-placed."

Here, Bruce explains how Murray & Roberts has dealt with the crisis, why partnerships and collaboration are essential to success, and where the bright spots are in the Middle East's construction sector.

The last 12 months have been difficult for everybody and I know that Murray & Roberts saw a significant proportion of its order book cancelled in the four months between November 2008 and March of this year. What impact did this have on your operations?

Brian Bruce. The first thing was to deal with what we call project terminations, because not all of the projects were 'cancelled'. We walked away from two projects in the Middle East where we saw trouble ahead in terms of increased working capital and potential for dispute, terminating our involvement on breach of contract. In the other contracts that were terminated, we initiated fairly urgent engagement with our clients to make sure – particularly where we saw clients were vulnerable, either because they were highly leveraged or for some other reason – of their future payment profile. The minute we got a sense that they were going to have difficulty paying us, we agreed to step away from those contracts.

I think this approach is quite unusual because the construction industry, historically, hangs on to its work and builds up a working capital balance, which it then tries to recover over extended periods – generally having to impair some of it at some stage in the future. It's a modern approach, if I can say that. I know a lot of the leaders in the global construction engineering sector and most of the leaders today are much more risk-aware, certainly in terms of major contracts. They are very conscious of reputation, very conscious of sustainability issues, very conscious of cash flow. So they're more likely to make these decisions, perhaps, than the construction leaders of the past, for whom a contract was a contract – their view was that 'a bird in the hand is worth two in the bush'.

The best firms see recession as an opportunity rather than a crisis. So maybe you could give us some idea of how you responded to the market forces that caused so much disruption to so many companies, both in the construction space and beyond?

BB. Within a few weeks of terminating our involvement in a range of projects, which added up to about a third of our order book, we had already released resources and we no longer had to spend management time trying to manage a past situation. We were effectively able to focus our resources onto the future. And that future is complex, particularly in the Middle East.

Construction markets, in our view, have value only if they're funded from free cash, and when construction markets are funded from debt, then generally the situation becomes a little less value enhancing for contractors. So the Dubai market was a debt-driven market. In free cash flow markets, on the other hand, economics tend to be more important. A free cash market would be something like we are now seeing in Abu Dhabi and Saudi Arabia, where oil revenues do provide significant free cash. Immediately, we started to monitor where free cash markets were. Abu Dhabi and Saudi Arabia are two of the most important in the Middle East. Qatar, of course, as well, but it's a slightly different market, so we just entrenched our position in Abu Dhabi, and with Dubai out of our hair, so to say, we were then able to focus resources on the potential of the Saudi market. We hadn't had to look at Saudi before, because we were just so busy in the other parts of the Middle East.

I'm pleased to say that, yes, our order book is eroded in the Middle East, but we've hardly noticed the reduction. We've picked up some new work and we've been able to improve our pipeline of engineering talent. A year ago, we were struggling to find the skills to put in many of our projects because of the boom in the market; but all of a sudden, we were able to put the best people we had and that were becoming available in the market into the projects we had and the projects we were winning. And the value proposition suddenly increases on a project when you've got the best people there.

So in many ways, you've taken a very proactive and confident approach to the downturn?

BB. We've got a good brand in the Middle East. A lot of people were worried about the fact that we withdrew from some contracts – the Dubai Concourse 3, in particular – and that this would put a dent in our brand. In fact, it enhanced our brand. Clients knew that Murray Roberts wasn't going to be messed around, and that we approach things very professionally. Our brand is effectively one of our greatest assets in the Middle East, and we've been able to pick up new work as a consequence.

In terms of the economic crisis itself, do you feel that the worst is over? Do you think the infrastructure markets remain on course for long-term growth?

BB. Overall, I would say that we are not over it yet. The construction industry is a lag industry. Our order book tends to carry us through a little bit longer than other sectors that feel the impact instantaneously, like retail. But we did see a period where there was virtually no new orders being issued, certainly in the first quarter of this calendar year, and that extended into the second quarter. Therefore you'll see a slight hiccup in order book development for just about all contractors.

But that's starting to pick up now. Governments have got fixed investment programs. Oil prices have recovered to a reasonably stable level at $70 a barrel or thereabouts. A number of commodity price increases have improved significantly, up to 33 percent in some instances, and we've tended to get out of those showing no signs of improvement, and focus our attention where the improvement is. I have to take my hat off to our executives, they really were able to refocus very quickly. But there was a lag between losing work and acquiring new work, and I guess that 2010 is going to be the year where this lag is felt. My personal view, and it is one shared by the company, is that we see significant demand for infrastructure for quite a long period ahead.

You've alluded to your ability to focus on the projects of key value to Murray & Roberts. So how do you decide which projects are of strategic importance? What do you do to ensure such projects as successful?

BB. First we try to identify what we call mega-trends. These are partly related to the work that we already do and partly related to the markets that we serve. So we look at trends where we would be able to focus our operations. We look for the opportunities that have got the potential to offer high levels of value, and how we can bring them into the group. We have developed quite a rigorous opportunity management system, which provides a set of filters that all projects of interest have to go through. We are principally geared towards delivering above market margins, therefore we effectively segment the market to look for the types of opportunities that will give us better value. This opportunity management system filters opportunities and allows them into our pipeline on the basis of a set of predetermined parameters that we, through our many years of experience, have identified as leading to higher value. So you've got to hunt a little further for your opportunities. You've got to be a little more patient. They're generally bigger projects, so you've got to invest a lot more in procuring them, but the rewards are there at the end of the day. And once we've won the contract, the implementation phase is where we ultimately deliver the value.

One thing you've recently spoken about is the idea of reframing Murray & Roberts, taking your existing business model and placing it within the context of a post-financial crisis environment. What does this mean for the company, and how are you achieving it?

BB. We run Murray & Roberts on a federal basis, so we've got a very small corporate office in South Africa. We spend most of our time dealing with macro issues. We identify where we think the trends are going to be, but we don't run our individual businesses from here; instead, we've got 25 operating companies that focus on various aspects of the markets we're active in. About 50 percent of our business is focused on international markets.

But the company's grown about 400 percent in the last five years, so trying to coordinate the actions of 25 companies is a little challenging under these circumstances. So what we're doing is changing the authority and discipline arrangement. We've clustered our operating companies together around certain markets, key areas of focus or opportunity, and those clusters deliver through the underlying operating companies in a more cohesive way. We believe that you've got to be a little bit more centralised in times of crisis, but at the same time you've got the appropriate level of decentralisation. This allows us to look at these clusters and decide how we can add on to them through new opportunities and acquisitions. So instead of bringing in an acquisition on the outside, we can now bring it into this cluster structure and enhance its value.

So how would this relate to activities in the Middle East? Will it involve further expansion in the region, moving to different markets or sectors?

BB. Up until recently, the corporate resource for our Middle East operation was based in London. We've now moved the corporate responsibility for the Middle East to that region, so we're looking at the Middle East as a growth and opportunity environment, rather than a corporate in London having the Middle East as one of its cluster operations. We're much more focused in the Middle East. We've launched the management team there and so they are now set free as a Middle East team to grow that business in that environment.

Can you tell us a little bit more about the projects you're currently working on in the Middle East? What would be the key projects going forward?

BB. Primarily we've done what we call large-scale commercial projects, and we tend to work mainly with public sector or semi-public sector bodies. We also do a reasonable amount of infrastructure, but not what I would call basic infrastructure. We don't do roads, but we have done bridges. We do a lot of marine works in the Middle East, and we're looking at the more specialized areas. There's some interesting new infrastructure projects, particularly in Saudi Arabia that we can bring some of our skills and capabilities from around the world to bear on. We also have a crane business in the Middle East that has been pretty successful. It's certainly one of the leading brands there. We may very well also look at acquisitions in that environment.

How important are local partnerships for you when working in a region such as the Middle East?

BB. Very important. That's one of the risk management non-negotiables in Murray & Roberts, that when we work in any environment outside our domestic environment, we engage in a partnership. We prefer to do it with a local partner that's got some level of substance; working with small players doesn't really help. So in the Middle East, our partnership with Al Habtoor has been very successful. We have worked in Asia with Leighton International for many, many decades. Leighton, of course, now has a stake in Al Habtoor, so that has enhanced that relationship. We've got a partnership with the Nass Group in Bahrain, which is probably the major player there. And we've also now tied up with Saudi Oger in Saudi Arabia. So they're very important for us, these local partnerships.

One of the big trends in construction at the moment is sustainable development. So how is Murray & Roberts building a greener focus into its design and development processes, and reducing the environmental impact of its large infrastructure projects?

BB. The first thing that we've got to do is start a process of properly and accurately measuring the impact of our activities – not just what we do ourselves, but the impact of the materials we use, the suppliers we work with, etc. That's the first step, because until we do that, we don't know what it is that we're trying to improve on. We disclose and report on those measurements and we've got a proper structure for doing that in place now. Next year, we'll have a much more comprehensive sustainability report as part of our year-end report.

So that's the first thing. Secondly, the environmental impact of contractors is largely a consequence of their clients' activities and needs. Now as an engineering and design firm we try to introduce the idea of sustainability to the clients that we have, but to a large extent, if they are not interested then we have a short-term problem. Moving to more sustainable ways of working is a progressive process, but we need to find an impetus to do it faster.

Do you see the Middle East as particularly open to the idea of more sustainable, greener practices?

BB. In the Middle East, there's been hardly any thought towards this. It's probably been one of the great disappointments of the last 20 years, that the opportunity to create a brand new built environment has hardly taken sustainability into consideration at all. In fact, my long-term concern in the Middle East is that the cost of maintaining the development that has happened there probably exceeds the viability of the environment. You have to desalinate all your water. Everything has to be air-conditioned. It is just an enormous maintenance challenge, certainly in the Dubai region.

So do you think there are lessons that the other emerging economies in the Middle East can learn from the way that Dubai has approached its development? Can they avoid some of the pitfalls?

BB. My personal view is that some of the developments in Dubai have not really considered their environmental impact. I think there'd be a lot of debate on the sustainability of The Palms, for instance, if they were to be started now. The strategy there was effectively development at any cost, but I think the green debate is now catching up with everyone so we have to find some effective solutions.

I look at the Middle East and I look at Africa and I can't see how we will achieve human development in this part of the world without some new ideas on how it's going to be done, because we can't aspire to the same developmental profiles as Western Europe or North America. The resource demand would be too great. There's got to be more appropriate technology processes. The development of what is currently the underdeveloped world has got to follow a different trajectory to the way that the developed world has evolved.

So what do you think is going to be the main driver for sustainable development going forward?

BB. He who pays the piper calls the tune, so at the end of the day financiers hold the key to this. We do a lot of PPPs, and the financiers have a significant influence in the way, ultimately, that a project will develop, simply because they apply these conditions to their funding. So that's the way I see it: that financiers will ultimately control the process and governments will legislate. Clients will tend to operate at the minimum level of legislation; there'll always be a few who'll want to lead the way, and contractors will generally do what they're told to do, but without direction from the people controlling the funding then progress on fully integrating sustainability into the building process will be slow.

Do you think green buildings standards, such as LEED, can play a role in this?

BB. Absolutely. One of the frustrations that we have at the moment is when you have traditional architects who will often sacrifice energy efficiency for design prerogative, so you get inefficient lighting systems, poorly designed layouts, etc., that require high levels of energy to keep them efficient. But there is now a new generation of architects coming to the fore, who first and foremost look at the impact of a particular structure and how design can influence things like energy efficiency. This is a change that we're seeing every day. We're doing buildings today that are designed by architects at the request of clients that are very efficient and environmentally friendly. We did the Microsoft head office here in South Africa, for instance, and the specifications the architect put in demanded high levels of energy efficiency. So this is good. Progressive clients are saying, "I want my company to be associated with what's good for the future, rather than what worked in the past." Competitiveness remains one of the principal drivers of performance and value.

And what we find, as we adopt these processes, is that we attract different types of people into the company. So 10 years ago, any young person looking for a career would probably have shunned the construction industry totally. It was seen as backwards, dinosauric in a way. But today, we're finding young people are very excited by the principles that companies like ourselves are espousing and working towards, and they want to be part of it because they can see their contribution. That, in itself, triggers a whole different new dynamic in the organization: you're not defending the past any longer; you're effectively trying to build the future. These are subtle but very important shifts in emphasis. As the construction industry moves away from effectively just fielding resources to build somebody else's plans, and rather takes more ownership of the way in which a project is designed and built and contributes towards that process, I think we will create a very different industry, one that attracts the best brains and people into it.

On that note, what is your outlook for the global construction industry over the next two to three years? What do you see as the key trends?

BB. A lot of the infrastructure that's been built over the last 50 years is in poor shape. It's falling apart. It hasn't been properly maintained. You don't solve society's problems by just building new infrastructure, but you do need to create new nodes. So I see that there's going to be an increased commitment by most economies, both developing and developed, to get the infrastructure right. It is a competitive advantage. That's going to require more resources. The critical thing is how do we use resources more effectively and efficiently than we have in the past? And this is really where the leading design and engineering firms, who truly think about sustainability, can come to the fore.

And I guess that will involve a good deal more collaboration between different industries – not just between participants within the construction industry, but between the construction sector and the technology, transportation and energy industries, for instance, in order to capitalise on the developments that are happening there?

BB. The truth is that you must have more collaboration between different types of industries to try and solve the particular problems we currently face. Some firms are going to see it and move in that direction fairly quickly, and some are just going to stay where they are. There's always going to be a demand for the traditional players – the consulting engineer, the professional consultant, the professional architect, the resource-based construction company. They're always going to have a role. But the leading firms and players are going to find different ways to do different types of solutions for different types of requirements. And it will open up a whole new realm of business opportunities for those firms.