Review from the chairperson
BBBEE scorecard rating
CAGR* of African investment
in African countries
||* Seven-year compound average growth rate.
In a difficult year for the construction sector, Group Five adhered to a disciplined and
responsible approach to very weak and unpredictable markets. I am proud to report that the
management team addressed the many challenges posed by current market conditions, while
simultaneously positioning the group for future growth opportunities over an expanded
The macro-economic environment
Global economic recovery has proved more elusive than generally
believed 12 months ago, with inflationary pressures and the rising
cost of capital likely to dampen public spending and private sector
investment in the short to medium term. Although it is disappointing
to note that a slower trajectory of global economic recovery is now
almost inevitable, the group continues to monitor the variable market
conditions through its ongoing risk assessment systems which
results in proactive management decisions.
A slower economic recovery has the potential to impact significantly on
the group’s markets, creating cost pressures and constraining new
business. The group’s response has been to further diversify its sector
focus and its geographical base beyond South Africa, where constraints
in public spending have had a particularly negative impact on new
contract availability during the period. Group Five now has operational
experience across 22 countries in Africa, Eastern Europe and the
Middle East. During the year, the group focused on reinforcing its
strong foothold in Africa, rebuilding its business in the Middle East and
seeking opportunities for expansion into other markets where we have
the potential to operate and grow.
Strong governance structures, including the effective management of
risk, are essential in navigating the business successfully through the
uncertain and potentially volatile economic conditions that we believe
still lie ahead.
At Group Five, risk assessment is seen as a critical business function
and essential in developing a resilient business culture that is risk
aware. In Group Five’s risk management process, key risks at a
macro-economic, business and contract level are identified and their
potential impact on the group is continually assessed and monitored.
Risk management is not seen as a once-off exercise and is integrated
into our business processes and decision making.
An example of the group’s approach to managing risk is its decision
to proactively engage with the Competition Commission in its
investigation into the construction sector. Over the past two years we
have worked in close cooperation with the Commission with the aim
of expunging historically misguided behaviours from our business
and the industry. We have been granted conditional leniency by
the Commission pending the finalisation of the broader industry
investigation. We believe this approach will be to the long term
benefit of the group and is in keeping with Group Five’s culture
of transparency and integrity.
The group remains committed to meeting the requirements of the
King Code of Governance (King III).
As reported last year, Group Five manages and reports on financial and
sustainability issues in an integrated business model. In this integrated
report we have further refined our approach to integrated reporting, as
required under King III, by identifying and reporting on the issues which
are most material to the group. For the first time we have included
reports from the chairpeople of key board committees to strengthen
our disclosure on all issues which impact on the group. We welcome
feedback on our reporting. This is essential if we are to continue
improving in this area.
Our governance protocol includes a board review. An independent review
of the board’s performance and capacity was conducted in the year. The
review process included peer feedback, structured interviews with each
board member and formal individual and group feedback.
The board was found to be running effectively overall, although it was
recommended that the board supplements its engineering and legal
skills capability. To address these gaps, the board approved the
appointment of two additional board members through its nominations
committee. They joined the board with effect from August 2011.
Transformation, skills development and socio-economic development
I am delighted to record that despite the challenging conditions during
the year Group Five has maintained an unwavering commitment to
black economic transformation and has shown concrete progress in
meeting the provisions of the Construction Charter. Our broad-based
black economic empowerment (BBBEE) rating under the Construction
Charter improved to a Level 2 contributor. We have been able to achieve
this goal despite being in the process of unwinding the ownership
transaction undertaken with one of our BBBEE ownership shareholders,
the iLima Consortium. In consideration of this unwind the board has
mandated management to review and propose a future BBBEE
shareholding structure which will be presented to existing shareholders
for approval. This process is currently under way.
The broader approach of the group to transformation extends beyond
mere compliance and we are now seeing the benefits of this philosophy
in the external acknowledgements the group has received.
We currently have the best rating in our sector against the guidelines
of the sector scorecard. We have also been rated as the 11th most
empowered company in South Africa and the winner in the Basic
Industrials Sector by the Financial Mail in its Top Empowerment Companies survey in 2011. Our board comprises a broad spectrum of
South Africans, including two black females, one white female, three
white males and one black male. The board also comprises three
international board members. We are proud of this diversity.
Our socio-economic development (SED) programmes have continued
to progress. As we move across the borders of South Africa, this
business ethos will continue into the other African countries in which
We are cognisant of the need to develop the capacity of the technical
skills required in our industry and therefore support the government’s
National Economic Growth Plan (NEGP). The group has a track record
of strong skills development in our business and industry, as well as
delivering training and development programmes through our SED
initiatives. Refer to page 79 for more information. We believe through
these initiatives we will make a tangible contribution to achieving the
objectives of the NEGP
Future growth opportunities
In South Africa, the need for public sector spending continues to
increase in importance. We are optimistic about the potential of the
power sector following the announcement by the South African
Department of Energy that it will start consulting with interested
parties on the next Integrated Resource Plan (IRP2) for the country’s
energy future. The timing of the plan’s roll out will be important to
ensure traction in delivery.
In the rest of Africa, we believe there is strong potential for growth,
particularly in the mining, power and transport sectors. Economic
fundamentals underpin strong positive sentiment around Africa’s
growth prospects. According to The Economist of January 2011, six
African countries were among the top ten fastest-growing countries
globally between 2001 and 2010. Capital inflows are forecast to reach
US$150 billion per annum by 2015. Africa has a wealth of natural
resources in a world that is resource scarce. Most impressively,
Africans themselves are leading growth in investment on the continent
with African investment in other African countries within a diverse
range of sectors and economies increasing by a compound rate of
21% from 2003 to 2010.
Group Five is well positioned to take its place in this new era of African
and emerging market growth. Although operating in Africa carries
specific risks, these can be managed with proper risk assessment
and governance processes. As a group, we have the track record and
experience to participate in this “African success story”. We have many
years of experience on the continent and a clear operating strategy.
We believe that our continuing focus on risk management and
governance enables us to expand our business on the continent in a
way which will generate sustainable value for shareholders and
contribute positively to the societies in which we operate.
In the Middle East and North Africa, careful assessment of market
conditions is needed given the combined impact of the global economic
crisis and recent popular revolutions in the region. The group has
chosen to focus on commercial and financial closure of its cancelled
Dubai contracts and to limit its business development activities to
a small number of territories which meet the group’s risk policies.
In Central and Eastern Europe, the concessions markets where we
operate through our Intertoll brand have experienced a difficult period
due to the economic slowdown and a number of political developments.
No significant improvement in market conditions can be anticipated
before 2012 or 2013. Against this, Intertoll has been able to extend its
footprint into alternative markets in the region, including undertaking
some contracts in the Balkans.
Looking forward, we believe that the gradual economic recovery will
lead to increasing demand in our sector in the medium term, although we expect the tough conditions to be present for much of the financial
As chairperson of the board, it is my pleasure to extend my appreciation
to my fellow board members and to thank them for their support
during the year. I thank our shareholders, clients, suppliers and
business associates for their continued partnership with and support
to the group.
The achievements of the management team at Group Five have
been significant in challenging circumstances and I acknowledge
their hard work and leadership. A special word of acknowledgment
to our CEO Mike Upton and his executive team. Credit must also go
to the group’s employees, who have worked as a cohesive team to
ensure the business weathers the current storm.
I am also particularly appreciative of the diversity of thinking displayed
by my fellow board members and the executive team. I enjoy and
value the constructive discussions around issues which affect the
future growth prospects of Group Five and the role it plays in the
wider context of our country’s economy and society in general.
P (Philisiwe) Buthelezi
5 August 2011