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Review from the chairperson of the risk committee

The impairment in
Construction Materials indicated
a need for more stringent
assessment processes.
As a board we monitor
the current climate carefully
to ensure the business will
weather the continuation of
the recessionary cycle.
Kalaa Mpinga
  Kalaa Mpinga

The last 12 months have continued to be a turbulent period for the global economy. Momentous political change, most notably in North Africa and the Middle East, took place against a backdrop of economic uncertainty underpinned by a profound financial crisis in the Eurozone. These dynamics have led to a more volatile and unpredictable business environment. Group Five has worked hard during the year to understand the implications of recent developments for its markets and operations and to take the actions necessary to adapt to these difficult trading conditions.

The role of the board risk committee is to provide assurance to the board that the risk management policy and strategy set by the board is operating effectively, to ensure that a policy, framework and methodology is in place for the group to identify, analyse and manage risk to comply with statutory laws and regulations and to ensure that management acts on any suspected fraudulent or criminal behaviour. The risk committee also focuses strongly on ensuring that safety is a priority in the group and proactively managed.

During the year, a large range of risks was therefore considered by the committee. The review from the group risk officer on page 101 discusses these in more detail. In this report, I would like to comment on three major issues which were at the forefront of our attention during the year:

Continued recessionary pressure, which resulted in further weakness in our major markets and fierce price competition
The potential for geopolitical shifts and changes to territorial and regional stability which threaten our existing operations and strategic growth objectives
Taking these two issues into consideration, the need to constantly monitor and review the risk-bearing capacity of the group, its risk profile and whether the group is able to effectively manage potential investments or expansions

  • Continuing recessionary pressure and construction market weakness

    Estimates of global recovery are subdued, with policymakers and analysts starting to express concerns over the delayed timing of a recovery and its effect on economic and financial assumptions, job creation and inflationary pressures. Regulators are adopting a cautious approach and continue to recommend tighter capital requirements for banks, which are likely to result in higher lending rates and a decreased appetite for risk.

    As a board we are monitoring the current climate carefully to enable the business to weather any continuation of the recessionary cycle. Of significance in the South African market is the current price competition which erodes margins and results in less favourable commercial terms. Cost control, as well as adequate working capital management is therefore critical, particularly given the continuing escalation of input costs, including steel, fuel and labour. Also of concern is the slow progress in the delivery of long-awaited national infrastructure contracts.

    As a commodity producer and exporter, South Africa has been shielded from the worst effects of the global recession. However, the South African construction market has remained weak with a lack of spending against previously committed infrastructure budgets and limited private sector spend. Group Five also operates in other markets which have been heavily hit by the downturn and by the depth and length of the recession, particularly Eastern Europe and the Middle East.

    Looking forward, however, economic forecasters are bullish about the economic potential of Africa. Foreign direct investment (FDI) growth into Africa is forecast from calendar 2012 onwards, resulting in infrastructure and development initiatives which will create potential opportunities for the group as it seeks to expand its African operations. The group’s strong operating track record in Africa and our established risk management framework will position us to take advantage of these opportunities as they arise.

    We remain committed to our home country of South Africa and are hopeful that the planned public sector spend will receive impetus going forward to ensure increased contract flow.

  • Geopolitical trends

    Globalisation has brought about both challenges and opportunities. As we have seen with the periods of unrest in North Africa and the Middle East, volatile political circumstances can quickly escalate and amplify political risk across borders. Our strategic growth objectives must therefore be tempered with a clear understanding of trends which can lead to increased political volatility which may result in business risk and employee safety. As a board we regularly review trends and monitor changes in the political landscape in the territories and regions where we operate and those which are strategic targets.

    To successfully interpret geopolitical events and identify their potential for impact on our growth objectives, we need to rely on input from external stakeholders and continue to refine our systems for filtering risk. We do this with dedicated resources which continuously assess the risk profiles of the countries where we operate or plan to operate. We are also very conscious of maintaining sufficient flexibility to modify our business strategy as circumstances change to ensure that the business remains sustainable in a changing environment.

  • Assessing contract risk and group risk-bearing capacity

    Each contract and business initiative has to be adequately assessed. The board’s capacity to contribute to contract and enterprise risk reviews is therefore an area of continuous focus. Against a climate of reduced capital availability, we have to be particularly cautious that when capital is committed, it is done in a way which maximises returns and ensures business sustainability.

    The group’s recent impairment of its Construction Materials acquisitions highlighted the need for more stringent assessment processes and board reviews in the application of capital and resources.

    Furthermore, it is no longer sufficient to only investigate technical risk. The brief outline of macro-economic and geopolitical trends given in my review shows us that our approach to assessing business initiatives has to be holistic. We need to take into account an increasingly volatile environment and markets which have weakened to such an extent that profit margins and cash flows are under pressure.

    Over the last few years, we have made significant progress in this area with further refinement of contract risk assessments, reviews and bid approvals. More of the group’s businesses are working internationally and has established its ability to bid for larger contracts with more complexity. The board has thus recognised the need to lead the development of systems and processes to establish measures which indicate the level of risk that is acceptable to the board and can be borne by the group, as well as to ensure the constant monitoring of the group’s risk-bearing capacity (RBC).

  • Appreciation

    I thank my colleagues on the board risk committee for their continued engagement in our risk management processes and their contributions and support. I also thank the Group Five risk team under Guy Mottram as group risk officer for continuing to provide excellent quality of risk analysis and reporting.

    KK (Kalaa) Mpinga
    Non-executive charperson of the risk committee

    5 August 2011

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