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Since May, the Murray & Roberts share price has rallied strongly on hopes that the group had seen the last of its massive write-offs and problem contracts. But the momentum is petering out, and threatens to reverse when the implications of this week’s arbitration are fully absorbed. M&R CEO Henry Laas tried to put his best foot forward, but once again he has to deal with an unexpected reverse on the problematic Gautrain contract. An arbitrator has concluded that a tunnel on the line, while not unsafe, is seeping water much more rapidly than the design specs say it should. So M&R’s engineers – and its partners in the Bombela Consortium – need to get down and dirty again and fix the problem. Laas isn’t saying what this latest reverse will cost the group, preferring to route of suggesting it could be offset against other claims that M&R is confident of winning. Unfortunately, it was also confident of winning this arbitration. – AH
ALEC HOGG: The Bombela Civil Joint venture in which Murray & Roberts own’s 45 percent, has been ordered to undertake immediate remedial work on the Gautrain tunnel section between Johannesburg Park Station and the Emergency Shaft 2. Henry Laas, Chief Executive of Murray & Roberts joins us now on the line. Henry, Emergency Shaft 2: is that near Rosebank?
HENRY LAAS: Its’ from Park Station to ES2, which is the section that is in question. From ES2 to Rosebank is not in question – that’s the boring section of the tunnel. The part that we need to do work on is between Park and D2.
ALEC HOGG: Just unpack it for us, because we’ve heard from the politicians that they are delighted that the public sector, in their view, won the case against Murray & Roberts in arbitration. Just unpack it for us really simply. What was at stake here financially, and what is it that you have to do to remedy it?
HENRY LAAS: This has been a very complex arbitration process and it is about the interpretation of the specification relating to the amount of water that is allowed to drain into the tunnel at a specified period of time. Now this matter was in the Dispute Resolution Board a couple of years ago and it ruled in a certain way, and that ruling was basically challenged by the province and by Bombela in an appeal, and this is what this arbitration was all about. The arbitration ruling in many ways was different to what was ruled by the Dispute Resolution Board. Effectively, what the ruling says is that the tunnel is perfectly safe. It is safe to operate. It is safe. It functions well. It is doing what it’s supposed to be doing as a system, and the system is in no way threatened by the inflow of water to the tunnel. From a construction point of view, the integrity of the system is not in question at all. It’s perfectly safe and it’s functioning very well. The issue is that the specification, and the way it has now been ruled through the arbitration process, in terms of the water that goes into the tunnel. If you compare that to the amount of water draining into the tunnel now, we are not within specification and if we were to achieve that specification, we would have to undertake more work. The panel didn’t rule that there was anything wrong with the tunnel from a safety point of view, so my take on that is that there is the potential for a commercial settlement on this matter because it does not impact the safety of the system or the functionality of it in any way. It’s merely a fact that we’re not meeting the specification, which was now determined by the arbitration panel.
ALEC HOGG: From what I understand from the other side, is that the tunnel was supposed to last 100 years. However, the water is coming through at a rate they would only have anticipated to happen in 80 years’ time, so the taxpayer is going to have to pick up the cost for the last 80 years of the contract. These are long periods and I think both of us are going to be deep in the ground at that stage. Is that accurate?
HENRY LAAS: I think it is actually impossible to make these types of predictions at this moment in time. Our view is that the tunnel will last for as long as the design life has been specified. If there is any impact as a consequence of the water ingress, it is nearly what the impact would be in terms of running additional pumps and pumping the water out of this tunnel – the excess, in excess of specification. I don’t think it is reducing the useful life of the tunnel in any way. All that it basically requires is that the drainage system should just cope with the additional water, which is draining into the tunnel. I can tell you that the drainage system is capable of dealing with a lot more water than it’s currently dealing with in the system
ALEC HOGG: Henry, your shareholders…there has been quite a lot of impact here. You wrote off a few billion rand on the whole contract. Is it likely now that you can claw some of that back?
HENRY LAAS: Look, where it is now…this ruling does not give Murray & Roberts or the Bombela Group of Companies the opportunity for claw back, because if there is more work to be undertaken, it must come at our cost and we need to bear the risk of that additional cost. You need to see it in the context of all the commercial notices, which are in dispute between Province and Bombela. We do still have a large delay in disruption claim between the parties, and that is a claim that, if ruled in Bombela’s favour it would have a cost implication for Province, whereas this water ingress matter has a cost implication on Bombela. Yes, if more work is to be done it will come at a cost and it will impact our financial results, come the day that we need to account for that. I’m still hopeful that there is scope for a commercial settlement because that tunnel – according to our interpretation and our experts – is perfectly fine as it is.
ALEC HOGG: Henry Laas is the Chief Executive of Murray & Roberts. Clearly, the fat lady has not sung in that instance.
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