R10bn Winelands road project awarded to upgrade the N1 and N2

In a world where big infrastructure projects are in short supply, construction companies Group Five and Basil Read have won a tender that will keep the revenues ticking over for the next three.

The SA National Roads Agency (Sanral) on Monday awarded the companies a contract to upgrade the N1 and N2 highways between Cape Town and Worcester and between Cape Town and BotRivier respectively.

A third partner, French company Bouygues TP is also part of the project consortium.

The project covers 170kms of road and involves building upwards of 170 culverts and bridges, in certain parts converting a four lane highway into six lanes; building a tunnel through Sir Lowry’s pass, and flyovers at two points on the N2 through Somerset West.

The project is estimated to cost around R10bn.

This award is just for the construction and upgrades of the two roads, says Hugan Chetty; construction sector analyst at Afrifocus. “Details on how the concession will be run and maintained are still to come. More disclosure on the financial details will come in February, when the company releases its interim results.”

Smaller black-owned companies will also secure work through the tender. About 20% of the design and construction work must be completed by small firms. Once the road has been upgraded, 30% of the operation and maintenance work is reserved for black companies in the first half of the 30-year concession and 80% in the second half of the concession contract.

Like others in the construction industry, Group Five has had a torrid year, reporting a 44% drop in full-year profit for the year to end-June. Diluted headline earnings per share totalled 315c, compared with 561c a year earlier.

“This contract will make a difference, but won’t save the day,” adds Dirk Kotzé,, portfolio manager at Coronation. He estimates the contract will be worth the equivalent of 20% of the company’s turnover in its construction business (R3.5bn this year), each year. “It is nice to have that banked”.

Now Group Five will be looking to win another contract – there are some big projects out there – prisons, hospitals and municipal buildings in Pretoria.

“Things will start to look a little different when a second and third such project comes in,” he says.

He adds that Group Five had had “backed itself” to win this contract. “It has not been participating in recent tenders because margins have been so low and returns virtually cash negative.”

Because all of SA’s big construction firms bid for the contract, margins are still likely to be on the low side. But, the project is not as challenging from an engineering perspective as something like Gautrain was. “This is about logistics, and scheduling. If you know what you are doing and are organised you can still make a decent margin.”

However, this won’t be felt in the 2012 financial year.

The project dates back to March 1998 when the Group Five consortium, known as the Protea Parkways Consortium submitted an unsolicited proposal to Sanral to upgrade, construct, maintain, operate and toll portions of the N1 and N2 National Routes in the Western Cape. The proposal process was formalised after two years and the consortium was awarded Scheme Developer status in April 2000. 

In 2002 Protea Parkways and Sanral commissioned a study on the socio economic impact of the proposed toll roads. Recently, Sanral commissioned an update, which was completed by the University of Cape Town’s Graduate School of Business in October of 2007.   The updated report has found that many of the road sections along the N1 and N2 are approaching the end of their design life. Parts of both the N1 and the N2 are deteriorating.

Current traffic volumes are congesting certain sections of the roads, leading to longer journeys and greater risks of accidents. This problem is only likely to increase as forecasts in traffic growth indicate the likelihood of serious congestion along many sections of the roads.

Group Five closed up 0.39% to R25.60.