Bank criticises Ras al-Zour bid model

30 May 2008
Attack on fixed-price contract is latest sign that contractors are struggling to cope with rising costs.

The bidding model being used by Saudi Arabia’s Water & Electricity Company (WEC) on its $3bn Ras al-Zour independent water and power project (IWPP) has been criticised by one of the bidders’ financial advisers in the latest sign of cost difficulties for contractors.

Bids for the engineering, procurement and construction (EPC) contract on the project were due to be submitted by 2 June, but following a third delay they will now not be presented until 28 June.

Ghazali Iman, global head of corporate finance at Arab Bank, which is advising a consortium led by Saudi Masader, says its client is struggling to allow for potential future cost inflation in the price they offer, because WEC is insisting that bidders submit a fixed construction cost.

“No EPC contractor can give a fixed priced contract at the moment,” he says. “All the potential bidders are struggling with this issue. The model being used by WEC is severely dated.”

Omar Alghamdi, chief executive of WEC, acknowledges that some bidders are having difficulty securing finance for their bids. “We received a request to delay the deadline from two of the four bidders due to concerns about raising debt from the financial markets and EPC costs,” he says.

The model being used for the Ras al-Zour plant is the same as the one used for the Shuqaiq and Shuaibah projects, and was put in place in 2004 when inflation in the kingdom was about 2 per cent. Since then, inflation has accelerated to about 10.5 per cent.

However, despite the difficulties, it is unlikely that WEC will change the model it uses as doing so would require it to completely restart the tender process, delaying the project even further.

It would also present a difficulty for WEC in its own structuring of the deal.

Most IWPP deals are structured in the same way so that the sponsor, in this case WEC, can plan a tariff structure once the project is completed.

Alghamdi says it would be “out of proportion” to adjust the model used for the project.

“It would be too difficult to analyse the bids and we don’t have that expertise.”

“WEC needs to have the visi-bility of fixed development costs,” says one Saudi banker involved in project finance.

“Otherwise it will be taking on a lot more risk if the costs rise and the tariff structure it has planned becomes uneconomic.”

The difficulty in committing to a fixed-cost project in the current inflationary market, coupled with the credit crunch, has led several banks to decline to get involved until a winning bid has been chosen.

The Saudi Masader consortium also includes Taiwan Power Company, Taiwan Cogeneration Company and Taiwan Water Company.

The three other bidding groups are Japan’s Marubeni Corporation with Belgium’s Suez Energy International, Japan’s Sumitomo Corporation with Malaysia’s Malakoff Berhad, and the local Acwa Power with Korea’s Electric Power Corporation (MEED 2:5:08).

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