Banks are considering charging a fee for the work they do to support bidders on major construction contracts, according to several senior bankers in the region.
Currently, the work that banks do for the bids of engineering, procurement and construction (EPC) contractors is done on the basis that they will earn a fee on the financing if the bid is successful. They earn nothing for their work on construction bids that prove to be unsuccessful.
This is in contrast to other professional services providers, such as law firms and financial advisers, which already charge fees for their services regardless of the success of their client.
“Lawyers and financial advisers still get fees for all the work they do, but banking groups often end up with less than nothing because we have put time and effort into supporting bids that either fail or do not even materialise,” says one senior project banker based in Saudi Arabia.
Inflationary pressures on EPC costs have led to a spate of contractors that have been shortlisted for projects deciding against submitting bids for the contracts, despite having done all the work needed to do so.
Among recent deals, a consortium led by Saudi Masadar and Taiwan Power Company withdrew from bidding on the Ras al-Zour independent water and power project (IWPP) days before the 28 June deadline, although some of its supporting banks say they were not officially informed of its decision until after the deadline passed (MEED 30:6:08).
“We have discussed introducing some sort of fee structure, and have had discussions along those lines with other banks,” says another Saudi project financier.
Of the banks MEED has contacted, including regional and inter-national institutions, most say they would like to charge a fee for supporting the bids of EPC contractors.
While bankers admit that contractors are likely to strongly resist any moves to start charging for their services, they say they may be able to force through a change. “EPC contractors would not welcome a move by banks to start charging fees for work they do on supporting a bid,” says one project finance banker based in Dubai.
“But because they have to have committed bank support for their bids to be accepted, they may be in a position where they are forced to pay.”
Other figures in the banking industry say it would be hard to convince clients to start paying a fee for services, given that banks that work with unsuccessful bidders are often invited into deals at a later date.
“The difficulty is that there is a perception that if you don’t get in on a deal with your initial client, the winning group could well invite you to join them, especially given the huge size of Gulf projects these days,” says one banker at an international institution.
However, there is a downside to joining deals at a later stage, as the more lucrative relationship banking work has often already been taken by the initial lead arranger group that has been there since the beginning.