At the start of the year, Shandong 3 Electric Power Construction Corporation (Sepco 3) became the first Chinese contractor to be part of a successful bid for an independent water and power project (IWPP) anywhere in the GCC. Sepco 3 was part of a consortium that also included Singapore’s Sembcorp and the local Oman Investment Corporation. The group was confirmed as the preferred bidder for the Salalah IWPP by Oman Power & Water Procurement Company in January.

But its success was short-lived. The group lost its preferred bidder status after the client refused to accept its proposed tariffs in early May. The three groups originally vying for the deal have now been invited back to the negotiating table.

It is a telling example of the difficulty Chinese firms have in trying to break in to the market. Despite often submitting competitive prices, their success so far has been confined to private power schemes in Oman and Saudi Arabia. No Chinese firm has yet won a government-sponsored power engineering, procurement and construction (EPC) contract anywhere in the region.

Chinese contractors are well aware of the challenges they face. “The market has been monopolised by Western, Japanese and South Korean contractors for a long time, and it will take time to change this,” says one executive at Sepco 3. “They want to keep Chinese contractors out of the game.”

Changing perceptions

In March, two months after the announcement of a preferred bidder for Salalah, Saudi Arabia’s Acwa Power International with Korea Electric Power Corporation was named as the preferred bidder on the Rabigh independent power project (IPP) planned by Saudi Electricity Company (SEC).

The group’s EPC contractor was a joint venture of Sepco 3 and another Chinese firm, Dongfang Electric Corporation. The Saudi developer, which hopes to achieve financial close on the Rabigh project in late June, says its experience with Chinese firms has been positive and it expects them to win more business in the future. “It is a ‘no brainer’ that the day that Rabigh IPP financial close happens will be another landmark [for Chinese contractors],” says Paddy Padmanathan, chief executive officer of Acwa Power International. “The door has been cracked open; it will then be kicked open.”

But before that happens, Chinese firms will need to overcome their perceived shortcomings. There have been delays in raising the finance for the Rabigh IPP and Salalah IWPP, which some bankers in the region say stems from the difficulty in conducting due diligence on Chinese firms. “It does make it more difficult,” says one banker based in Saudi Arabia.

As part of its efforts, Acwa organised a visit for bank representatives to Dongfang’s manufacturing facilities in China in late May to ensure they were comfortable with supporting the deal. “Technical due diligence was completed and SEC is now adequately satisfied to proceed with signing the power-purchase agreement,” says Padmanathan.

In Kuwait, Qatar and the UAE, no Chinese firm has ever been prequalified for a power project. Chinese contractors had bid to participate in Kuwait’s emergency power programme, which was launched in 2007, but were unsuccessful. In early 2008, the Water & Electricity Ministry rejected Chinese participation on the Subiya power plant despite prequalification submissions in December 2007 from Sepco 3, China Power Investment, Brighten Power and Harbin Power Engineering.

Even in Saudi Arabia, where Chinese companies have been successful in the private power sector, government EPC contracts continue to elude them. Sepco 3, for example, succeeded in prequalifying for SEC’s planned Rabigh 6 extension in mid-2008, but the utility retendered the project in May this year, and Sepco 3 is no longer involved.

SEC’s eligibility criteria for the Rabigh 6 project are strict. Its list of approved turbine suppliers includes Siemens China and Doosan Heavy Industries of South Korea, but the turbines must be guaranteed by Ger-many’s Siemens and the US’ GE, which have licensed their technology to the Asian firms, respectively.

Similarly, SEC will accept boilers produced by Babcock & Wilcox China and Doosan, but only under guarantee from the US’ Babcock & Wilcox and UK-based Mitsui Babcock.

This has sparked speculation among contractors that the utility has a policy of excluding certain contractors and suppliers from its own EPC schemes, although SEC denies this. “We do not exclude contractors based on nationality,” says Amer al-Swaha, head of SEC’s IPP programme. “We will study the submission made by any entity requesting prequalification for an EPC project and decide on the basis of that submission.”

Separately, in February, Saudi Arabian Mining Company (Maaden) also retendered a captive power project to serve its planned aluminium complex at Ras al-Zour after receiving just two bids for the scheme, from China Harbour Engineering Company and South Korea’s Hyundai Heavy Industries. China Harbour was to procure turbines for the plant from its compatriot Harbin Turbine Company and Hyundai was to use turbines supplied by Siemens China.

One potential issue for Chinese contractors in Saudi Arabia is their lack of experience in operating power plants on the 60Hz frequency used in the kingdom. China, like much of the rest of the world, uses 50Hz turbines, and while contractors from other countries have had to overcome the same technical challenge in the past, it makes it more difficult to break in to the market.

To ensure that everything runs smoothly on the Rabigh IPP, Acwa is keeping a close eye on its contractors. “We are an extremely paranoid client,” says Padmanathan. “It is our money that is at risk so we are careful to make sure that the EPC contractor delivers on time and to the quality standard.”

To achieve this, Acwa will provide support to the contractor in Saudi Arabia and oversee activity at its factory in China. But some industry sources question the viability of such an approach. “It is a very costly process,” says one contractor based in the kingdom. “If you start to implement quality control in the manufacturing process, you will not meet your schedule.”

Despite all the setbacks and continuing problems, the Chinese are confident that they can establish themselves in the region. “We think Chinese contractors can bring high quality, proven design and rich experience to the Gulf market,” says the Sepco 3 executive. “We can definitely provide a very competitive price. We have more than 10 years’ experience overseas and more than $12bn in contract value.”

The company says its discussions with potential clients in Saudi Arabia, Oman, Kuwait and the UAE have been promising. “It is true that some clients are not familiar with Chinese equipment, but we think the response from clients is quite positive and they are interested in co-operation,” says the executive.

China is home to about 880GW of installed power capacity and its equipment manufacturers can supply 90GW a year to the domestic and overseas market - twice Saudi Arabia’s total installed capacity.

“The reality is that these people in China have half the production capacity available in the world,” says Padmanathan. “You cannot afford to ignore that. And if you go to China, all the lights work.”

Significant experience

The country has a wealth of experience with coal-fired, gas-fired and nuclear power plants, as well as wind and biomass projects, and is able to export boilers, steam turbines and generators to the international market.

As its gas turbines are built under licence from foreign suppliers, different rules apply. However, if a foreign client wants to import gas turbines from China, it can be arranged on the payment of an additional royalty fee.

Industry observers say that over time, the advantages that Chinese contractors can offer in the power and water market means their presence will grow in the Gulf.

“There will be a ‘getting used to’ period from the lenders and procuring authorities,” says one international banker based in the UAE. “In the past few years there has been a huge EPC crunch [because of a shortage of contractors and equipment], so clients were forced to open up their eligibility criteria. As a result, lenders will start to be more comfortable.”

It is possible that the speed of the transition will be tempered by the global economic slowdown, which has reduced contractors’ workloads around the globe.

“In that environment, do Chinese contractors still have a price advantage compared with Siemens or [France’s] Alstom?” asks the banker. “If they do, do clients want to play ‘least cost’ economics or pay for proven technology? Chinese technology is proven, but less proven than technologies from other contractors.”