Setting Up a Joint Venture: the Risks and Realities
Joint ventures (JVs) in the construction industry are common around the world. Although more companies in Cambodia are entering into such business agreements, the concept is still not widely understood here.
A contractual JV could be an unincorporated or incorporated arrangement among firms created by a contract, usually referred to as a JV agreement, to develop a specific business opportunity. The JV agreement typically spells out the duties and responsibilities among each of the parties, called the ‘venturers’, that will include their respective contributions to the project, sharing of profit/loss, control and management of the venture, and other business arrangements unique to each venture.
Entering into a JV agreement can offer parties in the agreement access to a new market, new building techniques, technology, additional financing or performance guarantee capability. In other words, a JV partner might bring needed customer contacts, a technical qualifications and expertise or other desirable attributes, according to the Construction Executive website.
There is no limit to the number of partners to form a JV, but two is common. A JV is possible not only for contractors, but also for sub-contractors, project consultancies and any firm wishing to increase capacity to win bids for large-scale projects.
Setting up a JV is often compared to entering a marriage: The rewards can be great, but so can the heartaches and risks if partners aren’t well suited for each other. There are many common pitfalls and issues to consider before entering into a JV if the parties wish to produce a fruitful relationship.
How JVs are formed internationally
There are no clear criteria or guidelines drafted so far in Cambodia for setting up a JV among contractors here. For this reason, Cambodian and foreign entities usually refer to international JV experiences and guidelines when they think of JVs. Construction Executive outlines four main steps that contractors practice internationally; deciding on a JV, JV establishment, getting the JV under way, and wrapping up the JV.
Making a decision on JV
Contractors considering a JV should begin with an honest assessment of what their company could gain from the JV agreement. They should ensure their board members, executives and all departments of the entire organisation are ready to implement individual or shared roles and responsibilities spelled out from the JV contract.
JV establishment
Key terms of the arrangement should be drafted out in detail in the JV agreement between the partners. In addition, many other operational details should be agreed on and documented, even if they aren’t part of the actual JV contract. In many ways, this process is similar to establishing a new business from scratch; there are various issues that must be addressed. These concerns can be organised into five general areas; corporate structure, governance and capital issues, operational issues, financial management, risk management and tax and accounting issues.
Getting the JV under way
Even if all the preparatory work in a JV project is done well, many issues must be watched for as work gets under way. Ideally, parties in the JV will need to monitor and work closely together on the day-to-day project activities to avoid problems. Beyond general management involvement, parties should take special attention on: fraud prevention and detection, performance measurement, change order management, billing review, internal audit and ash management.
Wrapping up the JV
When a project is about to be completed, it is time that all JV parties should conduct a review on their JV cooperation to determine what can be improved if they are willing to undertake a similar arrangement in the future.
JVs in Cambodia
In Cambodia, most JVs are entered into among property developers whereby the local firm places its land bank as a contribution and the foreign investor brings construction expertise and finances the construction project. Cambodian law demands the local firm to own at least 51 percent of the JV stake, due to the constitutional requirement that land ownership has to be owned by a Cambodian natural or legal entity, and the rest can be owned by foreign parties.
Muhibbah Engineering (Cambodia) Co. Ltd is the Cambodian firm most experienced with JV deals. After reaching a JV with Muhibbah Engineering Malaysia in 1995 to establish various construction businesses such as quarries, asphalt mixing plants and concrete batching plants, it entered into a large-scale JV called SCA in 2001 with French giant infrastructure contractor VINCI to build and operate Cambodia’s international airports. Unlike other local JVs, VINCI holds 70 percent of the stake and Muhibbah holds the rest, based on their negotiation.
Despite experiencing only good JV partners so far, Oknha Hann Khieng, director of Muhibbah Engineering (Cambodia) told Construction and Property Magazine that financial issues are also a common headache for JV businesses.
Cambodia’s infrastructure guru, who has also entered another JV with Muhhibah Malaysia to build a $200 million sugar cane factory, encourages local companies considering forming JVs with foreign firms to clearly investigate their background.
Foreign partners usually form a JV with a local firm that not only has the resources and technologies they need, but also the wide local knowledge and networking that can help make their business viable, he explained. “Foreign firms want local partners with close connections with the government, so if they offer us a bit more, it is still not much for them.”
With his reputation and extensive local and international connections, many companies from China and Japan hoped to form JV deals with him, but have all left disappointed as he is not interested in more JV businesses. However, he usually facilitates their investment in Cambodia.
Muhhibah has however opened opportunities for companies interested to form a JV for a $200 million expressway to be built in Phnom Penh after it won the sole contract from the government.
Oknha Hann has observed the absence of strong controls on JVs and bidding in Cambodia which allows foreign firms to easily join the bidding and win the project without having to form JV with local firms that often have limited capacity. He requests the government to subsidise 9% of the projectvalue to local firms in the bidding so that foreign firms will resort to forming JVs with local firms by giving them the 51 percent stake.
“The JV can be successful or not depending on the investment capital from each partner and the right timing of partners’ arrival,” he explained.
Dr. Sok Siphana, managing partner of leading law firm SokSiphana&associates, has assisted numerous clients in setting up joint ventures especially in real estate developments usually between local land holding firms and foreign investors. He said firms rely a lot on his law firm’s expertise to structure the JV, for example, on the JV shareholding and governance aspects, and complex structuring of multi-purpose commercial building designs taking into account the constitutional prohibition of foreign ownership of land.
He raised two specific legal instruments to ensure a strong and undisputed JV agreement for the Cambodian context. One is the JV agreement itself and the second is a detailed shareholder agreement, if the JV agreement stipulates the establishment of a new company to operate the commercial real estate project.
“The two parties to the JV have a choice to decide that upon entering into a JVA, a new company would be set up for the specific purpose of handling and implementing the JV agreement,” he said.
He stressed that drafting a well-defined shareholders’ agreement that sets out clear rules that define the relationship between the shareholders and precisely outlines how the JV will be controlled and managed is crucial. The agreement can also serve as a useful tool in dispute resolution as it can either settle the matter or provide a procedure for a quick, inexpensive resolution of the matter.
To alert contractors when it comes to a JV agreement to ensure win-win agreement among them, his advice is all about managing expectations and risks. “Take the time to build rapport, trust and relationships. Bridging different cultures and management styles takes time. Be mindful also of the language barrier. All these so-called small matters, if not carefully handled, can result in the breakdown of the JV,” he said.
Agreeing with Dr. Sok Siphana, Dr. Sat Dara, a university professor with extensive qualifications and experience in civil engineering and industrial construction said JV agreements which are unclear and unfairly written is still the main source of conflict and suffering among parties and customers.
“If the agreement is written fairly, that is fine. If the agreement is written with favour to the foreign firm, the local party must accept all losses stated in the JV because we don’t have a legal institution that can solve the unfair JV agreement yet,” he said.
While there are specific management principles on joint ventures in developed nations, these are not yet available in Cambodia. According to Dr. Sat, there are separate management guidelines to control JVs at the Ministry of Land Management Urban Planning and Construction, the Ministry of Public Works and Transport, the Ministry of Rural Development and the Ministry of Water Resources but they are largely ineffective. Only the MLMUPC has set up bidding capacity guidelines for capital deposits in the bank and asset values for bidding companies wanting to set up JV agreement to win the bid.
Dr. Sat requests line ministries and concerned privately-run associations like the Cambodia Constructors Association (CCA) to set up effective JV criteria that can guarantee the benefits of JV parties as well as customers. He also alerts the venturers to pay strong attentions to the drafted agreement and the resources contributed by each party.
“Since we don’t have an effective legal framework to control JV establishments, foreign companies can form a JV with a local firm to sell a property project. After they sell the units, they can just take away the money without constructing them, and the loss simply falls on local firm and the customers,” he warned.
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