A Study of Joint Venture Formation Between Construction Organizations in Tanzania
A Study of Joint Venture Formation Between Construction Organizations in Tanzania
A Study of Joint Venture Formation Between Construction Organizations in Tanzania
Abstract
Formation of joint ventures between construction companies is one of the recent efforts in
combating contractors problems in Tanzania and addresses one of the key challenges
facing the construction industry today in the country especially when large and complex
projects are involved. The main objective of the research is to examine the formation of joint
ventures in Tanzania, specifically to: study joint ventures formation procedures; identify
criteria in selection of joint venture partner; and identify risks associated with and challenges
facing joint venture undertakings in Tanzania. The study adopted a descriptive research
design and purposive sampling. Multiple sources of evidence was used to collect information
mainly literature review, questionnaires and interviews. Key findings reveal that legal and
statutory requirements in the formation of joint ventures include registration by Business
Registration and Licensing Agency (BRELA), Contractors Registration Board (CRB) and
under Registration of Documents Act (RDA). All JV respondents were registered by BRELA
and CRB which are mandatory but only 7 were registered by RDA. Most important factors
considered during formation of JVs are: contract agreement, financial stability and
commitment while key risks associated with JVs are cultural and social differences, delays in
approvals and financial risks. In addition, main challenges facing joint ventures are:
identification of possible risks and joint venture agreement interpretation. The study
concludes that formation of JVs have been addressing some of emerging challenges facing
local construction organizations despite the risks and challenges that exist. The study
recommends that firms entering joint ventures should explore the benefits of registering with
RDA and ensure risks associated with their JV are properly assessed. The study also
recommends introduction of an incentive scheme through Tanzania Investment Centre to
grant tax relief for foreign contractors going into joint venture with local construction firms.
Introduction
Joint venture formation between construction companies is one of the recent efforts in
combating contractors problems in Tanzania and addresses one of the key challenges
facing the construction industry today in the country especially when large and complex
projects are involved. Construction joint ventures are formed for a number of reasons
including pooling of resources, sharing of risks, undertaking large and complex projects,
entry to a foreign market and business diversification (Minja, 1986; Dalle and Ports, 1999;
Kwok, Then and Skitmore, 2000; Adnan and Morledge, 2003).
In formation of joint venture interested parties need to set criteria that will lead to successful
execution of envisaged construction project. Various studies (Kwok, Then and Skitmore,
2000; Adnan and Morledge, 2003; Rowan 2005; Adnan, Chong and Morledge,2011) have
identified criteria pertinent to JV partner selection such as ability, experience and skills,
financial stability, partners’ commitment, understanding and commitment to JV objectives,
inter-partner trust and personal knowledge of the partner organizations.
Risks are inherent in construction Joint venture is not an exception some of the risks such as
the agreement of the contract, partner selection, potential financial distress in JV partner,
improper project feasibility study, project delay, inadequate forecast about market demand,
Australasian Journal of Construction Economics and Building Conference Series
loss due to bureaucracy for late approvals and design changes have been identified
worldwide (Kwok et al, 2000; Shen, Wu and Catherine, 2001; Adnan and Morledge, 2003;
Rowan 2005; Adnan, 2008; Jamil, Mufti and Khan, 2008; Adnan et al, 2011). Likewise
construction joint ventures face challenges which to be known addressed by the potential
partners. The purpose of this research is to examine the formation of joint ventures in
Tanzania particularly, JV formation procedures, partner selection criteria and associated
risks.
Review of Literature
Minja, S.J., Kikwasi, G.J., and Thwala, W.D. (2012) ‘A study of joint venture formation between construction
organization in Tanzania’, Australasian Journal of Construction Economics and Building, Conference Series, 1 (2) 32-42
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Australasian Journal of Construction Economics and Building Conference Series
• defines the management and structure of the joint venture and the associated
appointment mechanism;
• defines the (corporate) vehicle under which the joint venture will be carried on;
• defines the basis on which the participants share in the profits and losses of the joint
venture;
• defines the liabilities of the joint venture partners;
• provides for a conflict resolution mechanism, and
• provides for a termination mechanisms.
Joint venture agreements depend on the form of joint venture adopted. Rowan (2005)
indicates three forms of joint ventures which are: joint venture in form of company; joint
venture in form of partnership; and joint venture on contractual basis (unincorporated joint
venture).
Minja, S.J., Kikwasi, G.J., and Thwala, W.D. (2012) ‘A study of joint venture formation between construction
organization in Tanzania’, Australasian Journal of Construction Economics and Building, Conference Series, 1 (2) 32-42
34
Australasian Journal of Construction Economics and Building Conference Series
A number of studies have identified risks in construction joint venture undertakings in various
parts of the world. Jamil et al (2008) identify 10 most important risks in international joint
venture as financial risks due to delays in payments, foreign currency fluctuation,
incompatibility of local policies with international practice, pollution and safety rules, changes
in laws and regulations, design problems, inflation and cost overrun, delays in approvals and
permits from government, inadequate technical specifications in tender documents and site
access/right of way. Shen et al (2001) identify top ten risks in construction joint venture in
China and these are: cost increase due to changes of policy, improper project feasibility
study, project delay, inadequate forecast about market demand, improper selection of
project location, improper selection of project type, increase of resettlement costs,
inadequate choice of project partner, loss due to bureaucracy for late approvals and design
changes.
Methodology
Research design
The research design of this study is descriptive which is attempting to put to light issues on
construction joint venture formation in Tanzania.
Sampling procedure
Some criteria were set to obtain the sample from joint ventures and these are: at least one of
joint venture partner has the office located in Dar es Salaam for easy communication and
has execute a project with a value of not less than TAS 500 million. Using the criteria, only
30 joint venture companies were selected. Consulting firms involved in the study were
selected basing on the fact that they were established before 2001 and therefore have been
Minja, S.J., Kikwasi, G.J., and Thwala, W.D. (2012) ‘A study of joint venture formation between construction
organization in Tanzania’, Australasian Journal of Construction Economics and Building, Conference Series, 1 (2) 32-42
35
Australasian Journal of Construction Economics and Building Conference Series
in practice for over ten years, and have been involved in joint venture projects for between
two to six years. Purposive sampling was used to select consultants from quantity surveying,
architectural firms and statutory and consultative bodies.
Data Collection
Multiple sources of evidence were used to collect data. Literature was reviewed to establish
what has been written on formation of joint ventures between construction firms.
Questionnaires were sent to selected joint ventures, consulting firms, statutory and
consultative bodies. Statutory and consultative bodies are: Business and Licensing Agency
(BRELA), Contractors Registration Board (CRB), Architects and Quantity Surveyors
Registration Board (AQRB), Public Procurement Regulatory Authority (PPRA) and National
Construction Council (NCC). Responses from the respondents are indicated in Table 1
below.
_
Σ (x - x) 2
N
Where
Minja, S.J., Kikwasi, G.J., and Thwala, W.D. (2012) ‘A study of joint venture formation between construction
organization in Tanzania’, Australasian Journal of Construction Economics and Building, Conference Series, 1 (2) 32-42
36
Australasian Journal of Construction Economics and Building Conference Series
Relative Importance Indices (RIIs) comparison tables can be used to rank the results by
taking into account the average scores and the RII as follows:
Respondents’ Profile
The joint ventures involved in the study comprised of 12 local to local, 10 local to foreign and
2 foreign to foreign joint ventures. Statutory bodies selected have the following roles: BRELA
which is responsible for registration of companies; CRB which is responsible for registration
of contractors; AQRB is responsible for registration Architects and Quantity Surveyors;
PPRA is responsible for regulating procurement of public services and goods; and NCC is
an institution that gives directives on construction related matters. Consulting firms
comprised of architectural and quantity surveying firms.
Minja, S.J., Kikwasi, G.J., and Thwala, W.D. (2012) ‘A study of joint venture formation between construction
organization in Tanzania’, Australasian Journal of Construction Economics and Building, Conference Series, 1 (2) 32-42
37
Australasian Journal of Construction Economics and Building Conference Series
Results in Table 3 above indicate that all joint ventures were registered by BRELA and CRB
and only 7 were registered by RDA. The fact that registration by BRELA and CRB is
mandatory and no company in Tanzania can undertake any construction work without
fulfilling it, all JVs were registered and they did not find any importance of registering with
RDA. The joint venture companies obviously overlook the advantage of this registration
which gives more weight to the document as the registration gives more confidence and trust
to the partners themselves and even to the outsiders who wish to join the joint ventures.
Basing on Table 4 above the most preferred form of joint venture is integrated followed by
non-integrated. These results suggest that integrated joint venture is preferred due to the
fact that it involves sharing profits and losses by 50% - 50% and therefore reducing
investment risks.
Minja, S.J., Kikwasi, G.J., and Thwala, W.D. (2012) ‘A study of joint venture formation between construction
organization in Tanzania’, Australasian Journal of Construction Economics and Building, Conference Series, 1 (2) 32-42
38
Australasian Journal of Construction Economics and Building Conference Series
Results indicate that highly ranked key factors for success in joint ventures are willingness,
financial stability and competitive of required task while similar business philosophy and
firm’s ability are considered to be medium. Similarly the factors were examined using
responses from JVs and Consultants and the results are shown in Table 6 below.
Table 6: Key Factors guiding selection of a Joint Venture partner- Consultants and JVs
Results of combined responses indicate that highly ranked key factors for success in joint
ventures are contract agreement, financial stability and commitment while mutual
understanding and coordination are considered to be medium.
Minja, S.J., Kikwasi, G.J., and Thwala, W.D. (2012) ‘A study of joint venture formation between construction
organization in Tanzania’, Australasian Journal of Construction Economics and Building, Conference Series, 1 (2) 32-42
39
Australasian Journal of Construction Economics and Building Conference Series
Results in Table 8 above reveal that the highly perceived challenges in JVs undertakings are
identification of possible risks and joint venture agreement interpretation followed by
operations by different contractors, alignment of partners strategies, management control
over local joint venture and grading joint venture ability and capacity which are perceived as
medium. This suggests that prior to entering into joint venture agreements, joint venture
partners must satisfy themselves that the undertaking has overcome all possible risks and
set procedures to settle such problems should they occur in the course of executing the
contract. However due to the urgency of drawing up the contract and joint venture formation
Minja, S.J., Kikwasi, G.J., and Thwala, W.D. (2012) ‘A study of joint venture formation between construction
organization in Tanzania’, Australasian Journal of Construction Economics and Building, Conference Series, 1 (2) 32-42
40
Australasian Journal of Construction Economics and Building Conference Series
some of these aspects may be overlooked resulting into problems during the course of
executing the contract.
Conclusion
Formation of joint ventures between construction organizations has been an important
endeavour in overcoming problems facing local contractors such as inadequate work
opportunities, weak financial capability, lack of plant / equipment and lack of management
skills. These problems can be addressed by forming joint ventures between foreign and
local, local and local or foreign and foreign companies. The usual purpose of joint venture is
to spread a risk inherent in large projects and to pool resources in a way that permits to
execute a project.
The formation of joint venture companies in Tanzania need to follow all legal and statutory
requirements including registration with registration by Business Registrations and Licensing
Agency (BRELA), registration by Contractors Registration Board (CRB) and registration
under Registration of Documents Act (RDA). In planning for a joint venture arrangement, it is
important to consider all important factors in order to have a project delivered successfully.
Factors that guide joint venture formation in Tanzania are contract agreement, financial
stability and commitment. The most important risks associated with joint venture
undertakings are cultural and social differences, delays in approvals and financial risks.
Similarly, joint ventures as any other undertaking do encounter challenges. Challenges
facing joint ventures in Tanzania include: identification of possible risks and joint venture
agreement interpretation.
Recommendations
Based on the findings and conclusion of this study, it is recommended that firms entering
joint ventures should explore the benefits of registering with RDA and ensure risks
associated with their JV are properly assessed. The study also recommends introduction of
an incentive scheme through Tanzania Investment Centre to grant tax relief for foreign
contractors going into joint venture with local construction firms.
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Minja, S.J., Kikwasi, G.J., and Thwala, W.D. (2012) ‘A study of joint venture formation between construction
organization in Tanzania’, Australasian Journal of Construction Economics and Building, Conference Series, 1 (2) 32-42
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