A Study of Joint Venture Formation Between Constru

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A Study of Joint Venture Formation between Construction Organizations in

Tanzania
Article in Australasian Journal of Construction Economics and Building - Conference Series · February 2013
DOI: 10.5130/ajceb-cs.v1i2.3164
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A Study of Joint Venture Formation between
Construction Organizations in Tanzania
Steven J. Minja, and Geraldine J. Kikwasi (Ardhi University, Tanzania)
Wellington D. Thwala (University of Johannesburg, South Africa)
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.
Keywords: Construction organizations, joint ventures, process, risks, challenges
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
Overview of Joint Venture

Gaeton and Keith (1999) state important resources to successfully undertake construction
projects to completion as: adequate financial resources, managerial skills, plant and
equipment, appropriate technology and skilled and unskilled labour. Depending on the
nature of the project, at times these resources are not readily available to construction
organizations thus necessitating formation of joint ventures. A number of authors (Gaeton
and Keith 1999; Wolf, 2000; Miller, 2002; Watermeyer, 2005) have defined joint venture
broadly, basically as a partnership or coalition between two or more companies which can
be short or long term to carry out an activity.
Globally, construction businesses are becoming more competitive due to complexity of
clients requirements and technology advancement. Construction organizations are forced to
form alliances at varying levels in order to stay in business. Some of the reasons dictating
such alliances include: surfacing of large and complex projects; pooling of resources;
sharing of risks; entry to foreign market; access to technological improvements; political or
diplomatic improvements; tied aids (Minja, 1986; Dalle and Ports, 1999). By pooling
resources and complementary strengths companies can increase productivity and
competitive standing in ways they could not do by themselves. It is important for companies
which are considering entering into a joint venture to examine strategies applied in order to
uncover what makes them successful (or unsuccessful) and why they work differently in
different situations (Kathryn, 1986). In general joint ventures are not the easiest forms of
organisation to manage and operate. Therefore there must be compelling reasons why
parties to a construction contract resort to the formation of a joint venture in contrast to the
conventional contractor/subcontractor relationship (Dalle and Ports, 1999).
Adnan and Morledge (2003) identify important objectives to be achieved through joint
venture works which are: new market opportunity, profit, financial objectives, increased
project scale, reducing risks and organizational learning. Similarly Kwok, Then and Skitmore
(2000) have listed motivators for joint ventures in Singapore as strategic market entry,
business diversification, sharing of resources and risk sharing.
Joint Venture Agreements

The joint venture agreement on a sophisticated international construction project is a
complex document that usually is the product of extensive negotiations between the parties.
There is no single standard form of Joint Venture Agreement because there can be a range
of characteristics. But general consideration of Joint Venture Agreement should bear in mind
important issues as follows (Rowan, 2005):
• defines the parties to the agreement;
• defines the purposes and objectives of the joint venture;
• defines the monetary and non-monetary contributions to be made by each of the
parties;
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
33
• 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).
Joint Venture Partner Selection

Prior to selection of a joint venture partner firms aspiring to form joint ventures should
formulate or adopt criteria that will guide their undertakings. The main criteria considered
when an organization is looking for possible partners to go into joint venture partnership are
as follows (Rowan 2005):
Ability, experience and skills: Require organization with proven ability experience and skills
Financial stability: Financial suitability is an important requirement for joint venture
partnership
Similar business philosophy and concepts: This factor constitutes a basis for building a
cohesive team with common goals
Strength of partner’s willingness to form joint ventures: The joint venture must be driven by
both parties
Spoken language: Most contractors prefer to look for partners abroad who speak the same
language to avoid communication problems
Kwok, Then and Skitmore (2000) reveal criteria used in selection of a joint venture partner in
Singapore as partners’ commitment, understanding and commitment to JV objectives, past
JV experience, compatibility between partners and understand own and shared risks.
Adnan and Morledge (2003) identify criteria for partner selection among12 critical success
factors for joint venture projects. Additionally, Adnan, Chong and Morledge (2011) identify
critical factors in the international JV partner selection in which criteria were related to the
reputation, inter-partner trust, experience, personal knowledge of the partner organizations,
commitment and human resources management
Risks in joint venture undertakings

Joint venture undertaking involves risks that need to be known to the partners such that
appropriate measures can be taken. Adnan (2008) identifies risk factors in joint venture
formation in Malaysia as the agreement of the contract, partner selection, control/equity,
sub-contractors, renegotiations and training. Other most important risk factors in Singapore
were revealed by Kwok et al (2000) and these are disagreement in accounting profit and
loss, potential financial distress in JV partner, potential financial distress in JV, partner’s lack
of management competence and resourcefulness, over-interference by parent companies of
either parties, and disagreement in allocation of work.
34
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.
Challenges Facing Joint Ventures

Challenges are part of any project undertakings including joint ventures. According to
Watermeyer (2005) the following are the challenges facing construction companies going
into joint ventures:
• identification of possible risks likely to be in a joint venture undertaking and finding
ways which will enable losses to be minimized and opportunities to be maximized;
• to determine forms and reasons for joint venture formation most appropriate in
Tanzania;
• how to grade a joint venture capability and capacity;
• how to encourage joint venture formation, assuming that it is a desirable practice;
• decision on how two or more contractors with different capacities can enter into joint
venture agreement; and
• how does one prevent misinterpretation of the facts in order to influence the tender
process or the award of a contract arising from a tender offer or collusive practices
intended to subvert developmental objectives during the period of performance of the
contract.
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.
Population and Sample size

The population of the study is the number of projects registered by Contractors Registration
(CRB) undertaken under joint venture arrangement between 2007 and 2010. Statistics from
CRB indicates that the number of Joint ventures registered during the period were 102. The
sample size was 45 comprising 30 of joint ventures, 10 consultants and 5 statutory bodies.
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
35
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.
Table 1: Responses from Consultants, Statutory Bodies and Joint Ventures

S/N Respondent Questionnaires Questionnaires
sent received
Statutory and consultative
Bodies (AQRB, CRB, BRELA,
1 PPRA and NCC) 5 5
2 Consultants 10 6
3 Joint Venture Companies 30 24
Total 45 35
Analysis and Discussion

The process of data process was done by arranging the collected data in frequency tables
and then computing mean, standard deviation and relative importance index. Relative
Importance Indices (RIIs) and cross comparison tables are then used to rank the results
obtained.
• Calculation of Mean: This is the average of all values in a set of data. The mean is
calculated by adding all the values in then group and then dividing by the number of values.
• Standard deviation: This is the measure of the degree to which data is spread around
the mean. It is a positive square root of the variance. Standard Deviation is calculated as
follows:
_
Σ (x - x) 2
N
Where
X = Value, ¯X = Mean value, N = total number of respondents
36
• Relative Importance Index (RII): This is calculated as follows:

RII = ΣW/AxN
Where;
W = weight given to each factor by respondents
A = highest weight, N = total number of respondents.
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:
Table 2: Relative Importance Indices (RIIs) comparison tables
Average Score RII Rankings
4.0 to 5.0 0.80 to 1.00 High (H)
3.0 to 4.0 0.60 to 0.80 Medium (M)
1.0 to 3.0 0.20 to 0.60 Low (L)
Source: Chileshe, Haupt and Fester (2007)
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.
Process of Formation of Joint Ventures

The formation of joint venture between two companies in Tanzania like in many other
countries involves registration with various entities namely: BRELA, CRB and under
Registration of Documents Act (RDA). Registration with BRELA and CRB is mandatory;
however, registration under RDA is optional. Assessment of 24 joint ventures registration
status is indicated in Table 3 below.
Table 3: Registration of JVs by BRELA, CRB and under RDA
S/NO ENTITY JVs

1 Registration by Business Registrations (BRELA) 24
2 Contractors Registration Board (CRB) 24

2 Registration of Documents Act (RDA) 7
37
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.
Forms of Joint Ventures in Construction Projects in Tanzania

There are three forms of joint ventures classified as integrated, non-integrated and
combination joint ventures. Responses on the type of joint ventures commonly applicable in
Tanzania are as shown in Table 4 below.
Table 4: Forms of Joint Ventures
S/N Type Total Ranking

1 Integrated JV 19 1
2 Non -Integrated JV 8 2
3 Combination JV 2 3
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.
Factors guiding selection of a JV partner

Selection of joint venture partners is a crucial factor which determines the success of the
joint venture undertaking. Some aspects must be carefully considered before the selection of
appropriate partner is done. A list of factors was compiled for joint ventures to assign
weightings as follows: 4=Very Important, 3=Important, 2= Moderately Important, 1=Less
Important and 0=Not Important at all. The results are summarized in Table 5 below.
Table 5: Key factors guiding selection of a JV partner- JVs
S/N Factor Total Mean Std Dev. RII Rank

1 Willingness 90 3.75 0.44 0.94 1
2 Financial stability 83 3.46 0.51 0.86 2
3 Competetiveness of required task 80 3.33 0.70 0.83 3
4 Similar business philosophy 71 2.96 1.12 0.74 4
5 Firm's ability 68 2.83 0.96 0.71 5
6 Firm's experience 48 2.00 1.14 0.50 6
7 Political stability 44 1.83 1.05 0.46 7
8 Track record in JV's 40 1.67 1.17 0.42 8
9 Spoken language 36 1.50 0.98 0.38 9
38
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
S/N Factor Total Mean Std Dev. RII Rank

1 Contract agreement 109 3.63 0.56 0.91 1
2 Financial stability 100 3.33 0.61 0.83 2
3 Commitment 97 3.23 0.77 0.81 3
4 Mutual understanding 88 2.93 0.87 0.73 4
5 Coordination 84 2.80 0.96 0.70 5
6 Cooperation 59 1.97 1.00 0.49 6
7 Partner selection 57 1.90 0.96 0.48 7
8 Local conditions 50 1.67 1.15 0.42 9
9 Communication 51 1.70 0.95 0.43 8
10 Past experience 13 0.43 1.04 0.11 10
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.
Risks associated with Joint Venture undertakings in Tanzania

It is desirable for construction firms to identify the risks and find probable impact of these
risks as early as possible, so that suitable strategies are made before actual execution of
project commences. Risks in international construction projects are more critical as
compared to domestic projects because they play a vital role for successful project delivery
and increase efficiency and profitability of construction projects (Jamil, Mufti and Khan,
2008). Assessment of risks associated with joint venture formation in Tanzania is
summarized in Table 7 below.
Basing on Table 7, the highly perceived risks are cultural and social differences, delays in
approvals and financial risks while foreign currency fluctuation, loss of trust, incompatibility of
local policies with international practice, termination of joint venture agreements and cost
escalation were perceived to be medium. In international joint ventures, incompatibility of
local policies with international practice affects mainly the foreign partner who is not familiar
with the policies of the host country. Therefore in planning for joint ventures there is a need
to minimize or eliminating such risks through identifying, assessing, analyzing, ranking risks
and finally developing handling options. Fluctuations in rates directly impact on projects
which have a significant component of imports but all remaining types of projects also get
affected to some extent.
39
Table 7: Risks in JV undertakings in Tanzania
S/N Risk Total Mean Std Dev. RII Rank

1 Cultural and social differences 103 3.43 0.68 0.86 1
2 Delays in approvals 98 3.27 0.78 0.82 2
3 Financial risks 97 3.23 0.73 0.81 3
4 Foreign currency fluctuation 94 3.13 0.73 0.78 4
5 Loss of trust 92 3.07 0.91 0.77 5
6 Incompatibility with local policy 90 3.00 0.87 0.75 6
7 Termination of JV agreements 89 2.97 0.67 0.74 7
8 Cost Escallation 80 2.67 0.92 0.67 8
9 Poliyical stability 66 2.20 0.81 0.55 9
Challenges facing JVs Undertakings in Tanzania

Joint ventures may encounter challenges during the course of execution of joint venture
projects or even at the close out stage. These challenges may have repercussions on the
joint venture and therefore they should be well planned ahead of contract implementation to
avoid frustration or even termination of joint venture agreement. Table 8 below summarizes
challenges facing JVs.
Table 8: Challenges facing JV Undertakings in Tanzania
S/N Challenge Total Mean Std Dev. RII Rank

1 Identification of Possible Risks 103 3.43 0.77 0.86 1
2 JV Agreement Interpretaion 100 3.33 0.84 0.83 2
3 Operations by Different Contractors 94 3.13 0.82 0.78 3
4 Alignment of Partner Strategies 90 3.00 0.69 0.75 4
5 Management Control over Local JV 86 2.87 1.07 0.72 5
6 Grading JV ability and capacity 78 2.60 1.04 0.65 6
7 Competitive cost Structure 59 1.97 0.81 0.49 7
8 Joint Venture Formation 54 1.80 1.24 0.45 8
9 Establishing Joint Goals 47 1.57 1.19 0.39 9
10 Tender document Pricing 43 1.43 1.04 0.36 10
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
40
some of these aspects may be overlooked resulting into problems during the course of
executing the contract.
Conclusions and Recommendations
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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(ICCIDC–I), Karachi, Pakistan
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Kathryn, R. H. 1986. Managing for Joint Venture Success, Lexington Books, New York.
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42
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A Study of Joint Venture Formation between Construction Organizations in

Wellington Didibhuku Thwala

Journal of Construction Project Management and Innovation (JCPMI) View project

Financial Management View project

The user has requested enhancement of the downloaded file.

Keywords: Construction organizations, joint ventures, process, risks, challenges

Overview of Joint Venture

Joint Venture Agreements

Joint Venture Partner Selection

Risks in joint venture undertakings

Challenges Facing Joint Ventures

Population and Sample size

Table 1: Responses from Consultants, Statutory Bodies and Joint Ventures

Analysis and Discussion

X = Value, ¯X = Mean value, N = total number of respondents

• Relative Importance Index (RII): This is calculated as follows:

A = highest weight, N = total number of respondents.

Table 2: Relative Importance Indices (RIIs) comparison tables

Average Score RII Rankings

4.0 to 5.0 0.80 to 1.00 High (H)

3.0 to 4.0 0.60 to 0.80 Medium (M)

1.0 to 3.0 0.20 to 0.60 Low (L)

Source: Chileshe, Haupt and Fester (2007)

Process of Formation of Joint Ventures

S/NO ENTITY JVs

2 Contractors Registration Board (CRB) 24

Forms of Joint Ventures in Construction Projects in Tanzania

Table 4: Forms of Joint Ventures

S/N Type Total Ranking

Factors guiding selection of a JV partner

Table 5: Key factors guiding selection of a JV partner- JVs

S/N Factor Total Mean Std Dev. RII Rank

S/N Factor Total Mean Std Dev. RII Rank

Risks associated with Joint Venture undertakings in Tanzania

Table 7: Risks in JV undertakings in Tanzania

S/N Risk Total Mean Std Dev. RII Rank

Challenges facing JVs Undertakings in Tanzania

S/N Challenge Total Mean Std Dev. RII Rank

Conclusions and Recommendations

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