Why joint ventures fail or succeed in the construction industry.
In December 2017, Melbourne Metro Rail Authority awarded a AUD 6 billion contract to the Cross Yarra Partnership.
The deal covers the financing, design, construction and maintenance of two 9 km tunnels and five new underground stations over 25 years.
It is a mammoth contract, which illustrates an ongoing trend towards larger and larger infrastructure packages.
The volume of work in some markets means that organisations do not have the skills or resource to manage multiple contracts and interfaces, so they split projects into fewer packages.
As a result, many of these contracts can only be tackled in joint venture, often requiring overseas players to supplement local capabilities.
Cross Yarra Partnership is a joint venture between Lendlease, John Holland, Bouygues Construction and Capella Capital and is supported by a joint-venture design team of Arcadis, Arup and WSP.
While joint ventures share risk between partners, they also introduce new risks as they bring together culturally and operationally diverse organisations.
Ensuring the right parties take the lead in the right areas is challenging but vital for successful and profitable delivery.
The financial and reputational cost of getting it wrong can be high. “Losses impact not only the project but on the company itself,” says Miguel Peces, Head of Construction at March-JLT in Madrid.
“There have been experiences in construction with losses above EUR 100 million. If a company, even a huge company, has to bear such a loss, its stocks will plunge the next day.”
For any contractor entering a new market – whether a different country or another state – one of the most important first steps is to find a local partner, preferably with complementary skills and expertise.
“We strongly recommend overseas contractors consider joint venturing with domestic contractors to develop local know-how,” says Iain Drennan, Head of Construction at JLT Specialty in Australia.
“We have seen some examples where fully overseas joint-venture consortia have tried to take on projects but they have not had the requisite experience in the local market to effectively deliver the project from cradle to grave.”
“It can be a struggle to get in tune with the local culture,” says Peces, who has first-hand experience, having worked for a Spanish contractor on international joint ventures in Asia and the Middle East before joining the insurance sector.
“You may be trying to maintain the same quality as your home market while competing with local companies who do things differently.
“For that reason, I would say it is almost mandatory to have a local partner and to learn with them.”
Labour laws can be a stumbling block. In Australia, for instance, certain states such as Victoria and New South Wales have stronger union representation.
“If you are not used to dealing with union representatives, or if you have not worked in Australia previously, you can fall foul quite significantly,” says Drennan.
Outsiders also need insider knowledge on contract terms. “We have some examples where European contractors have not done so well because they have accepted terms of contract that Australian contractors have said ‘no thank you’ to,” says Drennan.
Indeed, from a contractual risk management perspective, it is also vital to ensure any potential partner has appropriate financial strength.
Parties in a joint venture are typically jointly and severally liable, which means that, if there’s a claim that’s too big for one partner, the others must pick up the bill.
Peces advises that overseas companies rely on their local partners for guidance on building practices, permits and documentation, and communicating with the client.
However, when it comes to insurance, there is likely to be a difference of opinion, says Peces: “You have to get your partner on the same page, which can be difficult if you are talking about adding cost.”
Both Peces and Drennan agree that the cleanest solution is to purchase insurance for the whole joint venture, but that isn’t always possible with value for money options of utilising corporate annuals often selected.
If work is clearly divided into specialisms – one partner carries out tunnelling work, the other above-ground for instance – separate insurance may be an option, although there will still be elements for which partners are jointly and severally liable, which can be troublesome come claim time.
Additionally, there will almost definitely be tensions between what local law dictates and what overseas contractors and consultants are used to.
For example, Asian contractors coming into Australia are keen to use insurers from home markets, with whom they have long relationships, says Drennan, but these insurers may not be able to meet the requirement of Australian law.
In such a case, a hybrid solution works well, with the Asian insurer providing reinsurance capacity behind a locally licensed retail insurer.
Cultural differences can, and do, extend far beyond approaches to insurance.
One of the biggest hurdles, particularly in developing markets, is how to retrain local workers to work more safely.
After just one project, Peces’s former company elected never to work in that country again. “Although we did make money, the company decided that it was too difficult to work there. We struggled in particular with health and safety; people didn’t want to wear the right protective equipment or work in a safe way.
“At the end of the day, we couldn’t afford to be in the news for allowing poor working conditions or, worse still, having a death on site.”
For more information, please contact Miguel Peces, Head of Construction at March-JLT on email@example.com.