Joint Ventures in Joint Ventures in Construction Firms in Saudi Construction Firms in Saudi

ArabiaArabiaByBy

Kamal Khalil Khairaddin AbbasiKamal Khalil Khairaddin AbbasiA thesis paper summaryA thesis paper summary

Summarized bySummarized byMahdi Fida Al-AdelMahdi Fida Al-Adel

OutlineOutline

• IntroductionIntroduction

• JVsJVs

• Problems facing Joint VenturesProblems facing Joint Ventures

• The Survey The Survey

• ConclusionConclusion

• RecommendationsRecommendations

IntroductionIntroduction

• projects become more complex and projects become more complex and sophisticated sophisticated

• Need for JVsNeed for JVs

• identify problems faced by joint ventures in identify problems faced by joint ventures in Saudi Arabia and to suggest ways to Saudi Arabia and to suggest ways to alleviate these problems in future work.alleviate these problems in future work.

Introduction (Cont’d)Introduction (Cont’d)

• Previous Studies:Previous Studies:• "Construction Joint Venture" is a paper "Construction Joint Venture" is a paper

presented by David Ashley presented by David Ashley • a. Due to a reduction in total project a. Due to a reduction in total project

contingency, a joint venture of contractors has contingency, a joint venture of contractors has a competitive advantage over any of the same a competitive advantage over any of the same contractors acting independently.contractors acting independently.

• b. Increased liabilities by each contractor for b. Increased liabilities by each contractor for the action of the others may produce the action of the others may produce competitive advantages.competitive advantages.

• c. When project shares are distributed, c. When project shares are distributed, each partner will have same rate of return each partner will have same rate of return on cost.on cost.

• d. Since optimal project shares may vary d. Since optimal project shares may vary with bid amount, they should be jointly with bid amount, they should be jointly determined with the bid amount. determined with the bid amount.

• Lammie and Shah, in a paper with the title Lammie and Shah, in a paper with the title "Managing Joint Venture in Large Public "Managing Joint Venture in Large Public Projects", discuss how joint venture Projects", discuss how joint venture helped to finish one of the biggest projects helped to finish one of the biggest projects in the United States in a successful way in the United States in a successful way

Introduction (Cont’d)Introduction (Cont’d)

Objective of the Study:Objective of the Study:• Undertake comprehensive analysis of joint Undertake comprehensive analysis of joint

venture in construction firms, particularly in venture in construction firms, particularly in Eastern ProvinceEastern Province

• Identify and analyze the problems which Identify and analyze the problems which faced joint ventures in the construction Firms faced joint ventures in the construction Firms in KSAin KSA

• Test the hypothesis that the Saudi-Saudi Test the hypothesis that the Saudi-Saudi joint venture and Saudi-Foreign joint joint venture and Saudi-Foreign joint venture agree on the importance index venture agree on the importance index ranking of problems facing joint ventureranking of problems facing joint venture

Introduction (Cont’d)Introduction (Cont’d)

Introduction (Cont’d)Introduction (Cont’d)

methodology of this research:methodology of this research:

• Step 1: Study of all types of joint ventures Step 1: Study of all types of joint ventures

• Step 2: Data is gathered through site visits, Step 2: Data is gathered through site visits, interviews and discussions interviews and discussions

• Step 3: questionnaire is formulatedStep 3: questionnaire is formulated

• Step 4: The questionnaire is distributed to both Step 4: The questionnaire is distributed to both ventures ventures

• Step 5: Data was gathered from the questionnaire Step 5: Data was gathered from the questionnaire and analyzed statistically and analyzed statistically

• Step 6: Recommendations Step 6: Recommendations

Introduction (Cont’d)Introduction (Cont’d)

Scope and Limitation of the Study:Scope and Limitation of the Study:

This research is limited to construction This research is limited to construction Firms in Saudi Arabia, in the private sector Firms in Saudi Arabia, in the private sector only. This study will be restricted to the only. This study will be restricted to the construction firms in the Eastern Province construction firms in the Eastern Province of Saudi Arabia.of Saudi Arabia.

Joint VenturesJoint Ventures

A joint venture is a cooperation formed by two A joint venture is a cooperation formed by two or more separate entities, usually or more separate entities, usually corporations, which typically allocate corporations, which typically allocate ownership based on shares of stock ownership based on shares of stock controlled. controlled.

Joint Ventures (Cont’d)Joint Ventures (Cont’d)Reasons for undertaking Joint Ventures:Reasons for undertaking Joint Ventures:

1) To share the risk1) To share the risk2) To generate required binding capacity2) To generate required binding capacity3) To reduce the number of competitors3) To reduce the number of competitors4) To satisfy the customer’s desires4) To satisfy the customer’s desires5) To give specialized treatment on a job requiring unfamiliar 5) To give specialized treatment on a job requiring unfamiliar

expertiseexpertise6) To give an additional source of manpower6) To give an additional source of manpower7) To give an additional source of supervision7) To give an additional source of supervision8) To give an additional source of financing8) To give an additional source of financing9) To provide more than one estimate of the job for comparison9) To provide more than one estimate of the job for comparison10) To satisfy local customs and practices and provide local 10) To satisfy local customs and practices and provide local

representation on a project in an unfamiliar area.representation on a project in an unfamiliar area.

Joint Ventures (Cont’d)Joint Ventures (Cont’d)

Types of Joint VenturesTypes of Joint Ventures

1) Construction and land development joint 1) Construction and land development joint venturesventures

2) Exploration and drilling joint ventures2) Exploration and drilling joint ventures

3) Mining3) Mining

4) Marketing and distribution joint ventures4) Marketing and distribution joint ventures

Joint Ventures (Cont’d)Joint Ventures (Cont’d)

Generally project characteristics which need Generally project characteristics which need to be joint ventured are:to be joint ventured are:

a) High risk projectsa) High risk projects

b) Foreign workb) Foreign work

c) Large scale projectsc) Large scale projects

d) Projects requiring technologyd) Projects requiring technology

Problems facing Joint Ventures Problems facing Joint Ventures

a) External problemsa) External problems

b) Internal problemsb) Internal problems

Problems facing Joint Ventures Problems facing Joint Ventures (Cont’d)(Cont’d)

External problems can be any of the External problems can be any of the following:following:

1) Poor written contract1) Poor written contract

2) Payment delay from the owner2) Payment delay from the owner

3) Government regulations3) Government regulations

4) Work termination4) Work termination

Problems facing Joint Ventures Problems facing Joint Ventures (Cont’d)(Cont’d)

Internal problems are as follows:Internal problems are as follows:

1) Poor quality of venture work1) Poor quality of venture work2) Delay caused by the venture2) Delay caused by the venture3) Poor organization structure of venture3) Poor organization structure of venture4) Financial problems of venture4) Financial problems of venture5) Poor communication between parties5) Poor communication between parties6) Inadequate estimation6) Inadequate estimation7) Lack of adequate preplanning7) Lack of adequate preplanning8) Lack of attention and flexibility8) Lack of attention and flexibility9) Lack of policy agreement9) Lack of policy agreement10) Foreign venture headquarters are abroad10) Foreign venture headquarters are abroad11) Too much paper work has to be sent to other party for approval11) Too much paper work has to be sent to other party for approval12) Lack of adequate study of partners before financing the joint venture12) Lack of adequate study of partners before financing the joint venture13) Reaching a decision takes a long time13) Reaching a decision takes a long time14) Poor written contract14) Poor written contract15) Payment delay from the owner15) Payment delay from the owner16) Government regulations16) Government regulations17) Work termination17) Work termination

The SurveyThe SurveyThe questionnaire used for this research had The questionnaire used for this research had

two parts to it. Part “A” includes general two parts to it. Part “A” includes general information questions including the information questions including the company’s name, the company’s company’s name, the company’s nationality and respondent name and nationality and respondent name and position. position.

Part “B” concerns the problems facing joint Part “B” concerns the problems facing joint ventures in construction firms. This part ventures in construction firms. This part includes seventeen different problems includes seventeen different problems facing the joint venturefacing the joint venture

The Survey (Cont’d)The Survey (Cont’d)

Data collected from the questionnaire was analyzed Data collected from the questionnaire was analyzed statistically using a computer program (SAS). The statistically using a computer program (SAS). The different methods used for calculating and presenting different methods used for calculating and presenting the survey results are as follows:the survey results are as follows:

a) Tabulation and Cross Tabulationa) Tabulation and Cross Tabulationb) Statistical Techniques (weighted mean, Std. Dev., b) Statistical Techniques (weighted mean, Std. Dev., Std. Error of Mean, Confidence Interval, Coefficient Std. Error of Mean, Confidence Interval, Coefficient of Variation)of Variation)c) Ranking (using the Importance Index)c) Ranking (using the Importance Index)d) Correlation (The Spearman Rank, Partial Corr., d) Correlation (The Spearman Rank, Partial Corr., Multiple Corr.)Multiple Corr.)

ConclusionConclusion

For Saudi - Saudi joint venture:For Saudi - Saudi joint venture:

The following problems were ranked as importantThe following problems were ranked as important

1. Payment delay from the owner1. Payment delay from the owner

2. Government regulations2. Government regulations

3. Poor organization structure of venture3. Poor organization structure of venture

4. Financial problems of venture4. Financial problems of venture

5. Lack of policy agreement5. Lack of policy agreement

6. Inadequate estimation6. Inadequate estimation

Conclusion (Cont’d)Conclusion (Cont’d)

The following problems were ranked as some what The following problems were ranked as some what importantimportant

1. Lack of adequate study of partners before 1. Lack of adequate study of partners before forming the joint venture.forming the joint venture.

2. Poor communication between parties2. Poor communication between parties

3. Work termination3. Work termination

4. Reaching a decision takes a long time.4. Reaching a decision takes a long time.

5. Poor written contract5. Poor written contract

6. Poor quality of venture work6. Poor quality of venture work

Conclusion (Cont’d)Conclusion (Cont’d)

The following problems were ranked as The following problems were ranked as some what not importantsome what not important

1. Foreign venture headquarters are abroad1. Foreign venture headquarters are abroad

Conclusion (Cont’d)Conclusion (Cont’d)

For Saudi - Foreign joint venture:For Saudi - Foreign joint venture:

The following problems were ranked as very The following problems were ranked as very importantimportant

1. Poor written contract1. Poor written contract

2. Lack of adequate study of partners 2. Lack of adequate study of partners before forming the joint venture,before forming the joint venture,

Conclusion (Cont’d)Conclusion (Cont’d)

The following problems were ranked as The following problems were ranked as importantimportant1. Government regulations1. Government regulations2. Payment delay from the owner2. Payment delay from the owner3. Lack of adequate preplanning3. Lack of adequate preplanning4. Financial problems of venture4. Financial problems of venture5. Inadequate estimation5. Inadequate estimation6. Lack of policy agreement6. Lack of policy agreement

Conclusion (Cont’d)Conclusion (Cont’d)

The following problems were ranked as some what The following problems were ranked as some what importantimportant

1. Poor organization structure of venture1. Poor organization structure of venture

2. Poor quality of venture work2. Poor quality of venture work

3. Delay caused by the venture3. Delay caused by the venture

4. Too much paper work has to be sent to the 4. Too much paper work has to be sent to the other party for approvalother party for approval

5. Foreign venture headquarters are abroad5. Foreign venture headquarters are abroad

RecommendationsRecommendations

1.1. A standardized form of the contract is A standardized form of the contract is strongly recommended. All points in the strongly recommended. All points in the contract should be meaningful and contract should be meaningful and reasonable. reasonable.

2.2. Every party in the joint venture firm must Every party in the joint venture firm must study his partner in detail study his partner in detail

3. Drawings and specifications should be 3. Drawings and specifications should be reviewed reviewed

4. It is recommended to mobilize the joint 4. It is recommended to mobilize the joint venture in the Kingdom of Saudi Arabia venture in the Kingdom of Saudi Arabia to save traveling and communication to save traveling and communication expenses expenses

Recommendations (Cont’d)Recommendations (Cont’d)

5. Good relationship between parties in the joint 5. Good relationship between parties in the joint venture is very helpfulventure is very helpful

6. Foreign exchange currency rate variations must 6. Foreign exchange currency rate variations must be taken into consideration.be taken into consideration.

7. Local contractors mainly enter joint ventures for 7. Local contractors mainly enter joint ventures for technology transfer to the project in the technology transfer to the project in the Kingdom, while the foreign contractor enters a Kingdom, while the foreign contractor enters a joint venture to get into the Saudi market.joint venture to get into the Saudi market.

Recommendations (Cont’d)Recommendations (Cont’d)

8. The management of joint venture must be 8. The management of joint venture must be from both partners, because when the from both partners, because when the foreign venture provides the management, foreign venture provides the management, he will take a fee for that plus his he will take a fee for that plus his percentage in profit. So most losses to the percentage in profit. So most losses to the joint venture will be faced by the Saudi joint venture will be faced by the Saudi partner..partner..

Recommendations (Cont’d)Recommendations (Cont’d)

Thank YouThank You