Market analysis: The driving force of JVs in Saudi’s mega infrastructure projects
Rita Allan, senior construction and projects associate, Pinsent Masons, looks at why some projects fail where others succeed
Driven by rising populations and urbanisation in emerging economies, it’s estimated that spending on global mega infrastructure projects accounts for around 8% of global GDP. In order to deliver such crucial projects, the infrastructure sector in Saudi Arabia and elsewhere is increasingly reliant on the successful performance of joint ventures to deliver their ambitious goals and to meet the requirements for ever increasing scale and complexity. Their success will depend on the ability to bring businesses with different skills and capabilities together, through collaborative joint ventures.
However, empirical evidence suggests that not all joint ventures (JVs) are successful, and many underperform.
Key considerations and critical success factors
Project owners or clients are usually the architects of the JVs which will deliver their mega infrastructure projects. This is because the formation of JVs is in response to client demand and, ultimately, the ‘packaging’ of a mega infrastructure project.
JVs formed to deliver global mega infrastructure projects have tended to be transactional in nature and formed to respond to project owner requirements on a project by project basis. A greater use of programme management skills by project owners in packing global mega projects is needed to balance demand with the market.
Leadership is the critical success factor in delivering global mega infrastructure projects, and requires intellect, clarity of thought and emotional intelligence. Building leadership teams is a critical part of mobilising a JV to deliver a global mega infrastructure project successfully yet all too often this key factor is overlooked.
The structuring of a JV needs to be flexible enough to deal with the diverse and dynamic nature of mega infrastructure projects, and to apportion risk appropriately between the JV members.
The governance approach that is adopted by a JV is essential for the smooth running of the relationship and for the success of the project. It is estimated that around a third of construction JVs end in disagreement. Often disputes reflect a lack of understanding or compliance with obligations under the JV agreement or its poor administration.
Achieving success in the digital transformation of infrastructure requires comprehensive planning and the implementation of appropriate and agile technology solutions, such as BIM. It also demands that a data strategy is drawn up at all levels of operation to guide and enable effective decision making. Trying to future-proof technology solutions is near impossible, given the pace of change. However, mitigation against disruptive impacts can be achieved by focusing on emerging technologies and providers, compliance, contracts and collaboration.
Similarly, early attention given to possible dispute resolution measures and potential exit strategies is a feature of successful JVs. This is a difficult discussion to have at the start of a commercial relationship, but one that needs to be addressed and managed properly. The specific approach must be tailored to the JV, taking into consideration factors such as whether it is integrated or not, the requirements of the underlying agreements, the number of JV partners, their participation shares, their respective risks and any rights and liabilities towards third parties.
Key considerations for JVs in Saudi Arabia
Saudi Arabia remains subject to certain foreign ownership restrictions If the JV parties are considering an incorporated JV, they will need to meet local ownership requirements, including the role of the local shareholder (e.g. silent or active partner) and the contractual arrangements as between the JV parties, the local shareholder, and the company. Nevertheless, great strides have been made recently in foreign investment liberalization efforts in the Kingdom, including changes to the limits on foreign investment in publicly listed companies.
In the future
New alliances and enterprise-based models will challenge tried and tested JV models, especially where long term JVs are formed to tackle complex and innovative global mega infrastructure projects.
Participants must invest time and effort early on to ensure their collaborations and JVs are capable of meeting these new challenges.
For further information on joint ventures please see our recent special report https://www.pinsentmasons.com/thinking/special-reports/joint-ventures-global-infrastructure-projects
