RISKS OF CONSTRUCTION JOINT VENTURES IN EGYPT: OVERVIEW AND CASE STUDIES

BY MAGED E. GEORGY1, MOHEEB E. IBRAHIM2 AND MOHAMED A. ABDEL-GAWAD3

ABSTRACT Globalization of construction markets exposes local firms to heavy international competition. Companies, therefore, need to formulate new business/organizational strategies to respond to such threats. Several options are typically recognized, including, internal development, mergers & acquisitions, joint ventures (JV), among a host of others. Although JVs are claimed by many to be the most advantageous, their practices in Egypt have not always been successful. The paper attempts to shed more light on the topic. First, it summarizes the results of a study conducted by the authors to identify sources of project risks in construction JVs. This study is based on feedback obtained from industry experts via series of questionnaire surveys. Various sources of risks in JV practices are examined and ranked in accordance with their chances of occurrence and severity of impact. Afterwards, the paper introduces three case studies of construction JVs in Egypt; two of them are major residential/commercial facilities, while the third is a water treatment infrastructure project. The projects exhibited varied levels of success, as actual schedule delays varied between 11% and 88%. The paper tries to analyze the circumstances and risks that led to the type of schedule delays experienced in each case. 1. INTROUDUCTION The significant recent changes in the global economy have resulted in increased business opportunities for architectural, engineering, and construction firms (A/E/C), throughout the world (Hastak and Shaked, 2000). Globalization is allowing many local firms to compete internationally. To remain competitive, new and innovative forms of business development
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Assistant Professor, Construction Engineering and Management Program, Structural Engineering Department, Faculty of Engineering, Cairo University, Giza, Egypt, phone: +20 2 567 8442, e-mail: mgeorgy@eng.cu.edu.eg. 2 Professor of Construction Engineering and Management, Structural Engineering Department, Faculty of Engineering, Cairo University, Giza, Egypt. 3 M.Sc. Candidate, Construction Engineering and Management Program, Structural Engineering Department, Faculty of Engineering, Cairo University, Giza, Egypt.email: mgawad@aucegypt.edu

and cooperation are becoming more common in practice. A list of such innovative forms would typically include internal development, mergers and acquisitions, joint ventures (JV), among a host of others. Joint venturing has particularly grown to be one of the more attractive options of cooperation between local and international companies (Nasser and Kashishian, 1997). Basically, a JV is a business establishment by two or more companies to achieve a specific purpose (Gillespie, 1990). A commonly held view is that the purpose of a JV is to put together complementary resources of already existing firms. From a multinational company (MNC) perspective, a JV not only offers the opportunity of entering promising new markets where other forms of entry may be barred, it helps reduce the significant political and economic risks generally associated with foreign projects. These risks can be due to a variety of factors, including unstable local government, and fluctuating currencies. Moreover, rising economic nationalism has resulted in many host countries imposing formal, and/or informal restrictions on foreign companies doing business in their countries. In this context, JVs with local firms can be one of the few ways in which MNC can satisfy host governments requirements for local participation and ownership in the management of enterprises within their boundaries. The local partner, on the other hand, usually enters a JV with a very different set of objectives. For example, such a venture might be attractive because it provides access to technology. In fact, transfer of technology probably constitutes the single most important reason for which firms in developing countries seek JVs with organizations in technologically advanced and developed countries. Figure 1 summarizes the various objectives of JV partners (Gillespie, 1990). Similar to other industries, several JVs have been established to carry out a number of large construction projects, both abroad and in Egypt. However, these projects were not always successful. Previous surveys found that a large number of construction JVs fails to achieve the goals and objectives that were originally established. In developing countries, the number of construction JVs that failed is significantly high, as one survey showed them to exceed 50% of all those established (Bing et al., 1999). A principal reason for this failure is that almost all participants in joint venturing practices approach risk management in term of individual intuition, judgment, and experience gained from previous contracts. To minimize the chances of failure or underperformance of a JV, a better understanding of the risks of JVs should be first achieved. Afterwards, risk management techniques should be efficiently introduced into construction planning for JV 2

(Bing et al., 1999). The paper attempts to shed more light on the topic. First, it summarizes the results of a study conducted by the authors to identify sources of project risks in construction JVs in Egypt. The study is based on feedback obtained from industry experts via series of questionnaire surveys. Also, the paper introduces three case studies of construction JVs, examining their performance and the types of risks encountered in each of them.

MNC * Profits * Growth * New markets * Synergistic benefits * Satisfy nationalistic demands

LOCAL FIRM * Diversification * Transfer of Technology * Acquire brandnames and trademarks * Growth in domestic and international markets

NEGOTIATING CONFLICTS AND CO-OPERATION

HOST GOVERNMENT * Employment * Import substitution * Conservation of foreign exchange * Minimize foreign control

Fig.1: Objectives in cooperative joint ventures (Gillespie, 1990) 2. RISKS IN CONSTRUCTION JOINT VENTURES Risk and uncertainty are inherent in all construction work regardless of the size of the project and the type of organization executing it. The words `hazard' and `risk' are often used interchangeably. Strictly speaking, a hazard is usually considered to be an aspect that might go wrong with adverse consequences, whereas a risk is defined as some measure of the resulting hazardous situation. In this context, a risk is estimated as the multiple of the consequence of this hazard and its possibility of occurrence (Edward, 1995). Few previous attempts have been made to investigate the topic of risk under construction JVs, particularly in China. Based on an extensive review of these attempts, along with several unstructured interviews with 12 experts having broad knowledge of JVs in Egypt, a comprehensive list of 44 risk items was identified to associate with this type of business 3

cooperation. As shown in table 1, the 44 risk elements are classified into six major categories, namely, financial, legal/cultural, management, market, policy/political, and technical. It is to be noted that some of these risks are similar to those found in any traditional construction project delivery system, while others are unique to the joint venturing experience. In order to recognize the magnitude of each risk element and how it could impact project success, a questionnaire survey was conducted with 68 experts. The questionnaire respondents had different backgrounds, ranging from consultancy to estimating and project management. However, they all possess previous/current experience working in JVs, either on behalf of the foreign partner or its local counterpart in Egypt. Each respondent was requested to judge the magnitude of each risk element through two parameters, namely, the probability of risk occurrence, denoted by , and the level of negative impact it could have on project success, denoted by . In this study, time and cost performances were particularly considered for recognition of project success. A numerical scale of 1 to 5 was used for the evaluation of and for each risk element. This 1-5 numerical scale corresponds to the linguistic descriptions of very low, low, medium, high, and very high, respectively. Based on a total of 30 useful replies for the questionnaire survey, a measure of risk magnitude, called risk significance index, was calculated for every risk element as follows: RScost= * cost RStime= * time (1) (2)

After assessment of RScost & RStime, the various risk elements were ranked, as shown in table 1. According to the results, a number of findings were drawn regarding each category of risk elements as follows. 4.1 Financial Risks The third most critical risk element that impacts project cost/cash flow under JVs belongs to the financial risk category. This risk factor is fluctuation of exchange rate. Clients cash flow problems were also identified to have major impact on the execution time of the project. This often involves the clients ability or inability to fund the project through to completion or to make timely payment upon submission of invoices by the contractor.

Table 1: Major risk elements in construction joint ventures

Risk Element
Low credibility of shareholders Fluctuation of exchange rate Fluctuation of interest rate Fluctuation of inflation rate Bankruptcy of partner Currency restrictions Cash flow problems of client Incomplete contract terms Breach of contract by partner Loss due to insufficient law Uncertainties of court justice Cultural differences Change of organization Improper feasibility study Improper planning and budgeting Improper selection of project location Improper selection of project type Improper selection of partner Incompetence of management teams Poor relationship with partner Distrust Disagreement on account of profit Disagreement on staff allocation Disagreement of work allocation Increase of material prices Increase of labour prices Local protectionism Cost increase due to change of policies Loss incurred because of corruption & bribery Political changes Loose due to bureaucracy for late approval Bad relationship with government Design changes Equipment failure Error in design drawings and specifications Material shortage Poor quality of procured materials Subcontractors low credibility Unknown site conditions Shortage of skilled labour Tendering mistakes Little coordination between activities during project execution Delay because of bureaucracy for late approval by consultant Subletting work to incompetent subcontractors who are part of the partner group

RScost
7.20 10.01 7.25 8.00 6.71 8.05 8.64 7.61 6.70 5.50 4.71 5.37 6.94 9.15 9.50 5.79 5.65 7.02 8.63 7.88 6.68 5.32 6.08 6.29 10.61 8.59 6.60 8.82 7.78 5.89 7.37 6.29 10.45 7.22 8.67 7.53 7.43 8.80 6.92 7.51 8.66 8.25 8.44 8.78

RStime Rankcost Ranktime

7.32 8.68 6.12 6.91 7.07 7.62 9.28 7.72 6.90 5.42 4.48 5.56 7.32 8.95 9.42 5.73 5.65 6.97 8.66 8.26 6.68 5.11 6.44 6.59 8.67 7.17 5.95 7.91 6.86 5.97 7.81 6.62 10.89 7.53 9.04 8.45 7.34 9.20 6.72 8.01 7.88 8.67 9.13 8.61 27 3 25 17 31 16 11 20 32 41 44 42 29 5 4 39 40 28 12 18 33 43 37 36 1 13 34 6 19 38 24 35 2 26 9 21 23 7 30 22 10 15 14 8 23 8 36 28 26 20 3 19 29 42 44 41 24 7 2 39 40 27 11 14 32 43 35 34 9 25 38 16 30 37 18 33 1 21 6 13 22 4 31 15 17 10 5 12

Financial

Legal/Cultural

Management

Market

Policy/Political

Technical

4.2 Management Risks Improper planning and budgeting and Improper feasibility study are ranked fourth and fifth, respectively, for their impact on cash flow and ranked second and seventh for their impact on schedule delay. This highlights the fact that a proactive project management approach, that is rather comprehensive, is generally more effective than a reactive one. In particular, the management functions in early project stages are of utmost significance. 4.3 Market Risks Increase in materials prices was ranked on top of risk elements impacting cash flow, which could have a great effect on the profitability of the JV. 4.4 Policy/Political Risks Cost increase due to change of policies was identified to be the six highest risk element that impact on JVs cash flow. 4.5 Technical Risks In the top 10 list of risk elements having impact on JV cash flow, five technical risks were included. They are design changes, subcontractors low credibility, Subletting work to incompetent subcontractors who are part of the partner group, error in design drawings and specifications, and tendering mistakes. It was also identified that design changes, subcontractors low credibility, delay because of bureaucracy of late approval by consultant, error in design drawing and little coordination between activities during project execution are within the top 10 list of elements impacting schedule delay. 5 CASE STUDIES To demonstrate the impact caused by various risk elements on the performance of construction projects executed by JVs, three case studies are presented. For a more concise presentation of the case studies, a filtering of the original list of risk elements, previously identified in table 1, was made primarily to exclude the elements with low and very low significance. This resulted in a shortened list of 28 risk elements as shown in table 2. Details of the three case studies are given hereafter.

5.1 CASE STUDY (I) The selected project is a major facility complex named City Stars GPP. An image of this project is shown in figure 2. The project consists of 5-star hotels, shopping centers, and residential & office towers.

Fig.2: City Stars project The division of project area is as follows: Total built up area Hotel and residence Net rentable area of commercial center Residential building Underground parking General service Storage 750,000 m2 50,000 m2 190,000 m2 150,000 m2 210,000 m2 120,000 m2 30,000 m2

Examination of City Star project documents and feedback from project participants indicated that the actual levels of risk for the identified 28 risk elements were as illustrated in table 2. According to plan, the project duration was estimated to be 33 month starting from 1 August 1999 till 30 April 2002. The actual amount of delay for this project was reported as 7

88% from its original duration. The reason behind these extensive delays is the high levels of risk encountered, especially those types of risk that have more significant impact on project performance. At top of the list, the project suffered major design changes and errors in drawings and specifications. Other existent risk elements included the improper planning and budgeting, incompetence of some members of the project management team, and the little coordination between activities during project execution. Apparently, some of these risks were primarily attributed to the business nature of joint venturing between the MNC and the local partner. Table 2: Actual levels of risk in the three case studies
Risk Element
Low credibility of shareholders Cash flow problems of client Fluctuation of exchange rate Bankruptcy of partner Currency restrictions Incomplete contract terms Breach of contract by partner Change of organization Improper feasibility study Improper planning and budgeting Incompetence of management teams Poor relationship with partner Increase of material price

Level of Risk (%) Case Study Case Study Case Study (I) (II) (III)
60 5 40 0 20 0 50 20 70 50 80 40 70 20 30 60 90 5 70 10 20 40 20 5 40 70 40 20 0 20 0 0 30 50 0 20 10 10 10 50 20 0 0 10 5 25 25 15 10 20 40 10 20 15 15 10 0 0 0 0 0 3 0 0 0 10 0 25 3 0 5 2 0 5 1 2 2 5 2 20 2 2 1 1

Financial

Legal/Cultural

Management

Market

Cost increase due to change of policies Loss incurred because of corruption & Policy / Political bribery Loose due to bureaucracy for late approval Design changes Equipment failure Error in design drawings and specifications Material shortage Poor quality of procured materials Subcontractors low credibility Tendering mistakes Unknown site conditions Technical Shortage of skilled labour Little coordination between activities during project execution Delay because of bureaucracy for late approval by consultant Subletting work to incompetent subcontractors who are part of the partner group

In addition to all above-mentioned, the existences of several concurrent risk elements further increased the impact they could have on project performance. Examples of those concurrent risks are: (1) the incompetence of some members of the management team besides the little coordination between activities during project execution, (2) the existence of error in design drawings and specification, while being unable to handle them appropriately due to the incompetence of some members of the management team, (3) the coupling between the errant design drawings and specification in addition to the continuously changing design. 5.2 CASE STUDY (II) The second project is a waste water treatment plant located in El-Jabal El-Asfar. According to the original schedule, the project had a 36-month duration. The starting date for this project was middle of year 2000 and its scheduled finish date was middle of year 2003. The actual completion date was delayed by 6 months, i.e., 16.7% from the original planned finish date. The thorough examination of the levels of risk in this JV project, as shown in table 2, reveals the inherent reasons behind this amount of delay. Some of the risk elements encountered include the incomplete contract terms, poor relationship with partner, tendering mistakes, in addition to some other technical risks. However, the levels of these risks were rather moderate. Thus, no major schedule delays were encountered in this JV experience.

5.3 CASE STUDY (III) The third project is The World Trade Center located at 1191 Corniche El-Nile Street, Cairo, Egypt. This project consists of two apartment towers, an office block and a podium commercial center, refer to figure 3. The original duration for the project was 36 months. The levels of risks are identified as shown in table 2. Based on the final report for this project, the actual amount of delay is 11.1%. The existence of some problems between partners and unknown site conditions are clearly the primarily reasons behind this amount of delay. Had these risks been inexistent, the project could be claimed as ideal. Other than those, risks were within manageable limits.

Fig.3: World Trade Center in Egypt 6. SUMMARY & CONCLUSION Risk and uncertainty are inherent in all construction work, no matter what the size of a project is or the capabilities of the company executing it could be. This paper particularly investigates the aspect of risk in one of the more popular forms of this era business cooperation; that is joint venturing. Using questionnaire surveys among a large pool of construction JV experts in Egypt, the major elements of risk associated with this business practice were identified. Two indices, RScost and RStime, were further employed to rank these risk elements in terms of their significance. Analysis indicated that most of the top-10 risk elements impacting cost overruns are about the same as those impacting schedule delays. Furthermore, the three highest ranked risks that impact cash flow and cost overruns were found to be: (1) increase of material price, (2) design changes, and (3) fluctuation of exchange rate, whereas, the three highest ranked risks that increase schedule delays were: (1) design changes, (2) improper planning and budgeting, and (3) cash flow problems of client. The presented case studies further strengthened the findings of the earlier surveys. One of the three case studies experienced major delays, reaching 88% delay of the originally planned schedule, mainly because of the existing risk elements such as design changes and errors, incompetence of some members of the management teams, and the less than perfect job in the preliminary planning and budgeting of the project. The other case studies experienced much less problems, with decreased risk elements and controversial project circumstances. Further work by the authors, as extension of the current study, addresses the vital need for synthesizing computerized analytical schemes that link between risk elements to their impact on the primary project performance indicator of schedule delay. Fuzzy principles

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are particularly employed to capture the needed knowledge to establish such links and further provide methods of delay quantification. The readers are advised to refer to some of the other publications by the authors for more details. ACKNOWLEDGEMENT The authors would like to thank all industry experts who participated in this study, especially, Eng. Hazem Nour, Eng. Ziad Bishouty, Eng. Moneer Khalaf and Eng. Mohamed Halaby. REFERENCES Hastak, m. and Shaked, A. (2000), ICRAM-1: Model for international construction risk assessment. Journal of Management in Engineering, ASCE, 16(1), 59-68. Nasser, R. and Kashishian, T. (1997). Lebanon and Europe: Forging new partnerships: Working papers on the formation of joint ventures, Konrad-Adenauer-Stiftung, Beirut. Gillespie, I. (1990). Joint Ventures: A euro study special report, Eurostudy, London, UK. Bing, L., Tiong, R.L.K., Fan, W.W., and Chew, D.A. (1999), Risk management in international construction joint ventures. Journal of Construction Engineering and Management, ASCE, 125(4), 277-284. Edward, L., (1995). Practical risk management in the construction industry, Thomas Telford Services Ltd, London, UK.

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