As small and medium enterprises retool their operating models to survive the current economic crunch resulting from the Covid-19 pandemic, we explore whether joint ventures can provide a viable alternative in the circumstances to manage costs yet maximise business opportunities.
Joint ventures are established when two or more enterprises pool resources and capabilities for a particular objective. Though sharing attributes with partnerships, joint ventures are different in the sense that they are created for a limited and specific project or undertaking over a definite period of time while partnerships may endure longer.
Joint ventures take two broad forms. On one part, enterprises can collaborate for a specific purpose without necessarily forming a single corporate entity. This is known as the contractual or unincorporated joint venture. On the other part, the partners may establish a new entity that they incorporate together for a business opportunity. This is known as an incorporated joint venture.
The decision whether to go for an incorporated or unincorporated joint venture depends on the nature of the industry and the arising commercial considerations notably the tax consequences. Unincorporated joint ventures, for instance, predominate the upstream oil and gas industry because it is possible to commercially jointly engage in oil production without forming a single corporate entity. Sectors that are constrained to operate efficiently without creating a single entity usually go for the incorporated joint venture to avoid multiple layers of interaction that often lead to tax leakages.
Joint ventures have been widely used in the airlines and the oil and gas industries templates of which can be replicated by other sectors. Different airlines often develop partnerships that enable their customers share services and facilities in their various geographies of operation. Uganda’s oil and gas development is currently led by a joint venture of three companies though one is exiting shortly. By mutually undertaking this project, the oil companies can share risks that no single party would be willing to bear.
In 2018, Buganda Kingdom’s K2 Telecom partnered with Airtel . Though both entities are independent, K2 customers continue to enjoy telecom services but using Airtel facilities including access to the customer care distribution points.
Joint Venture Agreement
Parties coming together to collaborate on a joint venture should reduce the terms of their arrangement in an agreement. The agreement should set out at least the objectives, the structure whether it would be an incorporated or contract joint venture, contributions to the joint venture, management and the sharing of costs and rewards and the dispute resolution mechanisms among others. Collaboration enables the shared use of facilities eliminating the duplicity of costs hence increased profitability. For instance, it does not make sense for the different oil companies in Uganda to each build a separate pipeline to transport their share of crude oil produced yet they can construct one together.
Joint ventures can match complementary business skills to the benefit of all parties and can open up greater access to resources. Here, the venture partners can share and mitigate business risks better. Instead of being borne by one party, the risks are spread across the joint venture partners. But joint venture arrangements can be complicated if the parties do not read from the same script and their objectives are misaligned. Disputes can equally arise in joint venture arrangements from the different cultures of the partners.
The author is managing partner, Cristal Advocates.