Determining management structure for joint ventures

BY: Joseph Akyeampong

The advertisement by Ghana National Gas Company in the DAILY GRAPHIC of Thursday 25th September 2014 inviting applications for a joint venture partner (JVP) to develop gas infrastructure in Ghana gladdened my heart and I believe a number of investment lawyers as well.

For one thing, it signals the dawn of an era in Ghana where government seems to have embraced fully the idea of partnership between the public sector and private sector for meaningful strategic alliances for accelerated economic development. 

Also, in earlier articles in this paper, I have canvassed the idea of the government formulating appropriate policy prescriptions to aid the establishment of meaningful strategic alliances between Ghanaian companies and their foreign counterparts for accelerated economic development and also in particular to halt capital flight leading to the rapid depreciation of our national currency. 

The objective of this article is to commend Ghana Gas on its initiative and provide guidance to other public and private sector business operators who intend to enter into joint venture agreements with foreign partners on the appropriate management structures to put in place to derive the maximum benefits from joint venture operations.

It must also be emphasised that the establishment of joint ventures in an era of the dearth of investment capital also offers a veritable route to accelerated economic development.

What is a Joint Venture?

A joint venture is a business entity which is set up by two companies for the purpose of pursuing a particular enterprise. Sometimes, a joint venture could be set up by three or more companies as a consortium particularly for the execution of huge infrastructural projects. 

Some well-known examples of international joint ventures is the partnership between Fuji Photo and Xerox for the manufacture of high grade photographic and office automation equipment. 

Most international joint ventures are in the electronic and semiconductor industries such as the joint venture between STM of Switzerland, Phillips and Free Scale for the production of semiconductors, Fijutsu and AM Devices for the production of microchips etc.

However, the most enduring international joint venture seems to be the one between Aerospatiale of France, British Aerospace of Britain, Constructionnes Aeronauticias of Spain and Messerschmitt Bӧklow Blӧhm of Germany in the Airbus consortium for the manufacture of long haul aircraft. 

Depending on the legal regime in the particular country concerned, equity stake in an international joint venture can be as high as 75 per cent for the foreign partner while in other cases, a JVP from the foreign country is mandated to take minority shares of not more than 49 per cent. 

It must also be emphasised that in certain critical and sensitive industries, a JVP or an investor cannot acquire more than 25 per cent of the equity stake in a joint venture enterprise as is the case with the US aviation industry. 

However, it must be emphasised that irrespective of whatever equity stake a JVP may acquire in a joint venture enterprise, joint ventures may not last forever. They may be brought to an end when the objectives of the joint venture is achieved or when the joint venture comes to an end due to managerial or boardroom wrangling or when one JVP acquires the shares of the other JVP due to their own agreement or a combination of some factors enumerated above.

However, be that as it may, it must be emphasised that international joint ventures, being a veritable investment vehicle for accelerated development, offers many advantages. 

As such, it is incumbent on the JVPs to put in place the appropriate management structures to maximise the benefits of the joint venture enterprise.

The rationale for forming international joint ventures (IJVs)

In the introduction to the advertisement by Ghana Gas in the DAILY GRAPHIC of September 25, 2014, it requested for technical and financial proposals for the selection of a competent JVP for the development of gas infrastructure, particularly for the transfer, storage and export of liquefied natural gas (LNG). 

Also, the advertisement stated the purpose of the joint venture company (JVC) as the construction, maintenance and operation of gas infrastructure comprising a network of conveyance pipelines, tank farms, terminals and jetty.

Obviously, with hindsight from the botched China Development Bank (CDB) loan for the development of gas infrastructure, it looks like the government has changed course and has surmised that its interest would be best served by bringing on board a credible JVP to partner Ghana Gas in the development of the gas fields. This obviously offers a better option to the long winding route of securing a loan for the development of the gas infrastructure.

Be that as it may, it could be said that having regard to the fact that since Ghana is now embarking on the development of gas infrastructure, it is prudent to bring on board a company with the acknowledged expertise in the development of gas infrastructure thus making the option of bringing on board a JVP a most prudent one. 

It is apparent from the Ghana Gas advert that it is certainly optimising the obvious advantage in the operation of joint venture enterprises being the sharing of the financial burden and also benefitting from the technological expertise of the potential JVP. 

For the potential JVP, its obvious advantage in teaming up with Ghana Gas would be reliance on the expertise of Ghana Gas of the local business terrain and the advantage of the political patronage of the highest order which Ghana Gas presently enjoys. 

The other consideration to be taken into account by any potential JVP with Ghana Gas would also be the knowledge acquired by Ghana Gas of the development of a viable secondary gas market in Ghana drawing on the experiences of the Asogli Plant and its interactions with statutory bodies like the Energy Commission, PURC, VRA etc.

However, besides these, other considerations which would influence an enterprise in entering into a joint venture with a foreign partner would be a consideration of the investment climate in the host country with regards to such issues as government policy, ease of repatriation of profits, competition policy among other things.

The management structure for IJVs

Readers would recall the case of the STX Housing project and the passion it generated among its proponents, particularly the government spokespersons at the time and some media commentators. When it was thought that the STX Housing project would be the panacea for the country’s housing deficit, it suddenly came crashing down. 

From the events surrounding its failure to take off, one could easily surmise that it was due to boardroom wrangling between the equity partners. It became obvious that the partners in all probability were not able to agree on the best management model for the operation of the JV enterprise.

It must be emphasised that the adoption by the JVPs of an appropriate management structure would guarantee success for the project and with the calibre of persons managing Ghana Gas presently, there is no doubt that the JV would not go the way of the STX Housing Project.

The management systems for the operation of a joint venture enterprise are as follows: shared management, split control, dominant parent, rotating management and independent management.

Each management model for an international joint venture (IJV) has its incidents and when managed properly, will carry into full effect the objectives of the JV enterprise.

With the shared management, the JVPs exercise equal control for the management of the JV. They contribute the same number of persons to the board of directors, the management team and also split equally between them the headship of the key divisions in the JV like marketing, strategy, innovation, research and development, sales, accounting etc.

With the dominant parent model, one of the JVPs, obviously the majority equity stakeholder exercises a dominant control over the enterprise. It provides almost all the managerial staff and takes exclusively all the strategic and operational decisions of the JV entity. The only area of concession to the minority JVP would be the allocation of some seats on the board of directors.

A JV entity can also operate on the independent management model whereby even though the managerial staff is appointed by the JV partners, they invariably regard themselves as separate and distinct from the parent company which appointed them.

A JV entity which adopts the independent management model often recruits management staff from outside the parent organisations.

With the rotating management, managerial control is normally rotated between the various partners for definite periods.

The intention by Ghana Gas to enter into a joint venture with a foreign partner for the development of Ghana’s gas field is certainly a welcome development. It would leverage the critical financial outlay required for the development of our gas fields and most importantly introduce the appropriate technological know-how for the exploitation of our natural gas resources.

However, the expectation of most Ghanaians is that the project becomes successful and does not go the way of the STX Housing project which became stillborn obviously due to boardroom wrangling over the appropriate management system to be adopted. I wish Ghana Gas well in its endeavours.

The writer is a lawyer with specialisation in international business law.

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