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Beware the risks
What owners should know when forming joint ventures to developer
their land
01/01/2005
NST-PROP
By Salleh Buang
A joint venture in any undertaking - whether in trading, manufacturing,
construction or land development - is like a marriage. While some joint
ventures can be said to be “made in heaven”, there are others that can
only be described as “consummated in hell”.
Asked to advise parties intending to enter into a joint venture, or
“strategic alliance”, as the current fashionable terminology goes, I would
normally ask each of them: “What if things don’t work out as planned?”
This question normally evokes the sort of response that would enable the
potential JV partners and I to work out the necessary measures. Better to
be safe than be sorry, I tell them. Better to quarrel now rather than
later, when it would be too late.
As long as they know what they are planning to do, reasonably confident
(based upon prudent investigation and ascertained facts, not on blind
hope) and if the joint venture partners (JVPs) are competent, capable and
compatible, there is no reason why they should refrain from forging the
intended alliance.
They should avoid entering into a completely unknown business venture -
something in which neither partner has knowledge of, nor experience in.
They should also be careful about a JVP who is practically a stranger to
them, or whose track record is a blank page. To do so is akin to marrying
someone your parents chose for you, a stranger you’ve not met before, from
a place you have not heard of.
I am usually asked about the “legal skills” required to negotiate a
workable and profitable JV and my usual response is that there is nothing
to worry if you don’t have such skills: What you don’t have, you can buy.
The important thing is not to go into negotiations with a prospective JVP
without the benefit of legal advice. You should get a seasoned lawyer to
advise you or better still, bring him along when you go into the
negotiation room.
In the meantime, look around for legal workshops and seminars on the
subject, which are held from time to time. If you can find the time, do
attend these sessions and equip yourself before the occasion demands it -
you would subsequently say that it was time (and money) well spent.
Over the last weekend, the subject of international joint ventures and
strategic alliances resurfaced in my mind as I read reports in the daily
newspapers about the visit of our Prime Minister to West Asia and India.
Many joint ventures and business alliances can be expected out of this
important (first) visit to these two parts of the world by our national
leader, who had been accompanied by the customary entourage of business
leaders and corporate chiefs.
I remember the things so many local chief executive officers who went on
these foreign missions with national leaders had told me at the workshops
on joint ventures I used to conduct in the mid-90s.
These people have gone to various corners of the globe, negotiating and
dealing with foreign partners. They told me stories of the things they did
right, and other things that they did wrong - plus the human and financial
cost that they subsequently had to bear.
I have discovered that many CEOs form joint ventures without the benefit
of a proper business plan. It is akin to flying blind. Likewise, I have
also discovered that many landowners agree to form joint ventures with
property developers without any firm idea of what is actually happening,
and what they would be getting at the end of the day.
They have some vague idea of what they will get if and when the planned
project is finally completed, but they usually do not know, nor do they
actually care, how the project will progress from one day to another, or
from one year to another.
Many are lulled into a “comfort zone” by the developer, with a rosy
picture of what’s coming. Many happily sign JV agreements without really
understanding the risks they are taking.
In the past, there have been cases of landowners granting full powers over
their land to the developer through power of attorney, without considering
the dangers of this, after being offered a paltry amount as “advance from
profits”.
Many joint ventures have failed because the parties are actually not
“compatible” with each other: Compatibility is required not only in terms
of management style, financial strength and corporate vision but also in
fundamental matters such as honesty and integrity.
Likewise, many joint ventures failed because the expectations of the
landowner are not known - or even worse, not fulfilled or totally ignored
by the developer.
There have been in the past joint ventures that also failed because of a
communication breakdown between the parties. The most notable case of such
a failure occurred some two decades ago, affecting a joint venture between
a Perak State Government statutory body and a private sector company.
This case, which is reported in the law journals, is usually referred to
as the “Asean Security Paper Mill” case.
A joint venture can also fail if it is meets with strong local opposition,
even though it might have obtained the blessings of the Government. Many
years ago, a private sector company based in Kuala Lumpur forged a
strategic alliance with a State agency to develop a mega tourism-related
project, Disneyland-style, in Kedah.
Unfortunately, a greater part of the land area to be developed was already
part of the popular Gunung Jerai mountain resort. As a result of strong
pressure from the local people, the joint venture project was scrapped,
even though we were told that the parties had concluded a formal joint
venture agreement.
A joint venture agreement involving land can also fail if there are too
many parties involved, as a result of which no single party can be
identified as a strong leader. I am reminded of the old adage, “too many
cooks can spoil the broth”.
Residents of Johor should be able to recall what had happened during the
early stages of the “Desaru Project”, when there were at least five
parties involved in the venture to build an ambitious holiday resort along
the beautiful Desaru beach.
If there is a single cause of failure of joint land development ventures
that tops the list, it would be “lack of funds” on the part of the
developer.
The Johor sugar plantation project failed because the money had dried out:
The company involved did not even have funds to pay the quit rent due to
the State, as the Privy Council decision showed (see UMBC vs Pemungut
Hasil Tanah Kota Tinggi [1984] 2 MLJ 87).
A housing project near my birthplace in Jalan Bakri in Muar, Johor, failed
15 years ago. It has been abandoned, without any hope of being revived by
the Housing and Local Government Ministry or by any other party, because
the developer ran out of funds and absconded, leaving the purchasers and
the landowner in the lurch.
In a nutshell, giving up your land to another party to develop it on the
basis of a joint venture is a risky affair. Do it only if you know the
party well, and you are absolutely certain he will not let you down.
Take precautions and, better still, get involved in the project. That way,
you will know what is happening all the time.
Salleh Buang is senior advisor of a company specialising in competitive
intelligence. He is also active in training and public speaking and can be
reached at sallehbuang@hotmail.com
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