Out-Law / Your Daily Need-To-Know

Out-Law Analysis 6 min. read

Joint ventures provide the model for rebuilding Ukraine

Businesses will have to work in partnership to win – and then perform – many of the contracts linked to rebuilding Ukraine’s war-damaged infrastructure. Joint venture (JV) arrangements are likely to be the favoured model for that collaboration.

JVs offer a way for international contractors and suppliers to pool their capital, labour, technology and knowhow and work alongside Ukrainian businesses that have knowledge of the local market, culture and practices. This model allows JV partners to deliver the large-scale infrastructure projects – rail, road, hospitals, housing, energy and digital infrastructure, for example – needed to rebuild Ukraine and revitalise the country’s economy, while bringing social value to those projects.

Businesses from across Europe, North America and Asia are all likely to have an important role to play in rebuilding Ukraine. JV models are already extensively used globally for large or mega infrastructure projects or programmes and account for a large proportion in the delivery of these types of projects. Contractors from many countries, including Korea, China, Japan, Turkey, Germany, France, Italy and Spain, that have sizeable international contractors, are likely to be involved. However, preferences and practices for JVs vary depending on local laws, regulations and cultures, and there are risks that businesses seeking to engage in JV arrangements in the context of rebuilding Ukraine need to understand and manage.

The role for JVs in the context of rebuilding Ukraine

Ukraine’s built environment bears the scars of conflict and is expected to become the world’s largest construction site. Homes, industrial facilities and major infrastructure have been damaged or destroyed

The task facing Ukraine’s authorities is not only to restore what was there before, but to replace damaged infrastructure with more modern equivalents that set the country up to thrive economically, by harnessing the power of technology and data, and ensure it can best address challenges arising from the climate crisis – building back better and greener will help Ukraine meet associated EU standards and facilitate the country’s accession to EU membership that its leadership covets.

However, economically distressed and with a depleted labour market, Ukraine neither has the finance nor manpower or skills on its own to rebuild at the pace and in the form it desires. Pinsent Masons estimates that the cost of recovery is likely to be around $1 trillion over many decades. An international effort – involving both the public and private sector – is required.

State authorities in Ukraine are already engaged in extensive procurement exercises to lay the groundwork for the major reconstruction work ahead. For international contractors and suppliers, there will be many major contracts to compete for.

The size and complexity of many of the projects ahead in Ukraine is so vast that even the largest international contractors and suppliers will need to operate in JVs. This will necessitate that those businesses explore partnerships with others to offer a proposition that is attractive to contracting authorities in Ukraine. JV arrangements will therefore become popular.

JV arrangements can be formed by the participating parties under contract or via incorporation of a new company, although contractual JVs are the most common approach used in construction. They offer participants the opportunity to share the risks involved in delivering major infrastructure projects, increase the scale of their own offering and in turn reduce costs, and also build a coalition of capability.

For example, local contractors might bring knowledge of the local market and manpower, global contractors might bring international standards and expertise, best practice and know-how to the partnership, while certain other contractors can also be brought onboard to provide specific technologies or specialist skills – such as those required to rebuild a dam or to build data centres and digital infrastructure. Other advantages of a contractual JV can include increased financial resilience, as the client will have recourse against all JV member organisations in the event of a default.

Bringing diverse skillsets to a project via a JV arrangement can also promote and enable the industrialisation of construction processes and the benefits that can offer in the context of Ukraine, such as the efficiencies to be gained from off-site manufacturing of building components and potential for fewer building defects to arise as a result of greater standardisation. It can also ensure international best practices in building safety are imported to the project and that the latest and most innovative approaches to embedding digital technologies and data into the design and construction phases are adopted to enable infrastructure to be operated in the most effective and efficient way – including in the context of the need to reduce embodied carbon in the built environment in response to the climate emergency.

Risks in JV arrangements and how to manage them

There are a wide variety of issues to consider when considering a JV arrangement.

There is the form a JV arrangement should take – whether a contractual JV, where parties can retain their own duties and control and distribute and manage the risks and opportunities according to their scope of works, or an incorporated JV where the parties set up a separate company to deliver the project and transfer people, finance, and other resources to that company to enable it to perform the contract.

There are tax considerations too and thoughts to be given to how issues such as ownership and use of intellectual property, dispute resolution, and exit requirements – among other contractual matters – should be provided for in the JV agreement. There are also risks to manage in respect of potential conflicts of interest that could arise where directors of the JV entity still owe duties to one of the underlying parties to the JV.

Important as those issues are, there are more fundamental issues that businesses must get right if a JV arrangement is to be successful.

Selecting the right businesses to partner with is essential in any JV arrangement. There are financial, reputational and regulatory implications for getting this wrong. Robust due diligence and compliance checks need to be carried out before entering a JV arrangement, not only so parties can satisfy themselves on matters such as corruption risk and competition laws, but also to identify practical barriers to the JV being operated successfully.

In all JVs, members interests will be broadly aligned around the success or failure of the project, however JVs often fail. JVs fail most often because of a breakdown in communication that breeds mistrust between members. As a result of this, JV members can have a tendency to retreat into organisational silos, at best, or engage in defensive and adversarial behaviour, at worst – the opposite of what is required in order to collaborate to achieve the shared project goals successfully. A lack of clarity over the scope of parties’ responsibilities is another central cause of JV failure, as it can spur disagreements and disputes over who should undertake – and pay for – works that fall between the cracks of each members’ individual duties.

Careful drafting can help with allocating scope of works between parties, but where such issues arise it will usually serve parties’ interests better to work together collaboratively on finding solutions, however imperfect, than let the issue derail their entire enterprise and project delivery. JV partners should also set shared, purposeful objectives that can help to unite them behind common goals and causes and mitigate the risk of them pulling in different directions.

For projects arising in Ukraine specifically, it is possible that multiple parties might form a JV and operate from different jurisdictions. There may be inherent logistical challenges to overcome if parties are in different time-zones, and there can be language barriers, cultural differences, different ways of working, and divergent approaches to regulatory compliance. These issues must be considered seriously at the outset too.

If parties do proceed to JV together then there is a need to underpin the arrangements with a range of measures to enable the JV to succeed: the right people need to be selected for the JV and project boards; there should be a regular flow of information between parties to encourage open communication and standardised reporting back to the JV board; and processes in place to enable issues arising between parties to be escalated early and resolved before they fracture relations and develop into full-blown disputes.

As big and complex as rebuilding Ukraine will be, there is extensive expertise in operating successful JVs across the international contractor community that will offer comfort to contracting authorities in the country. Where the risks can be effectively managed, JVs will be the model through much of the country’s extensive rebuild and restoration programme will be delivered.

Rebuilding Ukraine
The prospect of Ukraine’s re-emergence as a modern country with a thriving economy when the war ends offers the chance to build something better, from physical and digital infrastructure to greater social value and a greener economy.
Rebuilding Ukraine
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