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
1

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

LOCAL FIRM

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

* 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

(1)

RStime= * time

(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

Financial

Legal/Cultural

Management

Market

Policy/Political

Technical

RScost

RStime Rankcost Ranktime

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

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

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

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

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

6.60

5.95

34

38

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

8.82

7.91

16

7.78

6.86

19

30

5.89

5.97

38

37

7.37

7.81

24

18

6.29
10.45
7.22

6.62
10.89
7.53

35
2
26

33
1
21

8.67

9.04

7.53
7.43
8.80
6.92
7.51
8.66

8.45
7.34
9.20
6.72
8.01
7.88

21
23
7
30
22
10

13
22
4
31
15
17

8.25

8.67

15

10

8.44

9.13

14

8.78

8.61

12

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

750,000 m2

Hotel and residence

50,000 m2

Net rentable area of commercial center

190,000 m2

Residential building

150,000 m2

Underground parking

210,000 m2

General service

120,000 m2

Storage

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
Level of Risk (%)
Case Study Case Study Case Study
(I)
(II)
(III)

Risk Element

Financial

Legal/Cultural

Management

Market

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

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

60
5
40
0
20
0
50
20
70
50
80
40
70

0
20
0
0
30
50
0
20
10
10
10
50
20

0
0
0
0
0
3
0
0
0
10
0
25
3

20
30

0
0

0
5

60

10

90
5
70

5
25
25

0
5
1

10
20
40
20
5
40
70

15
10
20
40
10
20
15

2
2
5
2
20
2
2

40

15

20

10

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

10

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.

11