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The pitfalls of contractual joint ventures

Partnership iStock 000006695073XSmall 146x219Rebecca Hazeldine looks at some of the opportunities and pitfalls of joint ventures.

We have seen an increasing number of local authorities entering into joint venture arrangements with other local authorities or other public / private sector partners, for example Entrust and South West One. Some of these have been successful but some this has not always been the case.

With the increasing need for local authorities to consider alternative ways of delivering services in order to make savings and become more efficient, joint ventures are becoming one of a number of key options being considered.

So what are joint ventures, why are they are used, are they always necessary and do they provide the “best fix”?

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What is a joint venture?

A joint venture is “an arrangement between two or more parties who pool their resources and collaborate in carrying on a business activity with a shared vision and a view to mutual profit.”

A joint venture arrangement could take the form of a contractual joint venture or a corporate joint venture. It may involve the sharing of assets, resources, land, capital, staff and investment.

In a corporate arrangement the local authority could establish a separate corporate legal entity (usually a company) which is owned jointly by the local authority and other partners in agreed proportions (typically but not necessarily 50% - 50%). The relationship is governed by the constitution of the entity (i.e. articles of association) and the shareholders'/members' agreement.

On the other hand, a contractual arrangement could be put in place between the various partners and stakeholders. This would be similar to a corporate route in that the parties are sharing resources and collaborating but rather than set up a separate legal entity, this is purely a contractual arrangement.

In both case, all parties to the joint venture need to have a shared vision about the objectives of the joint venture for it to work in the long term.

Does a local authority need a joint venture?

A local authority may consider a joint venture arrangement for a range of reasons including to improve services and/or to make savings or to generate an income.

It is often used to bring in third party investment, skills and other resources that complement the offering of the local authority or where it can do something that the local authority or a wholly owned local authority company could not do.

It is important for a local authority to identify its reasons for considering a joint venture and the objectives it is aiming to achieve before it takes steps to establish a joint venture and should keep taking these into account. Different types of arrangements will be suitable for different purposes and will be subject to different requirements. A local authority could waste resources in pursuing an arrangement which will not achieve its objectives if it does not identify them appropriately at the outset.

The local authority should also be clear from the outset what they are expected to contribute and what the other parties will bring to the arrangement and how this may benefit the local authority.

Contractual or corporate?

Whether a contractual or corporate route is more appropriate will depend on what the parties are trying to achieve.

A contractual route is well established in the market and can be simpler to put in place than a corporate joint venture. It also provides a structure in which the objectives, roles and responsibilities can be clearly delineated.

Where a local authority wishes to make the most effective use of the council’s powers to act for a commercial purpose, it must do so through a company. Setting up a company as a joint venture with another organisation may allow a local authority to identify and exploit commercial opportunities which it might not achieve on its own.

Dealings with third parties will be easier where there is a separate legal entity and it may also make branding and marketing easier. A corporate route can be more flexible in addressing changing market conditions.

Pitfalls of joint ventures

Some of the pitfalls of a joint venture are that:

  • There may be a lack of interest from the market so it is important to scope the requirements and test the market at the outset.
  • Decisions to enter into such arrangements can be challenged therefore it is important to consider all the legal requirements from the outset, ensure all decisions are taken within the council's powers and have evidence to support decisions.
  • The joint venture partner may not deliver effectively and the council may be left in a difficult position when the joint venture ends. To minimise this due diligence should be undertaken before entering into arrangements so you know the partner and robust exit arrangements should be put in place in case things do go wrong.
  • There could be a failure to achieve maximum return from assets unless an effective strategy and structure is put in place at the beginning to achieve maximum return. The local authority will also need to ensure compliance with its best consideration duties and State Aid law.
  • Members of the council or members of the public may not happy with the council’s position so consider whether consultation should be undertaken and what publicity there should be before entering into a joint venture to get everyone onside.

Practicalities

If a local authority does decide to go down a joint venture route, it should bear in mind the following practical issues for setting up the arrangement:

  • The importance of developing a business plan and setting clear objectives which are aligned between the parties.
  • Does the joint venture partner need to be procured – what obligations will there be on the partner? How will any joint venture be required to behave in the future in terms of contracting?
  • How much control does the council wish to retain? Is this acceptable to members?
  • The governance arrangements and managing conflicts of interest.
  • How will it be financed – what funding is available from the parties? Will it be sustainable?
  • What assets, staff, services and land will it need?
  • How should it be branded and marketed – what connection does it retain with the council?

Rebecca Hazeldine is an Associate at Geldards LLP. She can be contacted on 020 7921 3993 or This email address is being protected from spambots. You need JavaScript enabled to view it..

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