The term joint venture can refer to a variety of project relationships between a public sector agency, on the one hand, and private sector organisations or individuals, on the other. Large-scale joint ventures between the government and the private sector to deliver infrastructure and other related services can also be called public private partnerships.
The key difference between a joint venture and more conventional forms of procurement is that the partners are co-principals, as opposed to the more traditional principal-agent relationship where a government organisation contracts a company to perform a function. Sometimes a joint venture entails forming a new legal entity but typically the private sector partners have some form of controlling interest in the management of the project. This means that the private sector partner does not automatically act at the direction of the public sector organisation and the traditional “arm's length” contracting arrangement does not exist.
|Kickbacks in a land development joint venture
The ICAC investigated allegations of corruption in a proposed joint venture between a Local Aboriginal Land Council (LALC) and a group of businessmen on four parcels of land owned by the LALC. At the time of the investigation, the land vested in the LALC, including the four parcels and other land holdings, had an estimated value of between $3 million and $4 million. The investigation found that:
- key decision-makers at the LALC had accepted payments and other financial benefits to facilitate a joint venture on the LALC land. Land dealings in LALCs require the approval of members and the decision-makers were in a position to influence the members
- in early 2005, the businessmen approached key decision-makers at the LALC about the joint venture and, some weeks later, presented their proposal at a general LALC members meeting. While the minutes of this meeting record that during a “private discussion”, the members had determined to proceed with the proposal, the minutes were not signed and did not record the names of the members who had attended the meeting. The minutes also recorded that one of the office holders at the LALC told the members that the proposed transaction would be “checked out” by the NSW Aboriginal Land Council (NSWALC) prior to it being finalised; this did not occur
- the joint venture agreement was conditional upon NSWALC, the peak body of LALCs in NSW, approving the joint venture in accordance with the then s 40D of the Aboriginal Land Rights Act 1983 (“the ALRA”). At the time, s 40D provided that a LALC could sell or dispose of land vested in it if, at a meeting of the LALC where a quorum was present, not less than 80% of the members determined that the land was not of cultural significance to Aboriginal people in the area. No such meeting was held before the key decision-makers determined to proceed with the joint venture
- in May 2006, more than a year after the joint venture agreement had been signed, the then LALC chairperson sought advice from NSWALC for the first time. NSWALC was highly critical about the proposal and found several flaws, in particular that the LALC had not conducted its own due diligence, had largely relied on the information provided by the businessmen, and had not sought other expressions of interest
- there were various areas of dispute between the parties involved, and the joint venture did not proceed. Importantly, during the protracted negotiations for the joint venture, the ALRA was amended to require that LALCs gain NSWALC’s approval before undertaking any land dealings (with a minor exception concerning leases on LALC land).
The ICAC made findings of corrupt conduct against three people who were, or had been, associated with the LALC and two people (the businessmen), external to the LALC, who wanted to develop the LALC land.
Source: Report on investigation into the conduct of officers of the Wagonga Local Aboriginal Land Council and others, September 2012.
Many of the corruption risks that arise in other types of procurement also exist in joint ventures, but in joint ventures these risks can be exacerbated by the complexity of the transactions. Poorly structured contracts and insufficient monitoring could leave the public agency exposed to financial and other probity risks.
The different ways that the private and public sectors do business can also give rise to corruption risks. For example, giving gifts, lobbying, and using industry connections can be an accepted (and expected) part of doing business in the private sector, whereas such activities are subject to greater scrutiny and regulation in the public sector. Public agencies may also engage consultants or employees with private sector experience to work on the joint venture who may not fully understand public sector values and obligations.
Common corruption risks in joint ventures include:
- a public official or their associate having a financial interest in the joint partner and deliberately failing to declare this conflict of interest
- a public official colluding with the people involved in the joint partnership for personal benefit, such as a financial gain or promise of future employment
- a public official accepting or soliciting a bribe or secret commission from a joint venture tenderer to give favourable treatment to their tender
- a public official or an employee of the joint venture partner misusing either party's confidential information for personal benefit
- employees of the public sector agency identifying too closely with the interests of the joint venture partner (also known as “capture”), subsequently leading to a failure to properly monitor the work performed and preferential treatment in later dealings.
Developing a strategy
Management of corruption risks cannot be transferred to a private sector partner, because it is the responsibility of public sector agencies to protect the public interest and therefore take responsibility for managing the risks. A rigorous assessment of the risks of a joint venture should be carried out before initiating a project, and corruption risks should be included along with general business risks in this process.
Consider the following measures:
- ensure experienced contract managers represent the government in negotiations with potential joint venture partners
- establish a steering committee to oversee the negotiation and subsequent management of the joint venture
- ensure the joint venture is guided by a clear, well-structured, written contract
- ensure contracts do not compromise the ability of the agency to act in the public interest or adversely affect the agency's overriding accountabilities, and that they give the agency the ability to address unethical conduct and to efficiently sever the relationship if intractable probity problems arise
- include in the contract a written negotiation protocol that includes a dispute resolution mechanism to prevent ad hoc decision-making
- communicate public sector values to the private partner and then integrate these values into the joint venture agreements and contracts
- ensure no one public official has absolute control over any part of the joint venture process by segregating duties and ensuring multiple agency staff are involved in oversight and accountability arrangements
- put steps in place to ensure commercial and regulatory roles are segregated.
The joint venture partner that has contributed the greater amount may argue that it has a right to dominate decisions and dictate outcomes. However, it is important that before any contract is signed, all parties agree on the aims and projected outcomes of the venture, how decisions will be reached and how the financial and other benefits – as well as the risks – are to be distributed.
Some of the resources available to guide local councils and NSW public sector organisations about joint ventures are listed below.
- The website of the NSW Office of Local Government has information on guidelines and legislation for local councils considering public private partnerships.
- NSW Treasury has produced various publications that focus on working with the private sector on joint venture-type arrangements, including the NSW Public Private Partnership Guidelines (2017). Any public private partnerships that arise through unsolicited proposals also need to comply with Unsolicited Proposals: Guide for Submission and Assessment (2017).
Updated December 2018