JIN-419 -- Rigging in the Digging

[jin at mailman.japaninc.com]

J at pan Inc magazine presents:
The 'JIN' Japan Inc Newsletter
A weekly opinion piece on social, economic and political trends
in Japan.
Issue No. 419 Wednesday June 20, 2007 TOKYO

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Rigging in the Digging

For Japanese journalists writing on bid-rigging, creating
headline stories about the latest public figure to be brought
down on charges of construction industry corruption must be a
breeze. Simply change the photo of the official getting into the
police car and do a 'find all-replace all' search with the
prefecture name and official's title. Adjust some of the
statistics and dates, and the article is ready, adjourn to the
bar.

Last week the Land Ministry admitted that it had found out that
one of its bureaucrat's had been conveying insider information on
floodgate and reservoir contracts to engineering companies. The
week before Mayor Hirakata of Osaka was talking to the police
about his alleged involvement in a garbage incinerator project
that was awarded to Obayashi Corp—implicated in a number of
similar scandals. And in just the last 18 months, Mayor Hirakata
follows in a succession of such public cases including those of
the Governors of Fukushima, Miyazaki and Wakayama.

The Japanese word for bid-rigging is 'dango' and for the less
familiar, a working model looks like this. A local government
decides to build say, a sewage system. A couple of large
companies talk with senior level government officials and
establish a price that is much higher than the actual cost—thus
maximising profits for the firms involved and creating enough for
a generous kickback for the official. By clubbing together with
a dozen or so smaller firms who will also get a part of the
contract, at a higher price than they would be able to obtain on
their own, the deal is in no danger of being scuppered by
squealers or a genuinely better-value contender. Everyone one is
happy—except the taxpayer who is paying over the odds for a
project that in many cases has no benefit for them. And some
analysts estimate that 'dango' takes places in at least 80% of
all public works projects in Japan.

However, there are some very good reasons for thinking that the
system is changing. I spoke to Hiroshi Ohashi, Associate
Professor of Economics at Tokyo University who told me that one
major reason for change is that government spending on
procurement is decline—the  government simply can't afford to
pay prices inflated by bid-rigging.

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Koizumi also made some attempts to reform the system. In 2003
a new system of fines was introduced and very quickly a cartel of
38 companies were fined US$57 million for breaches. He also
strengthened the Anti-monopoly Law and boosted the Japanese Fair
Trade Commission (JFTC) who vastly increased the number of
'dango' arrests from 2005. Dr. Ohashi told me that that the JFTC
was considered by many to be a 'sleeping lion' until it roared
into action around three years ago.

Ohashi explained that behind the JFTC's crackdown on bid-rigging
lie two key factors. Firstly is the figure of its chairman,
Kazuhiko Takeshima. He was recently approved to advance to his
unprecedented third term. At the end of this term, he will end up
having served approximately 10 years in his post, much to the
chagrin of many construction industry and government honchos.
Takeshima is a character who is unafraid of treading on corporate
toes, as his record in increasing numbers of JFTC arrests shows.
Secondly, JFTC officials, Takeshima included, are predominantly
lawyers, who as Ohashi commented, 'generally focus on what
they are good at—investigating and finding evidence.' This has
led to a high number of prosecutions. On the other hand however,
the preoccupation with bid-rigging is in turn responsible for a
neglect of other issues such as mergers. A UK report, the
Global Competition Review, put the FTJC as having a membership
of only 6% economists, compared with its equivalent bodies in
the US and Europe which boast 16% and 35% respectively. A
statistic that Dr. Ohashi sees as significant in that such
regulatory bodies tend to only pursue what they understand.

Still, changes have been made and it is apparently getting harder
for both construction chiefs and government officials to get away
with bid-rigging. In the early 1990s Shin Kanemaru, LDP paymaster
apparently received a small percentage of commission on almost
every public works contract in the country, with 90% of contracts
being won by only four companies including Obayashi (see Albrecht
Rothacher—http://ideas.repec.org/f/pro216.html). Similar stories
regularly made print since Kanemaru's arrest in 1993, but as Dr.
Ohashi pointed out, the most successful cases of 'dango' are not
the ones that we are likely to know anything about.

Finally, while it is difficult to argue that 'dango' is in any
way a positive practice, Ohashi urged commentators to
understand that discretionary procurement, often singled out
as a precondition for corruption, can been used effectively.
The opposite, competitive bidding, allows a number of unchecked
and not always reputable bidders into the procurement process.
And after all, should public works projects always be going with
the lowest bidder? To maintain quality there needs to be an
element of vetting and sincere private negotiation. Without any
opportunity for such negotiation within the system off-the-record
discussions have been in a sense a necessary evil.  'Dango' in
Japanese does not necessarily have a negative meaning but for
those interested in doing business in Japan, they can perhaps
be optimistic that 'bad dango' is becoming, gradually, a thing of
the past.

By Peter Harris
Chief Editor, J at pan Inc magazine

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