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Friday, Nov. 15, 2002
AT THE JUNCTION
Affiliates are cashing in on cozy ties with Japan Highway
Last of two parts Staff writer Last spring, an employee at a road maintenance company smelled a rat as his firm prepared to bid for an expressway-related project by the semi-governmental Japan Highway Public Corp.
The company succeeded in winning the facility maintenance contract, but the employee claimed the bid was essentially rigged by his firm and Japan Highway.
Officials from Japan Highway and the company went through a series of consultations, agreeing on the bid price in advance without any serious cost estimation, claimed an employee, who requested anonymity to protect his position.
"The bid price was decided by simply multiplying a certain number to the costs for all the items used for last year's contract," the employee said, "not by estimating the actual costs necessary for the work."
The road maintenance firm, whose name has been withheld, is officially regarded as an "affiliate" of Japan Highway under accounting rules for special semi-governmental corporations. This is because it has hired a number of retired officials from Japan Highway, a practice known as "amakudari" or "descent from heaven."
As more shady ties between Japan Highway and its affiliated firms are revealed, debate has turned more heated at an expert panel charged with the privatization of Japan Highway and three other public expressway firms, whose collective, and growing, debt amounts to 40 trillion yen.
Some panel members argue that amakudari within the closed circle of Japan Highway group firms hinders fair competition and is a major factor for the notoriously high construction costs on the expressway network.
As an example that the alleged bid-rigging case involving the facility-maintenance contract was not a rarity, on Tuesday the Fair Trade Commission ordered four Japan Highway-linked firms in Kagawa, Hiroshima and Okayama prefectures to stop fixing bids for road maintenance contracts.
According to accounting rules, a company can be regarded as a group firm of a semi-governmental corporation if a certain percentage of its board members, or more than 30 percent of its sales revenues, come from the semi-public company.
Under the rules, about 84 firms are categorized as affiliates of Japan Highway, but a growing number of companies are establishing closer ties through amakudari.
According to Naoki Inose, a key privatization panel member, about 2,500 former Japan Highway workers held jobs at about 700 road-related firms as of fiscal 2000.
Over the past five years, those 700 companies generated combined annual sales revenues of about 1.45 trillion yen from contracts with Japan Highway.
Similarly, 307 firms had 530 amakudari executives from Metropolitan Expressway Public Corp., and 277 former Hanshin Expressway Public Corp. employees worked at 146 related companies, in fiscal 2001.
The panel members believe much of the maintenance and construction costs run up by Japan Highway could be reduced if market-driven discipline is introduced, and the key to this is to cut the cozy ties with group companies.
Citing as an example the former government-run Japanese National Railway, which was privatized in April 1987, East Japan Railway Co. Chairman Masatake Matsuda said his firm's material procurement and construction costs are nearly 20 percent to 25 percent lower than before 1987.
In his book describing the process of privatizing JNR, Matsuda said he is convinced that construction companies and material suppliers were engaged in bid-rigging, thereby pushing up those costs for the railway.
But through privatization, JR East was able to cut cozy relations with old suppliers, and it introduced a new contracting system by thoroughly analyzing the cost structure of construction work, Matsuda said.
"We have successfully reduced costs," he told the panel. "In the case of Japan Highway, I think they will be able to cut nearly 30 percent of its costs."
The winning price of a bid can also suggest dubious relations that may be pushing up the costs of highway projects.
Past bid-rigging cases involving public works have shown that the winning prices were usually very close to the upper limit set by the entity placing the orders.
A bidder placing a price exceeding the limit, which is supposed to be a secret, is immediately disqualified.
By making a bid very close to the limit, bidders can maximize profits. As a result, project costs mushroom.
Earlier this month, an official of Hanshin Expressway Public Corp. and three others were arrested for alleged bid-rigging in 1999.
In this case, the successful bid price was about 98 percent of the upper limit set by Hanshin Expressway.
According to research by The Japan Times on 57 cases that fall under the categories of "Road Maintenance and Construction" and "Facility Maintenance and Construction" offered by Japan Highway in this fiscal year, the average successful bid price was as high as 97 percent of the limit set by the firm.
Observers say that such a close margin between the successful bid and the price limit indicates a lack of free competition among bidders, and that many bids were rigged.
"If bidders really compete with each other, it's impossible for the bid prices to be at such a high level," said Kenzo Matsuba, a lawyer based in Mie Prefecture who has dealt with many bid-rigging cases.
Such close proximity to the supposedly secret price limit is suspicious, suggesting bidders were privy to the level in many cases, Matsuba said, noting that the margin runs between 75 percent and 85 percent in most municipalities that have taken measures to prevent bid-rigging.