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Tuesday, July 3, 2007
BID-RIGGING IN JAPAN
How Japanese tax-payers' money is lost in bid-rigging
Every few years, politicians, bureaucrats and construction company bigwigs get embroiled in bid-rigging scandals — and the public's faith in government sinks deeper.
In bid-rigging, or "dango," corporations ostensibly competing for a government contract ferret out the secret ceiling bid price. With that knowledge, they conspire to decide which among them will win the bid. Members of the circle take turns winning, or being "chanpyon" (champions).
The shady practice has a long history, and while it is most pervasive in the construction industry, other sectors have been involved as well, including defense contractors. Although company profits can be reduced by illegally skirting competition, the burden on taxpayers mounts.
In the latest dango affair, Agriculture, Forestry and Fisheries Minister Toshikatsu Matsuoka last month committed suicide amid a burgeoning investigation into suspected bid-rigging involving ministry-backed corporation Japan Green Resources. Separate bid-rigging scandals led to the arrest last year of the governor of Wakayama, and the former governors of Fukushima and Miyazaki.
Following are some basic facts about bid-rigging:
How common is bid-rigging and how much money does it cost the public?
Experts say bid-rigging occurs in every region of Japan. It is particularly rampant in construction because of the public's difficulty monitoring and understanding the cost structure of bids for public contracts.
The Japan Citizen's Ombudsman Association, a corruption watchdog, estimates local governments might have overpaid up to 1.16 trillion yen in public work budgets in fiscal 2005 alone due to big-rigging. Throw in decades of infrastructure-related projects that have drawn bid-rigging allegations, ranging from airports to subway systems to tunnels and highway bridges, and the tab the taxpayer has had to foot is incalculable.
Recently, however, heavier fines and more competitive bidding have apparently led to a decline in dango.
How can bid-rigging be detected?
According to the watchdog organization, one indication is a winning bid extremely close to the secret ceiling set by the government for a public contract.
If the winning bid is 95 percent or more of the secret price ceiling, "there is an extremely strong possibility" it was rigged, according to a report by the association.
In a study of major works bids across all 47 prefectures that was conducted in 2002 by the association, the average ratio of winning prices to government-set price ceilings was 95.3 percent — a damning sign of widespread corruption.
According to the association, however, recent increased competition in bidding has pushed prices down, causing the ratio to start declining in 2003, falling to 91 percent in fiscal 2005. Nagano Prefecture, which has taken especially robust steps to impose competition, boasted the lowest rate — 74.8 percent — that year.
What measures are in place against bid-rigging?
Article 96 of the Penal Code stipulates that any party compromising the fairness of public bids, by force or fraud, must be punished.
Dango can be punished under the Antimonopoly Law, which prohibits cartels, and the Penal Code, which prohibits bid-rigging and acts of hindering fair public bidding in general. If public servants are involved, they can be punished by another law specifically targeting bureaucrats.
The Antimonopoly Law was revised in January 2006 to raise fines. A construction company can now be fined the equivalent of 10 percent of the sale it raised through bid-rigging, up from 6 percent before the revision.
The fines, however, are still criticized as too low and thus a disincentive to fair play, compared with those in other countries, prompting a government expert panel to recommend further hikes in its latest report submitted last month to Chief Cabinet Secretary Yasuhisa Shiozaki.
Are big fish ever caught?
Officials at almost all major constructions firms — including Kajima Corp., Taisei Corp. and Shimizu Corp. — have been convicted of bid-rigging.
The biggest scandals were in 1993 and 1994, when 32 people from various companies, including Kajima, and from public offices were arrested for either giving or receiving bribes in connection with bid-rigging.
Among the disgraced was former Construction Minister Kishiro Nakamura, who was convicted of accepting a 10 million yen bribe from a vice president of Kajima Corp. to pressure the Fair Trade Commission not to file criminal charges against a suspected construction bid-rigging circle in Saitama Prefecture.
The Ibaraki and Miyagi governors, the mayor of Sendai and top executives at other leading general contractors were also arrested.
Of the 32, 30 have been convicted. Two former Kajima Corp. executives are still on trial, while former Ibaraki Gov. Yukio Takeuchi's trial was dropped after he died in September 2004.
The crackdown is believed to have helped weaken the shady financial ties between ruling-bloc politicians and construction companies.
What role do various power holders play?
Bureaucrats can exert great influence on the bidding processes, making government agencies hotbeds of corruption. Some become even greater sources of corruption by retiring and landing lucrative key positions in industries they once oversaw. This is known as "amakudari," literally "descent from heaven."
Most public bids at the central and local governments are based on the "designation-bid" system, in which construction firms are ranked by the government based on their technical capabilities and financial condition.
The government or government-affiliated agencies use the ranking to designate which companies can submit bids and set a specific limit. The standards of designation, however, are often criticized as opaque and arbitrary.
Perhaps more problematic is the tendency for corrupt bidders to build close ties with bureaucrats as a means of learning the secret ceiling price for public-works projects. Bidders that overshoot that price are disqualified.
Politicians, meanwhile, can exert power over bureaucrats through appointment of monitors overseeing bidding, prompting bureaucrats to favor contractors that contribute to their coffers.
How have bureaucrats achieved such such strong control?
In the years just after World War II, bureaucrats were unrivaled in their ability to estimate costs for large construction projects. The bidding system was designed to enable them to ensure smooth budgeting and expedite public projects.
Industry insiders and ministry officials, however, say that in recent years the government has lost its edge in accurately determining project costs because it now lags behind the private sector in knowledge of cost-reducing technological developments.
As a result, budgets often end up inflated, favoring contractors but costing the public dearly.
The Weekly FYI appears Tuesdays (Wednesday in some areas). Readers are encouraged to send ideas, questions and opinions to National News Desk