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Mysteries of the East

Sydney Lenssen

Japanese contractors abroad are aggressive. Part of their ability to price keenly is that their domestic public works market has been riddled with rigged tendering, allowing dominant contractors to make fat and safe margins.

The rackets were exposed by the 'zenekon' (big contractors) scandal of 1993, which in turn was sparked by US Senate threats from 1985 onwards to ban Japanese contractors in retaliation for blocking US firms from tendering on Kansai's new airport.

Brian Woodall, assistant professor at the Georgia Institute of Technology, details how contracts were fixed in his book Japan under construction.*

Amazingly, the rigging of road, bridge and dam tenders has survived for over 40 years thanks to three groups: clubs of chosen contractors, Ministry of Construction (MOC) senior civil servants and the ruling Liberal Democratic Party.

Japan's home market is the world's largest, representing 18% of gross national product. This is equivalent to over £2,000 per head of population, twice that in Europe and America. The industry employs 6.2M people or 10% of the workforce.

Price-fixing and compensation for losing bidders is decided at 'fellowship clubs' or 'dangos'.

For typical public works, ten 'qualified' firms are invited to bid and all are judged against the MOC's own confidential ceiling price. This price is based on material, plant and labour rates which are published twice a year. All bids above and those too far below the ceiling are out. Knowing the official price is key to fixing arrangements.

Japanese career civil servants retire between 50 and 55, and top ones go into politics, public bodies or join private firms. MOC officials are an elite, prized by contractors and property firms. Their salary, car, personal secretary and size of office are all agreed with the MOC's personnel office. Contractors employ scouts to spot talent years in advance. Following the scandal, the ministry announced that it would cease to specify conditions of employment for retiring staff.

A 1992 survey in Tokyo showed 363 out of 2,021 senior managers in the 61 largest contractors listed on the Stock Exchange were former government officials.

The Liberal Democratic Party gained power in 1955 and held it until 1993. It suited them that all candidates needed ever larger campaign funds to win elections. Construction was a prime source. One association with 600 members reported donations of 5-10% of contract values for political services and acted as the conduit for donors to make known contract preferences.

Tender manipulation needs to be paid for, and estimates of 30-50% extra for public works are given. Former transport minister Ishihara Shintaro is quoted as believing that price fixing inflates public works by 40%.

From 1993-97, I helped to host to several Japanese delegations of officials, consultants and contractors visiting Britain, supplying cost data, describing tendering and estimating systems, forms of contract, visiting ministries and construction sites. The visitors worked hard, were polite and diligent, intelligently questioning every detail. There was never a hint of what was going on at home.

*Japan under construction was published in 1996 by the University of California Press.

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