View from Tokyo: Cosy construction cartels come under fire

On Thursday afternoon, inspectors of the Fair Trade Commission raided the offices of a builders' association in Yamanashi, west of Tokyo, in search of evidence of suspected bid-rigging for public works contracts. The Japanese construction industry is under attack by the US government for alleged systematic corruption which, among other things, is said to keep foreign firms out of the Japanese building industry. The raid was intended to show that the government is trying to clean up the industry.

However, on Thursday morning Japanese newspapers carried advance news of the impending raid, even down to the number of inspectors who would be used in the procedure. It is not hard to see why even Japan's domestic press has begun criticising the building industry and the Construction Ministry for running a rigged show.

The story began on 30 April, when the new US trade representative, Mickey Kantor, publicly asserted that Japan's building industry was closed to foreign firms. This is a particularly sensitive issue at the moment, not just because of Japan's huge trade surplus with the rest of the world, but also because much of the supplementary spending the government has authorised to lift Japan out of recession has been directed at public works, creating a huge pool of funds for companies involved in building.

Mr Kantor and his advisers suspect that little or none of this work will go to US or other foreign contractors. He said that if nothing was done to correct this situation within 60 days, Japan could face some form of retaliation, which might include trade sanctions, or banning Japanese firms from bidding for government contracts in the US.

Japan reacted angrily to what was regarded as shotgun diplomacy by the US, and said it would not accept a unilateral approach from one government on a matter that should be dealt with multilaterally by Gatt. Tokyo is becoming increasingly impatient with US trade demands, and government officials have said they are no longer willing to cave into every request from Washington, as was the custom in the past.

CORRUPT AND CLOSED

And as for the construction industry, a statement from the Foreign Ministry stated categorically: 'The Japanese construction market is institutionally non-discriminatory and open.'

This was greeted with howls of derision on both sides of the Pacific, since evidence from the special investigation into Shin Kanemaru, the disgraced political fixer, has been accumulating over the past few months and indicates that the construction industry is institutionally rigged, corrupt, and closed to outsiders.

In March, Mr Kanemaru, who was once the most powerful politician in the ruling Liberal Democratic Party, was arrested tor tax evasion after months of investigations by the Tokyo Public Prosecutor's office into his links with organised crime and his acceptance of kickbacks for political favours. After he was arrested, police found billions of yen in cash and gold bars hidden in his house and office. They also turned up detailed lists of how much money he was being paid by all the country's big building companies in exchange, it is widely assumed, for help in getting government contracts.

Politicians and bureaucrats from the Construction Ministry have enormous power over the awarding of public contracts, most obviously in the 'designated bidder system'. When public works are put out for tender by building companies, the ministry decides in advance on a limited number of companies that are to be allowed to enter a bid.

The official reason for this is to keep out companies associated with gangsters and to maintain high standards of workmanship. But in practice it means that building companies must keep good lines of communication with bureaucrats from the ministry and politicians who can put in a good word for them. This means money. Some of the bigger building companies were found to have been paying Mr Kanemaru millions of pounds a year to stay in his favour.

The rigged system does not stop there. After companies are designated as bidders, it has become normal practice for them to get together and agree on how much each company will bid - this is called a 'dango'. The companies decide whose turn it is to 'win' the competitive bid, and then fix their respective bids, ensuring nice profit margins are maintained. So cosy is this system that often the media found out who was going to win a public bid before the actual bid was made. In one case last November, the local government in Yamanashi prefecture was forced to suspend bidding for a sewerage project after the press announced that the bid had been blatantly rigged beforehand.

Even the Japanese public is getting tired of such systematic corruption by their bureaucrats and politicians, and so, despite its irritation at being put on the spot by Mr Kantor's outburst, the government announced that the rules for bidding for public works contracts would be overhauled. And who was to do the overhauling? The Construction Ministry, which is an intrinsic part of the problem in the first place.

WELL-SIGNALLED RAID

Not surprisingly, the new regulations issued by the ministry have been criticised as doing too little to solve the problem. The system of selecting 'designated bidders' has not been changed, although the Construction Ministry has drawn up a clearer list of criteria under which potential bidders will be selected. The ministry says they will place more emphasis on companies' technical qualifications.

The Japanese press went on the attack. 'Don't leave public works reform to the Construction Ministry' said an editorial in the Nihon Keizai Shimbun, the country's most influential business newspaper. 'We are surprised that the Construction Ministry is so naive about domestic and international criticism.' Nothing will really change in the industry, the critics said, until a fully open bidding system is introduced, which cannot be manipulated by cartels meeting behind the scenes.

The well-signalled raid on the builders' association in Yamanashi was meant to be the second step in showing the ministry's determination to clean up. Yamanashi was the home prefecture of Mr Kanemaru, and many of the building companies there have been linked with the fallen politician.

Whether or not the Fair Trade Commission's investigators found any documents with evidence of bid- rigging has yet to be revealed. The FTC does not have a strong reputation in Japan, and is often parodied as a tiger with no teeth. It says it has found only 23 cases of bid-rigging in public works projects since 1977, although bid-rigging is thought to be the norm rather than the exception. But it is becoming clear that the halfhearted measures by the Construction Ministry to improve its image are not going to work, either on US trade negotiators, nor, increasingly, on the Japanese public itself.