Jun 6 2005
When 14 executives from 11 steelworking companies were arrested last week on suspicion of rigging bids for steel bridge construction projects Hiroshi Okuda, chairman of the Japan Business Federation (Nippon Keidanren) expressed deep regret over the case, while also saying, "Honestly, I don't think it's possible to completely abolish bid-rigging."
Okuda's remark was not surprising, as it was Nippon Keidanren that objected to the Fair Trade Commission's proposal to substantially raise penalties on companies violating bidding rules to prevent the practice. Japan's business community remains tolerant of bid-rigging, despite being aware that the practice is illegal.
Japan is not the only country where cartels are formed in the awarding of contracts for public works projects. Given that the United States and the European Union impose heavier penalties on bid-rigging than Japan, forming cartels is regarded as a serious problem in these nations too. The difference between Japan and other countries is that in this country, all businesses in the industry participate in bid-rigging, with profits from public works projects distributed among all participants. Under such a scheme, stronger companies will not necessarily gain larger profits than weaker ones.
In the Japanese financial sector, the so-called "convoy" system has long been adopted under the government's administrative guidance. The scheme, which is likened to a convoy of ships limiting the speed of navigation to the slowest of the vessels, adjusts the speed of slow-moving companies to prevent the fastest company from leaving others behind so that no company would drop out.
Bid-rigging is the industrial version of the convoy scheme of the financial sector. It is a lucrative system for companies because it allows any member of the cartel to earn a certain proportion of profits with relative ease, regardless of the bidding outcome.
Five years ago, a large-scale bid-rigging case was uncovered in Hokkaido in connection with an agricultural engineering project. About 300 companies were involved in rigging bids for orders by the Kamikawa regional office of the Hokkaido government. The companies coordinated bid-rigging talks to allocate construction projects among cartel members and even decided on bidding prices in advance under the guidance of industrial organizations concerned. In fact, the rigging was virtually managed by the Hokkaido government, which ordered the project.
In this case, not only did most local companies take a share of the profits from the public works project, but the local government that issued the order led the bid-rigging. Neither the companies nor the administrative authorities thought they had done anything wrong, considering their action as a traditional practice. Some of the companies involved had recruited retired senior officials of the Hokkaido government as their executives.
It is believed that bid-rigging for bridge construction projects has been going on for more than 40 years. A total of 47 companies were members of the two industrial associations that arranged the latest bridge construction bid-rigging. Suspicions are now emerging that retired public corporation executives who parachuted into bridge construction companies are involved in the practice.
Both the bid-rigging in Hokkaido uncovered in 2000 and the latest bid-rigging in bridge construction show that despite heavier penalties imposed on bid-rigging under the revised Antimonopoly Law, the practice remains unchanged.
Bid-rigging, or dango in Japanese, is a serious offense, because elimination of competition in public works projects makes projects less efficient and forestalls cost reductions, which in turn could damage the interest of taxpayers.
Bid-rigging takes place mostly in industrial sectors that have a large number of companies and is designed to allow all companies to survive. Yet, as long as the bid-rigging scheme remains in place, structural reform, including corporate realignment, will stall and poorly performing companies that would otherwise fold will survive.
Economic globalization is also a factor. Corporate mergers and acquisitions beyond national borders are increasing, while global coordination is progressing regarding competition policy.
Japan is concluding cooperative agreements on competition policy with the United States and the European Union and instead, is adjusting its competition policy with them. It would be a shame if the dango practice remained synonymous with Japan.
Sato is a senior deputy chief officer at the Yomiuri Research Institute.
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