Cablegate: Bid Rigging in Japan: A Feature, Not a Bug

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INFO RUEHKO/AMEMBASSY TOKYO IMMEDIATE 7744
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UNCLAS SECTION 01 OF 03 OSAKA KOBE 000588

SIPDIS

DEPT FOR E, EB, EAP/J
STATE PASS USTR FOR AUSTR CUTLER AND MBEEMAN
STATE PASS FEDERAL TRADE COMMISSION FOR GENERAL
COUNSEL BLUMENTHAL
FTC ALSO FOR INTL ANTITRUST - TRITELL/SHANAHAN
JUSTICE FOR STU CHEMTOB IN ANTI-TRUST DIVISION
STATE PASS TO NSC FOR TONG
USDOC FOR ITA/OFFICE OF JAPAN MELCHER
NFATC FOR LISA FOX AND BARRY BLENNER
PARIS FOR USOECD

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ETRD ECON EINV ELAB JA
SUBJECT: BID RIGGING IN JAPAN: A FEATURE, NOT A BUG

1. (SBU) Bid rigging (dango in Japanese) is a common
form of corruption in Japan, in which firms restrict
open competition by coordinating their bids on
procurement or public contracts. Although not unique
to the Kansai area surrounding Osaka in western Japan,
recently one example of bid rigging came to light in
Osaka's southern neighbor of Wakayama that shines light
on the practice as a whole.

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BACKGROUND
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2. (SBU) On October 13, the Osaka District Public
Prosecutor's Office arrested Wakayama Prefecture
Treasurer Satoaki Mizutani and 4 others in conjunction
with its expanding probe of alleged bid rigging in four
public works projects ordered by the Wakayama
Prefectural Government in 2004. The investigation also
targets current and former executives of the Obayashi
Corporation, a major Osaka-based construction company.
An Osakan golf course owner close to Governor Yoshiki
Kimura is suspected of taking 60 million yen (over USD
500,000) from the successful bidders for advance
details of the projects. Although Obayashi did not
participate in the bidding, Osaka authorities suspect
that the conglomerate was exerting control over the
amount offered by bidders.

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BID RIGGING: A CASE STUDY
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3. (SBU) More interesting than the particulars of the
unfolding criminal case is the glimpse the case offers
into the rationale for the deeply ingrained system of
rigging bids in Japan -- a practice that shows no signs
of abating any time soon.

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OBAYASHI: GODFATHER OF BID RIGGING IN THE KANSAI
--------------------------------------------- ---

4. (SBU) Osaka media interlocutors tell us that former
Obayashi Managing Director Sakae Hirajima personally
selected bid winners and controlled bid prices for
thirty years starting in the 1960s. Known as the
Godfather of construction companies in the Kansai,
prospective bidders reportedly had to supplicate
themselves to him in order to clinch deals on all
public projects. Hirajima left Obayashi after a large
corruption scandal and disclosed details of his firm's
bid rigging practices to the Japan Fair Trade
Commission (JFTC) in 1997.

5. (SBU) Predictably, although the JFTC subsequently
clamped down, a less direct system for rigging bids
soon filled the vacuum left by Hirajima's departure.
In the current system, a number of major construction
companies, many of which are based in Osaka, take turns
at dictating bid conditions. In Obayashi, reportedly
there is now a team of executives in charge of bid
rigging divided to two groups: one for road and tunnel
projects, the other specializing in buildings.

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FROM BID RIGGING TO "BID DUMPING" IN PUBLIC WORKS
--------------------------------------------- ----

OSAKA KOBE 00000588 002 OF 003

6. (SBU) While detected bid rigging cases have declined
since 1997, so has the Japanese economy as a whole.
But Toshikazu Ito (please protect), a Technical
Coordinator of the Kinki Regional Development Bureau,
Ministry of Land and Infrastructure (MLIT) reported to
econoff that what MLIT saw through December 2005 was a
shift from artificially high bids to bids up to three
percent less than the official estimated cost Q- a
trend in which firms are under-bidding to win
contracts.

7. (SBU) Furthermore, this "bid dumping" became much
more pronounced in the Kansai starting this year, with
bids as low as 60 Q 70 percent of the government's
designated maximum price. The MLIT official felt that
in his opinion, firms cannot maintain adequate safety
levels at those prices. According to Ito, MLIT is
increasing its safety screening as a result.

8. (SBU) Major construction companies can offer such
low prices because they have the economic clout to
offer their subcontractorsless money for their portion
of the overall contract without reducing the amount of
work the subcontractors have to do -- and while they
maintain adequate profit levels, the small-scale
construction companies downstream must cope with a
profit squeeze. Subcontractors are faced with making
hard choices about safety and their own economic
viability, according to Ito. However, MLIT's analysis
omits the value of increased competition in lowering
the cost of competitive bids and improving the terms
offered by firms, something the USG has tried to
impress upon economic bureaucrats in Japan.

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CAN BID RIGGING BE REFORMED IN JAPAN?
-------------------------------------

9. (SBU) Ito said that although it is not an optimal
situation, there are still too many small construction
firms that will go bankrupt without the handout of a
subcontracting job from a conglomerate like Obayashi.
Since the Japanese labor market has low liquidity, the
GOJ is reluctant to push a large segment of low-skilled
laborers into the unemployment rolls, hampering the
GOJ's ability to end the system of bid rigging and bid
dumping.

10. (SBU) As in other industries, for the Japanese
government underemployment is preferable to
unemployment. However, given the storm in the Diet
last November over subcontracting architect Hidetsugu
Aneha's falsification of mandatory structural strength
analyses for hotels and condominiums (essentially
caused by the same dynamic of bid dumping by a general
contractor), it is surprising that the GOJ has not
recognized that putting the public's safety at risk is
potentially much more costly in human lives and in yen
than increasing its unemployment figures.

11. (SBU) Manabu Nojima (please protect), a manager at
the Kansai Economic Federation only half-jokingly
opined that the Japanese economy is based less on
capitalism than market socialism. Many in the business
community in Osaka, especially large construction
companies, do not think that bid rigging is bad
behavior. Instead, they argue that due to its

OSAKA KOBE 00000588 003 OF 003

employment of tottering family operations and
underemployable elements of the labor force, bid
rigging serves as a form of social security in Japan.
Small construction companies serve to sponge up excess
unemployment during economic downturns, and release it
during periods of expansion. He added that it would be
difficult to change irregularities over bidding without
changing these attitudes first.

RUSSEL

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