Editorials

Bidding troubles and the maglev

The four major contractors indicted on charges of engaging in unfair bidding for contracts dealing with the ¥9 trillion maglev project linking Tokyo and Osaka had declared in 2005 an end to the widespread industry practice of bid-rigging after they were accused of such wrongdoing in a series of government projects. The charges by prosecutors, if valid, would mean that the contractors have not learned from the past mistakes that they pledged never to repeat. Along with exposing the responsibility of the parties involved, the investigation into the case should shed light on why these nefarious deeds are allegedly being repeated and, if there are structural problems behind the practice, what needs to be done to stop it.

Indicted on Friday by Tokyo prosecutors, acting on a criminal complaint filed by the Fair Trade Commission over suspected violation of antitrust rules under the Anti-monopoly Law, are Obayashi Corp., Kajima Corp., Shimizu Corp. and Taisei Corp., along with Taisei and Kajima executives in charge of their firms’ maglev business. The prosecutors claim that the four contractors colluded between 2014, when the government gave the go-ahead for the maglev construction, and 2015 to adjust their bids for works to build stations in Tokyo’s Shinagawa district and Nagoya. Officials of the companies allegedly agreed to determine ahead of the bidding which of the firms should win the order for which section of the work and exchanged information about their estimated bid prices, thereby obstructing the competition to win the work orders.

Later, orders for two sections of the work to build the maglev station in Shinagawa went to joint ventures led by Obayashi and Shimizu, respectively, while the bidding for work on a section at the Nagoya station was won by an Obayashi-led consortium. Of the 15 work orders for construction of tunnels and underground stations offered by Central Japan Railway Co. (JR Tokai) by the end of last year, each of the four major contractors won three or four of the contracts.

Since investigators from the Tokyo District Public Prosecutor’s Office and the FTC jointly searched the head offices of the four contractors in December, Obayashi and Shimizu have told the FTC that they rigged the bids, seeking exemption from punishment under leniency rules, but Taisei and Kajima have reportedly continued to deny that they engaged in bid-rigging. Only the Taisei and Kajima executives have been arrested and indicted. The case may offer food for thought ahead of the introduction in June of the plea bargain system, in which prosecutors will be empowered to withhold indictments or file lenient charges against criminal suspects in exchange for providing testimony or evidence to cooperate with investigations.

Taxpayer money is squandered if construction costs on projects ordered by national and local governments become inflated because of bid-rigging. If such a practice increases the cost of work ordered by private-sector firms — such as JR Tokai in the case of the maglev project — the added expenses may be passed on to customers. JR Tokai will pay for the entire ¥9 trillion cost of the maglev project, which is touted as connecting Tokyo and Nagoya in just 40 minutes with magnetically levitated trains in 2027 — and then extending to Osaka in 2045 — with ¥3 trillion in low-interest loans from the government. Unlike government-ordered projects, it is said to be unusual for the antitrust provisions of the law to be applied on bidding for works ordered by a private-sector company.

It is far from unanimous that the prosecutors’ case against the four contractors will succeed. Construction of the maglev line is believed to involve extremely high technical hurdles, which will require the resources and technology of the top four contractors to overcome. More than 80 percent of the 286-kilometer route between Shinagawa and Nagoya will run through underground tunnels, including some sections in the Southern Alps mountains where the line will run up to 1.4 km beneath the surface. Since only the top contractors have sufficient financial resources and manpower to handle such tough jobs, the intention of JR Tokai may have been the determining factor in the decision on which companies should be awarded the contracts in question, instead of the contractors manipulating the bidding process.

The entire picture of the maglev project bidding needs to be exposed through further investigations. And in the process, what is indeed wrong with the practice of bid-rigging, why it does not disappear and what should be done about it should receive a thorough discussion.