View from Tokyo: Building a breeding ground for corruption

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Compared with Europe, Japan looks new. Office blocks, private houses, bridges, railway lines throughout the country - all have that shiny, barely-out-of-the-crate look to them.

Part of this is due to the destruction of the Second World War, which left many cities in ashes and necessitated a complete rebuilding of residential and commercial property. And as the economy grew in strength in the 1960s and 1970s there was more and more money available for investment in building and infrastructure projects.

But even before the war Japan had always been quick to knock down and rebuild. With so little usable land, the value of any property has resided mostly in the plot on which it is built, not on the structure itself.

As soon as a building is thought to have outlived its usefulness, the knocking ball is brought in, the rubble is cleared away and within weeks a new structure is rising.

To service this building fever, Japan has developed an extensive network of construction companies. Out of a current national population of 123 million, 6 million people work in the building and civil engineering industries. More than 500,000 firms are involved in building Japan's bridges, harbours, houses and roads.

Many of these firms, including some of the biggest - such as Kajima Corporation, which has operations in five continents - are still family-run concerns, often with roots in the building industry that go back into the last century.

There has been plenty of work for these firms but, more than any other Japanese industry, they have been plagued by corruption. On one fringe is the involvement of organised crime, common to the building industry in many countries where contractors rely on unscrupulous methods to control the labour force. But in Japan the prime source of corruption is the political world.

Because much of the construction is in public works, and thus someone who is not spending his own money has to decide to whom contracts are awarded, there is enormous potential for patronage and bribery. Construction firms are careful to court politicians and bureaucrats from the relevant ministries.

On the payroll

A government report released this week revealed that 30 present and former members of parliament are on the payroll of construction companies. One firm was quoted as saying that it relied on a former cabinet minister who was on its board 'in a genuine sense for his guidance on engineering issues'.

Bureaucrats are courted as well. There are 187 building companies listed on the stock exchange, and they have 1,517 non-executive directors. Of these, one-third come from government ministries and agencies.

Not surprisingly, the largest number of directors comes from the construction ministry, followed by the national railway companies, the public highway corporation and the housing and urban development corporation.

Over the years the building industry has developed into a huge feeding trough for politicians. At election time the firms are expected to cough up money to cover the exorbitant expenses of politicians' election campaigns, and in return they can expect to have a proportion of public works contracts awarded to them if and when the politicians are elected.

This year is no exception, as construction companies complain that candidates for the elections on 18 July are making their usual rounds in search of money, even though the recession has hurt many in the industry.

One company received a call from a politician who said he had 'prepared a receipt for 1 million yen'. Angered, the company delicately responded that it was under pressure from tax inspectors to reduce its 'miscellaneous expenses' and could not help him. But most companies cannot extricate themselves so easily from the well-established symbiotic relationship between their business and politicians.

As has been mentioned in this column before, the US government, chafing at Japan's large trade surplus, has targeted the building industry as one of the most obvious examples of a market controlled by a closed network of officials, politicians and companies that does not allow in foreign firms.

A pre-selection process of designated bidders allows only firms that are close to the ministries to tender for public works projects, and bidding is regularly rigged.

This week it was revealed that in an outline plan to build a dam in central Japan the construction company that was to do the work had been secretly agreed upon more than a decade before the job was put out to tender.

Sanctions threat

With its new 'get hard on Japan' policy, the US announced it would impose punitive sanctions on Tokyo for refusing to open up public works projects to outside bidders. Supplementary budgets have been pumping thousands of billion of yen of government money into construction projects in the past 12 months in an attempt to revive the economy, and the US has been eager for its firms to participate in the building bonanza.

But on Wednesday, Mickey Kantor, the US trade representative, announced that Washington was postponing a decision on sanctions until November. This was to allow for negotiations with the new government that will be installed in Tokyo after the general elections.

Coincidentally or not, the delay on sanctions was announced the day after the arrest of Toru Ishii, the mayor of Sendai, a city 180 miles north of Tokyo, in a construction scandal. Mr Ishii is suspected of taking Y100m ( pounds 606,000) in bribes last year from four building companies in relation to a 10-year project to redevelop the city's harbour that will cost pounds 606m.

He was facing a re-election battle later in the year, and it has been suggested that he needed to top up his campaign chest.

As the construction industry puzzles over paying political donations in recessionary times, Japan's captains of industry have their own dilemma - should they continue their generous financial support for the ruling Liberal Democratic Party, which may lose the next elections, or should they spread their funds to cover opposition parties?

This is a hot topic in the halls of Keidanren, the federation of economic organisations that is the most powerful of the country's business lobbies. The chairman of Keidanren, Gaishi Hiraiwa, has said he favours continuing exclusive support to the LDP, which amounts to Y13bn a year.

Other business lobbies threatened to revolt, and Keidanren had to exercise its considerable clout to stop a split in the business community. A meeting was called on Thursday, and a consensus reached. The business community would 'consider' funding other parties - after the election results have been announced.