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Japan maglev project marred by bid-rigging arrests

Contractors feared hard-bargaining JR Tokai would make work unprofitable

Current and former officials from Kajima and Taisei are accused of rigging bidding for railway projects.

TOKYO -- Japan's big four contractors are accused of bid-rigging for a planned magnetic levitation train line in an apparent effort to protect earnings amid pressure to cut costs.

Tokyo prosecutors Friday arrested two former and current senior officials from general contractors Kajima and Taisei suspected of colluding with peers Obayashi and Shimizu when bidding on contracts in 2014 and 2015 from Central Japan Railway, commonly known as JR Tokai.

The companies are accused of agreeing in advance on their price estimates for construction at two stations, one in Tokyo and one in Nagoya, linked to the Linear Chuo Shinkansen, in effect parceling out contracts among themselves.

But sources at the companies have laid responsibility partly on JR Tokai. The rail operator "put intense pressure on us to lower our prices," one person interviewed by prosecutors said, according to a source familiar with the matter. The high-speed line, seen cutting travel time between Tokyo and Osaka to around an hour, is expected to cost roughly 9 trillion yen ($85.2 billion) in all.

JR Tokai, which said in 2007 that it would foot the bill for the maglev line, drove hard bargains on contracts for the first portion of that line, set to open between Shinagawa Station in Tokyo and Nagoya in 2027. A source familiar with the matter said the rail operator even presented contractors with their rivals' proposed construction costs as the price to beat.

The contracting sector feared that having one company take on an unprofitable project could set off a downward spiral that eventually would ruin the industry. Sources claim that led Takashi Okawa, then a Taisei managing director, to contact the other three big companies, kicking off a series of meetings at which the ostensible rivals coordinated their bids. Okawa was one of the two officials arrested Friday.

Bid-rigging is not a new problem for Japan's construction industry. In the 1990s and 2000s, contractors routinely coordinated when vying for public-sector work, letting them charge national and local governments unfairly high prices. Amid a stagnant economy, contractors sought to earn a little extra profit on public works projects with already wide margins.

But construction projects linked to the 2020 Tokyo Olympics and recovery from the March 2011 earthquake and tsunami in Japan's northeast have handed top contractors record earnings over the past several years. At the end of September, the big four had outstanding orders worth over 7 trillion yen.

When complete, Japan's Linear Chuo Shinkansen maglev line will shorten trips between Tokyo and Osaka to around an hour.

Yet the Olympic redevelopment boom will last only so long. Contractors are hunting for projects to sustain them in the longer term, which makes contracts linked to JR Tokai's maglev line exceedingly valuable. The big four companies "likely look to prove their mettle on these challenging projects to help them win other contracts in the future," a source at one contractor said.

However, any coordination involving the maglev line seems looser than during incidents in the past, as the supposed favorite bidders occasionally lost out on projects. Taisei denied Friday that the allegations against Okawa constituted a violation of Japan's anti-monopoly law, calling his arrest "completely unacceptable."

The other contractors have been more contrite. Kajima apologized for the arrest of Ichiro Osawa, a senior manager at the business development division, and said the company would continue to cooperate fully with investigators. Obayashi and Shimizu reportedly acknowledged bid-rigging, sparing their senior executives from arrest for now.

Prosecutors and Japan's Fair Trade Commission appear unmoved by the companies' profit concerns. Though JR Tokai serves as the maglev line's nominal sponsor, low-interest public loans are being used to finance 3 trillion yen of the project.

"This is not a purely private-sector project," a senior official with the prosecution said. "The contractors are turning a profit, if a small one."

Individuals who violate Japan's anti-monopoly law face up to five years in prison and fines that can reach 5 million yen, while companies can be fined up to 500 million yen. Separately, the FTC can compel violators to turn over 10% of the sales that result from illegal acts.

Though Friday's arrests concern only bid-rigging for the two station projects, authorities could impose such a penalty on all projects linked to the maglev line, slapping each contractor with fines of several billion yen. JR Tokai and others have commissioned 26 such projects since 2015, with the big four winning 16 of them.

The companies already have suffered from the scandal, such as with Obayashi losing a tentative contract for a project in Mito, a city north of Tokyo. But the impact on the maglev line appears likely to be limited. Nearly 40% of the contracts for the first phase have been issued, including some of the most difficult parts of the project. The rest can be done even without the big four contractors, a source said. And despite the allegations against them, those companies are proceeding with the contracts they have received.

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