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Four Japanese maglev contractors indicted over bid-fixing

Pressure from client to keep costs low seen as a reason for collusion

The maglev link between Tokyo and Nagoya is expected to be operational in 2027.

TOKYO -- Japanese prosecutors lodged antitrust indictments Friday against the "big four" general contractors involved in what is turning out to be a complicated case of bid-rigging over a planned magnetic levitation rail line.

Investigators say Kajima and Taisei colluded with Obayashi and Shimizu before submitting bids to build stations along the Linear Chuo Shinkansen, a high-speed magnetic levitation link that will eventually connect Tokyo with Osaka.

The Tokyo District Public Prosecutors Office's special investigative squad also formally charged Ichiro Osawa, Kajima's civil engineering sales division manager, and Takashi Okawa, a former managing director and current adviser for Taisei. Both were arrested earlier this month in connection with the scandal.

Managers from Obayashi and Shimizu have admitted to collusion, and they have had their indictments suspended. A number of executives at both companies will give up portions of their salaries over specified periods.

Japanese antitrust law forbids contracting companies from contacting each other to predetermine a winning bid or its value. As a result of search warrants and other investigative procedures, prosecutors have collected tables listing construction work desired by each company, as well as technical documents. Investigators also say that at least one manager has mentioned discussing bid pricing with other companies.

In Japan, bid-fixing usually occurs during economic downturns, when struggling contractors get together to pump up the price of public works contracts. But in this case, the construction industry is in the midst of a boom period, and they are desperate for workers.

Many point the finger at the ties between the four contractors and Central Japan Railway, the operator of the maglev project. The company, commonly known as JR Tokai, awarded the contracts to build the Shinagawa station in Tokyo and another in Nagoya.

However, both stations are being built 30 meters to 40 meters below the currently operating Tokaido Shinkansen bullet-train line, presenting unique construction challenges. The project also requires a tunnel penetrating a mountainous area of Japan known as the "Southern Alps."

"JR Tokai wanted major [contractors] for the construction that had high technical capabilities," according to a general contracting insider.

Before launching bid procedures, JR Tokai requested that each contractor collaborate in research geared toward solving technical and other issues. The companies ended up shouldering costs in the hundreds of millions of yen (100 million yen equals $951,000). Within that context, each company was focused on landing maglev contracts.

However, JR Tokai was also pressuring the builders to lower prices, raising profitability concerns. But the four companies could ill afford to abandon a major national project, which would make a crowning addition to their resumes. Many believe the contractors ended up colluding with each other as a response to the railway operator's request for discounts.

The scandal is starting to impact business at the four general contractors. Ever since Osawa and Okawa were arrested on March 2, governing bodies representing Tokyo, Nagano Prefecture and other places have either stopped selecting the companies for projects or barred them from participating in bids. One provisional contract has even been cancelled.

Public works projects account for 20% to 30% of combined revenue at the four companies' domestic construction businesses. However, the total balance of contracts at the end of December amounted to roughly 7 trillion yen. With the private construction business enjoying booming demand from urban redevelopment, earnings are not expected to decline sharply.

The Japanese contracting business features originators lacking in technical resources, and contractors who have built up a wealth of skill and know-how over the years. In order for contractors to put together winning proposals, it has become necessary to gather intelligence on clients and rivals.

The bid-rigging scandal risks creating a chilling effect on that sort of data-gathering. "We won't be able to share information with managers from other companies," said the head of a midtier general contractor.

Both Kajima and Taisei deny all the charges, with the former promising to fight the allegations in court. Taisei did admit to sharing information, but denies that the conversations led to predetermined bid winners and contract amounts.

"If that amounts to collusion, then large projects cannot be done," said a source close to Taisei.

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