Regulatory Developments In past years, the construction sector in Japan has undergone change, largely because of drastic cuts in public spending that brought construction costs closer to international levels. Yet relatively little has changed to increase competition in the industry. European firms still find that project bidding is often more trouble than it is worth, given the complexity of the bidding process, lack of transparency and lack of clear bidding criteria on performance requirements and quality control. Foreign involvement is relatively low with only a few European firms operating in niche areas of the market. According to Japanese regulations, a company must hold a permit (kensetsu gyo kyokasho) to be a contractor or a direct subcontractor of a general contractor for projects that are worth over 5 million yen (roughly 30,000 euros) in value. To obtain this permit, the company must have a resident management staff member with more than five years of relevant experience in the same company or in another company in the same field. Small foreign firms that cannot find an appropriate person are forced to make "go-between" side-deals with a permit-holding subcontractor, which increases the cost of doing business in the Japanese market. Although the Building Standard Law is now essentially performance-based, detailed specifications formulated under previous regulations are still widely valid, thereby obstructing the proliferation of high-quality alternative (foreign) materials on the market. The lack of consistent performance criteria has caused Japan to lag behind in the development of safer and more energy-efficient buildings. For example, several accidents, including fatal accidents involving children, have occurred in Japan as a result of using annealed float glass, which is accepted almost everywhere in Japan both on and inside buildings. In Europe, in unprotected areas and in ceilings, it is compulsory to use safer materials - such as tempered glass or laminated glass - that do not easily shatter into large pieces when subjected to external shocks. To achieve the desired increase in competition, the Government needs to implement new, firm measures to rationalise the construction industry. The ceiling price system (yotei kakaku) for public tenders should be abolished and requirements for bid participation relaxed. Rules peculiar to the construction of public works, such as the requirement for locally qualified and licensed engineers for all projects worth over 25 million Yen, and burdensome inspection requirements not found in private sector projects, should be eliminated. The widespread amakudari practice (private sector employment of retired ranking government officials) should be restricted. Finally, action should be taken to address the fact that current private financing initiative/public-private partnership (PFI/PPP) schemes provide little or no freedom in the means of delivery, do not reward innovation and are largely just a variant of contractor-financing (with deferred payments by the purchaser) rather than real PFI/PPP projects. Prospects for EU-Japan Economic Integration Although the relative share of the construction sector has decreased from 14.2% in 1998 to 10.2% of Japan's total GDP in 2006, the absolute size of the sector (363 billion Euro in 2006) makes it one of the largest in the world. The Government has made enormous efforts to increase the sector's efficiency by more than halving (54%) yearly public spending during the past 8 years, yet inefficiencies in the structure and management of the sector continue to prevent the creation of a market environment based solely on cost-effective merit. It remains almost impossible for foreign companies to sell and install building materials and equipment in Japan directly to end-users, especially for new building projects. Moreover, opportunities for European firms to use innovative designs, imported materials and modern construction methods - the key to their competitive advantage - are effectively eliminated in Japan by over-prescriptive regulation, resistance to change by local officials and complicated procedures to obtain the necessary approvals. Priorities
Key Issues and Recommendations ■ Harmonisation of building materials standards Yearly status report: limited progress. Building materials exported to Japan are tested according to both European and Japanese standards, although most of the tests are very similar. Few European testing institutes are accredited to test building materials for Japan. Inevitably, this raises the costs of imports to Japan and makes them less competitive than domestic supplies. In 2001, the Ministry of Construction (currently the Ministry of Land, Infrastructure and Transport - MLIT) issued a Cabinet Order to the effect that foreign standards and certification may be used as a way to prove structural strength for structural lumber and gluelam. Application for acceptance of CE Marking for these products is underway. Recommendation:
■ Promotion of safe and environment friendly construction Yearly status report: limited progress. Although a performance-based system was formally introduced in Japan through revision of the Building Standard Law in 1998, in practice, prescriptive product type specifications are still widely used. Such detailed product prescriptions are not only difficult for foreign manufacturers to fulfil, given the historical bias towards domestic standards, but have also failed to promote energy-efficient and safer buildings. Japan continues to use building materials that Europe classifies as dangerous and officials are not actively encouraging energy-efficient construction. Recommendation:
■ Public procurement Yearly status report: limited progress. The EBC appreciates strengthened enforcement of Japan's Anti-Monopoly Law and efforts of the Government to provide information on upcoming public works projects. However, the public works procurement situation remains far from ideal, and continues to limit opportunities for European firms to participate and increases the cost of public works to the Japanese taxpayer. The single-fiscal-year budgeting policy leads to large projects being broken up into arbitrary bid packages that are unrelated to the content of the work - this reduces efficiency and increases the price as future year packages are often awarded to the successful first-phase contractor with little or no real competition. This practice can also lead to individual awards falling below the WTO minimum threshold - a manipulation that contravenes the WTO Government Procurement Agreement (GPA). The application of PFI/PPP in Japan continues to be mediocre, merely implying deferred payment via contractor-financing. Procurement policies that would greatly improve the transparency and efficiency of public works procurement already exist in Japan, but are not widely applied. For example, the EBC would like to see greatly expanded application of the Comprehensive Evaluation Bidding System, which enables bidders to submit technical proposals that may give them a competitive advantage - and makes it much harder for contractors or commissioning entities to rig the bidding process. Recommendation:
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