Reforming Japan's Public Works System

No.16
September 1997
Research Fellow Hidetaka Yoneyama

1. As Japan's budget deficit grows increasingly grave there is mounting criticism of the high price structure of public works. This report aims to clarify the actual conditions of the public works price structure from the standpoint of the price gap between public and private construction, and explores the methods of reforming the public works system.Comparing the unit price of construction costs for public and private buildings reveals an increasing disparity between the two. While unit prices for both skyrocketed from the end of the 1980s, the decline in the price of public buildings during the subsequent crash was smaller and less volatile compared to that of private buildings.
2. Bidding on public works is conducted collusively between businesses, and it is not uncommon for successful bids to be decided at prices very close to pre-determined estimates. Estimation survey costs-which serve as the premise for construction price calculations-and overhead cost ratios are rigid and do not react to changes in market prices, resulting in the recent growing disparity between public and private costs.
3. On the other hand, the U.S. public works system features transparent bidding and contract processes, and promotes appropriate price competition between businesses. Though the budget window for public works is announced beforehand, the price assigned through bidding is considered separate, and successful bid prices may run above or below the budget window depending on movements in the market.
4. In order for Japan to engender appropriate price competition, the present estimated cost system and estimation standards must be abolished. At the same time, it is critical that the processes for public works plans, proposals, bidding, and contracts be made transparent. Lastly, the price structure for estimation surveys of public works should be standardized in order to facilitate price comparisons between companies.

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