Fumiaki Ichiyama, who managed an izakaya bar until he had to close it because of the coronavirus, stands by the site where his bar was located and demolished in Tokyo. Photo: REUTERS/Issei Kato
business

Gov't under fire over huge COVID-19 aid contract for ad giant Dentsu

47 Comments
By Mari Saito and Ju-min Park

Off a narrow corridor above a store selling Persian rugs in central Tokyo, a small office houses a private operation which won a tender in April to distribute more than 2 trillion yen in government aid to businesses hit by the new coronavirus.

The agency, the Service Design Engineering Council, actually carried out only a fraction of that work, local media reported last month. Service Design was co-founded by Dentsu Group Inc, one of Japan's most influential companies. It passed the contract to administer the project back to Dentsu, an advertising and PR company with close ties to Prime Minister Shinzo Abe's ruling Liberal Democratic Party (LDP), government documents show.

Under the arrangement, Service Design won the contract to distribute the 2 trillion yen, but actually took less than 1% of the total 80 billion yen for managing the project and passed on most of the rest to Dentsu, which set up vetting procedures, websites and call centers, the companies and the Ministry of Economy, Trade and Industry (METI) said.

Dentsu, in turn, subcontracted the work again through its subsidiaries. The ministry has said that there were five tiers of subcontractors and at least 63 companies involved. Officials have disclosed the names of only 14 of those; the government has not fully accounted for contracts worth at least 26 billion yen, about one-third of the total.

The arrangement led to confusion and delays for small business owners. Members of parliament have questioned how taxpayers' money was spent during a national emergency.

Controversy over the contract - one of the largest that Japan has outsourced from its pandemic budget - is widening for Abe's government, already facing a fall in public support over its handling of the pandemic. Questions are mounting from opposition politicians about the government's links to Dentsu, a publicly listed company. At issue is whether Service Design helped shield Dentsu's leading role from scrutiny. The government and Dentsu have come under fire in the past for their close ties.

WAIT WAS TOO LONG

Nearly three million firms have applied for payouts of up to 2 million yen each, according to METI, which awarded the contract. Thousands are still waiting to be approved or paid. Some small business owners told Reuters the wait was so long and the payout so small, they had no choice but to fold.

Service Design is a private, not-for-profit group which does not disclose ownership details and has a staff of 22. Dentsu founded it with Pasona Group Inc, a temporary staffing agency, and Transcosmos Inc, an IT services firm; three of its nine directors and several of its employees are from Dentsu group companies.

The ministry declined to disclose the full list of companies involved because of a clause in Japan's disclosure law. If revealing information about a company could harm the firm's competitive position, it said, it is not obliged to disclose it.

There are no allegations of illegality in the process.

Opposition politicians blame the subcontracting for administrative costs rising to what one of them, Masayuki Aoyama, said was roughly 30 times more than a similar program for private individuals that was handled by local governments. They and some frustrated small business owners want to know why the government picked Service Design, and why and to whom the work to distribute the money was then farmed out.

"The whole thing is extremely gray," said Kaname Tajima, one of dozens of opposition members of parliament who are campaigning for the ministry to release full details of how the contracts have been handed out.

"What is strange is the government is protecting Dentsu from scrutiny about lack of information and accountability," Tajima said.

A poll in June by TV Asahi, a broadcaster, found 73% of respondents thought the government had handled the program inappropriately.

The economy ministry said that as of July 20, it had received 2.9 million applications from small businesses and distributed funds to 2.67 million; Service Design said that for the most part, funds are being paid out roughly two weeks after an application is received.

Yusuke Tanaka, the official at the ministry in charge of the payouts program, said METI conducted a competitive tender and awarded the contract based on a comprehensive rating system. He said the ministry had not given preferential treatment to Service Design and Dentsu. Asked if involving private companies added costs to the project, Tanaka said that applicant vetting, and the cost of providing face-to-face support for the applicants, had lifted administrative costs compared with the scheme for private individuals.

Service Design, which told Reuters by email it tendered for the project because it had experience with an IT subsidy program, hired extra staff and found venues to help businesses with their applications, and retained a bank to help process the payments. It said Dentsu was best placed to carry out the ambitious and wide-ranging project.

Dentsu said the contracting structure was not opaque and that payouts were timely. Administering the project requires various companies and more than 10,000 workers, it said.

"To begin with, we did not think that it was possible for one company to handle a public project of this level," the company said in a statement to Reuters on July 21.

The next day, Dentsu announced on its website that in response to public reaction over its dealings with the government in the small business program, it was conducting a review of its involvement in such projects. The company said it would not bid on any new contracts from METI until the review was complete.

Transcosmos and Pasona declined to comment.

TRACK RECORD

Abe told parliament in June the outsourcing had been carried out appropriately. But support for his administration's response to the pandemic fell to 36% on July 20, a Kyodo News poll showed, down from 49% a month ago.

"There's no question the unclear scheme around the small business relief program has ... damaged public support over(the government's) handling of the pandemic," said Atsuo Ito, an independent political analyst.

Abe's party, in power in Japan almost continuously since the 1950s, is an important client for Dentsu. Dentsu has done work for the party since the 1950s and 60s, when it was hired to help it campaign in elections, and smooth the passage of an unpopular security treaty with the United States. It was also involved in the 1964 Olympics.

More recently Dentsu, which started as a news agency, has made sports marketing a centerpiece of its business. It served as a marketing agent for Tokyo's bid to host the 2020 Olympics, for which it helped Japan raise a record 330 billion yen in domestic sponsorship. The tournament has been postponed for a year due to the pandemic.

The world's sixth-largest advertising agency, Dentsu also works in public relations, market research and polling.

Screen Shot 2020-07-28 at 8.20.59.png
Takenobu Tonegawa, 41, who owns a video production firm, cycles as he works his part-time job as a Uber Eats delivery person, in Tokyo, on July 16. Photo: REUTERS/Issei Kato

The coronavirus aid was meant to help businesses like Takenobu Tonegawa's video production firm, which specialized in corporate events. When cases of COVID-19 surged in spring, most of his clients canceled. The Tokyo-based entrepreneur waited four weeks for his one million yen check from the government, he said.

While he waited, the 41-year old found work delivering food on his bicycle for Uber Eats. Tonegawa said he had rung a call center operated by one of the companies under Service Design more than 100 times over three days to chase his application. Each time he was referred to a different part-time employee who was not aware of it. It was one of the most stressful periods of his life, Tonegawa said.

"I don't blame the outsourcing itself, but if they run this system with taxpayers' money, they should've operated it better," he said.

PASS THE BUCK

Pictured on national TV as a sparsely furnished office where a handful of employees type at laptops under fluorescent lights, Service Design oversees the entirety of the small business aid project. It coordinates with companies and liaises with the ministry, METI's Tanaka said.

Service Design competed for the relief contract with Deloitte Tohmatsu Financial Advisory, the ministry said. Deloitte had two meetings with government officials, one of them over the phone.

Service Design met with ministry officials in person three times and was joined at the meetings by Dentsu officials, the ministry has said, adding that it followed proper procedures. A spokeswoman at Deloitte declined to comment on the process.

As a non-profit, Service Design is not required to release detailed earnings information. When it tendered for the contract it had not filed the required public records of its assets and liabilities for three years, Japanese media reported. It posted them on its website after the reports, and told Reuters it had not done so before because of an internal communication error.

The non-profit passed most of the contract to Dentsu, which in turn handed down the work. The largest portion of the subsequent contract went to Dentsu Live, an event production company that is wholly owned by Dentsu, according to the ministry. Dentsu Live further outsourced the work, Service Design said.

Japanese ministries are free to award contracts to bidders who intend to subcontract some of the work, but subcontracting more than 50% of a taxpayer-funded project is not normally advisable, governance experts say, citing standards issued by the finance ministry in 2006 to ensure transparency in public projects.

METI officials have told Reuters that even though Service Design subcontracted a large portion of the awarded funds, it still managed the "core" of the project.

Last month, after politicians asked the ministry to explain why Service Design was allowed to outsource so much of its work, it provided heavily redacted bidding documents, which some lawmakers said obfuscated crucial information. The ministry said it could not disclose further details due to competitive concerns.

Dentsu told journalists in June it didn't become the primary contractor for the aid project because it believed Service Design had the necessary track record, and felt recipients of the payouts may be confused if they saw Dentsu was involved in the payments.

Added to this, Dentsu told Reuters in July it had decided not to lead the work itself after its accounting department advised that doing so would "impact the balance sheet and possibly hinder normal operations." It did not elaborate.

The ministry has set up a third-party panel to review how it awards public contracts and make recommendations on increasing transparency, it said.

By the time hotel owner Yoshiteru Yonezawa's 2 million yen stimulus arrived, he had decided to sell out. Going bust would make it hard for him to run another hotel, he said.

He used the cash to pay severance to around 90 employees of the hotel that his family has run for nearly seven decades in Hokkaido, a region popular for winter sports.

"What small business owners really want is for any kind of support program to start as soon as possible," said Yonezawa in a tired voice.

The government has said it expects hundreds of thousands more firms to apply for its next round of relief funds.

It would be too late for Fumiaki Ichiyama. He ran Yonosuke, an old-school bar in Tokyo, for more than 40 years. Decorated with red lanterns and the day's specials written by hand on paper on the walls, the bar was popular with media types.

Before the pandemic, it brought in 500,000 yen a day in sales, he said. In early April that slumped to 50,000 yen. He could not afford the rent; the bar manager had had enough.

A few weeks after the bar closed, workers demolished the building. All that remains is a mound of rubble.

© Thomson Reuters 2020.

©2020 GPlusMedia Inc.

47 Comments
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They wanted promotion, they got it! Why angry?

-17 ( +0 / -17 )

"What is strange is the government is protecting Dentsu from scrutiny about lack of information and accountability," Tajima said.

Not strange just the LDP gifting tax payer money to a company that then complicates the process for tax payers to claim same money. Gray? Gay doesn't even cover how vile and corrupt both the LDP and this disgusting company are if you got either on the bottom of your shoes you would burn your shoes.

26 ( +27 / -1 )

It boggles the mind how nothing changes. After they bullied that girl to death there were plenty of calls for Dentsu to be barred from government contracts. Air was sucked through teeth, heads were bowed, and then they quickly got back to normal. And now this. If the government wanted to send a message they would ban Dentsu and affiliated companies for a few years from bidding on contracts. The fact that they don't indicates where their loyalties lie. Pork barrel politics at its finest.

31 ( +31 / -0 )

If this were another country, I'd say Abe is in trouble. But, it is not, so Abe will deny any knowledge of it, Dentsu will say it is the fault of sub-contractors, whom they will admit they need to be tougher on and from now on will be completely transparent, and there'll be a shoulder shrug, a Shouganai, and that's it.

30 ( +31 / -1 )

Everything related to Dentsu stinks. In fact, everything connected to Abe stinks to high heaven. But, anycase, not my country. If the Japanese don't care, why should I?

28 ( +30 / -2 )

The economy ministry said that as of July 20, it had received 2.9 million applications from small businesses and distributed funds to 2.67 million; Service Design said that for the most part, funds are being paid out roughly two weeks after an application is received.

I don't like Dentsu or middlemen in general, but 90% of applicants getting paid already and about two weeks after applying is better than the way the 100,000 yen per citizen has been handled by local governments. I applied for this myself and got it within ten days of applying. The 100,000 per family member took over a month to get the form and then a further month to be approved, and that was with no income documents or the like to check.

I don't know what commissions were taken and I don't like the lack of transparency, but its good that the job of making the payments is being done.

1 ( +2 / -1 )

@Pukey2

But, anycase, not my country. If the Japanese don't care, why should I?

Indeed. Since this ban on re-entry for non-JP visa holders and PRs, my whole outlook on this country has changed. I once cared about this country, but now I know in no uncertain terms that I'm absolutely not welcome here and so I couldn't care less.

22 ( +22 / -0 )

Rancid.

15 ( +15 / -0 )

How do you say, "Tip of the iceberg" in Japanese?

7 ( +7 / -0 )

Dirty, dirty people. And the public keep turning a blind eye

17 ( +17 / -0 )

Why is everyone surprised by this?

4 ( +8 / -4 )

Incredibly I got my coronavirus stimulus check from the US sent to me in Japan without doing anything (they just refer to your last tax filing) in May and sent it to my bank in the US and the money was available mid-May. On the other hand, in Japan where I live and pay taxes in Setagaya-ku, I only got the application for coronavirus stimulus money for me and my family in July and applied and it still hasn't been paid. I really feel sorry for the average Japanese. They get so screwed by their own government and don't realize it. The US is going to send a second round of checks soon and I may get that money as well before anything from the Japanese government.

19 ( +19 / -0 )

This could be one of worst examples of multi-layer subcontracting.

Who is responsible for monitoring governance authority, where the buck stops, essentially the role of the prime contractor , i.e the higher-tier subcontractor, especially in managing its subcontracts? A contract to distribute the 2 trillion yen???

Service Design is a private, not-for-profit group which does not disclose ownership details and has a staff of 22. Dentsu founded it with Pasona Group Inc, a temporary staffing agency, and Transcosmos Inc, an IT services firm; three of its nine directors and several of its employees are from Dentsu group companies.    

22 Staff would have neither the time nor inclination to be fully aware of legal requirements or any systems technology to fully absorbing time frame uncertainties. lacking availability of resources or a comprehensive proficiency or expertise to manage competently the operational conditions.

It truly remarkable that in the midst of a pandemic, and the importance that distribution of essential government aid could have been handled in such an inferior and shoddy manner.

The ministry declined to disclose the full list of companies involved because of a clause in Japan's disclosure law. If revealing information about a company could harm the firm's competitive position, it said, it is not obliged to disclose it.

Little or no transparency, to audit and manage J country's economic and social resources.

It flipping outrageous

14 ( +14 / -0 )

Legal money laundering? In Japan?

11 ( +11 / -0 )

Dentsu did facilitate the 2020 Games for Japan - which must have cost a lot - 4-5 years of work in and out of Japan, and 2-3 floors of staff dedicated to it. And with the postponement they've potentially lost income.

Nice to have friends in high places.

10 ( +11 / -1 )

but actually took less than 1% of the total 80 billion yen for managing the project

80 million yen ain't bad for doing basically nothing.

6 ( +8 / -2 )

Sorry, 800 million.

5 ( +7 / -2 )

Cronies gonna crony.

10 ( +10 / -0 )

If this were another country, I'd say Abe is in trouble. But, it is not, so Abe will deny any knowledge of it, Dentsu will say it is the fault of sub-contractors, whom they will admit they need to be tougher on and from now on will be completely transparent, and there'll be a shoulder shrug, a Shouganai, and that's it.

Perfectly summarized!

8 ( +8 / -0 )

How is Abe still the PM?

5 ( +6 / -1 )

@moonbloom now that is proper reporting, you're never getting a press pass with such reaseach or truth. Good job.

1 ( +1 / -0 )

If the government wanted to send a message they would ban Dentsu and affiliated companies for a few years from bidding on contracts. The fact that they don't indicates where their loyalties lie. Pork barrel politics at its finest.

The government can’t really ban itself. This would be the state enterprise in a Socialist systems. In a Democratic capitalist system, you can’t be so blatant and have to play around a bit and hide it.

2 ( +2 / -0 )

@Cricky

Thnx.

I tried to alert my uni students about it in (a class that had as its main objective doing in-depth research to better understand domestic/world events), and was told by ex-pat admin (UK & US) that it was not acceptable.

lol.

Glad I've moved on from there.

0 ( +0 / -0 )

The ministry "declined to disclose the full list of companies involved"

Officials have disclosed only "the names of only 14 of [the 63 companies involved]"

Service Design "does not disclose ownership details"

....Dentsu: "the contracting structure was not opaque"

3 ( +3 / -0 )

How do you say, "Tip of the iceberg" in Japanese?

氷山の一角 (Hyouzan no ikkaku)

7 ( +7 / -0 )

Japanese bureaucrats are above the law, with a carte blanche to do as they like.

6 ( +6 / -0 )

The whole thing is extremely.....corrupt!

4 ( +4 / -0 )

Why is everybody anti Abe? At least Suga cares about our dear leader.

-3 ( +2 / -5 )

Talking about Dear Leader, has anyone seen him lately? Seems to be hiding.

2 ( +3 / -1 )

I have been saying for year that Japan is very highly institutionally corrupt & this is an example of MANY MANY cases, it is one of the reasons Japan's debt is so high.

Basically the LDP make corruption LEGAL!! And yeah sadly most Japanese dont care, so its on them

9 ( +9 / -0 )

Densu no Densetsu. And boy, what a stinky legend it is.

3 ( +3 / -0 )

The "Cool Japan" initiative was by and large an expensive failure because not only was it conceived by UN-cool high-level bureaucrats, it was executed by stodgy Dentsu, who financially did very well with the public funds.

4 ( +4 / -0 )

But, anycase, not my country. If the Japanese don't care, why should I?

You should care, because they parlay the benefits they derive from it into leverage over countries like yours and mine. Leverage that they’re loathe to admit exists, even as they’re up to their necks facilitating its acquisition.

3 ( +3 / -0 )

Not good.

1 ( +1 / -0 )

Dentsu has received so much corporate socialist welfare that it would not be socialist at all to nationalize them and use their assets to help those in need for crisis relief.

3 ( +3 / -0 )

@Oyatoi

Good point.

Unfortunately, it is not possible to convey the level of ire that I feel ( in this forum) for these thieves...

3 ( +3 / -0 )

Why blame Abe? You think he doesn't want it to work? Anyone with a brain knows that the whole country is watching this money. Unlike most other countries, Japan is very strict when it come to transparency of where money end up. Abe needed this to work to gain public support and he need it to save the companies in Japan to revive the economy. He isn't stupid. Problem is that everyone involved was to blame. Is not about corruption but more about incompetence. The project was too huge and no one was able to carry it out of it's own so they wanted to divide the work. But something like this never happen before in Japan so they are inexperience. I would blame everyone for their lack of cooperation and speed. I don't get why every time something goes wrong, people had to blame one person when the thing is not even in his hands. Ignorance and lack of understanding how the structure works is the problem. Do you think Abe want his support rating to keep falling and he is doing it intentional? Of course not. The man isn't god. He can't handle nor has the power every details of how the government works.

And don't praise US so much when you don't even know how bad currently it is there. Unemployment there is through the roof and social unrest is at it's highest peak. Their economy is 10times more in troubles than ours after all this is over. You have no idea how bad it is there and how many are dying everyday.

-7 ( +2 / -9 )

There are no allegations of illegality in the process.

so what is the issue?

-8 ( +0 / -8 )

Hiro

Unlike most other countries, Japan is very strict when it come to transparency of where money end up. 

Lord forgive him for he knows not what he is saying.

What a joke, looks like you are taking us for fools.

7 ( +8 / -1 )

@hiro - simply pathetic

5 ( +6 / -1 )

@Hiro

Japan is the only country in the world to have sampled a comet.

Are you really telling us that it is incompetence and not foul play that is the problem?

4 ( +4 / -0 )

The ministry has said that there were five tiers of subcontractors and at least 63 companies involved. 

That's called money laundering.

7 ( +7 / -0 )

I have seen a lot of subcontracting just to get the money. It is called missappropriation of funds from the firdt tier contractor who is made of of buddies from Dentsu. Sure those buddies are well paid. Names ?

5 ( +5 / -0 )

There is a clear absence of independent oversight, or any governance framework.

If any Government agency assigned the responsibility to award contracts to distribute more than 2 trillion yen to aid businesses affected by this pandemic, then from day one accountability and transparency in the decision-making process in awarding the right contract to the best contractor in paramount.

A clear path indicating which decision makers are answerable/accountable to the shareholders/taxpayers.

Another area is disclosure. In this case the lack of.

Budget transparency ……best practice…..

https://www.oecd.org/gov/budgeting/best-practices-budget-transparency.htm

Sorry, no regulatory policy was implemented,  not just incompetent, it is unethical.

1 ( +1 / -0 )

At last, the Japanese PEOPLE are waking up.

1 ( +1 / -0 )

There demands to be an effective opposition to this ruling Government, to maintain and uphold checks and balances.

The ministry has set up a third-party panel to review how it awards public contracts and make recommendations on increasing transparency, it said.

After awarding contracts to distribute more than 2 trillion yen.

No more panels.

A judge led full independent public inquiry, that can have Ministry officials, bureaucrats, every party, vested interest involved in this sorry saga testify under oath. Nothing less will suffice.     

1 ( +1 / -0 )

Sadly Hiro is like too many Japanese, they just blindly follow what their govt does to THEM & ACCEPT it as shoganai........like others I have long since stopped caring, if Japanese do not care & most sadly DONT, then why should i.

2 ( +2 / -0 )

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