The Profiteers

by Sally Denton

  As the company prepared to move into the next century, Riley determined to reinvent its mission yet again. At the millennium, he reversed his earlier credo that under his watch the company would never be a conglomerate and that “the engineering and construction business will always be our primary purpose.” His new vision entailed a broad span of diversification to rival that of any other conglomerate in the world, evolving from engineering and construction into mobile telecommunications, water delivery, disaster relief, urban planning, nuclear waste, management of government facilities, homeland security, nuclear submarines, aircraft carriers, counterterrorism technology, environmental remediation, data collection, aerospace, megaproject financing, telecom start-ups, e-commerce, and more. This global power grab was of massive proportions unlike anything seen in world history. Characteristically, Bechtel put a benevolent spin on the unprecedented grasp, even giving it the altruistic-sounding motto of “Global Reach with a Local Touch.”

  Bechtel Enterprises, the newest iteration of Bechtel Financing Services and Bechtel Enterprises Holdings, Inc., would be Riley’s rocket into the twenty-first century. BEn, as it was called at corporate headquarters, created a number of joint ventures, which gave it a competitive edge in the industry and produced lucrative investment opportunities for Bechtel and its partners. The prototype for these “world-class ownership teams,” as the company described them, was in the power sector, where BEn partnered with California’s Pacific Gas and Electric Company (PG&E), forming the largest privatized electric power plant in the country. Passage of the US Energy Policy Act of 1992—thanks in no small part to the vigorous Bechtel lobbying—had made it possible to build and finance independent power plants. “USGen took off,” the company reported, referring to the BEn and PG&E joint venture, US Generating Company, spawning InterGen, another Bechtel partnership with PG&E to develop, own, and operate electrical generating facilities outside North America, where many nations were privatizing and deregulating utilities. As power privatization expanded globally, Bechtel extended its utility partnerships into the United Kingdom, the Philippines, Mexico, and Colombia.

  In short order, InterGen had contracted to build twenty plants, at a cost of $10 billion and strewn across the planet, with the capacity to power sixteen million homes. Banks “were eager for a piece of the brave new deregulating power business,” as Business 2.0 described the boom of privatized energy, “and were happy to lend the company 100 percent of the funds.” Stunningly, many lenders agreed to bankroll the risky ventures without even examining Bechtel’s “zealously guarded financial data,” agreeing to use the unbuilt plants themselves as collateral. The few bankers who insisted on access to Bechtel’s internal financial documents were subjected to strict confidences, allowed only to view the records in a secure room at corporate headquarters, chaperoned by a Bechtel employee. The banker was not allowed to bring any items into the room—not even a purse or a briefcase—and was prohibited from taking notes or making photocopies. Bechtel “does not release the details of its financings, investments, financial statements, or share price,” a company spokesman responded to a media inquiry about its extreme secrecy. Bechtel executives attributed its success with the lenders to what was referred to internally as the company mystique. “The family reputation is very strong,” said a former insider. “Some banks understand that, and some don’t. We worked with the ones that did.”

  From the beginning, Riley’s brainchild, BEn, set itself apart from the more staid Bechtel Group of his father’s generation. “Staffed by MBA hotshots rather than engineers, it occupied offices in a separate building,” according to one published account. “With its black marble floors and sweeping view of San Francisco Bay . . . it seemed worlds removed from the no-frills cubicle farms inhabited by Bechtel engineers at headquarters.” Almost immediately, BEn became a leading influence on the company, with longtime executive Cordell Hull (a distant relative of FDR’s secretary of state) luring outside backers to “invest in privatization projects wherever Bechtel can find them—or stir them up,” according to one account.

  By the year 2000, the forty-eight-year-old Riley’s radical transformation of the family company from an engineering and construction giant into a conglomerate “renowned for its financial designs,” as Forbes described it, was making senior managers and hundreds of employees nervous. The close-knit “family” of high-level engineers and executives viewed Riley’s diversification frenzy with alarm, as their personal financial worth was tied up in the company’s stock. While BEn had a $16 billion portfolio of electric and industrial plants, its affiliate, the Fremont Group, was “a money manager with $10 billion under its wing,” according to Forbes—“a lot of it Bechtel family money but also a fair amount from the public.” In keeping with Steve Sr.’s “no widows or orphans” motto, only those active in the business could own stock, and upon death or retirement, the stock was required to be sold back to the corporation or fellow stockholders.

  A $10 million investment in the Fremont Group from Saudi Arabia’s bin Laden family would soon become an embarrassment for the firm when Jane Mayer of the New Yorker reported it. Rick Kopf, the general counsel of the Fremont Group, declined to discuss the origin or nature of the relationship between the bin Laden and Bechtel families, both of which made fortunes in huge construction projects in the Arab world. “Ownership is private and is not disclosed,” Kopf told the New Yorker, while also confirming that Fremont’s majority ownership was held by the Bechtel family. Meanwhile, yet another subsidiary, Fremont Properties, owned more than four million square feet of commercial real estate; and Sequoia Ventures, which had divested itself of Dillon, Read & Company (acquired under George Shultz’s leadership), had also branched away from the careful, conservative reign of Steve Jr.

  “It’s a long way in a short time for [Riley] Bechtel, who took over from his father . . . shortly before Saddam Hussein raided Kuwait,” Forbes reported. Pushing far beyond his father’s more conventional moves and into the ownership of industrial plants, Riley was putting capital at great risk. Bechtel’s InterGen had become the second-largest nonutility developer of electric powerhouses, behind only Taiwan’s Formosa Group.

  “Enough of this waiting around. Let’s go kill something.” One account drew the analogy between BEn and the famous cartoon depicting two vultures talking to each other. Riley and his tiny, elite clique of trusted advisors dismissed the internal naysayers, boasting of their accomplishments. “It’s been so successful, our biggest challenge is finding enough capital to do all the projects on our plate,” the group’s president and Riley’s closest, most trusted confidant, Vincent Paul Unruh, told an interviewer. An accountant and longtime personal friend of the CEO, Unruh ran BEn.

  A proposed deal to extend Portland, Oregon’s, light-rail system from the city to the airport offered a glimpse into how the twenty-first-century Bechtel projects—as designed and executed by Riley and Unruh—were structured. Bechtel would contribute $30 million toward the $125 million public project and, in exchange for its investment, would obtain the construction contract. In addition, the city would give Bechtel an eighty-five-year lease on an adjoining 120-acre commercial site, where it would build infrastructure support for the rail—with government financing.

  “If you’re really in the game, you’ve got to understand what’s happening in governments and markets and see a deal before they put it out to bid,” an immodest Riley told an interviewer. “If the first time I hear about a big project is when the proposal is on the Street, then I don’t have a good win plan.”

  The ambitious, bespectacled Unruh was as insatiable as his boss. While the power plant projects were taking off, he and Riley were simultaneously seeking ventures in yet more new directions. In what would later be described as Bechtel’s “dot-com-era folly,” they ramped up investments in telecom and Internet start-ups that were all the rage in nearby Silicon Valley. Unruh poured more than $60 million into a dozen dotcoms, and another $140 million into telecoms. Neither
Riley nor Unruh saw the coming collapse of the dot-com bubble, and in early 2000 the two men were still swaggering about their prescience. At a corporate retreat that year, Unruh appeared as chief booster for BEn, proclaiming to employees that it was his and Riley’s strategic investment apparatus, not the outdated engineering and construction paradigm of the old Bechtel, that was the future direction of the company. “He was seen as the Einstein of the place,” as Business 2.0 reported the enthusiastic ovation he received from the audience. All that would soon crash.

  Within months, “Einstein” was on the verge of defeat, as his dot-coms started tumbling like dominos. “Red flags were popping up everywhere,” according to one account, and several executives sensed that BEn was headed for disaster. “Telecoms and dot-coms were blowing up left and right.” But that didn’t stop Riley from promoting Unruh to vice chairman of the company. The two men continued to assure their managers and partners that all was sound. “Someone wasn’t telling the partners and the board the whole story,” according to a company engineer and high-ranking partner who resigned in disgust at not only the downward spiral but also the blatant dissembling.

  At the same time, Bechtel was mired in a hotbed of criticism for its $1.6 billion cost overruns on the Big Dig in Boston. But even that was overshadowed by the volatile anti-Bechtel revolution in South America that was turning violent and spawning international scorn for the company. “As vexing as the Big Dig’s issues have been, the stakes for Bechtel have been even higher elsewhere,” reported the Boston Globe, as the company became one of the most controversial and reviled water-privatization companies in the world. The World Bank had threatened to withhold debt relief from Bolivia unless the government sold the public water system to the private sector and passed on the costs to consumers in that country’s third-largest city of Cochabamba. A Bechtel-led coalition, as the only bidder in the process, was granted a forty-year lease through a subsidiary called International Water (Aguas del Tunari) formed for that single purpose. Within weeks, the company had raised water prices by 300 percent for some of the city’s poorest inhabitants. Families who lived on less than $60 per month were suddenly being charged $15 a month for tap water. Impoverished residents took to the streets, rioting in protest against Bechtel.

  The residents of Cochabamba staged a strike that paralyzed the city. The Bolivian government called out soldiers to quell the unrest, but the anti-Bechtel revolt only intensified. When a seventeen-year-old boy was shot in the face and killed, and more than a hundred others were wounded in the melee, Bechtel executives first hid in a five-star hotel in the Bolivian Andes and then “fled the nation,” as the Boston Globe reported it, “leaving investments worth at least $25 million.” Bechtel pursued the Bolivian government, filing a legal demand for its losses in a “World Bank–controlled private arbitration.” While a Bechtel spokesman said the company intended to recover its “expropriated assets,” critics charged that Bechtel’s investment was nowhere near $25 million and that the company was seeking remuneration for anticipated profits that were thwarted. “The fact that a World Bank court is preparing to hear this case behind closed doors, without any public scrutiny or participation, is a clear example of how global economic rules are being rigged to benefit large corporations at the expense of everyone else,” said a leader of one of three hundred citizen groups that petitioned the secret trade court to make the documents and testimony in the case available for public inspection.

  “For Bechtel Enterprises . . . $25 million is about what the company takes in before lunch on an average workday,” wrote the executive director of a corporate watchdog organization. “For the people of Bolivia, $25 million is what it costs to hire 3,000 rural doctors or 12,000 schoolteachers for a year, or to hook up 125,000 families to public water supplies.”

  International citizens advocacy groups rallied around what they saw as the opening salvo of the coming “water wars,” focusing on Bechtel as the embodiment of exploitation of debt-ridden countries that were privatizing their water systems. With the onset of the water privatization bonanza, Bechtel moved quickly, becoming one of the top ten water-privatization companies in the world. Within a few short years, it was involved in more than two hundred water and wastewater treatment plants that provided facilities to more than thirty million people throughout the world. Its twenty-five-year lease agreements in the Philippines were the largest in the world, but that “marriage between the major global corporations and the elite families of the Filipino oligarchy has not brought clean water to the millions of needy families in Manila,” as one account described the Metropolitan Waterworks and Sewerage System.

  “In Bolivia, Bechtel demonstrated that it has no moral compass whatsoever other than seeking profit off the poorest people in the world,” an activist told the Boston newspaper. For its part, Bechtel blamed the Bolivian government. Spokesman Jeff Berger said it was the government that “controls water rates, structured the deal with Bechtel, and fired the shots into the crowd.”

  The company sought to deflect the criticism aimed at Riley, who, while maintaining the famous Bechtel secrecy, had become a lightning rod. As the patriarch of the dynasty and the billionaire heir to the family fortune, detractors were portraying him as the poster child for global economic injustice. At a moment when corporate greed and revolving-door cronyism were greeted with suspicion and contempt, Riley flaunted his membership in the exclusive Bohemian Club and boasted of his affiliation with the ubercapitalist Trilateral Commission. He boosted the company’s lobbying presence in Washington, along with a ramped-up public relations department at the corporate headquarters in San Francisco. But extensive, irreversible damage had been done to Bechtel’s image.

  CHAPTER TWENTY-NINE

  A License to Make Money

  The global wave of privatization rose throughout the 1990s, peaking in 1997 with privatization-derived revenues hitting a record $160 billion. The wave was also turning toward Asia, where a financial crisis was deepening. The “economic equivalent of extreme makeovers,” as one account put it, was occurring in Thailand, Indonesia, South Korea, and the Philippines. Called “the world’s biggest going-out-of-business sale” by the New York Times, multinational firms replaced Asian companies in record numbers, and, characteristically, Bechtel was among the first in line. By the year 2000, Bechtel had scored the contracts to privatize the water and sewage systems in eastern Manila and to build an oil refinery in Sulawesi, Indonesia.

  In keeping with the family tradition, in 2001 Riley lured a heavy-hitting government official to join the BEn team. Nicholas F. Brady, a former US senator from New Jersey, a former US Treasury secretary under Presidents Reagan and George H. W. Bush, and a former chairman of Dillon, Read, entered into a joint venture with BEn to invest in the Latin American technology markets in Brazil, Mexico, and Argentina. But even that high-level connection couldn’t stanch the bleeding at InterGen, where ambitious plans for an initial public offering had vaporized with a plummeting stock market, and where an estimated $700 million in debt for the numerous power plants it was building would come due the moment the plants were fired up. That debt load far exceeded the company’s net worth of only $350 million, and some of the power plants were “worth a fraction of what they cost to build,” according to one account. “In late 2001, the glutted power market collapsed with breathtaking speed, stranding producers that lacked customers,” wrote Bay Area business reporters Ralph King and Charlie McCoy. Electricity rates tanked at the same moment that the relaxation of environmental laws under the newly inaugurated Republican president George W. Bush “gave coal-fired plants new life.” Several of the plants were also behind schedule, which staved off some loan repayments. Even some lenders were sympathetic about Bechtel’s downward spiral. “We knew Bechtel was going to feel significant pain if it ever had to fund all those loans,” one of the bankers told an interviewer.

  When the US energy conglomerate Enron filed for bankruptcy in December 2001 amid criminal charges in a financial sc
andal of unrivaled magnitude, Bechtel took yet another hit. The company had partnered with Enron to build the Dabhol power plant in India—financed by US government loan guarantees through Ex-Im Bank and OPIC after the World Bank refused to fund it—which was the largest single foreign investment in that country and the largest private power project in the world. The controversial plant had been the scene of numerous public demonstrations in which protestors charged the company with severe human rights violations.

  All of that came on the heels of the dot-com crash, which resulted in Bechtel writing off $200 million in bad investments, wiping out a third of the company’s net worth. “One of the most tightly controlled and conservatively managed companies in the world, Bechtel fell head over heels for the same new-economy sirens that created Enron and the dot-com debacle,” wrote King and McCoy. Still, Riley seemed oblivious to the disastrous turn of events and continued the full support of his protégé Unruh. But by late 2002, Riley could no longer disguise or hide the precariousness of the situation, and in November the company cut the value of its stock by a quarter—setting off alarms among some fifty management partners who owned 60 percent of the company’s shares. While Riley controlled the company on behalf of his extended family, which owned the remaining 40 percent, his decisions were scrutinized and criticized by family members and employees as well. Several senior managers, along with at least one veteran partner, suggested that Riley resign as CEO but remain as chairman of the board. Riley stayed on, but his vice chairman, Unruh, resigned after holding his position for less than a year.

  Because of the obsessive secrecy of the firm, combined with the complicated ownership structure and arbitrary stock value, the gamut of the financial debacle could only be presumed. “If this were a public company, I probably would’ve been fired,” Riley told his partners. The company’s top engineers were outraged at Riley’s massive blunder, the full details of which were revealed in an audit by a new chief financial officer brought in by the board to look at BEn. “No one on the engineering side would have ever let that stuff get that out of whack—never,” a top engineer and high-ranking partner said after resigning in disgust. “In fact, there was a fear by all of us that we didn’t want to be an Enron. We kept saying, ‘Get out! Get out!’ ”