OCTOBER 1989 - VOLUME 10 - NUMBER 10
C O R P O R A T E P R O F I L E
Incompetence, Wheeling & Dealing:
The Real Bechtelby Jim Riccio
The San Francisco-based Bechtel Group is one of the largest engineering and construction firms in the world. Its executives have been confidants to queens and presidents; its political clout stretches from the Persian Gulf to Pennsylvania Avenue. Bechtel has built, either alone or in concert with other firms, the Hoover Dam, the San Francisco Bay Bridge, the Alaskan pipeline and the mass transit systems for Washington D.C. and San Francisco.
Bechtel is the largest design company, the second largest construction contractor and the largest construction management firm in the United States, according to Engineering News Record, an industry trade publication. About two-thirds of its design and the bulk of its construction work are in energy-related fields.
The company has been a purveyor of nuclear power since the birth of the commercial nuclear power industry in the late 1950s. In the United States alone, Bechtel has had a hand in the design and/or construction of 45 nuclear power plants currently licensed by the Nuclear Regulatory Commission (NRC) in 22 states.
Yet Bechtel is hardly a household name. It is not among the companies listed in the Fortune 500; nor is its stock offered on the New York, London or Tokyo exchanges. Bechtel is a closely held, private corporation. All its shareholders are high-ranking Bechtel executives. Upon death or separation from the company, the departing executives or their heirs must sell their shares back to Bechtel at a price determined by the majority shareholders. Stephen D. Bechtel, Jr., the corporation's CEO, was once reported to say, "There's no reason for the public to hear of us, we're not selling anything to the public."
Bechtel's penchant for secrecy has not, however, prevented the company from playing a highly visible role in the massive post- World War II construction, both nationally and internationally.
Warren A. Bechtel founded the W.A. Bechtel Company in 1906. The company's first jobs were building the railroads that would help open the West to trade and settlers from the East. With the advent of the automobile, Bechtel went from building railroads to building roadways. In 1919 Bechtel was awarded the first federal public road contract in California. In 1921, Bechtel teamed up with Henry J. Kaiser to build many of the major roads throughout California. In his national best seller, Friends in High Places, Laton McCartney writes that Bechtel helped "change the face of the American West forever."
Automobiles created a need for more than just roads; they also required oil. Bechtel and Kaiser quickly turned their attention to satisfying the construction needs of the budding oil industry. They constructed major pipelines for Standard Oil of California and for Continental Gas. "The lines, which were electrically welded in the field with a process invented by a Bechtel engineer, were set down so quickly and efficiently that the rest of the oil industry soon took notice," McCartney writes.
When Warren Bechtel formally incorporated his company in 1926, each of his three sons received a 5 percent share. Following Warren's death in 1933, however, Stephen D. Bechtel, the middle son, assumed control of the company and soon went on to build Bechtel into the engineering and construction giant that it is today. While his father had built Bechtel's reputation on competence, Stephen also relied on political connections to advance Bechtel's fortune.
The construction company's operations first received public attention largely as a result of the work of investigative reporter Mark Dowie. In articles for Mother Jones in 1978 and later in conjunction with Multinational Monitor in 1984, Dowie and his associates revealed Bechtel's extensive connections to officials within the U.S. government. A list of Bechtel alumni and associates reads like an historical Who's Who of Washington: John McCone (Atomic Energy Commission (AEC) & Central Intelligence Agency (CIA)), W. Kenneth Davis (AEC & Department of Energy), George Schultz (Secretary of State), Caspar Weinberger (Secretary of Defense), Richard Helms (CIA), William Casey (CIA) and Phillip Habib (Middle East Envoy).
Perhaps most significant for Bechtel's growth was Stephen's friendship with McCone. This relationship flourished with the onset of World War II during which the two partners built ships for the Pacific theater. The war was a profitable venture for Bechtel and McCone; together they grossed more than $100 million on a net investment of $400,000. These numbers were big enough to attract the attention of Congressional investigators holding hearings on war profiteering. The hearings, however, resulted in nothing more than negative headlines for the two partners.
McCone went on to head the AEC under President Eisenhower and later become CIA director in both the Kennedy and Johnson administrations. During the hearings to confirm McCone for his AEC position, Ralph Casey of the General Accounting Office (GAO) criticized McCone and other wartime manufacturers for making excessive profits during the war. Casey pointed out that "at no time in the history of American business, whether in wartime or in peacetime, have so many men made so much money with so little risk, and all at the expense of the taxpayers, not only of this generation but of generations to come." McCone's appointment was approved despite this condemnation.
After the war Bechtel turned its attention to private sector contracts, both at home and abroad. The government connections Bechtel had forged during the war proved to be one of the company's greatest assets. Soon after McCone was appointed chair of the AEC, Bechtel hired W. Kenneth Davis, the head of nuclear reactor development at the AEC. In 1959, Bechtel built the first commercial nuclear reactor. The company went on to receive about 40 percent of the nuclear power plant construction contracts in the United States.
McCone's assumption of the CIA directorship in 1961 opened lines of communication between Bechtel and the highest levels of government. The company was not a newcomer to the intelligence community, however, having worked in the Middle East with the ClA's predecessor, the Office of Strategic Services (OSS). In 1943, Standard Oil of California commissioned Bechtel to build a pipeline in Saudi Arabia, thereby introducing the company into a region which would play an integral part in Bechtel's vast growth. Bechtel formed International Bechtel Inc. (IBI) exclusively for work in the Middle East. By the end of the war, IBI was helping the OSS keep track of events throughout the Arab world, according to McCartney.
The Bechtel engineer continued, "there is substantial risk that these calculations, when not accompanied by the assumptions, judgments and trade-offs associated with them during the design process, could easily mislead one to a wrong conclusion." PGE promptly ended its inquiry.
While the experience at Trojan is a well-distilled example of Bechtel incompetence and duplicity, it is by no means unique. Bechtel has botched nuclear power plant construction projects across the country. Bechtel-built boondoggles include: the Pilgrim plant in Massachusetts; Susquehanna in Pennsylvania; Midland and Palisades in Michigan; Davis-Besse in Ohio; and San Onofre and Rancho Seco in California. All of these facilities, if they operated at all, have experienced long delays or outages due to Bechtel's incompetence.
Although Bechtel did not build the ill-fated Three Mile Island (TMI) nuclear power plant, as co-manager of the cleanup operation at TMI it did help make a bad situation worse. The NRC's Office of Investigations found that Bechtel schemed to avoid making the necessary repairs and that the company "improperly classified" modifications to the plant as "not important to safety" in order to avoid safety controls. When workers such as Senior Safety Start-up Engineer Richard Parks complained that Bechtel and TMI's owner were deliberately circumventing safety procedures, they were harassed and intimidated. In 1985, the NRC fined the two companies for this abuse.
Bechtel also disregarded the health and safety of the cleanup crew at TMI. A 1985 series in the Philadelphia Inquirer revealed the details of the neglect: workers were sent into radioactive sections of the plant without adequate protective clothing or respirators; workers were routinely given clothing that was already contaminated; and equipment intended to detect radiation hazards often malfunctioned. Contamination incidents have been routine since the accident, averaging two a week.
In a rare interview with Forbes magazine, Stephen D. Bechtel, Jr. acknowledged that Bechtel's nuclear mishaps have hurt the company but denied that they endangered the public. He said that the hefty fines imposed on it for violations of safety regulations are not an accurate measure of the company's safety record. "There have been some very major exposures--lawsuits in which the damage is assessed on the ability to pay rather than on realized damage," he said.
With the virtual collapse of the domestic nuclear construction market in the United States--no new nuclear plants have been commissioned since 1978--Bechtel focused the marketing of its nuclear services overseas. The 1984 Mother Jones/Multinational Monitor articles recount how Bechtel used Korean operatives to bribe Korean Electric Company (KECO) officials. In return Bechtel received lucrative contracts to build nuclear power plants in Korea.
In the early 1970s, with Richard Nixon in the White House and Henry Kearns heading the Export-Import Bank, Bechtel was in a position to exploit its government ties to increase its foreign business. Kearns and Stephen Bechtel, Sr. maintained a close relationship, and Kearns appointed Bechtel to the advisory board of the Ex-Im Bank.
With Stephen Sr. on the advisory board, the Ex-Im Bank provided generous loans to many countries which then used these loans to help finance Bechtel-related projects. Between 1970 and 1973, according to Laton McCartney, the Ex-Im Bank made the following loans for projects involving Bechtel: $160 million for oil refineries and pipelines in Indonesia, $13.5 million for a nickel production facility in the Philippines, $107 million for a nuclear plant in Brazil, $100 million for a pipeline in Egypt, $145 million for fertilizer plants and $294 million for liquid- natural gas facilities in Algeria.
After Stephen Sr.'s term on the advisory board ran out, Wisconsin Congressman Les Aspin charged Bechtel with having been guilty of numerous conflicts of interest. "Obviously, Bechtel's firm benefited while [Stephen Bechtel Sr.] was on the committee and since he left," Aspin told The Washington Post. The Algerian liquid natural gas project "never would have gone forward without" the Ex-Im Bank loan, Aspin claimed. He asserted that the loan was the product of "an apparent conflict of interest."
In the mid-1970s, Bechtel again came under attack for activities related to its foreign business endeavors, this time for allegedly adhering to the Arab boycott of Israel. Traditionally the Arab nations "blacklisted" companies which did business with Israel, refusing to do business with them. The boycott was extended in the mid-1970s to prohibit companies doing business with Arab countries from hiring or subcontracting to blacklisted companies. Compliance with the intensified boycott restrained interstate commerce and therefore violated U.S. anti-trust laws.
While Bechtel denied adhering to the extended embargo, Jess Hordes of the B'nai Brith Anti-Defamation League says, "it was clear Bechtel complied with the Arab boycott of Israel at both the secondary and tertiary levels." He cites as proof the actions taken by the Justice Department, which sued Bechtel for violating the Sherman Anti-Trust Act. In 1977, without admitting guilt, Bechtel entered into a consent decree with the Justice Department, promising not to adhere to the boycott.
Although Bechtel refused to do legitimate business with Israel, some argue the company was not opposed to trying to bribe Israelis, including former Prime Minister Shimon Peres and his Labor Party. In mid-1984 Bechtel was tentatively scheduled to begin construction of a $1 billion pipeline from Iraq to Jordan that fall. The plan suffered a setback when Iraqi President Saddam Hussein indicated that he wanted some form of substantive assurance that the pipeline, which was to run near Israeli territory, would not be the target of an Israeli attack.
In early 1985, Bechtel entered into a partnership with Bruce Rappaport, a Swiss businessman with strong links to the Israeli government. Rappaport was to secure a commitment from the Israeli government not to damage the pipeline.
In exchange for Israeli assurances not to attack the pipeline, the New York Times reported, Rappaport offered to sell oil at a reduced rate to Israel for 10 years.
Hussein, however, was not satisfied with the word of the Israeli government; he wanted his investment insured, according to The Washington Post. Rappaport enlisted the services of attorney E. Robert Wallach to obtain insurance from the Overseas Private Investment Corporation, a U.S. government insurance agency. Wallach, recently convicted for his role in the Wedtech affair, was useful because of his close friendship with then-Attorney General Edwin Meese.
In a memo uncovered by the Wedtech special prosecutor, Wallach wrote to Meese that some of the pipeline proceeds were slated to "go directly to" the Labor Party in Israel. The Labor Party, however, denies ever receiving a bribe.
Despite Rappaport and Wallach's elaborate scheming, somewhere along the way the deal fell through and the pipeline was never built.
In a more recent case Bechtel's inside dealing actually cost the company a huge contract. In a ruling handed down on August 29, 1989, the U.S. Court of Claims barred the Department of Energy from awarding a $1 billion contract to a consortium headed by a subsidiary of the Bechtel Group, Inc. Bechtel had formed a team consisting of seven subcontractors to oversee systems engineering, management and development of the high-level radioactive waste facility planned for Yucca Mountain in Nevada. But the Court found the DOE award to the Bechtel-led team to be marred by conflicts of interest: the Chairman of the Source Evaluation Board for DOE, Sam Ruosso, for example, had been employed by one of the Bechtel team members within a year of the time he was overseeing the bid selection process.
Despite Bechtel's ongoing problems with conflicts of interest and its miserable record in the nuclear industry, the company maintains a good reputation, according to construction industry analysts. Bechtel suffered with the collapse of the oil industry and the overall soft energy market in the early 1980s. After undergoing restructuring, however, the company has emerged with profitable prospects.
Although the nuclear market has contracted, Bechtel remains involved in the industry, according to Roger Hannan, business and economics editor of Engineering News Record. The company is involved in retrofitting, upgrading and, ironically, the process of shutting down nuclear plants.
The company is increasingly entering agreements to operate and manage existing nuclear and other power facilities. In some cases, says Carey Callaghan, a research analyst at Shearson, Lehman, Hutton, this involves "taking equity stakes in projects as means to ensure long-term profits;" more often Bechtel is just a contractor.
Bechtel's emphasis on management and operations is not confined to the private power industry. Engineering News Record's Hannan notes Bechtel and other engineering and construction companies are increasing their involvement in public sector energy operations. He says that in innovative areas like cogeneration and resource recovery where "counties and states do not have the wherewithal" to undertake projects, "they do them together with a company like Bechtel. The driving force [in these joint efforts] is the hard pressed" situation of counties and states. As a result, there is an emerging "trend of the privatization of what traditionally were considered public works projects."
Bechtel's entrance into this emerging business enterprise weakens the company's claim that it does not sell anything to the public and therefore is not worthy of public scrutiny. Bechtel's history of inside dealing, influence peddling, bribery and incompetence make it especially worthy of vigilance. The question is, can a government that seems to share personnel and values with Bechtel be a diligent watchdog of a company operating in the vitally significant areas of energy and infrastructure development. Jim Riccio is a nuclear policy analyst at the Nuclear Information and Resource Service. He writes occasionally on nuclear issues.