Markets at midyear

June 2013 » Exclusive
Congress's decisions —€” or lack thereof —€” will impact civil engineering markets significantly in 2013 and beyond.
Shanon Fauerbach, P.E.

Since the 2013 industry outlook article published in CE News in January ("U.S. construction industry forecasts cite potential for modest growth," page 16), we have seen industry analysts' predictions come true. According to a May 1, 2013, release by the U.S. Census Bureau of the Department of Commerce, total construction spending on a seasonally adjusted annual rate — which includes both nonresidential and residential spending — decreased by 1.7 percent for the month of March 2013 compared with the February estimate of $871.2 billion. Nevertheless, the March figure is 4.8 percent higher compared with March 2012. Looking at the first three months of this year compared with the same period in 2012, we see a 4.7-percent increase. While certainly not record-breaking gains, I'll take it!

The residential and nonresidential markets' good fortunes were not equivalent in March: residential is up 17.8 percent and nonresidential is down 1.2 percent compared with March 2012. A comparison between private and public construction tells a similar story. Total private construction in March 2013 rose 9.8 percent above March 2012, but total public construction dropped 5.4 percent.

With February's end, a new era dawned, one that may include an estimated $4 billion decrease in federal construction funding during the next seven months, according to the Associated General Contractors of America (AGC). Why? On March 1, 2013, President Obama signed an order to begin the sequestration — automatic and indiscriminate budget cuts — because Congress failed to agree on a plan to reduce the deficit. Even if the funding doesn't equate to $4 billion, any cuts will be difficult for the construction industry to absorb as it is already struggling to rebound.

With a potential deal to end the sequester at best months away (at press time), contractors who work directly with federal agencies will experience the greatest negative impact, according to the AGC, such as delays in permits, different procurement methods for smaller contracts, project scope changes, and certainly, fewer new federal construction project solicitations.

Notably, according to the AGC, "The Highway Trust Fund and Airport Improvement Program are exempt from the FY2013 sequestration process —€¦ Municipal and utility contractors who have a stake in clean water and drinking water state revolving loan funds, however, should expect a decrease in new projects. AGC estimates about $135 million will be cut from the State Revolving Funds (SRFs) under the sequestration."

A closer look at two key sectors of civil engineering-related construction and the impact that politics might have on the industry in the near future sheds some light on where things stand (when research was completed for this article).

Transportation update
According to the latest analysis of McGraw-Hill Dodge data by the American Road & Transportation Builders Association (ARTBA), released on March 1, 2013, "Despite the 2012 passage of the federal surface transportation law, known as MAP-21, the real value of highway and bridge contract awards over the last 12 months was down 3 percent compared with the previous 12-month period."

According to ARTBA's chief economist, Alison Premo Black, Ph.D., "The good news is that we do expect to see an uptick in activity later this year given the recent increase in federal aid obligations — many of those projects should go through the bidding and awards process over the next few months. It remains to be seen, however, if it will be enough to provide real growth in the highway and bridge construction market by the end of 2013."

On the state level, there is good news. The American Association of State Highway and Transportation Officials (AASHTO) has found that 30 states so far have proposed funding initiatives since December 2012 to repair, replace, or build a wide range of transportation projects including roads, bridges, railways, and bicycle and pedestrian trails. The AASHTO Center for Excellence in Project Finance compiled a listing of state transportation funding proposals that have been or are being considered, along with information on state transportation funding needs and estimates of how much revenue may be generated. The data will be updated biweekly and is available at www.transportation-finance.org/tools/state_by_state

Water and wastewater update
Considering the grades that water and wastewater infrastructure received in the latest American Society of Civil Engineers' (ASCE) "2013 Report Card for America's Infrastructure" (see "Grades are in" on page 22) — both dismissal Ds — it would seem logical that spending in this area should be strong. But apparently construction spending and logic don't always go hand-in-hand. The construction spending in these sectors is down and not likely to go up. As mentioned above, SRFs are getting squeezed from the sequester and the Obama Administration's 2014 budget won't help, even if the sequester is lifted. (See more on this below.)

Dawn Kristof Champney, president of the Water and Wastewater Equipment Manufacturers Association, recently published an article that reviews the combined annual value of construction put in place in the United States during the last decade for the categories "water supply" and "sewage and waste disposal" to initiate a discussion of what funding level is normal for this industry. "It's the question everyone is asking: Is this the new norm?" Champney wrote. "I believe that what we are seeing today in the water and wastewater industry is, in fact, the new norm. It is a correction to a bubble that we experienced for several years, but that could not be sustained. We may even see that figure drop a bit more in 2013, but indications are that things are beginning to level off and the amount of business we are seeing today will become our new baseline."

Not forgetting the great need in this area, she added, "Does our nation need to do more in the way of water infrastructure construction? Absolutely, but will it in the near term? Not likely. Not with budgets getting squeezed ever tighter."

Obama's influence
President Obama has presented influential plans related to the construction industry. On Feb. 12, during the State of the Union address, he presented his "Fix-It-First" program. According to a Feb. 20 White House fact sheet on the proposed plan, it contains three main components. First, the fix-it-first policy calls for "$50 billion in frontloaded transportation infrastructure investment [that] would direct $40 billion towards reducing the backlog of deferred maintenance on highways, bridges, transit systems, and airports nationwide." Additionally, it would enhance the role of private capital in U.S. infrastructure investment with a National Infrastructure Bank, America Fast Forward Bonds, and an expanded Transportation Infrastructure Finance and Innovation Act (TIFIA) program, which provides direct loans, loan guarantees, and lines of credit to regionally or nationally significant transportation projects. Lastly, the program includes a promise to cut red tape by shortening federal review and permitting timelines for construction projects.

According the American Public Works Association's March 2013 Washington Report, "Reaction to the plan was mixed. House Transportation and Infrastructure Committee Chairman Bill Shuster (R-PA) in a statement criticized the plan as 'a short-term proposal for long-term challenges.' Shuster, however, said he was 'encouraged by the President's comments about the need to reduce red tape and streamline project delivery.'"

Other critics, such as Robert Poole, director of transportation policy and Searle Freedom Trust Transportation Fellow at the libertarian Reason Foundation, said the proposal "has no credible funding source. That, alone, has made it dead-on-arrival in Congress." He also believes that a "fix-it-first" policy would significantly misallocate resources, especially in fast-growing states where capacity is the real problem.

However, Obama seems to be following through with his plans. His 2014 budget proposal sent to Congress on April 10, 2013, includes the $50 billion budget for the "Fix-It-First" project plan, funds to launch a national infrastructure bank, as well as budget for America Fast Forward Bonds. Importantly, it also commits to a plan to expedite infrastructure projects by modernizing the federal permitting process. It specifically states a goal to cut timelines in half for major infrastructure projects in areas such as highways, bridges, railways, ports, waterways, pipelines, and renewable energy. In response to an Executive Order, federal agencies have identified a set of best practices for efficient review and permitting, which range from expanding information technology tools to strategies for improving collaboration.

Another highlight of the budget proposal for transportation infrastructure includes $40 billion over five years to fund the development of high-speed rail and other passenger rail programs. Federal buildings will also fare well, if the budget is passed. The General Services Administration would receive significant increases compared with 2013, both for construction and repairs and alterations.

However, other sectors of infrastructure will likely suffer under this plan. Importantly, the Environmental Protection Agency's SRFs, which finance drinking water and wastewater infrastructure projects, will receive a 20-percent reduction under the proposal. Smaller and underserved communities are slated to receive the bulk of the funds, so the impact will be felt most by larger communities.

Also worth noting is that the budget proposal includes $1.8 trillion in deficit reduction, replacing the $1.2 trillion in automatic spending cuts (the sequester), which could have substantial impacts on construction sectors during the next 10 years.

Getting in the game
Hopefully the combined efforts of many leaders from civil engineering consulting firms, water utilities, and civil engineering-related associations who "flew in" to Capitol Hill this spring will reap significant rewards in increased funding, favorable shifts in budget cuts, and development of new programs.

In March, representatives from ASCE presented information to officials. Their focus was on the ASCE's 2013 Report Card for America's Infrastructure, with a legislative emphasis on transportation and inland waterways under the Water Resources Development Act.

In April, the American Water Works Association and the Water Environment Federation participated in an event called "Water Maters! Fly In." Attendees urged passage of legislation that would create a Water Infrastructure Finance and Innovation Authority (WIFIA) to confront America's growing water infrastructure challenge and advocate for the protection of water infrastructure bonds and the affordability of federal water mandates. A WIFIA pilot program is already included in the U.S. Senate Water Resources Development Act (S.601), and water leaders are urging introduction of similar legislation in the U.S. House of Representatives.

The American Council of Engineering Companies' "citizen lobbyists" urged their support for water, transportation, and energy initiatives essential to the nation's growth in April as well.

It is efforts such as these, along with letters to legislators, "virtual fly ins," and essential public relations efforts both nationally and locally, that will keep infrastructure investment forefront on the minds of citizens and decision makers. Only then will infrastructure-related construction spending values regularly climb to secure our nation's future.

Grades are in
In March, the American Society of Civil Engineers (ASCE) released its "2013 Report Card for America's Infrastructure," an assessment of the nation's infrastructure across 16 sectors. Updated once every four years, this year's Report Card found that America's cumulative GPA for infrastructure rose slightly to a D+ from a D in 2009 (see Table 1). The Report Card estimates total investment needs at $3.6 trillion by 2020 across all 16 sectors, leaving a funding shortfall of $1.6 trillion based on current funding levels.

For the first time, the Report Card is available as a digital application — available for download from iTunes and Google Play — that includes videos, state-by-state data, and other multimedia tools. View the 2013 Report Card for America's Infrastructure at www.infrastructurereportcard.org

Table 1: ASCE Report Card for America's Infrastructure; 1988-2013
Sector
1988
1998
2001
2005
2009
2013
Aviation
B-
C-
D
D+
D
D
Bridges
*
C-
C
C
C
C+
Dams
*
D
D
D
D
D
Drinking Water
B-
D
D
D-
D-
D
Energy
*
*
D+
D
D+
D+
Hazardous Waste
D
D-
D+
D
D
D
Inland Waterways
*
*
D+
D
D-
D-
Levees
*
*
*
*
D-
D-
Ports
*
*
*
*
*
C
Public Parks & Recreation
*
*
*
C-
C-
C-
Rail
*
*
*
C-
C-
C+
Roads
C+
D-
D+
D
D-
D
Schools
*
F
D-
D
D
D
Solid Waste
C-
C-
C+
C+
C+
B-
Transit
C-
C
C-
D+
D
D
Wastewater
C
D+
D
D-
D-
D
*Not included in analysis

Shanon Fauerbach, P.E., was formerly the editorial director of CE News.


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