Much is Riding on '09 Infrastructure Spending By Mary Sedor
Article Date: 12-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.
Infrastructure, though challenged, presents an unparalleled growth opportunity for the CE industry.
In 2009, infrastructure spending legislation faces its most important and challenging year in recent memory, as Congress will consider three major bills addressing funding for water, airport and surface transportation infrastructure. Mounting evidence suggests that all areas of infrastructure face growing demand, deterioration, and remain under-funded. In the year ahead, Congress will be tasked with determining new revenue streams in order to grow federal infrastructure investment. But convincing lawmakers and the business community at large to advocate funding increases will be an uphill battle, complicated by the downturn in the economy and record inflation in all sectors of the industry, according to Brian Moore, senior consultant for FMI, a management consulting and investment banking firm for the construction industry. Competition for dollars next year in Washington will be stiff, he adds, thanks to the recent $700 billion Wall Street bailout bill that is handcuffing government spending for other projects.Nevertheless, if Congress does succeed in approving additional – and adequate – funding, the construction equipment industry will reap big benefits. Increased infrastructure investment has the potential to more than double the current market impact on the construction equipment industry. Pending Legislation
A recent Environmental Protection Agency study determined that the total need for water infrastructure for the next 20 years exceeds $202.5 billion dollars. Current federal investment in water infrastructure is roughly $1.5 billion per year, with sewer programs receiving less than $700 million per year. The Water Quality Financing Act (H.R. 720) passed the House of Representatives on a strong, bipartisan vote (303-108) on March 9, 2007. The legislation – which did not become law in the 110th Congress – would reauthorize the Clean Water State Revolving Fund (SRF), which is the primary mechanism by which the federal government provides sewer construction resources to states and localities, explains Christian Klein, AED’s vice president of Government Affairs. Under that bill, the annual authorization level for the Clean Water SRF would rise to $5 billion per year over a four-year period. By contrast, the Clean Water SRF is expected to receive less than $700 million in FY 2009, meaning the Water Quality Financing Act would potentially increase federal sewer investment by more than 700 percent – if it were enacted into law.Now fast-forward to Sept. 17, 2008: The Senate Environment & Public Works Committee passed its own water infrastructure bill. The Water Infrastructure Financing Act (S. 3500) would provide $38 billion over five years for sewer and (unlike the House bill) drinking water infrastructure. The tie between increased federal infrastructure spending and benefits to the equipment industry is plain – and powerful. Based on a recent study conducted by AED and the National Utility Contractors Association, 12 cents of every dollar spent on sewer and drinking water projects makes its way into the hands of equipment distributors. That’s roughly $600 million directly into the hands of equipment dealers, based on the House bill; calculated on the Senate’s $38 billion plan, the equipment distribution industry could claim about $4.5 billion over the prescribed five-year period.“The market impact on our industry would increase dramatically, and at the same time address fairly significant public health and safety concerns,” said Klein.Airport infrastructure is another area of potential growth for the CE industry. For most of the last two years, Congress has been working on the Federal Aviation Administration reauthorization, which includes funding for airport construction programs. According to the Airports Council International, the federal government should be spending $15 billion per year on airport construction. Legislation that passed the U.S. House of Representatives called for spending approximately $4 billion per year on airports. “AED is working to achieve the maximum amount of airport investment,” said Klein. Finally, the largest of the three bills with the most potential impact on the industry is the reauthorization of the federal highway bill, or the Safe, Accountable, Flexible, Efficient, Transportation Equity Act: A Legacy for Users (SAFETEA-LU). Enacted in 2005 and expiring Sept. 30, 2009, SAFETEA-LU is the blueprint for federal highway and transit spending. The law guaranteed a minimum of $223 billion for federal highway investments through 2009. Congress will be required to reauthorize the highway program and put new spending levels in place for the next several years. The bill was designed to spend down the Highway Trust Fund (HTF) over the five-year period, bringing the balance near zero by its expiration. But that wasn’t quite the way things worked out. On Sept. 5, Department of Transportation Secretary Mary Peters sounded the alarm that the HTF would go bankrupt by the end of September. Had nothing been done to avert the disaster, Congress would have had to cut funding for the Fiscal Year 2009 highway program by more than 30 percent, from $41.2 billion to $27.2 billion. On Sept. 15, President Bush signed into law the Highway Trust Fund Restoration Act, barely staving off insolvency for the beleaguered federal highway funding mechanism, explains Klein. The law provides over $8 billion for the HTF and resolves the uncertainty surrounding highway funding in Fiscal Year 2009, averting a possible $14 billion (34 percent) cut next year due to shortfalls in HTF funding mechanisms.
“There is a growing recognition in Washington and around the country that we are facing dramatic infrastructure needs,” said Klein. “Underinvestment in infrastructure is taking a major toll on the economy. Congestion, resulting in part from inadequate road improvement funding, costs $78 billion per year in terms of wasted fuel and time.” Much Is at Stake
The U.S. construction industry market is the largest construction market in the world, and has a global impact, says Moore at FMI. It is also essential to the country’s own ability to grow and thrive in the future.
“While China and the Middle East are growing much more quickly, the U.S. infrastructure construction market is very important because it’s required for our economy to function effectively,” said Moore. “We have to have basic human needs in place, such as water and sewer to effectively grow our population.”
Further, over the next 20 years key aspects of the Interstate System will have to be replaced. To illustrate the daunting costs associated with road and bridge replacements, Jack Schenendorf, vice chair of the congressionally appointed National Surface Transportation Policy and Revenue Commission, cited the recent overhaul of the Woodrow Wilson Bridge, a major crossing over the Potomac River. It was built in the 1960s for $14 million and was replaced for $2.4 billion. Recognizing the importance of infrastructure and the current inadequate level of investment, AED is poised to fight for increases in highway infrastructure funding. The association is advocating an increase in the gas tax as the most fiscally responsible and fairest way to pay for increased infrastructure investment.
While there are no concrete numbers yet, the increase in highway infrastructure investment could range from a slight increase to doubling the bill. In FY2008, the federal highway program received $41.2 billion. During the next authorization, Congress may consider a $500 billion five-year bill, said Klein.
Increased investment in highway funding has a direct and positive impact on the construction industry. An AED-commissioned study authored by Dr. Stephen S. Fuller recently reported that 6.4 cents of every dollar spent on highway construction is used toward the purchase or lease of equipment, or on major repair and maintenance costs. “An increase in funding for the highway bill has a direct impact on AED members,” said Klein. “The market impact could be more than double on our industry.” The Contractor Perspective
In spite of the embattled state of the nation’s infrastructure, some contractors are still getting ample highway work. Knife River Corp. in Bismarck, N.D., for example, was recently awarded a $46.1 million Wyoming Department of Transportation (WyDOT) project.Operating in 15 states across the central, southern and western portions of the U.S., as well as in Alaska and Hawaii, the company is a major infrastructure and private development contractor that also mines aggregates and markets crushed stone, sand, gravel and related construction materials. The WyDOT project calls for the reconstruction of 12 miles of Interstate-80, including all four lanes and new bridge structures. The project includes a combination of 425,700 tons of aggregate sub-base and crushed base, and a total of 224,950 tons of asphalt plant mix. Work began Oct. 1, and is scheduled for completion by Nov. 30, 2010. Knife River’s Cheyenne and Casper divisions were also awarded four additional WyDOT projects, totaling approximately $6 million. “Although we have some tough economic challenges, the demand for our services and products is high,” said Knife River’s CEO, Bill Schneider. According to Schneider, the I-80 project started on time and has gotten off to a good start. Due to its elevation – roughly 7,500 feet above sea level – the project will soon be weathered out for the season. Knife River has the 21st largest fleet in the U.S., says Schneider.The troubled infrastructure funding issue is trickling down to contractors, says Schneider. Two negatives his company is currently dealing with are the inflation of asphalt oil as well as state revenue conditions. While the inflation of asphalt oil and diesel prices has started to fall, many of the states in which Knife River operates are facing a tough revenue outlook. In general, Schneider says it’s been a “mixed bag” as to whether states are continuing infrastructure spending. “Revenue is down for a lot of states,” said Schneider. “Consequently, that is impacting state budgets for infrastructure. While there are a few bright spots, state revenues and inflation remain our two biggest challenges.” For 2009, Schneider predicts both residential and nonresidential commercial work will continue to be difficult because of tightening credit. He expects the housing market to continue to show weakness into 2010, with energy markets remaining strong and public works increasing. “We are optimistic that there will be a good amount of spending on infrastructure,” said Schneider. “It’s needed and it would help the economy.” Schneider says his company purchased a large amount of equipment earlier in 2008 and will be spending less on capital expenditures in 2009. The company will either be renting or leasing equipment in the year ahead. Unlike smaller contractors faced with tightening credit markets, Knife River has not been impacted by the credit crisis. “There’s no question about it, credit has tightened up. Fortunately we’re a very conservative company and have a very strong balance sheet,” said Schneider. “But a lot of developers that wanted to do projects are finding it difficult, if not impossible, to find funding.” Schneider predicts he will see increased industry consolidation over the next 12 to 24 months, with the companies carrying a large amount of debt falling out of the market. Dealers can best assist their contractor clients by helping them think about contingency planning and strategic equipment planning, says Schneider. “Dealers should continue to provide us good service, knowing that the margins are going to be tight for a while,” said Schneider. “Everyone will be scrambling in this tough economic climate. Partner with your customers. Everyone has to pull together and we’ll get through this.” Knife River also plans to lobby for the next highway bill reauthorization in the year ahead. Schneider is calling for dealers to stand with their contractor clients to promote more infrastructure spending.
“Lock arms with us and mobilize the effort to lobby for the next highway bill,” said Schneider. “We need everyone’s help.” A Call for Bold Changes
After the debacle of the previous highway bill reauthorization, Congress established the National Surface Transportation Policy and Revenue Commission to analyze funding needs and make recommendations that would serve as the outline for the next highway bill, explains Schenendorf. Following a two-year investigative process, the commission issued its report in January 2008.“A bill that is just an extension of SAFETEA-LU is a status quo bill and will not get the job done,” said Schenendorf. “The transportation system will become a second- or third- class system and it’s going to drag the economy down with it. You can’t have a healthy robust economy without a healthy and robust transportation system, and we’re on the verge of losing that system.”The National Surface Transportation Policy and Revenue Commission made the following recommendations to meet the challenges of the 21st century: (1.) a new transportation bill; (2.) a requirement that the federal government remain a partner in solving the national transportation crisis; (3.) federal reform of the highway program to give it a renewed sense of vision; and (4.) increased investment. Schenendorf explains that the Bush administration’s position has been that the federal government should get out of the infrastructure business and leave it to state and local governments, and the private sector. “We found that this is a national crisis that requires a national solution, and the federal government needs to be a full partner as it has been in the past,” he said. The committee made the following financing recommendations:
- A federal motor fuels tax increase of 5 to 8 cents per gallon for five years, indexed to keep pace with inflation
“All of the different financing aspects are going to be controversial,” said Schenendorf. “The important thing is to make the reform, get a program that the people support, and then say we’re going to do this – here’s what it’s going to cost.”
- A freight fee in order to reflect the freight aspects of transportation
- Customer fees with a portion dedicated to the HTF
- A ticket tax on transit users and inner-city passenger rail users
- Carbon tax or Cap-and-trade
- An investment tax credit for railroads
- Alternatives to the motor fuel tax, such as a tax on vehicle miles traveled (VMT)
- Allow Congress to modify the current federal prohibition against tolling on the Interstate System to fund new capacity
- Allow congestion pricing on the Interstate System in metropolitan areas with populations greater than 1 million
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