STATE OF THE INDUSTRY: Nothing more

Lack of new funding could dampen spirit of market

Article December 06, 2012
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When you are falling off a cliff it is always good to have a parachute. It’s the people jumping on that you have to worry about.


As Congress debates whether it should stick a bungee chord on a U.S. economy that is headed straight for a vertical drop, many in the road and bridge industry are not dangling in a state of panic. The sequester, which will allow federal program cuts to kick in on Jan. 1 if nothing is done by those in power in Washington, would create about an 8% cut in transportation funding, but the blow would not be felt until 2014. However, other sectors of construction will not be as fortunate and may just attempt to do business in the road and bridge market, where competition for jobs is at an all-time high, in an act of desperation.


“The sequester, while it might not have a direct impact [on the highway industry], I think that the impact on other construction markets will certainly migrate over to the highway market,” Brian Deery, senior director, Highway and Transportation, at the Associated General Contractors of America, told ROADS & BRIDGES. “You are talking about more contractors coming over with lower bid prices.”


Since MAP-21, passed back in September, is tied to the transfer of general-fund money, program cuts would cause a slight stir, but there still is money in the Highway Trust Fund to allow the industry to cope during 2013.


“The sequester is really a nonevent for us,” said Deery. “I don’t know if it was bad drafting or they intended to [protect the highway industry].”


In all likelihood, Congress will work up some sort of extension to put some distance between the U.S. economy and the fiscal cliff and work out a much bigger deal before mid-2013. This so-called “grand bargain” is being used as a grand entrance by highway lobbyists to push for an increase of the federal gas tax one last time. The last two times the fee was increased was during deficit-reduction negotiations.


“The feeling is once some kind of deal is struck they are not going to want to go back and talk about taxes and spending cuts for quite a while, so we could be left out in the cold,” said Deery.


Rise in bridge work
Contractors, engineers and owners probably will not want to rewind 2013. Most industry experts are predicting a flat or slightly down road and bridge market.


“I think flat is about the best we could hope for on a national level,” Ken Simonson, chief economist at the Associated General Contractors of America, told ROADS & BRIDGES.


According to a recent survey by the American Road & Transportation Builders Association (ARTBA), 57% of transportation contractors are expecting sluggish growth in the market, while the rest are “pretty much expecting a recession,” Alison Premo Black, chief economist for ARTBA, told ROADS & BRIDGES.


“We are not looking at a growth scenario,” she said.


Still, a different viewpoint tells another story. According to Premo Black, the bridge design and construction market is operating at an all-time high in terms of activity. ARTBA is expecting that sector of the industry to produce more than $28 billion of work in 2013, up from $26.6 billion in 2011. In 2002, bridge construction was valued at just $12.5 billion. Much of the energy, however, is being generated in just eight states.


Pavement work is where many could see, and feel, a dip. Road building was up just $500 million in 2012 ($47.5 billion total) from 2011 ($47 billion), and Premo Black is not expecting an uptick in activity moving forward. Usually when Congress passes a major transportation bill there is a surge in growth, but MAP-21 lacks the strength exerted by six-year measures. Premo Black said there was a 10% decline in highway contract awards over the last 12 months, and 48% of survey respondents indicated they are working at less than 75% capacity. As a result, the labor force continues to deteriorate. The ARTBA survey revealed 47% of respondents recorded declining employment levels in the third quarter of 2012, compared with third quarter 2011.


“We see members who say it is just not worth moving forward at this point,” indicated Deery. “One of our members in Alabama said the kind of work that they do, there is none of it on the horizon for the next couple of years so they are going to close their doors.”


Despite the grim outlook, companies in the transportation sector are, for the most part, holding down the fort. According to ROADS & BRIDGES’ State of the Industry Survey, 39% rated 2012 as a good year compared with 10.4% that experienced a poor one, and in 2013 47.5% of respondents expect revenue to at least stay the same compared with 2012.
Shrinking state DOT budgets are beginning to take their toll, though. When asked about the current economic conditions in their state, in terms of money generated for road and bridge construction, 47.4% rated it fair and another 27.3% indicated it was poor. Just over 25% rated the situation better than average.


Rural and urban roads continue to suffer, with more than half of all R&B survey respondents in both categories ranking the conditions fair. In addition, many states have been slow to upgrade their bridge network. According to the R&B survey, 54.9% said their structurally deficient bridge list went unchanged in 2012, while 57.8% said nothing was done to shorten the functionally obsolete bridge list in their state.


Overall, just fewer than 47% of R&B survey respondents said their state did not have enough funds to adequately maintain the current system. However, more DOTs are becoming thriftier, as 45.8% revealed that more recycling (both asphalt and concrete) would be done in 2013.


Material prices appear to be tamer these days, and little will change in 2013. Simonson said diesel fuel prices will continue to be volatile, but the cost of steel, asphalt and cement is not expected to spike for any extended period of time over the next 12 months.


“We will have fluctuating prices, but not necessarily higher prices,” said Simonson.


Equipment sales in 2013 are expected to drop, but more contractors will rent or lease until conditions do improve, which might not happen for another three years.
“I’m not as worried about the next 20 years as I am about the next two,” remarked Deery.


Private ballot,
public undertaking
There are some states that are feeling pretty good about the next couple of years and beyond. The November ballot carried some important measures involving transportation funding. Arkansas voters approved a half-cent increase in the state sales tax to cover a $1.3 billion bond issue for roads and bridges. The temporary sales and use tax will help fund improvements for state highways and bridges, county roads, city streets and other surface transportation. Alaska also was able to move through a bond issue that will raise $453.5 million for transportation. However, a good chunk of the funding will go toward sectors other than roads and bridges. In Michigan, a referendum to prevent the construction of a second crossing over the Detroit River was defeated.


Not all of the news coming out of the voter booth was good. Measure J in California, which would have extended the 30-year half-cent tax passed in 2008 an additional 30 years, came up just short (65%) of the super majority needed to pass.


“On the whole it was discouraging ballot results, not for the things that were defeated, but the fact there were relatively few ballot initiatives or items to vote on,” said Simonson. “Politicians aren’t even trying to get approval from voters in many states now.”


Public approval of the Oklahoma DOT has to be up during a massive effort by Gov. Mary Fallin to wipe out the state’s structurally deficient bridge list at the highway level by 2019. Oklahoma’s County Improvement for Roads and Bridges fund, which operates off money from the motor vehicle excise tax, license and fees account, is being upgraded. The fund used to receive a 15% contribution, but Fallin increased it to 20% in order to generate an additional $480 million. A $15 million increase in annual funding to the Oklahoma DOT and a spike in the cap on funding to $550 million also are part of the plan to address the bridge issue.


A sudden boom in oil production in North Dakota and South Dakota also is expected to translate into more money for roads and bridges.


Public-private partnerships (P3s)  are gaining some traction at the state level. California has an aggressive plan in place that would build hundreds of miles of new roads, and Virginia and Texas continue to be active players. Arizona, North Carolina and Illinois also are pursuing P3s.


According to ARTBA, P3s currently take up 2-5% of the overall market activity, but that number is expected to grow over the next five years.


“I think we are going to continue to see some growth in that area,” said Premo Black. “It’s going to take a little time to get some of those projects online, but certainly there is a lot of interest and there are a lot of projects ready to go.” R&B

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