March 1, 2009There is no doubt that the United States is facing one of the most severe economic crises in its history. In fact, some are saying that the current downturn is the worst since the Great Depression of the 1930s.
Every night, the evening news reports job layoffs, falling stocks, foreclosures. In February, the Dow Jones Industrial Average hit a six-year low, losing nearly 50 percent of its value from its November 2007 high of 14,164.
It seems that no company or sector is immune, especially when you consider the types of companies that have shed tens of thousands of jobs, companies like Microsoft, Caterpillar, Home Depot, General Motors, Pfizer, Citigroup, Sprint-Nextel — a crosscut of the American economy. Massive commitments by the federal government have tried to stem the tide by providing aid to failing banks and spending programs and tax cuts designed to stimulate the flagging economy.
The Troubled Assets Relief Program (TARP) is a $700 billion program passed last fall designed to help banks stay afloat and keep credit markets alive in the United States. The stimulus plan — formally known as the American Recovery and Reinvestment Act of 2009 — was signed by President Obama in February, allocating $787 billion for spending and tax cuts.
But what effect is this having on the trenchless marketplace? Early indications are that the trenchless industry — particularly on the rehab side — has continued to flourish despite the overall economic downturn that took an estimated 2.6 million jobs in 2008.
“I am seeing many rehab contractors who have a bigger backlog than ever,” said Irv Gemora, executive director of NASSCO, whose members are primarily companies involved in sewer construction and rehabilitation. “Many cities are facing budget shortfalls resulting from decreased property tax and sale tax revenue, and they’re starting to hold back on some expenditures, so this may lead to a delay in some projects. But there are many projects under way that won’t be affected, and there are many ‘shovel ready’ projects that can keep us healthy as an industry.”
“When you see the news, the statistics are staggering with the amount of layoffs, but the trenchless market just doesn’t seem to fit the profile,” said NASTT executive director Mike Willmets. “Everyone in the engineering community I talk to is very busy. It’s oddly contradictory to what is happening in the general economy. And, people are now gearing up for an anticipated increase in work that may result from the stimulus package.”
While projects may be ongoing, the economy is having an impact in other ways. “We’re finding it difficult to acquire new contractors,” said Jerry Gordon, president of Sprayroq, which provides lining systems for water and wastewater systems. “Companies are hesitant to start a new product line because of the startup costs, which includes new equipment. They just don’t want to spend the money unless they have a sure thing.”
Economic downturns can elicit emotional responses in individuals and business that are difficult to assuage. Kaleel Rahaim, industry manager for Interplastic Corp., a specialty resin supplier serving the cured-in-place pipe (CIPP) market, sees this as being a factor in the current economy. “The key issue is uncertainty — uncertainty in the market, in the government, in energy and raw material prices. It’s tough to forecast; we just can’t do it like we used to. We’re also seeing a glut in the marketplace for our products, so we’re all fighting for a piece of a smaller pie.”
Impacts of the Stimulus Package
There is some debate as to whether the spending and tax cuts outlined in the stimulus package are enough to get the economy moving. There is also debate regarding whether it will have a short-term impact. At best, we may begin to feel the impacts in the latter half of the year, Rahaim said. “There are a lot of projects already designed and approved and just waiting for funding,” he said. “I think we’ll start seeing some of the early benefits start to happen in the fall.”
Alex Buehler, vice president of marketing and technology for Insituform Technologies Inc., sees a longer timeframe before the effects of the stimulus begin. “We don’t see it as having an immediate pop. We see it taking some time to percolate — it may be two to three years before it really makes a difference in our industry.”
Most, however, are in agreement that when stimulus money does begin to flow, the trenchless industry is well positioned to take advantage. “Trenchless technologies offer more bang for the rehab dollar,” said Sam Cancilla, general manager of RedZone Robotics’ Responder Division. “There is no mass excavation to disrupt people and businesses, but you still have the job creation and the positive benefits of infrastructure renewal. Trenchless allows you to get the most value.”
The impacts the infrastructure itself will also be beneficial. “We could not spend money on a better thing,” Willmets said. “Whether it has been a lack of money or political will, we have not made the investments needed to maintain our infrastructure. And without strong infrastructure, an economy can’t grow.”
The amount of funding of the stimulus plan, however, pales in comparison to the overall water/wastewater needs — estimated to be in excess of $20 billion annually — as well as in relation to the overall construction market, which is about $1 trillion per year. According to FMI, a construction industry-focused management consulting and investment banking firm, the total amount of direct construction investment or spending outlined in the stimulus package is between $100 billion to $200 billion spread out over four to six years or about $30 billion a year — a little more than 3 percent of the total annual volume.
“It will hardly register a blip on the total radar screen of total spending,” said FMI utility construction market consultant Mark Bridgers. “I am concerned that there is a general belief that the stimulus package is going to be a cure-all. And while it will have some positive impact, I think the ultimate solution is that we are going to have to find our own way out of this economic and financial situation.”
There may be lingering issues due to the collapse and subsequent bailout of the financial system. Many municipalities had funding secured in advance for projects that were coming out and may be currently under construction. Challenges could occur as this money is spent and municipalities have to secure additional funds for the 2010 construction season, Bridgers said.
Looking to the Future
FMI forecasts a 2 percent drop in the wastewater market for 2009 without taking into account stimulus-related spending for 2009, with a resurgence of growth in 2010. On the water side, FMI sees 2009 as being flat, with growth occurring in 2010. “This is perhaps overly optimistic, but at this point we are expecting a resolution and improvement in the economic situation by the middle to end of 2009 and taking into account some of the stimulus spending, these figures will improve slightly,” Bridgers said.
Given the downturn in the overall economy and consequently the dropoff in residential and commercial construction, there is some concern that inexperienced contractors may enter the fray.
“If there is a flood of work put out with low bid, there may be unqualified low bidders who may retard the growth of trenchless because of shoddy work,” Gemora said. “If owners have to go back and dig up a failed trenchless rehab project, it could be very problematic for the industry — people tend to remember bad experiences.”
NASSCO has launched an Inspector Training course it hopes will teach owners what to look for when managing a trenchless rehabilitation project. “In most cases, trenchless projects are successful,” Gemora said. “If you are a good contractor, then a trained inspector validates what you do. At NASSCO we developed this program to protect the majority of the contractors who understand the processes and what it takes to complete a project successfully. You have to understand the defects and what the fixes are.”
“We have to be in our best educational mode,” Gordon said. “If the money comes to pass, it will benefit the contractors, engineers and suppliers in the industry, but it could also attract the fly-by-nights who may not be in it for the long haul. We have to educate the cities about the products and the importance of quality installation. We can’t just rely on picking up low bids.”
NASSCO has seen its membership increase over the past several years and forecasts additional growth in 2009. “We are being cautious with a conservative budget, but we are projecting growth,” Gemora said.
Others aren’t quite so optimistic. “We see 2009 as being flat or slightly down,” Buehler said. “Much of our market is dependent on municipal taxes and municipal bonds for financing, and those are down. But on the other hand, we have a lot of work that results from consent decrees and many of those programs have already been financed, so in that respect the tightness in the credit market won’t have much of an impact.”
While there are many uncertainties in the overall economy and the trenchless market, the passage of the stimulus bill at least provides some clarity. In the meantime, companies are re-evaluating their business practices and looking to save money in any way they can. And that appears as it will be the case for the short term — at least.
“The crux now is to survive and come out of this downturn as strong as possible,” Rahaim said.
James W. Rush is editor of Trenchless Technology.