ENGINEERING MARKETS CONTINUE REBOUND WITH GREATER THAN 10 PERCENT GROWTH RATE IN 2005
Washington, District of Columbia, May. 23 - /EWire/ -- The U.S. environmental and infrastructure engineering market expanded 10.5 percent last year, its highest growth rate in six years. All major market segments enjoyed solid growth in 2005. Transportation engineers saw their market climb to $8.8 billion and register a growth rate of 12 percent. The power engineering market rebounded smartly with a 15 percent rate of growth. That engineering market in the U.S. now totals $2.5 billion. Water quality engineering slowed from its recent years of double-digit growth to a still-healthy nine percent rate. This market grew to $5.3 billion in 2005. Finally, remediation consulting and engineering grew eight percent to $4.8 billion, recording its second consecutive year of strong growth. The following exhibit shows the distribution of the infrastructure and environmental engineering market among the major market segments.
Distribution of $21.4 Billion Market in 2005 for Infrastructure and Environmental Engineering
Farkas Berkowitz & Company presented its Eighteenth Annual State-of-the-Industry-Report to an audience of 100 chief executives on May 2 in Washington, DC during the twelfth annual Farkas Berkowitz Forum. This invitation-only meeting for CEOs of leading environment and infrastructure firms was sold out for the fifth consecutive year.
Alan Farkas, Managing Director of the firm, commented on the theme that is affecting all markets, "Competition for resources and the resulting discontinuities in pricing is creating opportunities and threats – winners and losers – in all environmental and infrastructure markets." Mr. Farkas noted that these influences were already being felt for some markets, while for others, the major effects may be several years in the future.
Mr. Farkas cited escalating construction costs as an important example of the impact of resource competition. He noted, "Construction costs have escalated to the point where many public-sector procurements no longer result in construction awards because all bids are significantly over the public agencies' cost estimates." He went on to point out, "For engineers, this could mean a downturn in construction management revenues, but it could also mean increased design fees as public agencies re-design projects to lower costs."
He also noted that the volatility of costs poses added risks to firms undertaking construction or design-build projects on a lump-sum basis. Finally, he warned, "If the
costs of energy and materials settle at higher equilibrium prices for a period of years, then the increased costs of construction will leave fewer dollars available for engineering design."
The 12 percent growth of the transportation engineering market in 2005 was driven by a better than 10 percent rate of growth in the highway/bridge segment, according to the Farkas Berkowitz report. Mr. Farkas noted the passage last August of the Safe, Affordable, Flexible, Efficient Transportation Equity Act – A Legacy for Users, enacted 22 months behind schedule. He suggested that a more appropriate title for the federal highway bill would have been, "Too Little, Too Late." The Farkas Berkowitz report notes that the 30 percent increase in federal grants over six years amounts to a compounded annual growth rate of just over four percent. Mr. Farkas commented, "With the double-digit inflation rate for highway and street construction over the last couple of years, this funding level does not come close to keeping pace with inflation."
Farkas Berkowitz research shows that the quick rebound in the highway market was due principally to those states that raised taxes over the last two years to fund highway improvements. "Highway engineers can also look to the private sector as a driver of near-term growth," Mr. Farkas said. He went on to note, "Projects worth over $25 billion have either been proposed or are in development for new toll roads and HOT lanes, all funded through public-private partnerships." However, the report warns that when the federal law comes up for reauthorization in four years, the very existence of a federal highway grant program is likely to be called into question.
Reporting on other segments of the transportation engineering market, the Farkas Berkowitz report notes the continuing growth of transit and the expectation that freight rail, long dormant, will enjoy a resurgence beginning later this year or next. In contrast, the engineering market for airport terminals and runways saw its fourth consecutive year of no growth in 2005, and the firm believes that this market is likely to remain flat through 2007. Finally, the ports and harbors market segment grew some 5-10 percent in 2005, with opportunities in the East, particularly in the Southeast, outpacing those in the West and Gulf Coast.
The Farkas Berkowitz report attributes the 15 percent growth rate in the power engineering market to the return of King Coal as the fuel of choice to generate electric power. Mr. Farkas noted, "The sustained high price of natural gas has created a new math in the energy market. That new math favors coal." He pointed out, "Today, 12-15 coal-fired generating stations are in construction or close to it, and with each plant carrying an engineer-procure-construct (EPC) price tag of $700 million to over $1 billion, the return to coal has brought a quick revival to power engineers' fortunes." The report indicates that the advent of a variety of clean-coal technologies will further secure a prominent role for coal as the near-term fuel of choice in the U.S.
Power engineers are also benefiting from the build-out of liquefied natural gas (LNG) terminals. "Currently, permitting authorities in the U.S. have approved 13 such facilities, with an additional five approved by Mexican and Canadian authorities," commented Mr. Farkas. He went on to elaborate, "Although we expect fewer than 12 facilities to be built in North America, with EPC values between $500 million and $1 billion, this build-out benefits both power engineers and marine engineers." Finally, the Farkas Berkowitz report notes the boost given to green energy by the Energy Policy Act of 2005 and to the brighter outlook for nuclear power. Mr. Farkas revealed, "Our sources tell us that ten units will apply for combined construction and operating licenses from the Nuclear Regulatory Commission in 2007 and 2008. We expect the first plant to break ground before 2010."
Water Quality Engineering, Design Build, and Operational Services
The water quality engineering market registered a nine percent growth rate in 2005, after seven consecutive years of double-digit growth. The report noted considerable regional variation in growth rates. "The growth rates in this market mirror growth in population," commented Mr. Farkas, "We estimate that in 2005 the Western market grew at better than 15 percent and the Southeast at better than 12 percent, while the Central U.S. grew less than 8 percent and the Northeast less than 5 percent." The U.S. Census Bureau projects that from 2000 to 2030 the rates of growth in the West and South will be roughly five times that of the Central and Northeast states.
The design-build market for water and wastewater treatment grew 10 percent, according to the Farkas Berkowitz report. Mr. Farkas pointed out, "Most of this growth can be attributed to fewer than a dozen states that have embraced this delivery mode, and almost all of those states are located in the rapidly growing Western and Southeastern regions." The firm's survey indicates that the top engineering firms participating in the design-build market have begun to bid more selectively as they assimilate lessons learned in providing integrated design-build services on a fixed-price basis. Mr. Farkas noted, "Municipal clients are gaining confidence in this alternative delivery method as evidenced by the larger size of projects being let and by the reduced dependence on third-party advisors." He went on to forecast accelerating growth for the remainder of this year and next year.
Farkas Berkowitz also provided its assessment of the market for public-private partnerships for water and wastewater treatment systems. Relying on a survey conducted by Public Works Financing, the firm reported a growth rate for this market in 2005 of 8.5 percent. The firm's report noted that the average growth was skewed by the 57 percent rate of growth reported by Southwest Water. Without Southwest Water, this market grew five percent, with some of the larger players growing only one or two percent.
Mr. Farkas commented that the competitors in this market seem to be adapting to its slowing rate of growth. "While the flow of new starts continued to trickle," Mr. Farkas noted, "Renewals were plentiful, and 83 percent of the public partners were satisfied enough to remain with their incumbent private partners." The report went on to note that 93 percent of municipalities with expired contracts elected to continue with the public-private partnership model. However, Mr. Farkas observed, "The design-build-operate market has failed to fulfill its initial promise, with only two awards made during all of 2005."
Mr. Farkas indicated that the bottom line for competitors in the public-private partnership sector has improved as unprofitable contracts have either been renegotiated or written off. He predicts that many of the players here will work hard over the coming years to shed their body-shop image and strive to become true strategic partners with their municipal clients.
Remediation Consulting and Engineering
The report noted a considerable disparity in the remediation consulting and engineering market between those who serve the industrial market and those serving the Department of Defense (DOD) and the Department of Energy (DOE) cleanup markets. Although the firm charted an overall growth rate of eight percent in 2005, Mr. Farkas went on to point out, "We did a closer analysis of the top 15 firms in this market, and we discovered that those six firms that principally serve the federal market actually registered an aggregate decline in revenue of eight percent last year, while the nine firms that principally serve the industrial market enjoyed an aggregate revenue growth of 27 percent."
Private sector environmental and remediation consultants are clearly benefiting from record petroleum industry profits. Increased cleanup spending on the part of these companies during both 2005 and 2004 helped to account for much of the surge in growth in what has recently been a slow-to-no-growth market. The report notes that the development of coal fired plants, LNG facilities, and the improvements being made to the transmission grid are all boosting revenues relating to environmental permitting assistance.
"Those serving the federal market, and particularly the DOD, saw a big shift in priorities in 2005," according to Mr. Farkas. He went on to comment, "Funding for Iraq and hurricane relief clearly siphoned away dollars from remediation of contaminated sites." The report notes that federal contractors reported a significant decline in the flow of task orders and dollars throughout most of 2005 and the first quarter of 2006.
The Farkas Berkowitz report predicts that the fortunes of federal cleanup contractors should change once the Base Realignment and Closure (BRAC) program gets underway. Funding authorizations will increase over four-fold in federal FY2007 over FY2005. BRAC-related military construction dollars account for most of this huge increase. The exhibit below compares anticipated funding levels to those of recent years.
Exhibit 2: BRAC and DERA Funding ($ Billions)
In attacking the BRAC market, Mr. Farkas warned federal contractors not to rely simply on their remediation and cleanup skills. He said, "Top brass in the military have indicated that they want to find ways to use the cleanup and sale of property to help fund the realignment effort, and this will place a premium on contractors having deal-making skills and development savvy, the capability to do clean as well as dirty construction, and experience in dealing with local development agencies."
Reporting on the DOE cleanup market, the Farkas Berkowitz report questions whether the substantial number of the upcoming re-competes will challenge the top four firms currently serving this market: Bechtel, Washington Group International, CH2M HILL, and Fluor. The report goes on to suggest that many firms have signaled their interest in the DOE market, including Northrup Grumman, Lockheed, Jacobs, Parsons, and the Shaw Group.
Commenting on DOE's push in 2004 to award prime contracts to small businesses, Mr. Farkas concluded, "This effort appears to have subsided, with the results of that program having hurt as many small businesses as it helped." The report notes this effort was plagued with sustained protests and delayed and cancelled procurements, all of which increased the business development costs of small businesses without necessarily allowing them to reap any reward for their efforts.
Mr. Farkas concluded the firm's review of DOE by noting the following, "We look for DOE to move away from the incentive-laden performance contract model used so successfully at Rocky Flats. Some within the DOE community criticize this change, but many feel that the Rocky Flats contract model is not appropriate to the sites that remain." The report notes that the environmental management budget for DOE will continue to decline, with the President's proposal down 11 percent from the FY2006 appropriation level.
Reporting on federal government niche markets, Farkas Berkowitz notes that many firms benefited from the flow of dollars resulting from Katrina. Between FEMA and the Corps of Engineers, nearly $9 billion has been spent. Most recently, FEMA spending has favored small firms from the four-state impacted region. The delay in the reconstruction effort has many firms puzzled over when and how that reconstruction effort will unfold.
Finally the firm reported on the reconstruction effort in Iraq. Mr. Farkas noted, "Approximately $10 billion has been spent on reconstruction in Iraq with half of that procured by the Corps of Engineers and the rest split about equally between U.S. AID and the Air Force Center for Environmental Excellence. In the last 18 months, much of the funding has gone for security infrastructure, including police stations, training academies, and military installations, rather than civil infrastructure. Mr. Farkas forecasted, "We predict that most of the U.S. contractors operating in Iraq today will wind down completely over the next six months, with the remaining firms leaving within the next 12 months. Continuing reconstruction efforts will rely on Iraqi firms."
Farkas Berkowitz & Company is a management consulting firm serving companies that provide design, construction, and operational services for government and industry. Established in 1983, the firm assists clients with strategy, mergers and acquisitions, and operations improvement. Inquires should be addressed to Alan Farkas at 202-833-7530 or firstname.lastname@example.org or visit their website: www.farkasberkowitz.com.
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