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Industry Anxiously Awaits Infusion of Stimulus Funds

Thu February 26, 2009 - National Edition
Giles Lambertson

The February infusion of $140 billion into the federal infrastructure budget would seem to justify general jubilation among construction industry members. Yet celebration of the passage of the American Recovery and Reinvestment Act of 2009 is generally subdued, testifying to uncertainty about the distribution and impact of the stimulus money.

“I’m cautiously optimistic,” said Rob Bryant, who leads the governmental sales division of Wheeler Machinery Co. in Salt Lake City, Utah. His restrained response typifies the reaction of numerous industry leaders to the quick passage by Congress of a massive $787 billion “stimulus package” at the behest of the new Obama administration.

The overall package is a combination of spending increases and tax initiatives. Supporters argue that it will re-energize what is widely characterized as a moribund economy spawned by a credit collapse and resulting business nosedive.

Construction industry advocates had hoped that funding for infrastructure renewal and replacement, water projects, environmental cleanup, and school and federal buildings would have totaled more than $140 billion. They noted that the identified need for construction in those areas is several times larger than that. In the end, however, collapsing bridges and anecdotal reports of crumbling roadways and canals didn’t impress Congress enough to make infrastructure the top funding priority.

Still, $140 billion is not an insignificant amount of new money, not even at a time when trillion-dollar conversations are routine. (That is still true even though actual dollars to be spent directly on infrastructure projects are estimated to be even less — about $90 billion, or 11 percent of the total package.) Significant breakouts of infrastructure funding include:

• $27.5 billion for highway and bridge construction;

• $8 billion for high-speed rail corridors;

• $6.9 billion for mass transit projects;

• $1.3 billion for Amtrak and intercity passenger train projects;

• $1.1 billion for airport improvement projects;

• $7.4 billion for a combination of clean water, drinking water, rural water and wastewater projects;

• $4.6 billion to address a backlog of Corps of Engineers projects;

• $7 billion for various environmental cleanup projects;

• $8.4 billion for military construction and federal building projects;

• $8.8 billion for campus construction projects ranging from elementary schools to colleges.

Because the declared purpose of the huge appropriation is to spill federal money into the economy in sufficient quantities to lift it, timetables to release the money are relatively short.

For example, the $27.5 billion for highway and bridge work — all but $700 million of which is designated for federal highway projects — must be apportioned among the states by the end of the first week in March. Each state has three months from receipt of the money to contractually obligate 50 percent of it; 100 percent of it must be obligated within a year or it will be returned to Washington.

While that is quick by usual standards, it means dirt actually might not be moved on some “shovel-ready” projects for three months or longer, perhaps for more than a year. One provision requires that priority be given to projects that can be completed in three years. In other words, the stimulative impact of some of the projects will be nonexistent or minimal in the short term.

The legislation also stipulates that priority be given to projects located in economically depressed areas; some money also is reserved for designated urban areas in each state. So while state departments of transportation generally are given leeway to spend the money where it is deemed most needed, they do not have total freedom in funding infrastructure projects.

Some relatively minor tax breaks for the industry are contained in the bill, including an extension of business expensing to encourage investment in equipment and extension of a favorable depreciation schedule. The Urban-Brookings Tax Policy Center gives each of the stipulations a score of “C” for effectiveness in the current environment.

Implicitly acknowledging questions about the general effectiveness of the stimulus package, a spokesman of the Associated General Contractors of America nevertheless heralded the anticipated “positive impact” of the spending initiative. Said CEO Stephen Sandherr: “When you get beyond the politics and the policy, the fact remains these investments will put people to work, save businesses and help rebuild aging infrastructure. There’s no doubt the stimulus will have a positive impact for construction businesses and their workers across the country.”

AGC’s resident chief economist, Ken Simonson, predicted that the funding will “create or save” almost a million construction and industry-related jobs in the next two years.

“Whether or not you wear a hard hat for a living, these construction investments will make a difference for the better.”

Simonson also averred that new work is not apt to create shortages in supply of materials.

“Private and state-local funded construction is shrinking so rapidly that the stimulus money may not lead to a net increase in total nonresidential construction,” Simonson said. “Even if it does, there is sufficient excess capacity in supplying industries as a result of downturns that have already occurred — and new capacity coming on stream in steel and cement – that I don’t anticipate shortages or price increases in 2009, even with [the stimulus package’s] ’Buy American’ requirements.”

A spokesman of the American Subcontractors Association — most of its 5,000 members work in the construction industry — agreed with other industry leaders that the new funding will be “helpful.” ASA communications director David Mendes acknowledged, “there may be disputes about exactly when the money gets out,” but said that “for the projects that begin in the next 120 days or so, obviously it will be helpful and will be for the next couple of years.”

Mendes added he “would like to have seen more money for schools. There were funds for schools that were negotiated out.”

The association spokesman observed that the emergency package was passed at a time when “there is no question that the economic slowdown or turndown is impacting the commercial and industrial construction economy. While there are differences between some local markets, on the whole there is an increase in slowed or stopped projects.”

The most viable current market among subcontractors, in Mendes’ view, is in Oklahoma and Texas. “They seem to be coming in a little bit later to the turndown, but then they might go out a little bit later, too. We just don’t know.”

Not knowing is what leads people like Bryant of Wheeler Machinery in Salt Lake City to take a wait-and-see attitude.

“It is like anything else, we are always told one thing and how rosy things will be and the final results generally don’t match what the promises were. I’m cautiously optimistic.”

Wheeler Machinery is a statewide Caterpillar dealership with numerous locations around Utah and into Nevada. Bryant said some of the optimism in Utah is keyed to the fact that nearly $4 billion “put on the shelf” by the governor last summer because of budget constraints now can be taken down and dusted off.

“There are a lot of ifs, but our local large contractors are happy that the $4 billion has come back into the picture,” Bryant said. The money is designated for a variety of roadway and bridge projects.

The biggest hole in the federal funding rescue plan, from Bryant’s point of view, is the absence of anything for the mining industry. The world’s largest open excavation and open pit copper mine is located in Bingham Canyon southwest of downtown Salt Lake City. Caterpillar and other large equipment manufacturers supply surface mining companies — such as Kennecott, which operates the Bingham Canyon mine — with the huge earthmoving equipment that makes the mines cost-effective.

“I think we would feel a lot better if there were something in there that gave a hint of kick-starting the mining industry,” Bryant said. “The industry is suffering right now and a lot of your larger equipment dealers rely heavily on mining.” He added that nothing he has seen in the stimulus bill provides such impetus to that segment of industry.

James River Equipment is gearing up for the industry’s financial transfusion by expanding its product line. Scott Libby, who is responsible for James Rivers’ forestry and construction equipment sales in southern Virginia, said that the company’s move “into the paving business” is partly coincidental.

“We have been in the process of doing it for eight months to a year,” Libby said, “but this [emergency federal funding] put the icing on the cake.”

James River is now offering Vogele pavers, Wirtgen milling machines and Hamm rollers along with other specialty equipment and, of course, its staple, John Deere construction and forestry machinery.

“We’re really focusing on road work. That federal package has sent money aside for highway projects and we have stepped up to the plate in anticipation of it.”

Some James River dealerships had an open house the next to last week of February to introduce the new lines of equipment. Libby said 20 paving contractors showed up one day and 50 on the next, a possible indicator of renewed interest among general contractors in investment.

A few states north, an industry leader in New Jersey believes that’s exactly what is happening. The CEO of the Utility and Transportation Contractors Association of New Jersey, Bob Bryant Jr., said dealers with whom he has spoken are expecting an improvement in business activity and are talking about buying new pieces of equipment.

Bryant noted that depreciation and expensing incentives tried last year for contractors didn’t result in new equipment purchases because there was not enough work to justify the investments.

“Why buy equipment when there was no money out there for construction contracts? I think this go-around, with the stimulus money, these tax incentives will benefit dealers.”

The 1,100 members of his association are upbeat, Byrant said.

“We have more projects than we are going to have money to spend on projects. We’re not going to have any problem getting this money on the street.”

Projects that seem poised for funding in the state include highway and bridge work, a new tunnel from New Jersey into Manhattan and water and sewer plant work. He also is confident that some of the $4.6 billion earmarked for the U.S. Corps of Engineers will be spent on flood control and dam projects in New Jersey.

On the other hand, Bryant cautioned against anyone expecting a quick fix, because it will be months before contractors can expect to have extra money coming in.

“Our DOT has expedited the contract awarding process. It expects to have projects advertised and contracts awarded by June-July — that is a very fast turnaround.

“But even with that process, once the first shovel is turned, a contractor still is looking at 60 days before he will get any return on his investment. Improved cash flow won’t happen till the September-October time frame. Probably by November or December, contractors really will be able to tell the difference in their finances.”

A Pennsylvania heavy equipment dealer would only speak anonymously to the issue of the economic stimulus. He said he is expecting “some impact on middle to large contractors with a little trickle-down to small contractors who have 10-15 machines in their fleet of equipment. We are anticipating a little more demand for equipment but nothing tremendous.

“Owner operators still will be having a hard time and if they are, it is hard on everyone.”

Associated Builders and Contractors was supportive of the stimulus package as it moved through Congress. Geoffrey Burr, ABC’s vice president of government affairs, noted in a message to House members that the construction industry lost nearly a million jobs over the past two years because of budget restraints on private and government development. He said the bill would “invigorate” the industry.

“In addition,” Burr wrote, “the absence of any exclusionary union-only project labor agreements in this legislation will allow ABC members and the merit-shop contractors that make up over 84 percent of the construction industry the opportunity to bid on these projects on a level playing field.” He also asked for deletion of Davis-Bacon prevailing wage provisions from the fast-track legislation “so America’s tax dollars are best utilized.”

However, the final legislation did not strip away the labor contract provisions Burr wanted removed. No ABC officials were available for comment to Construction Equipment Guide before deadline and the association’s Web site announced passage of the bill without much editorial comment.

A Springfield, Ill., contractor, Steve Halverson of Halverson Construction Inc., said of the legislation that he “would like to think it is going to help.” The company president added that the money is coming at a time when his company “critically” needs more work. “We have stayed busy, but we have only about 50 percent of the work that we need.”

Illinois Department of Transportation engineers have identified $693 million in projects that are “shovel-ready” and can be let as early as April.

“While the list is larger [costs more] than is expected in the first wave of funding, it will allow Illinois to be in a position to spend any funds redistributed from other states,” DOT officials said.

Halverson noted that the DOT’s list of projects is heavy on resurfacing work and light on bridge work — which remains a dire need in Illinois as in many other states.

“A lot of the projects are in Chicago and East St. Louis. It doesn’t do a lot for the middle part of the state, but that won’t affect us. We’ll go where the work is.”

Halverson Construction contracts approximately $40 million of work a year in an increasingly competitive business. As of 2006, the state had 33,000 construction firms, according to AGC analysis, most of them smaller than Halverson.

“There is just a lot of competition out there,” Halverson said. “Even with the stimulus money, there is a lot of competition. The lack of work has made everything so competitive. Where we normally had four or five bidders, we might have eight now. On bigger jobs in Chicago, we might have 20.”

Across the country in Nevada, Gov. Jim Gibbons said he hopes to have the Nevada Department of Transportation “ready to advertise $1 billion to $1.5 billion in projects within 180 days.” Those priority jobs were culled from what the governor said is a backlog of projects totaling nearly $10 billion.

The bulk of the identified projects are interstate and interchange improvements and expansion or redevelopment of Nevada highways and urban freeways.

Water projects in the legislation are good news for utility workers, though not as good as it might have been, said Ben Gann of the National Utility Contractors Association.

“We initially asked for $15 billion for clean water, $10 billion for drinking water and so on, but you always ask with the idea that what you get may be less,” the government relations coordinator said. “I’m not going to complain about the numbers. Overall it is very positive.

“They could have gone with tougher timelines,” he added. “Each state has a year to have a project under construction. Hopefully, they have got their projects in line.”

Gann said the utilities segment of the construction industry is hurting.

“The obvious issue is the housing market. There isn’t much of one. That affects our members.”

So does Gann believe this bill will quickly ramp up construction activity? Gann shrugged. “I try to stay out of the prediction business. There should be more work. You would think that this would help the industry, but I don’t have a crystal ball. We haven’t tried this before, though, making infrastructure investment part of a stimulus. Part of the reason they are trying this is that they tried rebate checks and that didn’t work.”

Gann believes a looming potential problem is handling of the enormous amounts of money being pumped into the system.

“The problem may be in administering a program of this size,” the utilities association official said. “It is incumbent upon the industry to do the best job it can in managing the money, and the states as well. See that projects are done on time and on budget, that there is transparency in bidding. We all have a role to play in this.”

In a conference call to industry journalists, the board chairman of American Road & Transportation Builders Association (ARTBA), Charlie Potts, acknowledged that the industry will be “scrutinized” as the money flows through it.

“That is not necessarily a negative because it gives us an opportunity to show the positive effects of good management. I welcome the transparency.”

ARTBA — like most industry associations — lobbied Congress for higher levels of funding than finally was agreed upon. The association specifically endorsed one senator’s funding level amendment calling for $40 billion in highway work, $13.4 in mass transit and $13 in water projects.

“We urge you to support these investment levels and the House-proposed $3 billion for airport infrastructure,” urged ARTBA CEO Pete Ruane.

In the end, Ruane said, in the same ARTBA conference call, that while we “may not be satisfied with the aggregate,” the money in the emergency bill is helpful. The “real war lies,” he said, in winning passage later this year of additional congressional funding for critical highway and airport infrastructure work.

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