Growth of Environmental and Infrastructure Markets Is Accelerating

ARCHIVED 2002–2016: Originally distributed via the eWire press wire service. Preserved as historical record.

SUBSCRIBE/UNSUBSCRIBE |

Corporate Responsibility

Science & Technology

Syndication Partners

**************************************************************************

E-WIRE PRESS RELEASE E-WIRE PRESS RELEASE E-WIRE PRESS RELEASE

**************************************************************************

For Immediate Release

Growth of Environmental and Infrastructure Markets Is Accelerating

DC, WASHINGTON, Jun. 29 -/E-Wire/-- The economic recovery that began during the second half of 2003 led to a return to growth in the civil infrastructure and environmental engineering markets in 2004, according to Farkas Berkowitz & Co.'s Seventeenth Annual State-of-the-Industry Report. After a 1 percent contraction in 2003, the report said, these markets bounced back with 5-percent growth last year, generating total revenues of $19.6 billion across four major sectors.

The power engineering market rebounded with signs of continuing growth; remediation services showed surprising strength; and the water-quality engineering market continued to be strong. Only the transportation engineering market contracted in 2004.

In non-engineering markets, the water and wastewater equipment markets-a truly global business, pursued by a relatively new crew of powerful players like General Electric and Siemens-showed considerable strength and promise, while the hazardous waste management market continues to struggle with weak fundamentals.

Joan Berkowitz and Alan Farkas presented the findings of the Seventeenth Annual Stateof- the-Industry Report's to an audience of nearly 100 chief executives on May 17 in Washington, D.C. during the eleventh annual Farkas Berkowitz Forum, an invitation-only meeting of chief executive officers of leading environmental and infrastructure engineering firms.

The report projects that civil infrastructure and environmental engineering firms should see an aggregate growth rate of 7 percent this year and could see double-digit growth in 2006.

The report also noted that engineers are continuing to expand their service offerings, adding such front-end services as financial and management consulting and asset management, as well as planning and program management services. More engineering firms are also providing construction as prime contractors or as joint venture partners with construction firms as the trend towards design-build continues.

A review of the State-of-the-Industry Report's key findings follows.

The resurgent market for power engineering grew by 4 percent from $2.7 billion in 2003 to $2.8 billion in 2004 after a 25 percent collapse in 2003. In terms of worldwide gross revenues in power engineering, the top 15 firms-led by Framatome, Bechtel, Black & Veatch, Shaw Group, and Sargent Lundy-still account for nearly three-quarters of the market, which is the most highly concentrated of the engineering markets reviewed in the State-of-the-Industry Report.

"The market is poised to demonstrate again its susceptibility to boom-bust cycles," observed Mr. Farkas, "But fortunately for engineers the boom phase is coming quickly on the heels of the market collapse in late 2002 and in 2003."

This quick change of fortune for power engineers is due mainly to what Mr. Farkas refers to as the "new math" of the energy marketplace-a new math that is based on the high price of natural gas. Virtually all of the capacity additions of the past few years have come in the form of natural gas-fired plants. Unfortunately, the skyrocketing price of natural gas has rendered the many of these assets uneconomic as baseload capacity. "At current prices, independent power producers cannot buy gas on the spot market and sell electricity in the energy marketplace, so we have a lot of those assets that are either not being used or are being used only to meet peak load demand," said Mr. Farkas.

Experts indicate that natural-gas prices will eventually decline to an equilibrium level of $4.50 per million cubic feet, with a floor of $3.50. "The conventional wisdom today is that anything above $3.50 makes coal and nuclear quite competitive, and in fact, utilities have anointed coal as king once again," Mr. Farkas pointed out. Several coal plants are under construction today, and developers have obtained the necessary financial commitments for seven or eight additional facilities. As many as 100 others are on the drawing boards. Only a fraction of those plants will be built, but the capital costs of those plants are enormous, averaging upwards of $1 billion per plant. Furthermore, even those plants that are never constructed still generate planning and permitting consulting work.

Coal-fired plants are also generating a regulatory-driven bonanza for air-pollution control equipment. The Clean Air Interstate Rule (CAIR) promulgated this past spring places new limits on emissions of nitrogen oxides and sulfur oxides from existing coal-fired generating units, and these requirements are in turn generating tremendous demand for scrubbers and for selective catalytic reduction equipment. Only one-third of today's coalfired capacity has scrubbers, but again, the critical factor is the power market's new math, according to Mr. Farkas. Utilities are finding that their existing coal plants are "extraordinarily valuable," he said, "And today's economics justify expansion." Major players like AEP, for example, have announced plans to spend $5.2 billion in the marketplace, "Obviously benefiting some of the scrubber manufacturers that have waited for a couple of decades for their business to turn up," Mr. Farkas remarked.

Energy's new math is breathing new life into other older technologies besides coal, notably liquefied natural gas (LNG) and nuclear power. "We saw last January the first on-shore LNG terminal permitted since 1982," noted Mr. Farkas, and "three or four terminals that had been mothballed are now in the process of reopening and expanding." Altogether, a total of 52 LNG terminals in North America are on the drawing boards. Those that go into construction will provide work not only for power engineers but also for marine engineers.

The comeback of nuclear power is striking. Some environmental groups are now beginning to question whether nuclear power is part of a portfolio of energy alternatives needed to mitigate the harmful climate impacts of fossil-fuel combustion. Indeed, global warming joins energy's new math as a driving force behind the resurgence of nuclear power. "This is a phenomenal development," Mr. Farkas observed. "I think that most of us who grew up with nuclear power never thought we'd see a new nuclear power plant in this country in our lifetime. Now I think it's likely that we will."

Another technology receiving a boost from the new math is coal gasification, particularly in the form of integrated gasification combined-cycle (IGCC) technology. The Department of Energy (DOE) has proposed two IGCC projects, and Fluor and Bechtel, the latter in combination with General Electric, have licenses to technologies in this area. In addition, AEP and Cinergy are reported to be discussing plans for bringing coalgasification plants on line. "The advantage here is lower emissions," noted Mr. Farkas. "The disadvantage is higher capital costs than conventional coal-fired generation."

Altogether, "this new math means better than a 10-percent growth for engineers this year," Mr. Farkas said in concluding his discussion of the power-engineering market. "In fact, we seem to be entering another boom phase of what, of late, has been a highly cyclical market."

Transportation Engineering

Within the civil infrastructure and environmental engineering market in 2004, transportation engineering proved to be the exception to the rule of overall good fortune. The market slipped into reverse with a 2-percent decline in 2004 after a 4-percent increase in 2003, when firms were working off backlog, according to the State-of-the- Industry Report. The U.S. transportation engineering market was at $7.5 billion in 2004. Many firms shared in the declining fortunes in this most fragmented of infrastructure markets covered by Farkas Berkowitz. The top five firms-AECOM, URS, Parsons-Brinckerhoff, Louis-Berger, and Jacobs-share 31 percent of the worldwide market, while the next 10 largest firms command 21 percent.

In the highways and bridges segment, "growth stalls, as engineers fume," Mr. Farkas noted. The market has suffered from a 20-month delay in the reauthorization of Transportation Equity Act for the 21st Century (TEA-21), due in large part, to Congress having proposed more on highways than the Bush Administration was willing to allow. The current law has been extended seven times, and these extensions have generated uncertainty that has hindered progress on major projects. 5 Shares of $10.8 Billion in Gross Revenues

Highway and bridge contractors enjoyed 6-percent growth as they worked off project backlog last year, but the engineering side of the business declined by 2 to 3 percent, according to Mr. Farkas. The national decline, however, masks significant variability by region. Some states and cities have raised additional funds, and those markets have been very strong. "As a matter of fact, there were a lot of state and local initiatives on the ballot last November," Mr. Farkas pointed out, and "80 percent of those transportation initiatives passed." Florida, Texas, and California have emerged as the strongest markets, but solid activity is taking place in other states and regions, such as the Pacific Northwest, Arizona, Idaho, the front range of Colorado, and pockets of the Midwest.

There is some good news in TEA-21's successor bill, "TEA-LU," which stands for the "Transportation Equity Act: A Legacy for Users." A House version of the bill, authorizing a spending level of $284 billion, has passed, and the Senate has enacted companion bill authorizing $11 billion more. President Bush has declared his preference for the spending level in the House bill, and a number of details must be worked out in conference, "We should see a bill soon," said Mr. Farkas. "We expect growth of better than 5 percent in 2006, and we do look for at least some growth this year in highways and bridges."

Mr. Farkas remarked that alternative delivery in highway and bridge engineering is "near the tipping point." Design-build now accounts for 15 percent of the highway market, according to the Federal Highway Administration, and its use is growing more rapidly than that of conventional delivery. The reasons for this include speed of delivery and, perhaps, the growing shortage of experienced state DOT engineers. Mr. Farkas reflected, "Another factor that is encouraging design-build is the fact that public-private partnerships are gaining momentum, particularly in light of constrained funding." Publicprivate partnerships appear to be gaining ground in Texas, Florida, Georgia, Virginia, Utah, Oregon, and Washington. The city of Chicago recently signed a contract for a major partnership, and a bill pending in the California legislature, and supported by the governor, would also help public-private partnerships move forward.

Design-build is clearly here to stay, and "we think this is a trend that could over time transform the engineering market," Mr. Farkas declared. "As you go from conventional delivery to alternative delivery, you're going from qualifications-based selection, to socalled best-value selection, where price is always important, and from a public agency client to a commercial one." Although challenging, some engineers report that profitability on design-build projects has been better than on conventional engineering projects.

In the light rail engineering segment, the stalled federal bill is again a factor leading to delays in projects. Last year's growth was limited to 5 percent, but it is important to note that 75 percent of the state and local initiatives that included public transportation, either in whole or in part, passed. The center of gravity in the transit market appears to be moving westward from its traditional locus in the Northeast, as solid opportunities abound in Denver, Phoenix, Houston, Dallas, San Diego, Los Angeles and elsewhere in California. Miami is the notable exception to a relatively slower East Coast market. Again, design-build delivery is gaining momentum owing to early successes.

Farkas Berkowitz finds that heavy rail is poised for growth with its increasing needs. In contrast with light rail, heavy-rail engineering is a private-sector market, characterized by greater price sensitivity and, in today's marketplace, funding constraints. Despite these constraints, however, one trend on the horizon that could improve the heavy-rail market is intermodal development, of the kind taking place in the Alameda Corridor in southern California. Under this scenario, states and localities relocate freight rail and utilize the tracks and rights of way for transit. Such proposals are in the works in Chicago, Denver, Houston, South Florida, and Texas generally.

A growing number of firms is "gearing up for the coming bonanza in the transit market," Mr. Farkas observed. AECOM and Parsons Brinckerhoff have dominated this market sector, but other firms, such as STV, HDR, HNTB, PBS&J;, and Carter & Burgess, are beginning to catch up. "We look for a better than 10 percent growth by 2007," Mr. Farkas said. "The bidding opportunities today are much better than they were a year ago."

In the airport segment, the market remained flat for the third consecutive year, according to the State-of-the-Industry Report. The take-off that the firm projected for 2004 never occurred. An increase in bidding opportunities in the second half of 2003 and in 2004 had suggested the potential for growth, but with nearly all of the pre-9/11 backlog worked down in 2003, revenue from new opportunities were insufficient to offset the overall decline in backlog.

Basic airline economics presents a picture of significant challenges going forward. The Federal Aviation Administration (FAA) projects that passenger-miles traveled will return to pre-9/11 levels this year, and about half of all airports passed that threshold in 2004. Dollars-per-mile-traveled, however, continues to decline precipitously; the FAA estimates an 18-percent decline since 2000 and projects a nearly 40-percent decrease through 2016.

"We all know very well the financial plight of the airline industry," Mr. Farkas noted. "A true recovery in this marketplace, in our opinion, requires structural change, and structural change is always slow to arrive." Travelers will see increased congestion, and it's anyone's guess as to what may break the bottleneck, according to Mr. Farkas. "We could see airports levy surcharges directly on customers taking off from their airports. We do think that we will see a growth this year of about 5 percent, but a market takeoff is unlikely any time soon."

The one bright spot in transportation engineering was in ports and harbors, which are enjoying a substantial increase in commercial traffic and are upgrading to handle that traffic, according to the State-of-the-Industry Report. Trade at the top three ports-Los Angeles, Savannah, and the Port Authority of New York-New Jersey-doubled from 1999 to 2003. Ports on the East Coast are accounting for an increasing share of trade with Asia, owing to several factors, including the deployment of larger and faster ships. LNG projects and the development of intermodal facilities "will buoy a larger market," Mr. Farkas reported. Engineering firms in this sector are enjoying 10-percent growth, and "we look for growth at the current pace through 2006," he added.

Water Quality Services and Equipment

The U.S. water-quality engineering market remains strong, growing at a 13-percent rate to $4.82 billion in 2004-the seventh consecutive year of double-digit growth in this sector, according to the State-of-the-Industry Report (See Exhibit 5). The water-supply portion of the market continues to grow at a greater rate than the wastewater side. The water-supply portion of the overall market has grown from 38 percent of the market in1997 to 51 percent in 2004. The top five firms in this sector are CH2M Hill, Tetra Tech, MWH, AECOM, and Earth Tech, collectively commanding one-third of the market.

The flow of opportunities in water-quality engineering is substantial, with overflow control work generating a number of large projects. Rehabilitation work, including both plant upgrades and underground infrastructure, will continue to contribute to this growing market.

Interestingly, a Delphi survey conducted by Malcolm Pirnie shows that deterioration of infrastructure ranks relatively low on the list of priorities for utility operators, Mr. Farkas reported. This supports the firm's view that rehabilitation will occur very gradually. At the top of the utilities' list of critical issues are leadership, asset management, and an educated work force. As a result, engineering firms are increasingly providing management consulting services to their utility clients. Furthermore, "when we first saw this trend, the focus seemed to be on improving the efficiency of operations of these treatment works," Mr. Farkas pointed out. "That emphasis seems to be changing. We're now seeing a greater emphasis on helping utility executives figure out how to spend what are scarce resources in light of their very substantial needs."

Also outpacing the overall engineering market in terms of opportunities is the water resources development segment. This segment principally involves the development of new sources of water in places like California and the desert Southwest, where rapidly growing populations are putting extreme pressures on an already scarce resource. Farkas Berkowitz has been tracking several "mega-projects" in the water resources development arena, but the only one that really generated good contracting opportunities last year was the Everglades project, Mr. Farkas observed. "We saw $1.4 billion going to eight lucky contractors-who had already been pre-selected, I might add-and this was due to revenue bond financing at the state level. In terms of Corps of Engineers money-it's scarce."

In water-quality engineering, the business model is shifting slowly away from time-andmaterials- type contracting towards design-build and lump-sum engineering-only projects, according to Farkas Berkowitz. Design-build grew more slowly in 2004 than it has in recent years, perhaps as a result of the slowdown in bidding opportunities in late 2002 and early 2003. The slowdown may also reflect the "law of large numbers," Mr. Farkas reflected. "We estimate the growth rate of design-build last year at less than 10 percent in this segment, and we further estimate that today, about 20 percent of the total designconstruct value in the water-quality sector is going to alternative delivery."

California and Florida are contributing most to the growth of the alternative-delivery market, and the Pacific Northwest, Colorado, and Georgia are among the other states and regions where alternative delivery is favored. More than 20 states still do not permit it, Mr. Farkas added. The five largest firms undertaking projects under the alternativedelivery model-MWH, CH2M HILL, Black & Veatch, CDM, and Earth Tech-remain committed to it. Meanwhile, construction firms are fighting harder to compete with engineering-firm-led teams. Farkas Berkowitz projects that alternative delivery will grow at a rate of more than 15 percent annually in 2005 and 2006.

The contract operations market, primarily in the form of public-private partnerships, bounced back with an 8-percent growth rate to $1.16 billion last year after an essentially flat 2003, according to the State-of-the-Industry Report. Veolia Water North America alone accounts for 32 percent of this highly concentrated market, while United Water, OMI, and American Water together command another 39 percent.

As the public and private partners come to grips with the nuances of operating under 20- year contracts rather than three- to five-year contracts, "we see some evidence of this market maturing and becoming more rational," said Mr. Farkas. The U.S. Conference of Mayors will issue contracting guidelines very soon that "will hopefully make the contracting process more streamlined, more cost-effective, and provide for a more equitable sharing of risk between the public and private partners," he noted. Meanwhile, the players are focusing more on profitability than overall growth, either renegotiating unprofitable contracts or, when this is not possible, coming to amicable settlements with their municipal partners.

"Although growth in contract operations of 8 percent last year was most likely a function of projects that had been in the pipeline for some time rather than increased bidding opportunities, the fundamentals of the public-private partnership model remain strong," Mr. Farkas stressed (See Exhibit 6). A forthcoming survey conducted by the Water Partnership Council provides evidence that the public sector is realizing good value from these relationships and knows it, as reflected in contract renewal rates year over year of better than 90 percent. The players need to understand, however, that "this is a service that is sold but not bought," Mr. Farkas advised. "You've got to be out there, you've got to be marketing, you've got to be selling, and unless you are, you're not going to see much in the way of market growth."

On the equipment side of the water-quality market, the State-of-the-Industry Report finds a "feeding frenzy," as giants like General Electric, Siemens, and ITT Industries aggressively acquire technology firms to build comprehensive product portfolios. The total number of transactions in the equipment sector over approximately the last 15 to 16 months totals about $3.5 billion, with the transactions going for multiples of up to 10 to 14 times EBITDA, Farkas Berkowitz has estimated.

With the new players have come new rules, Mr. Farkas noted, and the first of these rules (with apologizes to the first Clinton campaign) is, "it's the world market, stupid." The water-quality market has always been global, but these giant new players have global platforms that can take the technologies and product lines of acquired entities "and extend them into that global marketplace far more effectively than has been done in the past," Mr. Farkas said.

The second new rule reflects the hard fall of the "total water solutions" company: the myth of market synergy has died. The logic of combining chemicals, equipment, engineering, and contract operations under one roof suffered from internal contradictions, and the companies that tried to provide total solutions eventually broke the pieces apart again. A new focus on technological synergy has been born, however, as GE, Siemens, and the other giant players attempt to combine in-house technologies with acquired technologies to provide their clients with comprehensive offerings for water and fluids management. Whether this synergy proves viable remains to be seen, according to Farkas Berkowitz.

Finally, with the new players, the equipment-services link will grow ever stronger in the years ahead, Mr. Farkas stated. "Obviously, the model that GE and Siemens have pursued-and I think we can add ITT to this list as well-is to take an equipment business and to wrap a service business around it, and clearly we're going to see that," he remarked. All of these new giants are looking for double-digit growth in their waterrelated businesses.

Industrial and Federal Markets

In the industrial and federal category, the State-of-the-Industry Report reviews the markets for remediation and environmental compliance services in the private sector and at the Department of Defense (DOD) and the Department of Energy (DOE), with additional reflections on the DOD privatization market and the reconstruction activities in Iraq.

In the U.S. remediation market, Farkas Berkowitz found surprising growth of 11 percent to $4.4 billion in 2004 and attributed that growth to significant activity within the industrial sector and at DOE (See Exhibit 7). The leaders in this market are URS, Bechtel, CH2M Hill, ERM Holdings, and Tetra Tech, which together account for percent of the worldwide gross revenues derived from remediation.

The industrial portion of the remediation and environmental compliance market grew by an estimated 5 percent in 2004, although there was a significant disparity in the fortunes of the players, as some saw little growth while at least one enjoyed 20-percent growth. The power industry is "fueling a market recovery," Mr. Farkas observed, as proposed coal and LNG facilities prompt permitting activity, and as new rules, such as the most recent round of air emissions standards and the water-intake rule, impose new obligations on existing facilities. In terms of remediation work, the petroleum industry is primarily responsible for the rebound, as high gasoline prices lead to high profitability and stepped up discretionary spending for cleanup projects.

The Sarbanes-Oxley legislation appears to have been less of a stimulus for cleanup work than originally expected, Mr. Farkas reported, and guaranteed fixed-price remediation now looks more like a market niche than the major trend it appeared to be one year ago.

Many Fortune 500 firms are not willing to pay the premium associated with the insurance protection called for under guaranteed fixed-price remediation-insurance protection that those Fortune 500 firms may not fully trust, Mr. Farkas explained. Furthermore, the shallow pockets of remediation contractors do not give these companies a very high degree of comfort.

The State-of-the-Industry Report projects better than 10-percent growth in industrial remediation and environmental compliance this year. By contrast, the DOD cleanup market is "quiet," according to Mr. Farkas. DOD's cleanup budget decreased by 4 percent for the current fiscal year, following an 18-percent decrease in that funding for the previous fiscal year (See Exhibit 8). Market players provided various responses to questions about whether the Iraq reconstruction effort reduced the flow of cleanup task orders last year, "but there certainly was strong agreement among all the contractors with whom we spoke that Iraq clearly has slowed or stopped discretionary spending for environmental matters," Mr. Farkas reported. For example the projected flow of work associated with the cleanup of unexploded ordnance and ranges has yet to materialize, and it does not appear likely to do so over the next couple of years.

Compounding the problems associated with this market sluggishness is the increased favoritism shown to small businesses, according to Farkas Berkowitz. The Bush Administration made a very important change in how it counts against the small-business contracting quotas, no longer giving credit for subcontracting. As a result, all of the major players report a loss of market share to small companies, which now command an estimated 25 percent of the total contract value in the DOD remediation market.

All of the military service branches are relying increasingly on performance-based contracting, with the Army continuing to stress guaranteed fixed-price contracting. "We doubt the Army's goal of cleaning up 70-80 percent of all sites through this contracting mechanism will be achieved," according to Mr. Farkas. For one thing, there is an inadequate amount of insurance capacity available to provide the necessary funding. "There are not that many remediation contractors who are willing to work under those circumstances," Mr. Farkas added, "And we doubt that there are a sufficient number of sites that really have the kinds of conditions that make guaranteed fixed-price remediation practical."

New contracting activity is limited within each of the three military branches. In the Army, the Corps of Engineers' dominance of the remediation market is now being questioned in the wake of some dissatisfaction with the way the Corps operates. New agencies, such as the Installation Management Agency, have been created to assume some responsibility over base operations. The Navy has merged the Naval Facilities Engineering Command (NAVFAC) and its Public Works unit, but it continues to rely on traditional contracting vehicles. At the Air Force, the Air Force Center for Environmental Excellence (AFCEE) remains in control of contracting and is expected to let a major engineer-construct contract in the spring of 2006.

The next round of Base Realignment and Closure (BRAC) offers opportunity, according to Farkas Berkowitz. Defense Secretary Donald Rumsfeld has recommended the closure of 33 major bases and significant realignment at many more major facilities. "We look for some of these contracts to combine cleanup and transfer, so for you entrepreneurs out there, it should be a very vibrant market over the next six years," Mr. Farkas noted.

Commenting briefly on the DOD privatization market, Mr. Farkas observed that housing privatization is a mature market, with perhaps only another 12 months before all of the contracts are issued. The other major DOD privatization initiative focuses on water, wastewater, and electricity-generating utilities, and these opportunities have been very slow to unfold. "It's fair to say that the potential service providers to this market are totally fed up with the way it has gone," Mr. Farkas remarked. "There have been a few contracts that have been let by the Army. It has taken four and five years in order to be able to fully negotiate and close the deals on those contracts. The Army has a lot of bids that are outstanding right now. When they are going to act on them is anyone's guess." Mr. Farkas added that the Air Force and Navy have let few or no privatization contracts.

At DOE, the environmental management market is peaking, with an appropriation of $7.8 billion in the current fiscal year and a projected long, gradual decline in funding looking forward. The funding cuts do reflect the fact that progress on cleanups has been substantial, and that less funding is needed, Mr. Farkas emphasized.

Of particular note in the DOE market is another potential changing of the guard among the prime operations contractors. Bechtel had been the major winner during the waning days of the Clinton Administration. Today, however, CH2M HILL and a reborn Westinghouse in the form of Washington Group International are posting an impressive number of contract wins. They won a major cleanup award and a lab operations contract in Idaho, as well as the Hanford River Corridor closure contract-an award that is under protest by Fluor Corp.

As is the case at DOD, small businesses are in the ascendance at DOE, Mr. Farkas observed. One year ago, 86 percent of the pending procurements by number and 35 percent in terms of value were going to be small-business set-asides, and those contracts were indeed let. Approximately half of the indefinite-delivery/indefinite-quantity contracts awarded under DOE's FOCUS initiative went to small businesses, but unfortunately, few task orders have been issued under those contracts. In addition, of the six small-business set-asides last year, four or five have been protested.

"Put yourself in the shoes of these small businesses," Mr. Farkas suggested. "Writing these proposals, believe me, is a huge investment, and I think that they're probably questioning now whether they're going to see an adequate return on that investment." The protesters "are spoiling the party," he noted, adding that DOE rules make protesting easy.

As for overall contracting opportunity, "we're seeing a relative lull now after a torrid pace," Mr. Farkas continued. He mentioned that a number of the national laboratory operating contracts are in the midst of procurement. The university operators are well entrenched at several of these laboratories, but they have not escaped criticism. Mr. Farkas expects some of them to reach out to the private sector to form teams for managing these facilities. "Next year we could see some major contracting opportunities as such major contracts as Savannah River, West Valley, the Hanford Tank Farms, Y-12, and Pantex come up for potential recompete," added Mr. Farkas.

Turning to Iraq, he observed that reconstruction and combat support work provide infrastructure engineering and construction firms with both opportunity and peril. The reconstruction segment is robust, although progress in deploying assets to rebuild the country has been slow, according to Farkas Berkowitz. Conflict between DOD and the Department of State, which assumed responsibility for the reconstruction effort in July 2003, has presented just one of the institutional barriers to progress. Congress has scrutinized the contracts issued to date, "and instead of seeing a streamlined procurement process, we've seen, particularly in the Corps of Engineers, an effort to dot all the i's and cross all the t's," Mr. Farkas observed. He singled out AFCEE for praise in its management of a host of large-capacity contracts that, happily for the winners, provided much more in the way of tasks than just cleanup.

As of this May, only 23 percent of the $18.4 billion originally authorized by Congress for Iraq's reconstruction had been dispersed, while 26 percent of the funding had been diverted to security-related projects. Numerous engineering firms are active in the Iraqi reconstruction segment, including Bechtel, Parsons, Washington Group International, the Shaw Group, Weston Solutions, Earth Tech, Versar, and AMEC. Yet despite the robust market and the launch of some 1,700 projects, the infrastructure in Iraq remains woefully inadequate. As of last November, for example, one in five urban households and three in five rural households lacked access to safe drinking water, according to the Center for Strategic and International Studies.

A ramp-down in the reconstruction market, in terms of the participation of U.S. firms, could come soon. "We're already beginning to see contracts going directly to Iraqi firms," said Mr. Farkas. The future of U.S. firms in the reconstruction of Iraq's infrastructure is therefore uncertain.

The combat-support portion of the market is huge and peaking now, according to the State-of-the-Industry Report. This market in 2005 has an estimated value of about $9 billion to $10 billion, and the scope of services is very broad, encompassing the storage and transport of fuel, tanks, and ammunition, and providing guards for U.S. officials, in both Iraq and Afghanistan. As for the major players, Kellogg Brown & Root (KBR) has posted approximately $7 billion in revenues from its contract, but reports indicate that this contract could be broken up for others to share. The other major players in the combat support market are Dyncorp and IAP Worldwide Services, a combination of IAP Worldwide and Johnson Controls World Services.

"Certainly, the civilian deaths associated with doing work in Iraq have sobered all of the market participants," Mr. Farkas concluded. Based on the most recent quarterly Report to Congress of the Special Inspector General for Iraq Reconstruction, "there have been claims related to 276 deaths of civilians working on government-funded contracts," he pointed out. "In terms of outlook, I think you need to be able to predict how long our troops will be in Iraq. I'm not smart enough to make that prediction, and I am too smart to speculate on when that might be."

Hazardous Waste Management

Once a hot market, the hazardous waste market has matured and continues to face significant challenges, Dr. Berkowitz told the audience at the Farkas Berkowitz Forum. "Many shared in a flat 2004 market of approximately $2.9 billion," she reported. Clean Harbors commands a 22-percent share of the hazardous waste market, and larger shares of the incineration and landfill segments, while five firms-Philip Services, Onyx Environmental Services, Heritage Environmental Services, Waste Management, and the portion of Safety-Kleen not acquired by Clean Harbors-share approximately 41 percent of the market. The remaining 37 percent is divided among nearly 160 firms (See Exhibit 9).

Recalling the turbulent history of the hazardous waste industry, Dr. Berkowitz noted that the issuance of the first RCRA Subtitle C regulations and the passage Superfund law, within one month of each other in 1980, led to spectacular growth. Many states, in fact, projected capacity shortfalls, and the private sector stepped up to meet the demand "and then some," she related. The 1990 recession hit the industry hard, and when the economy bounced back, the industry did not. Following a small recovery, the industry has essentially remained tightly linked to the ebbs and flows of the overall economy.

Although regulations built the market, the role of the federal government in sustaining it has been mixed, according to Dr. Berkowitz. "Today, high barriers to exit, created by closure and post-closure regulations, perpetuate over-capacity. To make matters worse, the EPA is acting to remove wastes from the RCRA regulations, in part to promote recycling-or so they say." The bottom line, she declared, "is that the key drivers are more economic than regulatory, as they are for many of the other markets we've been talking about."

The base business is not growing, and it is unlikely to grow, so firms are seeking to broaden their service offerings outside the traditional treatment, storage, and disposal realm, according to the State-of-Industry Report. Event business can provide a short-term boost, but if the event is associated with a move offshore by a U.S. manufacturing entity, "the annuity for that plant is lost," Dr. Berkowitz pointed out. "On-site services relating to waste, and even more broadly to materials management, provide longer-term opportunities that are being pursued by Clean Harbors, Philip Services, Heritage, Onyx, EQ, and others," she added. These services are less capital-intensive than the fixedfacility business, and this fact provides some advantages.

Some players in the sector are moving away from a product-led, "inside-out" marketing approach towards a customer-led, "outside-in" approach, and "the difference between the two approaches is profound," Dr. Berkowitz stressed. The product-led, inside-out approach "requires that your sales people become intimately familiar with the products and services you provide. In fact, some companies use different sales people for different services. The customer-led, outside-in approach means that your sales people have to be as familiar with the business of the industry that you're serving as they are with their own offerings. And the two approaches require a totally different approach to compensation and reward."

In summary, the hazardous waste management market is far from thriving, but "it is a market in which a well-managed firm can grow profitably," Dr. Berkowitz declared. This fact points to a critical lesson about the civil infrastructure and environmental engineering business generally. The key question is not, "What markets are hot?" Dr. Berkowitz reminded the audience, but rather, "What are the hot markets for your firm, given your core competencies, your interests and expertise, your cash position, and your attitude toward risk." * * * * * * * Farkas Berkowitz & Company is a management consulting firm serving companies that provide design, construction, and operational services for government and industry. Established in 1983, they assist clients with strategy, mergers and acquisitions, and operations improvement. Inquires should be addressed to Sarah Chittenden at 202-833- 7530 or [REDACTED-EMAIL] or visit their website: www.farkasberkowitz.com.

Farkas Berkowitz & Company

Sarah Chittenden [REDACTED-EMAIL]

http://www.farkasberkowitz.com

**************************************************************************

To Transmit Your News Over E-Wire, visit http://www.ewire.com or

call 1-[REDACTED-PHONE]. E-Wire Is Broadcast To Millions Of Readers Worldwide

**************************************************************************