The Water & Wastewater Market: It Just Keeps Rolling Along
The eternal constancy of the water and wastewater market is based on supply and demand. On the demand side of the equation we have the foundation of the water business. Water is essential to life! It's as simple as that. We are not going to stop drinking water. And unlike air, another essential component of life, water is not literally all around us and free for the taking. Water must be conveyed from point A to point B, water must be purified before human consumption and water must be collected and cleaned before returning it to nature for another round of use.
Furthermore, water is a finite resource, practically and economically. There is no substitute product, no matter what the sports drink companies try to tell us. All in all, one could contend, and probably find few challengers, that water is the ideal market.
Slow GrowSo how has the ideal market been performing? Since 1995, the water and wastewater business in the United States has been growing at around 4 percent to 5 percent per year. During the last few years, that rate slightly outpaced inflation so there was some real expansion, albeit minimal. Most market watchers would categorize the overall market as "mature," which is characterized by flat to low growth.
The water component of the market has grown at a relatively robust 9 percent over that four-year period while the wastewater component increased only 2 percent. Despite this more than four-to-one recent growth differential in the two markets, overall there is still more wastewater work being done in the United States (about 55 percent to 60 percent of the total water/wastewater market is wastewater related).
Let's examine the reasons for this performance and the forces and trends that will shape this market for the foreseeable future.
It's The EconomyPresident Clinton built his winning 1992 presidential campaign on the now familiar slogan, "It's the economy, stupid." That very same slogan can be used to remind us of the key factor in the health of the water and wastewater marketplace. When the economy is good, and coffers are bulging, capital flows readily into both public and private sector water and wastewater infrastructure. When the economy is struggling, those investments are pared back. It's a direct relationship, but the water and wastewater markets will lag the overall economy somewhat on both the uphill and downhill sides.
During the overall U.S. economic contraction of the early 1990s, many forecasters erroneously believed that this market was recession-proof. After all, they contended, we were regulatory driven and not subject to the slings and arrows of indecipherable economic mumbo-jumbo.
How wrong those "experts" were. Within 18 months of the onset of the country's economic distress, we saw a flat water and wastewater marketplace. We saw businesses fold or sell. We saw a shrinking number of projects. And we saw more intensive competition for those projects. All at a time when environmental regulatory demands on both government and industry were rather intense. Recession-proof? Hardly.
But look at the market today. As noted previously, the economy rebounded in the mid-1990s, and real water and wastewater market growth is now outpacing inflation. Utilities are rushing to respond to pent-up infrastructure needs. When my engineering and construction colleagues across the country are queried, virtually no one is struggling to find project opportunities - there are plenty of them.
In particular, consider this. According to a nationwide survey conducted in 1998 by the National League of Cities (NLC), 65 percent of municipalities reported that their fiscal condition is better now than in the recent past. The authors of the "Kiplinger Letter" declared that American cities are in their best financial shape of the last 20 years. Bond ratings have gone up for a number of major cities, including Detroit, Cleveland, New York, Chicago and Washington, D.C. What's more, voters in the November 1998 elections approved more than 90 percent of the city and state municipal bond referendums. When the economy is buoyant and people feel flush, they vote to pay for capital improvements - one of life's immutable truths.
Meanwhile in the private sector, U.S. manufacturing has been adding production capacity at 5 percent per year. In many situations, recent downsizing and mergers have resulted in improved financial performance and, on the whole, revenues and profits are respectable. Furthermore, the overall economy remains healthy. This all translates to a good climate for all kinds of environmental work.
In addition, a number of industrial concerns are linking environmental improvements to increases in productivity and efficiency. In other words, it's going directly to the bottom line. As this trend continues, the opportunity for water and wastewater work in the private sector will only increase. In fact, the BTI Consulting Group's recent survey of industrial environmental managers predicted a 6 percent growth for 1999 in environmental spending on consulting services to improve environmental management. This rate of growth notably exceeds what has transpired in previous years. And, as every astute valve manufacturer has recognized, where the consultants work today is where the valves will be sold tomorrow.
But again, watch the economy closely. If the economic indicators take a downward turn, the water and wastewater markets will inevitably go with them. After all, it's the economy, stupid.
Needful ThingsReverting again to supply and demand economic theory, demand equates to need and ability to pay. As we saw in the previous section, ability to pay is quite good right now. But what about need? Water and wastewater infrastructure need is nothing short of monstrous. In 1998, the American Society of Civil Engineers (ASCE) published its "Report Card for America's Infrastructure." On that report card, drinking water infrastructure received a D and wastewater garnered a D+.
Not exactly the grades you eagerly anticipated sharing with mom and dad.
ASCE cited the considerable repair, rehabilitation and replacement that is needed in our nation's water and wastewater systems. Among the specifics, for example, the ASCE report card noted that 2,000 additional wastewater treatment plants would be needed by 2016.
Other factors add credence to the ASCE conclusions. Many components of the numerous wastewater treatment facilities that were built in the first decade of the Clean Water Act (CWA) are now nearing the end of their useful lives. Then there's the maze of subterranean infrastructure that you never see but is also in need of help. Sixty percent of the sewers in the United States were installed before 1950 and, in a word, are "old."
Underground Construction magazine reported a 14 percent growth in municipal spending on pipelines in 1998, so attention is beginning to be paid to this area. Another NLC survey last year showed that American cities ranked infrastructure improvement as the second most important of all municipal issues.
Has anyone tried to quantify all of this water and wastewater infrastructure need?
Enter the Environmental Protection Agency. In its nationwide "1996 Clean Water Needs Survey," the EPA identified approximately $140 billion in water system needs and an equal amount for wastewater facilities during the same time period. But don't hang your fedora on those numbers.
In a separate investigation entitled "Infrastructure Needs for the Public Water Supply Sector," the American Water Works Association concluded that the EPA number dramatically underestimates the true needs. AWWA determined that the nation's drinking water systems alone would require a $325 billion investment over the next 20 years. And in "The Cost of Clean," a recently released study by the Water Environment Federation and the Association of Metropolitan Sewage Agencies, wastewater needs over the next 26 years were pegged at $330 million.
No matter which forecast numbers you believe, the conclusion remains the same. There is enormous need out there and abundant project possibilities await - as long as the ability to pay remains strong.
Big Government?Big brother is certainly not as big as it used to be as far as the water and wastewater business is concerned. Throughout the 1970s, 80s and into the 90s, federal and supporting state regulations were the principal driver of the marketplace.
But today, the market is undergoing a metamorphosis from a regulatory dictated business to one based more on an economic and business model. This is being caused by the tremendous needs mentioned earlier and the particular nature of those needs. Another reason is the relative dearth of regulatory initiatives in recent years that can translate directly into design and construction activity.
As a case in point, we have been rowing merrily along since 1997 without a re-authorized CWA. Fortunately, this has not adversely affected Federal State Revolving Fund appropriations for wastewater collection and treatment projects. Nevertheless, the absence of a re-authorized CWA and its possible impetus for new types of facilities and improvements has kept the wastewater side of the house in a "business as usual" mode. A good business to be sure, but one missing the driver for change, an advancement to which it is accustomed.
In the drinking water realm, regulations remain a more significant force. The Safe Drinking Water Act (SDWA) Amendments of 1996 have set a course for water quality improvement for the future. Of particular relevance under the SDWA are the Stage 1 Disinfection/Disinfection By Products (D/DBP) rule and the Interim Enhanced Super Water Treatment Rule (IESWTR) now in effect. The Stage 2 D/DBP rule and the final ESWTR are both expected in 2002. The current and future forms of these rules will result in treatment process and distribution system upgrades and modifications for many water utilities.
In addition, a new Groundwater Treatment Rule is anticipated to be promulgated this year. This rule will impact water systems using groundwater as the supply source, especially regarding disinfection practices.
There's an absence of a bandwagon environmental issue as a national campaign plank for 2000, and with the gradual devolution of the regulation generation and enforcement function from the federal level to the states, don't look for a legislative or regulatory revolution in the next two years.
If anything happens in addition to the aforementioned water regulations, it may be in isolated areas such as storm water, combined sewer overflows and possibly Total Maximum Daily Loads (TMDL) to receiving water bodies. None of these are anticipated to immediately generate any project work, however. All in all, regulations remain an important direction setter for the water and wastewater market, but they are now only one driver instead of the driver.
Who's Who?As mentioned earlier, the water and wastewater market in the United States has been labeled by many as "mature." In addition to flat or low growth, a mature market is marked by pricing pressures, a squeeze on margins and consolidation. All of these are occurring to varying degrees, but the consolidation factor and the changing face it puts on entering companies in 1997 are up substantially from previous years.
To begin with, there are fewer consulting engineering firms than before. A survey performed by Environmental Information Ltd. Showed that in as many as 17 states, more than 30 percent of the environmental firms had gone out of business in the past few years. Beyond these firms that closed their doors, there were 125 mergers and acquisitions of engineering companies in 1997 - up substantially from previous years.
The result is that the big are getting bigger at the expense of small and mid-sized organizations. As proof of this, in the 1998 Engineering News-Record Top 200 Environmental Firms, the largest 20 companies in water and wastewater now have 57 percent of the market. Expect this trend to continue and this percentage to go even higher.
Another form of consolidation is privatization - either private ownership or private contract operations of water and wastewater facilities. The privatization business has grown markedly in recent years. In 1997, more than 1,200 publicly owned utilities in the United States were being operated by a private contractor, compared to 940 in 1996.
But unlike what one would expect from this type of market niche in its relatively early stages of development, the wealth is not being widely shared. Although there are quite a number of contract operation entities, the top six companies possess 80 percent of the market.
One more way consolidation is manifesting itself is the gradually growing popularity of design-build as a method of water and wastewater project delivery. Although design-build delivery has been common in private enterprise for some time, it is now catching hold with public utilities as well. Accurate design-build growth figures are not available for the water and wastewater market, but with recent major design-build or design-build operate (which is actually another form of privatization) contracts being awarded in Seattle, Milwaukee and Detroit, it's intuitive to deduce that some growth is indeed occurring.
Who are the design-build players? They come in a variety of shapes and sizes. There are companies that can do the design, the equipment procurement and the construction (and possibly even the operations) all by themselves. There have also been seemingly infinite ways to assemble teams of participants, each skilled in a particular aspect of the job.
There is plenty of room for a wide range of involvement in a design-build setting. But to call design-build the "wave of the future" would be stretching it a bit. However, it should gain sufficient acceptance such that any designer, contractor or manufacturer who wants to gain or even maintain overall water and wastewater market share will need to become adept at it.
One implication of all of this is that the number of potential "customers" for valves and related products is decreasing even as the market is showing some growth. This shrinking customer base is good news in some respects, but bad news in others. For example, the fewer the competitors in a market, the more monopolistic forces will come into play.
A second implication is that competitiveness has become the watchword of the marketplace. Engineering firms, construction contractors, equipment manufacturers, utilities and private operators are all trying to improve their efficiencies and operation and management methods. But within the intense competition comes opportunities for business expansion and diversification that otherwise would not have been there. It's a time of unparalleled possibility, but it's not a time for the faint of heart.
What's It All Mean?All in all, the water and wastewater market in the United States is a good one to be in. Demand will always be present, and as the nation's population grows, so does that irreplaceable, insatiable demand. The sheer need for new facilities, upgrades and rehabilitation is in the hundreds of billions of dollars. So, even if the economy thumbs its nose at us for a spell, there will still be a lot of water and wastewater work to do.
The marketplace is transforming itself from one driven by government legislation and regulation, to one where more conventional business and economic forces are beginning to take over. The marketplace is putting on a new face, or at least experimenting with new makeup, as consolidation causes some firms to buy or sell and others to pack it in.
Also, the surge of privatization and the slowly increasing appeal of design-build project delivery are creating a competitiveness fervor that will be pronounced for some time to come. It's a market that will always be with us, and one that we can count on.
Reprinted with the permission of Valve Magazine, the official magazine of the Valve Manufacturers Association. The article originally appeared in the Spring 1999 issue.