By Brian Moore

Who comes after you?

The ownership transition and succession of closely held businesses is one of the greatest challenges in the engineering and construction industry.

Leading industry consultants FMI recently surveyed contractors to gauge where they were in the process of company ownership transition and how they develop and carry out a plan to transition ownership to the next generation or sell. Nearly 20 percent of the respondents were heavy/highway/civil contractors. The average age of the owners was 54 with 33 percent older than 60. Eighty-one percent of the H/H/C companies report more than $20 million a year in annual revenues, and 36 percent more than $100 million. Seventy-six percent of H/H/C respondents say their business is a family business, and 72 percent of businesses have been in the family for two generations or more.

In most respects, heavy/highway contractors’ concerns were very similar to the overall response, and, not surprisingly, most of the owners were of the baby-boomer generation, the notable exceptions being those few respondents of the next generation who are just recently taking over management and ownership.

It is not surprising that family members are the recipients of stock either by gift or bequeath in the event of the owner’s death. However, many owners also expect select senior managers to become owners by buying shares over time. And only 52 percent say they prefer family members ultimately run the business.

It is still somewhat alarming that so many owners have not begun to make formal plans for management and ownership transition.

Only 37 percent have a formal plan in place to transition themselves out of managing the business, and 34 percent do not have a plan in place to ensure continuity of operations in the event of their death. One area that seems to be improving since earlier surveys is the number of owners (49 percent) that now say they have strong managers who could easily manage the business in the owner’s absence. However, 47 percent have managers that still need considerable training before taking over the helm. On the plus side, 84 percent report having a buy/sell agreement in place in the event of their death.

The long recession hasn’t made it any easier for owners to plan their transition to the next generation or sale of the company. But only 16 percent of respondents say the recession has caused them to put their plans on hold. Recession or not, 42 percent have yet to begin an ownership transfer plan. Notably, a portion of those are younger than age 55, so they have time. Others do not have as much time to plan and execute a transition plan, and it does take time.

We have also found that more of the baby-booomer genration owners are intentionally creating what we are calling a “lingering ownership transfer plan.”

Ownership transition planning for engineering and construction firms has historically focused on a transaction, with retiring owners selling to the next generation. The transaction typically took place over a period of years and had a defined end. FMI is seeing a shift in the way sellers think of “retiring.”

Sellers are taking a slower approach to the sale, and sometimes the process does not have a defined end date. Thus the “lingering ownership transition.” Several factors are driving this change in thinking:

1. People are living longer – the prospect of living to 90 or 100 means that retirements are longer, which, in turn, implies that retirement income may potentially be needed for decades.

2. Traditional retirement investments have been underperforming for more than a decade. Since 1999, the stock market has been essentially flat, interest rates are nominal and real estate has struggled. The strategy of living off the income from traditional retirement investments is not working very well. Trading stock in a profitable private business for traditional retirement investments is not very appealing economically.

3. Many business owners want to stay engaged in their businesses. Pure retirement does not appeal to all. The traditional model of working until the magic number of 65 is no longer desirable to many owners who still want to contribute while reducing their time obligations.

4. Government’s role in the economy undermines confidence in the future. In combination, budget deficits, trade deficits, the falling dollar, entitlement liabilities and expectations of rising taxes undermine the confidence of business owners. Will inflation and taxes eat away at personal net worth and the retirement nest eggs in coming decades?

The reaction of some business owners to this environment is to put off transition planning indefinitely. Others sincerely want to sell and move towards retirement, but are unsure how to proceed in the new environment. Some business owners feel the need to tie in the next generation with ownership, but are not sure they are ready to make the full transition.

For these owners we see what we call a “lingering ownership transition strategy.” It works like this:

1. The selling owner(s) begins a process of selling a portion of the business to the next generation with the intent of retaining 10 percent to 51 percent of the company indefinitely.

2. Selling owner(s) continues to work, drawing salary and benefits while transitioning responsibilities of lesser interest to himself to the next generation.

3. Put in place a buy/sell or stockholders agreement that protects the business and is in the best mutual interest of both selling shareholders and the next generation of shareholders.

4. Sellers maintain a flexible transaction structure that allows them to retain some ownership indefinitely, but also a structure that can be accelerated should full retirement be desired. The advantages of this structure for the seller are that it maintains income for the indefinite future, holds exit options open and, locks in the next generation. The owner’s slow exit also provides stability for the organization, less financial strain on the company and, hopefully, a positive mentor for the next generation’s leaders.The disadvantages of this structure include the retention of business risk and the possible under-motivation of the next generation.

This structure could be perceived positively or negatively by the next generation. A negative perception could result from the possible delay and uncertainty in gaining control of the business. The next generation also may not look favorably upon sharing income with a less active, or exiting, owner. If structured fairly, the positive should be in the opportunity for increased ownership and leadership.

The primary key to this strategy’s success is developing and motivating the next generation. Prior to our long national recession, finding top, next-generation talent was already one of the greatest challenges facing leaders. This situation was likened to a “perfect storm” for the construction industry because of three factors that would transform the competitive landscape:

• Industry image

• Changing workforce demographics

• Ineffective or nonexistent recruiting, development and succession planning

It is unlikely that the talent that left the industry during the recession will return. Demographics are still a critical issue as the baby-boomer generation transitions out of senior roles in droves, leaving gaps that cannot be filled by the next generation.

Finally, the recession has forced many companies to cut back on anything discretionary associated with talent development, which has had a major impact on recruiting, employee development and succession planning.

FMI expects more engineering and construction business owners to adopt the lingering transition strategy. Our advice for this strategy is as follows:

1. Objectively plan the financial side of your retirement.

a) Prepare a personal financial statement and make projections for your retirement income needs and desired personal balance sheet.

b) Evaluate the risk you retain in the business. How long will you sign bonds if you are required to do so? What limits can you put on your indemnities? Open-ended personal signatures should be avoided.

2. Take care of your next generation of leaders. Without them, this strategy may not work.

a) Make the deal good for the next generation.

b) Empower the next generation to do their jobs, while monitoring your risk.

c) Commit to leader development strategies including educational opportunities, peer/association affiliations, management planning and personal time with them in running the business.

3. Have a sustainable transaction strategy.

a) The structure for your sale should be a template for the next generation’s future sale.

b) Put in place a buyer/seller or stockholders agreement that is in the mutual best interest of selling and next-generation shareholders while being protective of the company as well.

4. Make your lingering a positive for the company.

a) Transition your responsibilities appropriately.

b) Be supportive of the development of the next generation.

c) Earn your returns on personal contributions and capital invested.

As economic and political volatility continues to impact construction markets, the “lingering ownership transfer” will be a common occurrence.

It takes a significant amount of time to plan and make decisions, but it takes longer to implement the plan for a smooth transition. If the transition is internal, the most likely choice for the majority of owners, you will need to select and prepare the future leaders. Bottom line: Start now.

Brian Moore is a principal with FMI Corp. focused on consulting with contractors and construction materials producers on strategic, organizational and operational issues. Contact at (919) 785-9269 or bmoore@fminet.com.

Industry changes demand careful, strong responses.

By Brian Moore

Changes in the construction industry are resulting in a wider variety of delivery methods and changes in the qualifications of who can compete. Whether evolutionary or revolutionary in nature, these forces have the potential to drive some contractors out of business.

There is a growing trend towards fewer but larger projects. Some of these are simply reflective of their scale (for example, the eastern span replacement of the San Francisco-Oakland Bay Bridge). Others suggest the “bundling” of several smaller projects to award as a single contract. This has significant competitive implications.

The information revolution has given purchasers more information than ever. Large owners are more sophisticated, with a ton of technology at their fingertips. This is fueling a growing pressure to look at construction as a commodity purchased on the open market for the lowest bid. There is even some pressure for the procurement of construction services to resemble online purchasing, something like Amazon, Groupon, eBay or even the Chicago Mercantile Exchange.

There are already reverse auction sites for construction. To say the least, this practice has not been endorsed by major contractor organizations. Along with a host of problems associated with the open-bid approach, the savings to owners have not been demonstrated. The reality is construction is different from products and services sold online. Construction is a professional service where each project requires a unique mix of skills, capabilities and technical specialties.

Margin Compression – the Master Builder Returns

Interestingly, there is another trend of involving construction managers (CM) and contractors in the project in the design or even pre-design phase, especially for midsize and smaller contractors.

This concept also includes employment of qualified owner project managers (OPM) to serve as clerk of the works. Some have likened this to a modern version of the ancient “master builder” concept.

Although an OPM increases the upfront labor costs, the value promise is a reduction of final project cost, process inefficiencies and risk of going over budget or schedule. This is accomplished by the OPM challenging the contractor to validate all elements of a project, including budget, the contractor’s margin and the project cost structure. What makes this concerning is the margin compression applied by OPM. Without attractive margins and profits, the financial health of the contracting industry is in question. There will need to be limits on the margin compression applied by buyers of construction services for this method to become common practice.

Project Delivery Moves

As the desire to accelerate delivery schedules and guarantee costs intensify design-build (primarily) and availability concessions (secondarily) are becoming increasingly common. A leading legal and policy advisory firm estimates 50 percent of transportation construction projects are delivered as design-build on a value basis. Other government agencies are exploring options such as construction manager-at-risk (CM/GC) to create a “team” approach to the project, speed up the overall delivery and provide a better result.

Just like contractors, owners have reduced the number of people on staff, with the “FMI/CMAA Eleventh Annual Survey of Owners” noting that, “In the view of more than half of all owners, diminished staff resources are a permanent condition.” The result is that owners expect greater support from construction service providers, and they want the lowest price possible. This often means changing construction delivery methods. The options have increased considerably over the last two decades to include design-bid-build (D/B/B), design-build (D/B), construction manager (CM), construction manager-at-risk (CM/GC) with a guaranteed maximum price, and the more recent addition, integrated project delivery (IPD).

Pre-Qualifying

The definition of a heavy civil firm will evolve and morph over time as the distinction of roles and responsibilities is blurred between design and construction. Preference, intentional or not, is being given to the largest firms and joint ventures due to resource constraints. Contractors are reporting that, in addition to their traditional competition, they are also experiencing competitive pressure from national firms, large joint ventures and the occasional international firm.

Even if construction projects are not being treated as commodities, owners are still looking for the lowest bid. When times are tough, owners are more willing to take the chance that the contract will protect them from risk; and contractors, hungry for business, will cut prices even at a loss. Not all owners are moving to low-bid methods of procurement. Some are considering alternative materials and methods to save money, especially as material costs have continued to rise throughout the recession. Savvy owners are concerned about poor quality and missed schedules. The risks are too high for owners to take the chance that the lowest bid is not the best-qualified bid. If a contractor fails in the middle of a bridge or highway project, the cost for delays is extremely high. In addition, structural failure in any of these projects is potentially catastrophic. Therefore, many government agencies use a pre-qualified bidder process to ensure best value.

Looking to the Future

There are many trends and economic forces that are here to stay: sustainability and green construction, reduction of energy use, industrial technology use, consumer buying power and the Internet consumer market, scarcity of raw materials and growing populations.

The trend toward larger and bundled projects is bringing about changes in delivery method and financing. An advantage is that more design-build, CM/GC and IPD can reduce risk, as well as improve project success for all involved. In addition, the master builder concept can help protect owners from process inefficiencies and the risk of going over budget and schedule. Competition will continue to be fierce and owners will continue to be demanding. The push toward commoditizing construction may continue. However, the trend toward large and complex projects should bring back awarding projects based on the best value in relation to qualifications and experience, rather than just low, low prices.

With little prospect for consistent, long-term funding and increased competition, small to mid-sized contractors are feeling intense pressure. Many engineering and construction executives are being forced to decide whether to develop niche specialties, move up by diversifying or move out, selling or closing their business. The result is an accelerated contraction of the industry as smaller service providers are acquired or exit.

Regardless, this apparent future offers an effective way to control costs. The thriving contractor of the future will be a dynamic innovator in all aspects of their business, making them an attractive partner for the owners who need, want and value professional construction services.

Brian Moore is a principal with FMI Corporation, consulting with contractors and construction materials producers on strategic, organizational and operational issues. Contact at (919)785-9269 or bmoore@fminet.com.

Building strategic partnerships that work – for both of you

Contractors are, out of necessity, seeking work outside of their traditional markets.

These economy-driven moves require changing strategies to win and successfully complete projects that might be in a new place and/or in a new market type. There can be both risks and rewards when a company leaves its comfort zone, which is why a highway/civil construction firm must first consider how these new markets or larger projects will fit into the company’s current strategy.

For instance, a strategy of just “get more work” or “keep everyone busy” can quickly lead to a waste of time estimating and bidding everything out there, or worse, winning the work and losing your shirt. The response to these difficulties might be, “OK, then we will find a partner to work with to assure we have the capabilities and capacity to do the job.”

Problem solved? Not quite.

Although building collaborative relationships is one of the most successful trends for completing large, complex projects these days, there are many different forms of collaboration, teamwork and partner relationships.

The recession has caused many companies to reduce their workforce and often their capabilities for certain work in order to return to their core competencies. However, this may also mean the company can no longer compete for certain types or sizes of projects. Company management might consider forming some type of temporary partnership with a firm that has the capabilities it lacks. But joining with a partner has several different approaches — which also means there are different levels of legal and financial responsibility and risk involved. A partnership should not be construed as “buddying up” on a project. All have contract implications, and failed relationships can be costly. At the same time, all of these collaborative approaches are being used to great advantage by many companies for a number of reasons.

Joint relationships

Joint ventures are one of the least understood, yet often the most effective approaches to forming temporary partnerships for the duration of a project or selected projects.

 Although joint ventures are considerably more common on large, technically complex projects, they also appear on small and relatively straightforward projects. Companies pursue joint ventures for a variety of reasons. Among them are to:

• expand market penetration by tapping into another company’s expertise. Companies often seek to take advantage of a joint venture partner’s local knowledge, familiarity with subcontractors, customer understanding or other market expertise.

• gain access to specific skills or assets such as specialized engineering capabilities or equipment.

• maximize surety capacity.

• meet owner requirements, such as government set-aside contracts, experience, capacity or other pre-qualification requirements.

• mitigate risks on higher-risk projects. Contractors often seek to spread the risks among joint venture partners, but they also seek to reduce risk by having independent review of pricing, construction strategy and other areas of risk.

Strategic ventures

When a contractor’s strategy calls for finding a joint-venture partner, it is important to note that forming a joint venture requires serious commitments and considerations to be understood and decided even before the relationship begins. In addition to financial and operational concerns, there are also organizational issues to understand before entering a joint venture. Contractors should consult an attorney, insurance agent/broker and accountant to ensure that it has a clear understanding of the legal and financial considerations.

While the financial arrangements of the partnership are at the top of the list for most contractors considering joint ventures, it is important to focus on the idea that two (or more) companies are forming a new relationship. For instance, companies often pursue joint-venture partners to access surety and banking credit that they may not be able to obtain on their own. The other partner — typically a larger, better-capitalized firm — must also see some benefit in this arrangement, such as gaining access to local customers, subcontractors or some other capability needed to pursue a project. Whatever each party brings to the relationship, it is important to recognize that dealing with joint-venture partners can be the beginning of a great relationship or a messy divorce in the making.

All good relationships require a certain amount of openness and good communications to avoid misunderstandings and surprises. Depending on the partnership agreements and the reasons that the partnership is being formed, each partner may be asked to share financial statements more openly than it is accustomed to in normal business situations. For some contractors this can create a high level of anxiety. For instance, if both parties are preparing independent bids, there may be a need to share detailed cost information. Discussing details about how markup will be determined is another area that makes some contractors uncomfortable.

There are also specific financial and accounting requirements that must be addressed.

Discuss these matters in detail with your accountant or other financial advisors to make sure you completely understand how revenue and profit for the joint venture will be recognized, how liabilities and assets will flow from the joint venture to your financial statements and how any assets in the joint venture will be disposed of when the joint venture dissolves. This last concern should be clear at the outset of the joint venture.

Learning

Some companies see the joint-venture process as a way to learn from another contractor with specialized skills, expertise or competencies and developing those capabilities yourself is one way to upgrade your company. However, be careful. There is often a tradeoff required before a company is willing to share those things that have made it successful. When the learning seems to be one way, the relationship can become strained.

Culture differences

Examining financial reports and researching the reputation and capabilities of potential joint-venture partners are necessary step before signing an agreement. Nevertheless, one important bit of research that might be overlooked in the rush to find a suitable partner is the cultural fit of the partners. You should consider one that makes a good match with your company culture. Few organizations will share the same type of culture, but you want to avoid those that have drastically different cultures from your organization. A joint-venture arrangement that mixes cultures as different as oil and water is headed for disaster.

Cultural characteristics to consider when screening potential joint-venture candidates:

• Communication styles: How do the company’s internal and external communications styles compare with your company’s practices?

• Process development and procedures: How strict are the company’s procedures and policies?

• Employee satisfaction: Do concerns for employee satisfaction clash or complement the need to have a profitable project?

• Safety awareness, programs and culture: In addition to safety ratings, understand the importance management actually places on safety.

The Agreement

Once you have considered all the financial, operational and organization concerns of forming a joint venture you still have to draw up an agreement that is agreeable. Ward and Smith, P.A., a North Carolina law firm with considerable construction expertise, created a checklist to help its clients with the joint-venture agreement drafting process. Some selected items from that list include points to consider before drafting the agreement as well as a number of decisions that will have to be made:

• What is the scope of the joint venture? The agreement should clearly define the project that is covered by the joint venture and the capacity in which the joint venture will bid for the project (i.e., general contractor, construction manager or construction manager at risk).

• Who will be the members of the management committee?

• What actions of the joint venture will require the unanimous vote of the members of the management committee? What decisions can the sponsor partner make unilaterally?

• How will the costs of preparing the bid be allocated between the joint-venture partners? Will each party bear its own costs or will it be allocated based upon participation percentages?

• Who will be the joint-venture manager who is responsible for the day-to-day management of the joint venture?

• Who will be the project manager who is responsible for day-to-day construction of the project?

• How will the project be insured? (i.e., each party with separate liability insurance policies) How will Builders Risk Insurance be purchased? Whose insurance agency will be used?

• What are the financial arrangements?

• How will profits and losses be allocated?

• How will initial contributions be determined?

• How will additional capital contributions be handled? (For example, is a unanimous vote required?)

• What if a party fails to make additional contributions?

• How will reimbursements be handled?

• How will cash disbursements be made?

• How will disputes be handled?

Brian Moore is a principal with construction industry management consultants FMI Corporation, focusing on strategic, organizational and operational issues. Contact at (919)785-9269 or bnmoore@fminet.com.

Go to our digital edition at betterroads.com to read (page 33a) about a contractor (actually Equipment World magazine’s Contractor of the Year) who started a new business to get through the recession.

Planning is vital to compete in this construction market

When FMI asked contractors what they thought about long-range planning in the face of the 2009 recession many of the answers were bleak.

Although most everyone was concerned with survival — often referred to as “hunkering down” — at that point, there were also those who affirmed the benefits of long-range and short-range planning.

Given the outlook today, what will your strategy be five to 10 years from now, or even over the next three years?

Hope is Not a Strategy

These days, we often hear people say they hope business will get better. Who doesn’t? However, I am not an advocate for sitting by and hoping. I have learned that many firms have a strategic plan but no real strategy. We often say, “your firm is perfectly designed to get your current results,” but consider the potential benefits of focusing like a laser on just one strategy — ensuring excellence in your operations. It is a low-risk strategy with high rewards. Here are a few things to think about when beginning the strategic reinvention process:

* Identify where and why the game has changed for you, and review your capabilities:

• Where are you strongest?

• What do you do best?

• What is your number-one competitive advantage?

• Which do your clients value most?

• What strengths are missing from your team?

* Examine what you should be doing to create an organization that is sustainable in good times as well as the inevitable bad times.

• Develop a foundation to respond quickly to changing context or economy.

• Align your organization with your strategic direction.

• Analyze your current human resources to leverage their individual contributions.

Strategic Thinking for Better Strategy

For some senior executives, their own thoughts about strategy are inextricably linked to the firm’s strategy — even if that strategy is not written into a formal plan and shared with others. It is easy to see strategic thinking and strategic planning as the same thing. However, they are two different but complementary processes, and both can be learned and put to effective use. Briefly, here are the differences:

Traditional strategic planning tends to be:

• designed to generate a tangible work product (an action plan),

• usually conducted every few years and forgotten in the interim,

• often systematic and linear, and

• often conducted by the most senior members of an organization.

Strategic thinking is:

• focused on the process as the ultimate deliverable,

• aimed at developing a mind-set and way of seeing the world,

• a process that brings value through individuals’ ability to identify both opportunity and risk,

• emergent and adaptable, and

• necessary at all levels of an organization.

Strategic thinking is not hard to describe, and some of the keys elements include:

Vision. The ability to envision a future is a fundamental skill of strategic thinkers. Without it, leaders are purely opportunistic and reactive.

Strategic thinkers practice the ability to reframe their perspective to look at systems, processes and markets in a unique way.

Pattern recognition. Strategic thinkers must be trend spotters, able to recognize patterns that emerge in social, political, economic and technological change. This ability to “connect the dots” among seemingly unrelated trends, think through the implications for the business, and react quickly and appropriately is essential to strategic thinking.

Seeing risk. A key component of strategic thinking is the ability to take a clear-eyed, realistic view of an organization’s risk profile. Strategic thinkers have a constant, restless sense of low-level paranoia that drives them constantly to test their assumptions and beliefs about the risk of the business.

Creating purpose. One less-frequently mentioned ability of strategic thinking is the capacity to create a unifying sense of purpose in an organization. Purpose adds depth, richness and direction to strategic action.

Innovation. The fragmented nature of the construction industry and a generally shared belief that construction is fundamentally a tactical business limit the infusion of innovation as a competitive advantage. Strategic thinkers practice the ability to reframe their perspective to look at systems, processes and markets in a unique way.

Developing sound strategy requires a firm understanding of the context in which the company operates. One of the first steps is to prepare the background information to define your company’s environment. Before you can understand where opportunity exists, you must fully understand the 4Cs of context:

The 4Cs of Context:

• Climate: All the external factors and forces that influence your business, e.g., economic forecasts, surety capacity, commodity prices, politics, demographics.

• Customer/Market: Everything about customers, e.g., changes in buying behavior, unmet needs, drivers of their business and industry.

• Competitors: Everything about competitors, e.g., entry/exit, strategies, management, aggressiveness, pricing patterns, key staff changes, etc.

• Company/Capabilities: Internal considerations, e.g., strengths, weaknesses, aspirations, resources, key differentiators.

I have often found that many executives in a firm believe they have a pretty good understanding of the 4Cs for their firm off the top of their heads. However, with deeper research and discussion, they are often surprised at what they didn’t know or didn’t think about that might impact their strategies.

Brian Moore is principal with FMI, management consultants and focuses on consulting with contractors and construction materials producers Contact: 919-785-9269; bmoore@fminet.com.

Varying tolls to control congestion works. Sort of. Sometimes.

Congestion pricing cuts congestion. It’s true. But it’s not an entirely complete statement, because there are factors that mitigate the congestion-easing power. Road pricing or congestion pricing aims to motivate drivers to share rides, use transit, travel at less congested times, or pay to use tolled lanes. All projects in operation are either: High-Occupancy Toll (HOT) lanes, which charge solo drivers to use newly-constructed lanes or carpool lanes; or peak-period pricing projects, which charge a lower toll on already tolled roads, bridges and tunnels during off-peak periods. HOT lane tolls vary according to current demand; peak pricing projects create set fees for certain times of day.

A new study by the U.S. Government Accountability Office (GAO) shows that the 14 congestion pricing projects that have current and complete evaluations “generally show that pricing can help reduce congestion.” But, says the report, “other results are mixed.” And the GAO study did not look exhaustively into every functioning road pricing project.

“Hot lane projects, which aim to reduce congestion by decreasing travel time and increasing speed and the number of vehicles using the lane, have reduced congestion,” says the report. But there is a caveat. Some of those HOT lane projects also added new lanes, and GAO data does not distinguish the extent to which performance improvements were due to added lanes or pricing. High-Occupancy Vehicle road users, who usually pay no toll because they have, efficiently, loaded up their vehicle, can use HOT lanes without paying tolls.

Some HOT lanes have improved travel time and speed. The number of cars using HOT lanes has risen, but there are fewer people riding in those cars because of an increase in the proportion of toll-paying solo drivers and/or a decrease in carpools.

Peak-period pricing projects, however, did not appear to increase the number of people and vehicles using the targeted roads at peak times, although there has been some easing of congestion levels.

The GAO expresses concern about income equity in these anti-congestion practices. Are the costs of congestion pricing users incur proportional to their incomes, or are low-income drivers disproportionately affected? For example, low-income drivers may spend a greater proportion of their income to pay to travel at preferred times or incur greater costs in travel time by choosing alternate unpriced routes. High-income drivers who, economists generally believe, place a higher value on their time, may be more likely to pay the toll and benefit from a faster trip than low-income drivers.

For that matter there is uncertainty whether the practice of congestion practice hits any given group of people more unfairly than others. For example, the report worries about whether people from particular geographic areas are more negatively affected than others when traffic flow is manipulated. How equally are the costs and benefits associated with congestion pricing distributed within an affected metropolitan area? For example, if one corridor in a metropolitan area has congestion pricing and another does not, drivers in the tolled corridor may incur greater costs than drivers in the untolled corridor because of the tolls they pay or the increase in travel time they incur by choosing an alternate route.

Furthermore, drivers who choose to avoid the tolls and take an alternate route may contribute to congestion on the alternate route. Such diversion of traffic from tolled routes within a corridor can reduce the performance of the alternate untolled routes and negatively affect surrounding neighborhoods.

What happens to out-of-the-way neighborhoods that see more traffic as drivers steer clear of tolled roads, leaving behind the problems of increased traffic flow including pollution, safety, road deterioration and parking inadequacy?

What’s more, the GAO says equity problems may grow as pricing projects become more widespread.

New projects are already being built and a number of cities have networks of HOT lanes planned, significantly expanding the use of variable pricing across the country. “Equity concerns may become more acute where sponsors are using pricing not only to manage congestion, but also to raise revenue to build new projects,” says the report. “Raising revenue can be at odds with managing congestion (e.g., increasing passenger throughput) if higher tolls can produce more revenue from fewer paying vehicles.” It seems unlikely that using congestion pricing to raise revenue will remain a non-political football.

The GAO also concedes that concerns about the fairness of congestion pricing have “been a challenge to instituting these projects.”

One of the options to address equity issues that the GAO identifies is using some of the increased toll revenue to finance public transit service. This passing observation in the report may find itself center stage in the not-too-distant future. In crafting the reauthorization bill it brought to the floor last month, the House Transportation and Infrastructure Committee (or rather its Republican majority) stripped guaranteed federal money from public transit programs, essentially leaving them having to fight every other lobby in Washington for funds after 2016. Inevitably, some members of Congress will see tolls as a possible public transit subsidy source, if the need gets as urgent as transit supporters think it will.

“The changing character of congestion pricing and the new challenges it brings make improving the understanding of congestion pricing even more important.”

-GAO Report

Building new capacity to accommodate more vehicles is not an easy case to bring before Washington and win. And there are even researchers who argue more capacity will in fact only produce more congestion. And, of course, in some large cities, it is just not possible to add lanes; there is just no room.

According to the GAO, the first U.S. congestion pricing project opened in 1995, and 19 project sponsors now have 41 pricing projects in operation or under construction, and there are about 400 miles of priced highway lanes with tolls varying from 25 cents to $14.

In other words, congestion pricing in America is, as the GAO says, “in its infancy.” But, as the report concludes, “its popularity is growing. New projects under construction and in planning will not only increase the number of roadway miles that use congestion pricing, they will also change the character of pricing in the United States, as some will be operated privately and some will add congestion-priced tolls to previously non-tolled roadways. The changing character of congestion pricing and the new challenges it brings make improving the understanding of congestion pricing even more important.”

Economists argue that congestion pricing can be an economically efficient decongestant for busy roadways, with drivers who need or value a fast, predictable trip willing to pay for it, and those who do not prepared to stay on more crowded roads where they pay little or nothing.

An action plan for growth in 2012

As we begin 2012, American business is “improving,” says Tom Donohue president and CEO of the U.S. Chamber of Commerce.

”But it is doing so weakly, slowly, and insufficiently to put our nation back to work,” he says. To lower unemployment, the U.S. economy has to grow much faster than it is today, he says. “Unfortunately, we think the economy will actually slow down in the early months of the year. We expect growth to average about 2.5 percent in the first half and then work its way back to about 3 percent by the end of the year.”

Ominously, a new chamber survey of small business members found more than 80 percent are “very concerned” about the prospect of new regulations, mandates and higher taxes, and these concerns have put the brakes on new hiring, he says.

“2012 must not be a wasted year simply because it is an election year. There’s no justifiable reason why it should be.”

 – Tom Donohue

The chamber is putting forward its American Jobs and Growth Agenda, “to put people back to work without raising taxes or adding to the deficit.” Highlights include:

Rebuilding the Infrastructure

SAFETEA-LU expires again on March. If Congress doesn’t act, says Donohue, the Highway Trust Fund would be cut a minimum of 35 percent by this fall, putting thousands out of work. “And let me make this clear — every piece of infrastructure legislation should include reforms to speed up projects and encourage public-private partnerships and the use of private capital. In fact, by knocking down the barriers, we can unlock up to $250 billion in private capital for infrastructure. Leverage this with public investments, and we could create 1.9 million jobs over 10 years.”

Producing American Energy

“Our nation is on the cusp of an energy boom that is already creating hundreds of thousands of jobs, revitalizing entire communities and reinvigorating American manufacturing,” says Donohue. “Energy is a game changer for the United States,” he says. “With the right policies, the oil and natural gas industry could create more than 1 million jobs by 2018.”

Expanding Trade, Investment and Tourism

Ninety-five percent of the people we want to sell something to, live outside the United States. The chamber wants to see the completion of a Trans-Pacific Partnership (TPP) Agreement, and has proposed a new Transatlantic Economic and Trade Pact with the European Union. And, says Donohue, it’s time to get moving on additional free trade deals. “To do this and the TPP, Congress must renew Trade Promotion Authority. Every president should have it. The executive branch must be able to negotiate agreements that won’t be picked apart by Congress but, instead, be subject to an up or down vote.”

Advancing Regulatory and Legal Reform

“To grow our economy and create jobs, we need significant regulatory and legal reform,” says Donohue. “The regulatory avalanche confronting our job creators is unprecedented. The Labor Department has 100 rulemakings in the pipeline. Dodd-Frank requires 447 rules, 63 reports and 59 studies. The health care law established 159 new agencies, panels, commissions and regulatory bodies. EPA has some 200 regulations in the works. And the business community must contend with a National Labor Relations Board that is clearly tilted toward the unions. This adds up to a big drag on our economy.”

Donohue says the chamber will aggressively take on regulations that are costing jobs. “We will go to Congress. We will go to the courts. And we’ll go to the court of public opinion to explain how a regulatory system run amok is needlessly driving American jobs out of the country or out of existence. Let me be clear: The chamber supports necessary, sensible and forward-looking regulations.” Donohue says the chamber’s Institute for Legal Reform will continue to fight the expansion of excessive litigation, “that is sucking the vitality out of American businesses.” And, he says, the chamber wants to stop “the alarming rise” of third-party litigation financing where outside investors fund lawsuits in exchange for a share of the award or settlement.

Encouraging Innovation

“Innovation depends on a rational, efficient and globally-competitive tax system. If we want to keep industries here and attract new investors to our shores, we cannot continue to maintain one of the highest corporate tax rates in the world. We need to lower that rate as part of comprehensive tax reform that broadens the tax base, and reduces the costs and burdens of compliance.”

Promoting Fiscal Responsibility and Entitlement Reform

“We must rein in government spending, and bring deficits and debt under control,” says Donohue. “And we can’t do that without serious entitlement reform.”

A fiscal year 2012 transportation spending breakdown

By John Latta

Sometimes this page is used to help readers read between the lines.

The House Appropriations Committee has released its fiscal year 2012 Transportation, Housing and Urban Development funding bill. The legislation includes funding for the Department of Transportation. FY 2012 begins Oct, 1, 2011.

And should Reauthorization actually occur, the committee would change its numbers to reflect the funding called for in that legislation. But the proposal itself does indicate the committee’s basic approach to where what money should go.

As we face extension after extension on the way to (maybe) a new six-year surface transportation bill, we continually run into the problem that no one really has a workable idea about how to fund an adequate bill in the short term (i.e. now) since no one will raise fuel taxes, by far the main contributor to the Highway Trust Fund (HTF).

Whenever the question of funding a new bill arises, it is tossed, hot-potato-style, to the House Appropriations Committee, which would have to find the machinery to bring in extra money.

In total, the bill includes $55.15 billion in discretionary spending – a reduction of $19.8 billion below the President’s request and $217 million below last year’s level. The funding level in this bill reflects the overall FY 2012 discretionary spending total of $1.043 billion, to which the House, Senate and White House agreed in the recent debt ceiling legislation.

“Step by step, we are trimming government spending and streamlining programs to make them more cost-effective, efficient and responsive to the American people,” says committee chairman Hal Rogers. “This bill saves taxpayers billions of dollars and eliminates waste wherever possible. This bill is yet another example of this Committee’s commitment to return our government to some semblance of fiscal sanity by restoring responsibility, restraint and thoughtfulness to the budgeting process.”

The Senate’s version keeps current funding levels in place.

John Horsley, executive director of the American Association of State Highway and Transportation Officials (AASHTO) said that his group applauds “the entire [Senate] subcommittee for taking this action, which avoids a major reduction in transportation investment for FY 2012. The cuts proposed in the House bill would eliminate 500,000 jobs, not to mention putting the nation further behind on many critical transportation improvements.”

Transportation Highlights from the Bill

Transportation – The bill includes $16.7 billion for the Department of Transportation for fiscal year 2012, which is $3 billion above last year’s level and $15.8 billion below the President’s request.

Highways – The bill provides $27.7 billion for the Federal Highway program – the highest amount supportable by the Highway Trust Fund for fiscal year 2012. The Committee is prepared to support a higher Highway Trust Fund spending level, should a new, multi-year authorization bill be enacted. The bill does not contain a rescission of highway contract authority from the states.

Federal Aviation Administration (FAA) – Included in the legislation is $12.6 billion for the FAA, an increase of $233 million over last year and $485 million below the President’s request. The bill fully funds the FAA’s Next Generation Air Transportation System (NextGen), allowing the FAA to move forward with the next step in modernizing the nation’s air control and airport system, which will help ease congestion and reduce delays for travelers in U.S. airspace.

Rail – The Federal Railroad Administration (FRA) is funded at $1.3 billion, which is $7 billion below the President’s request and $36 million above last year’s level. Of this amount, $1.1 billion is targeted to Amtrak, primarily for capital improvements to the nation’s rail lines. The bill also includes policy reforms for Amtrak, such as requiring overtime limits on Amtrak employees to reduce unnecessary costs, and reinstates a provision that prohibits federal funding for routes where Amtrak offers a discount of 50 percent or more off normal, peak fares. In addition, the bill does not include funding for High-Speed Rail or Intercity Passenger Rail Service.

Transit – The bill contains a total of $1.8 billion for the Federal Transit Administration (FTA), which is $1.9 billion below the President’s request and an increase of $169 million over last year. The legislation also provides $5.2 billion in state and local bus grants – the amount estimated to be available from the Mass Transit Account (trust fund) for fiscal year 2012. The Committee is prepared to support a higher formula bus spending level should a new, multi-year authorization bill be enacted. The legislation also limits transit capital investments – only funding “Small Starts” projects and those projects that have signed Full-Funding Grant Agreements with the FTA prior to Nov. 1, 2011. The legislation also includes language that prohibits new Full-Funding Grant Agreements if the project is more than 50-percent federally funded.

Safety – The legislation contains funding for the various transportation safety programs and agencies within the Department of Transportation. This includes: $731.1 million in both mandatory and discretionary funding for the National Highway Traffic Safety Administration (NHTSA) – a decrease of $65.4 million from last year; $529.7 million for the Federal Motor Carrier Safety Administration – a decrease of $25.4 million from last year; and $182.9 million for the Pipeline and Hazardous Materials Safety Administration – a decrease of $13.2 million from last year.

The Bloomberg-Rendell-Schwarzenegger funding and fixing plan

By John Latta

This month, there may be a real reauthorization debate. Finally. Maybe. Whether it results in anything solid is something of a long shot.

Somewhere in almost all of the various plans presented as saviors of America’s infrastructure (and there is a sizeable number), there are ideas that must eventually be adopted. Too many good, experienced minds have analyzed all possible avenues for us not to have solutions available to us.

Now, Building America’s Future (BAF) has tabled new plans to help us fix our transportation infrastructure and move it out of its archaic straitjacket.

Building America’s Future was founded and is headlined by Pennsylvania Gov. and transportation policy maverick Ed Rendell, former California Gov. Arnold Schwarzenegger and New York Mayor Michael Bloomberg. It claims a diverse bipartisan membership of state and local elected officials from across the country. Its quirky independence might have caused it to lose some impact, but its new report entitled Falling Apart and Falling Behind is gaining support.

One simple statement from the BAF report is, prima facie, startling: “We have let more than half a century go by without devising a strategic plan on a national scale to update our freight and passenger transport system.” As the size of federal investment in transportation infrastructure (as a share of GDP) has steadily fallen, and as federal funds are “dispersed to projects without imposing accountability and performance measures,” our transportation infrastructure is stuck back in the past century. Our passenger transportation system is saddled with congestion woes and by being largely run on gasoline is “environmentally, politically and economically unstable. We have the world’s worst air traffic congestion, in part because we are still using the radar-based air traffic system developed in the 1950s,” so says the BAF report. And in this, they really echo virtually every other major report on the topic in the past five years.

BAF’s key recommendations are not new, but they are centrally important to our future:

One: Develop a national infrastructure strategy for the next decade that makes choices based on economics, not politics.

Essentially, this is a 10-year strategic plan for creating investment in America’s infrastructure. The plan must “spur” an investment of $200 billion a year and, if it does, it will create nearly five million jobs for the next decade, says the BAF research. “This investment would create nearly half of the 12.5 million jobs that we need to revive the American economy and keep them in place for the next decade.”

Two: Pass a six-year transportation bill updated to compete in the 21st-century global economy.

This one’s really an unopposed no-brainer. And the BAF emphasis on a bill that is not simply a status-quo extension is also almost universally supported, although there is some refreshing astringency in the BAF language: “The new bill must move from an essentially recycled version that thinly distributes funds based on archaic formulas and political expediency to a plan that sets clear priorities and makes hard choices . . .”

Three: Be both innovative and realistic about how to pay.

Again, the recommendation is mainstream and widely held. But it relies more heavily than most other analyses on the creation of a National Infrastructure Bank to leverage private money, and wants new long-term revenue-gathering options, as do most observers in this field. It also calls for a gas tax increase “once the U.S. economy improves,” another popular position. The infrastructure bank idea has been getting some increased support. When the American Society of Civil Engineers recently estimated just how badly our infrastructure had deteriorated, the group described a crumbling system that would take a five-year investment of $2.2 trillion to adequately improve. There’s no way that sort of money comes by check from Washington. To attract private money that is out there looking for something to do (and there is a lot of it), something predictable, reliable and with a good rate of return is needed: The Infrastructure Bank is an intriguing possibility. It would loan funds or guarantee loans for major infrastructure projects that are “in the public interest,” with returns primarily from user fees such as tolls and fares. The idea not only brings private money to the table, it would create jobs.

Four: Promote accountability and innovation.

BAF is again not alone and doesn’t break new ground in this area of reform recommendation. But the plain speaking (perhaps not a surprise, given BAF’s founders) is very much to the point: “Under current transportation policy, Washington impedes local innovation while failing to impose accountability for money distributed across the country.” The BAF report calls for faster project delivery times, clearer criteria for all funding and the encouragement of state and local innovation through competitive grants. There are those, of course, who argue that more state involvement, more “flexibility,” is also a way for Washington to slide off cost (read tax) increases that will have to be made by the states, leaving clean hands in D.C.

Reauthorization funding is uncertain, but reform looks good

By John Latta

Detailed proposals for a new surface transportation bill have finally surfaced, and two keys factors have dominated their presentation. It’s about funds, and it’s about reform.

The House Transportation and Infrastructure Committee (actually the Republicans on that committee) have delivered a proposal, and the Senate (actually the Democrat at the helm of the Environment and Public Works Committee) has counter-proposed. The House version offers $230 billion over six years; the Senate $109 billion over two years. There is plenty of reform in both versions and they have generally been welcomed across the board. But the House’s funding total has also almost universally been criticized as woefully inadequate.

So, the battle for funding will go on, as will the debate about how much reform without adequate funding will benefit our industries. But if there is any good news, it is that the reforms put forward will probably be in any new legislation if and/or when it happens. So the key proposed reforms are worth looking at.

The House version’s key proposals include:

1. More efficient environmental reviews. It:

• condenses the final environmental impact statement and combines it with the record of decision;

• provides a single system to review decisions and reduce bureaucratic delay by requiring concurrent reviews and setting deadlines for approvals; and

• classifies projects in the right-of-way as categorical exclusions under NEPA.

2. Clarification of eligibility for pre-construction activities. It:

• allows for acquisition of land during NEPA where the transaction itself does not cause a change in the area’s land use or cause adverse environmental effects;

• encourages corridor preservation to reduce project costs, delays, and impacts on communities; and

• allows detailed design prior to NEPA completion at state expense, making such work eligible for federal reimbursement only if the project is subsequently approved.

3. Promotion of integrated planning and programmatic approaches. It:

• builds on the efforts in Section 6001 of SAFETEA-LU and allows environmental decisions made in the planning process to be carried forward into the NEPA process; and

• clarifies authority for programmatic approaches (rather than project-by-project reviews).

This House proposal aims to reform surface transportation programs by consolidating or eliminating approximately 70 programs that are duplicative or do not serve a federal purpose.

Rather than applying spending cuts evenly across all existing programs, this proposal identifies programs that serve similar purposes. The proposal also identifies programs that do not serve a federal interest – such as the National Historic Covered Bridge Preservation Program and the Nonmotorized Transportation Pilot Program – and eliminates them.

States will no longer be required to spend highway funding on nonhighway activities. States will be permitted to fund such activities if they choose, but they will be provided the flexibility to identify and address their most critical infrastructure needs. However, this additional flexibility will not be unchecked. States will be held accountable for their spending decisions through new performance measures and transparency requirements.

Many of the programs that will be consolidated or eliminated in this proposal were created during a period when it was common to spend more than was collected in transportation revenue.

The Senate version’s key reform proposal:

• consolidates 87 programs under SAFETEA-LU into less than 30. States will have flexibility to fund activities for which dedicated funding has been removed;

• consolidates the Interstate Maintenance Program, the National Highway System Program and part of the Highway Bridge Program into a single program that focuses on the most critical 222,000 miles of roads in the nation;

• consolidates several existing programs to provide funds to states for projects on all Federal-aid highways, and all bridges and tunnels;

• provides for the sub-allocation of some funds to metropolitan areas and to other areas of a state based on population; and

• increases funding for TIFIA (Transportation Infrastructure Finance and Innovation Act) from $122 million a year to $1 billion a year. The Senate plan also increases the maximum share of project costs from 33 to 49 percent and allows TIFIA loans to be used to support a program of projects. And it allows upfront commitment of future TIFIA program dollars through the use of master credit agreements.

There are also several provisions to reduce project delivery time and cost, including expanding the use of innovative contracting methods, reducing red tape for projects “with no significant environmental impact,” encouraging early coordination between relevant agencies to avoid delays and incentives for speeding up delivery decisions.

A new report on the repair/maintain/expand debate

By John Latta

A new report argues that spending decisions made at a state level are causing road conditions to get worse in parts of the country.

The report was produced by Smart Growth America and Taxpayers for Common Sense, with support from the Rockefeller Foundation (see Editor’s Note below).

The report makes these key points:

• Rehabilitating a road that has deteriorated is substantially more expensive than keeping that road in good condition.

• In spite of an enormous repair backlog, the vast majority of states continue to inadequately fund road repair projects.

• Neglecting repair and preservation cost taxpayers billions of dollars in preventable expenses.

The report examined road conditions in each state and D.C., and recommends changes at both state and federal levels in spending priorities.

“Decades of disproportionate spending by states on road expansion at the expense of regular repair have left many state roads in poor condition,” the report states. “By underfunding repair and allowing roads to fall out of good condition, state leaders are choosing the most expensive type of repair possible, as rehabilitating a road that has completely deteriorated is substantially more expensive than keeping that road in good condition in the first place.”

According to the report, South Carolina spent 18 percent of its highway capital budget on repair projects between 2004 and 2008, but spent 41 percent on expansion. “The percentage of South Carolina roads in ‘good’ [based on FHWA data] condition during this time dropped from 45 to 33 percent, the largest decline of any state.”

The report also argues, ironically, that dollars spent on new road construction are potentially adding to the problem. “With every dollar spent on new construction, states add to a road system they are already failing to adequately maintain. As a result, states face a large and growing financial burden.”

The answer is to invest wisely in repair and preservation – a process that actively reduces the scale of future costs. The report cites American Association of State Highway and Transportation Officials (AASHTO) data that says one dollar spent to keep a road in good condition avoids anywhere from $6 to $14 needed later to rebuild the road once it has fallen apart.

Examining state funding priorities and the relationship between spending on expansion versus repair, the report found that between 2004 and 2008, states spent $37.9 billion annually on repair and expansion of roads and highways. Of these funds, says the report, 57 percent went to road widening and new road construction; that is, to 1.3 percent of the roads worked on. At the same time, 43 percent of funds was spent on the preservation of existing roads that make up 98.7 percent of the system.

“Prioritizing repair and preservation makes good fiscal sense and brings a host of additional benefits,” says the report. And not only are state taxes being wasted, “Federal funds built a large proportion of these major state roads, and allowing states to under-invest in repair and preservation greatly reduces the value of these federal investments.”v

Editor’s Note: Smart Growth America says it is “the only national organization dedicated to researching, advocating for and leading coalitions to bring smart growth practices to more communities nationwide.” Check it out at www.smartgrowthamerica.org

Taxpayers for Common Sense says it is a nonpartisan budget watchdog serving as an independent voice for American taxpayers. Its mission is to achieve a government that spends taxpayer dollars responsibly and operates within its means. Check it out at www.taxpayer.net

Priority imbalance?

98.7% (used) vs. 1.3% (new)