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Infrastructure Construction and Equipment Finance Opportunities

Executive Summary

Infrastructure construction includes the construction of highways and streets, power and communications, sewer and water, and other heavy and civil engineering. US infrastructure is in dire need of increased investment, but significant obstacles exist. The economic downturn has severely strained federal and state budgets, minimizing the amount of funds available for new infrastructure investment. Furthermore, Congress has been focused on issues such as health care, financial reform, immigration reform, and environmental regulation, delaying legislative action regarding infrastructure repair.

  • The American Society of Civil Engineers estimates that it will require approximately $2.2 trillion over the next 5 years to restore US infrastructure to good condition. The current gap between actual and necessary construction investment suggests that there is upside potential for the construction equipment market.
  • Stimulus bills such as the American Recovery and Reinvestment Act will give infrastructure construction a small, temporary boost. However, with funding stretched thinly across the nation, and state and local budgets in disarray, the stimulus bills will not provide a long-term solution.
  • The future of infrastructure investment depends heavily on federal legislation. Currently, Congress is targeting the highways and streets, power, and rail segments.
  • The prospect of public-private partnerships and the development of a national infrastructure fund designed to attract private investors is becoming more enticing as government agencies struggle with fiscal troubles.
  • Highway and street construction is burdened by a depleted Highway Trust fund, which is financed by declining federal gas tax receipts. Congress has not yet proposed a long-term solution, but as the most visible infrastructure segment, highway and street projects will continue to attract public and private attention.
  • Power construction will struggle over the next several years as the power industry transitions from oil and coal to cleaner technologies which are still in their research and development phases.
  • Rail is quickly gaining momentum as a preferred mode of transport. With the support of the Obama administration, high-speed rail studies are sprouting up across the nation, but actual construction will not occur immediately.
  • The downturn in the US economy has been particularly harmful for the construction industry. Total construction fell 12.5% in 2009, leaving many construction companies short of cash. Some fleet owners are delaying purchases of new equipment or renting until the economy stabilizes and construction projects return.
  • Operating on a lower-risk model, financial institutions are requiring that borrowers have top credit quality. They are also giving preference to longstanding clients.
  • Lack of work forced many companies to lay off workers and idle or sell their equipment. Utilization rates among construction equipment fell to around 60% compared to around 80% during normal economic times.
  • Interim Tier 4 regulations, which place strict limits on engine emissions for construction machinery, come into effect on January 1, 2011. The typical pre-buy that accompanies the implementation of new environmental regulations may be tempered by a slower economy and lack of cash flow in the industry.
  • Equipment manufacturers are developing new engine technology to reduce emissions and telematics to track and monitor the equipment. The new technology will not significantly impact equipment sales growth in the short run, as prices of the new equipment will be much higher than existing technology. In the long run, the technology will become less expensive, and owners will be able to take advantage of the machines' longer usable lives and higher residual values.

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