2014 Tunneling Industry Forecast

To kick off the new year, TBM decided to explore where the market is headed in 2014 and beyond. We are entering into an interesting period, as megaprojects conceived last century are beginning to wind down, and the industry looks to the next wave of infrastructure projects to sustain itself – and hopefully grow. These projects must be built in a new financial and funding environment, while using evolving contracting practices and risk management techniques.

To help get a sense of where we are, and where we’re heading, TBM polled a mix of tunneling experts from across North America to share their insights on the market and how they see the future. The participants are:

Daniel N. Adams, P.E.
Principal, Jacobs Associates

 

 

 

William W. Edgerton, P.E.
Principal, Jacobs Associates

 

 

 

Randall Essex
Director of Professional Excellence, Hatch Mott MacDonald

 

 

 

Jason Holden
Director of Sales, Akkerman Inc.

 

 

 

Michael Rispin
Senior Vice President, Normet

 

 

 

Paul A. Roy, P.E.
Senior Vice President, AECOM

 

What is your overall assessment of the North American tunneling industry as we enter the new year? Is the market growing? Stagnant? Shrinking? Why?

Mike Rispin: The North American tunneling industry remains as vital as at any time I’ve seen it in my 25-plus years of association. Being project driven, there are always ebbs and flows and peaks and valleys from one region to another, but from 30,000 ft (or 9,144 m) it is at least stable compared to the last five years. As a generalization, with some notable exceptions, the East Coast is shrinking, the West Coast and Canada are growing, but overall there is relative consistency. At the same time, there could always be more, and the challenges to this will be explored in later questions.

Jason Holden: I hesitate to utilize the term “stagnant” for the tunneling industry as there has been an uptick in activity during the latter part of the 2013, however the market is not accelerating as quickly as we would like to see. The continued lack of infrastructure funding due to political and federal deficit issues has created a limited number of sizeable projects that are typically required for contractors to pursue large capital investments. This situation has forced many underground contractors to expand their geographical reach in search of work, and in turn created a highly competitive environment. During the past few years, contractors as well as many equipment manufacturers, have been able to utilize the stagnant market to some sort of advantage by improving operations and investing in research and development. These improvements have been an effort to improve the tunneling market through higher efficiencies and advanced technologies.

Dan Adams: I am not as bullish about the market as I have been in years past as the market does not appear to be growing in the United States. We are seeing fewer projects to pick from, and longer and longer procurements. Generally, we have “built out” the turn-of-the-century political commitments, and simultaneously entered a protracted period where there is limited funding for major infrastructure improvements, let alone new projects. We also have a group of delusional leaders (at some levels) that somehow think PPP funds a project, but that is only a mechanism to finance it. If there is no willingness for politicians or the U.S. consumer to “pay” to improve their infrastructure, the projects languish. Additionally, the heavy civil industry is still plagued by a persistent inability to balance reporting the true cost of a projected project with the promises/expectations of politics.

Paul Roy: The North American tunneling industry is experiencing an improvement over last year and will continuing to grow as we enter and go through 2014. The construction startup of major transportation projects such as the Alaskan Way Viaduct project in Seattle, expected startup of several design-build projects in Southern California, the Purple Line in Baltimore and continued completion of the Second Avenue Subway in New York City are positive indicators. Substantial planning and preliminary engineering efforts for new transportation projects have come to life as we begin 2014 with additional metro system expansion in California, Red Line extension in Baltimore and the revived Trans Hudson Expressway in New York/New Jersey. Design-build projects are progressing in Los Angeles (the Regional Connector, Crenshaw Extension and Purple Line Extension for LA Metro) and Toronto (Eglinton LRT transit stations in Canada, which are expected to begin final design and commence construction in 2014). In addition, engineering and environmental clearance is continuing in California for the High Speed Rail project between Bakersfield and Palmdale and Los Angeles.

On the water tunneling side, an aggressive program to meet federal mandates is pushing forward and several new water tunnel projects in the East (Hartford Southern Conveyance Tunnel) and the Midwest (Indianapolis Poques Run Tunnel), while in the West the Delta Conveyance project is achieving environmental approval. Major flooding in Alberta and Toronto is expected to increase the need for additional wet weather storage capacities. These projects will strengthen the engineering and design and construction of tunneling industry and provide a steady growth through 2014 and beyond.

Randy Essex: It appears to me that the market is leveling off. The large transit projects in New York City and Toronto are under way, but the vast majority of the projects have now been bid. The Los Angeles and Seattle transit markets still have “legs,” and transit projects are moving ahead in Vancouver, Edmonton and Ottawa. With Devil’s Slide and Caldecott completed, other than the Alaskan Way Viaduct Project, there are no big highway tunnel projects in final design or construction other than the East End Tunnel (Drumanard), which is more a highway project with a short tunnel than a major tunnel undertaking. There is still a healthy backlog of water, wastewater and CSO tunnel programs going on across North America, but not with the frenzy we’ve experienced in the past.

Why? The short answer is funding and political will. Without getting too political, our legislators need to take a time-out from finger-pointing across the aisle, and come to the realization that our infrastructure is failing and constraining economic growth. With stalemate budget “strategies,” the horizon is more cloudy than sunny.

What geographic areas in North America are likely to see steady tunnel/underground work in the near term? Long term? Why?

Mike Rispin: The current hot spots, as we all know, include Los Angeles, the Bay Area, Seattle, Cleveland, Indianapolis, Ottawa, Toronto, and British Columbia. Why? … Because this is where the investments are being made, either publicly or privately. In most public cases, it’s because the state of infrastructure as measured against need has declined to a point where policy-makers are responding because they simply have to, or be faced with problems of an exponentially increasing magnitude. In private cases, the investments are driven by forward-thinking business opportunities: to drive access to resources or energy, or to shore up infrastructure that is nearing the end of its serviceable life.
In the long term, it’s imprecise to predict locale by locale, but look to urban and environmental drivers of population growth and outdated infrastructure.

Jason Holden: The North American regions that are exhibiting market potentials are those with good infrastructure funding and economic growth. The province of Alberta looks to increase oil-sand production by as much as 100 percent in the next few years, which will certainly offer increased underground construction opportunities. The housing market has taken an upward turn toward the end of 2013 in parts of the United States and, if continued into 2014, can certainly play an important role in assisting state and local governments fund infrastructure projects through increased tax revenues.
Flooding events recently seen in Colorado and Mexico have provided opportunities for remedial infrastructure projects as contingency funds become available. This is in addition to existing requirements for the design and construction of long-term CSO mitigation projects. The unfortunate part of this scenario is played out far too often – a catastrophic event triggers the requirement for updating and repairing an already aged and stressed infrastructure.

Dan Adams: In the next 1-2 years we’ll see design and construction of projects on the West Coast and planning and permitting activities in the Midwest and East. In 2-5 years the Midwest will see clean water projects, while the Southwest will likely need projects due to population growth and difficulty of finding water.
The Canadian looks healthy. As a nation, Canada has a different view regarding the importance of funding infrastructure, and the role that transit plays in developing the future of a city.

Paul Roy: The geographic areas most likely to see a further steady growth in the near term in transportation include most of the major urban areas, such as the U.S. areas of the Northwest and the West and East coasts, and in Canada the Toronto, Ottawa and Edmonton areas. Near-term water tunnels will continue to see a steady increase based on federal mandates both in the United States and Canada. The long-term water tunneling growth will be focused in wet weather flood control, conveyance and treatment plants throughout the U.S. Midwest and California and transportation highway and transit on West and East coasts. The amount of growth will still be governed by federal support in the United States and in Canada.

While the general economy and lack of government funding can be problematic, there are some positive signs for the tunneling market: increased interest in environmental friendliness, sustainability and livability (transit and high-speed rail, hydropower) and environmental regulations (consent decrees). How do you see these factors affecting the market? What other factors are impacting the market?

Mike Rispin: There’s no question that these factors are having an increased effect. I saw somewhere recently a statement to the effect that “we don’t inherit the earth from our ancestors; we borrow it from our children.” This had an impact on me and speaks to what our industry does; our work leaves our environment a better place. This is true for freshwater conveyance, CSO mitigation, public transit systems (with all their known benefits) and sustainable energy generation.

I believe strongly that the United States and Canada need to invest in infrastructure in order to sustain competitiveness on an international front. The global marketplace is changing; countries have to be as effective as possible internally in order to remain competitive externally. Given the value-added nature of underground infrastructure, it’s a given that we must also grow assertively here to compete.

Jason Holden: One of the bright spots that is easily overlooked in the past couple years is that the tunneling market for small- to medium-diameter utility tunnels has not been impacted as severely as other construction sectors in North America. Although many municipalities have been struggling with budget deficiencies and revenue shortfalls, they are under constant pressure to improve water and wastewater infrastructure to meet EPA standards.

The ability to minimize the negative social impacts that can be associated with traditional open-cut construction methods in urban areas has become increasing more important in the public eye. Educational opportunities and interest in trenchless technologies has increased partly as a result of these impacts and will continue to escalate as urbanization increases. More universities are adopting a trenchless curriculum into their technology program, which will assist in building a future knowledge base.

Dan Adams: They all help make our projects more desired by the general public. However, high-speed rail is so far off (for our market) that it is hard to count seriously. Hydro is a growth market, but you need to have the river and the willingness at political level to allow them.

Bill Edgerton: Other factors affecting the market are the ability of the completed projects to generate positive publicity that they have been a success. Success factors would include on-time delivery, under budget turn-out cost, no accidents, etc. The industry still does a terrible job of getting it right, and even when we do, we don’t get enough positive publicity in the right places to make a difference in the public’s (read: politicians) perception.

Paul Roy: These factors certainly impact forward progress particularly in construction. The more complex issues of environmental requirements for systems such as high-speed rail alignments and meeting the consent decrees are prime issues to solve and have a major impact on the market timing, i.e. digging the tunnels. Consent decrees are being enforced in several states and will continue into all states and areas required to meet the Clean Water Act. Overcoming “NIMBY” opposition for high-speed rail projects in California has been a major challenge. Local money and participation is also a major factor. California has done an amazing job to allocate money for transportation projects and strongly supported by the voters resulting in the Measure R funding with an increase of the sales tax by only 0.5 percent. Imagine the money that could be raised if there were a workable and fair national program to support our infrastructure and Clean Water Act.

Randy Essex: Without the federal commitment of public funds, or increased streamlining of private ventures, environmental and livability considerations may not be sufficient to drive these very costly projects. As projects like the Alaskan Way Viaduct Tunnel come to fruition, and provide vivid proof that quality of life on the surface is enhanced with innovations underground, more projects will be raised for consideration. Unfortunately, without the necessary public or private funding mechanisms in place, good ideas will remain ideas. An important factor that will stimulate funding of projects, unfortunately, is when infrastructure fails. This may be the only way our infrastructure needs are understood.

What is your assessment of the international market? How does its health affect the market in North America?

Mike Rispin: The international market is as healthy as the domestic market and, measured in terms of opportunity and growth, is actually healthier. Recently communicated, the ITA (International Tunneling and Underground Space Association) is projecting a 7 percent global compound annual growth rate for underground construction for the next three to five years. The traditional hot spots in Europe have dried up somewhat but, at the present time, the Asia-Pacific, India, the Middle East and parts of Scandinavia are very active. I relocated to Europe toward the middle of 2013 to take on some additional challenges and, while still closely associated with the domestic market, look forward to greater exposure globally and to benchmarking other tunnel markets.

Is there a knock-on effect to North America? Only peripherally, I think. More work elsewhere can be said to dilute the talent pool of expertise available for domestic work. Those international firms which focused on North America (and other regions) when their traditional markets dried up may now look elsewhere also. Definitely, it behooves all of us to benchmark technological developments which work elsewhere for the benefit of the domestic industry. There has been too much “not invented here” in the past which we have to get over.

There are definite synergies with a close association of the domestic industry to the global industry. I think that the UCA of SME should be positively reinforced for its leadership in strengthening ties with the ITA. It will be interesting also as this relationship develops leading up to San Francisco hosting the World Tunnel Congress in 2016.

Jason Holden: As the European economy continued to struggle through 2013, experts are predicting a slight recovery for Germany, Italy and Spain, countries representing major players in the tunneling industry.

Struggling markets and lack of infrastructure spending in Europe has caused a shift of specialized contractors from international markets to enter the tunneling scene in North America, thus creating additional competition among contractors.

Dan Adams: Australia is healthy because they make infrastructure a part of the national economy, and the driving and traveling public accepts that to drive on a new freeway, one must pay for it. China is still healthy, and I believe huge opportunities exist in the long term when the county decides to clean itself up, but that is not happening in this decade. In Europe the outlook is mixed. France, Spain and Ireland are declining, while the United Kingdom, Germany and Eastern Europe are chugging along. The Middle East is crazy busy, similar to China of 5 years ago. The market in South America is very difficult to predict.

Over the past few years we have seen increased pressure on our market as a result of weaker overall markets elsewhere, including companies like FCC, Dragados, OHL, Vinci, Bouygue, etc., increasing their focus here.

Bill Edgerton: Tunneling is a relatively small niche market.

When there’s a lot of work in one area (or part of a country) there’s a big up-swing in employment of less-qualified people to do it. Thus more project failures. When the market contracts, there’s a drop off of employment, but not always the least qualified people drop out.

Paul Roy: Although the economy is recovering slowly in Europe other international markets are expanding. Certainly the Middle East continues to be a rapidly growing market for transportation and water tunnels and the Far East is showing an increase in work in transportation lately, after a short slowdown. With the slow economy in Europe, companies based there are competing in North America against the more established companies. We have seen this happen over the past several years and it will continue. Competition is good for our industry and should drive construction costs lower, providing more money for capital investment. Projects in the Middle East may cause some strain on the work force in North America since more owners prefer work to be done within their “sights,” which requires a mobile engineering and construction force and relocates the North American talent pool to other global regions. As the tunneling design and construction market becomes more global, smaller and midsize tunneling engineering and construction companies will have more challenges to be competitive.

Randy Essex: Economic slumps in certain European markets have given rise to an increase in international contractors pursuing work in North America. This has come with mixed results, with regard to technical know-how, labor union dynamics, and commercial awareness. We need to do a better job educating owners that if they want to attract international contractors, they have to do a better job explaining their approach to risk sharing, risk allocation, and disputes resolution – topics that local contractors will already know.

What trends are you seeing in the North American market? What are the results?

Mike Rispin: From an overall commercial perspective, there are new domestic and international contractors and engineers entering the market on a consistent basis. It provides for an interesting dynamic with paucity of actual tunneling experience stacking up against different and fresh business and construction perspectives. While new entrants always pose a challenge to the incumbents, only history will judge as to the success of their approaches.

The trend to mechanization, widely documented, will continue. North America estimates that in excess of 80 percent of the projects forecasted for the next five years will be TBM driven. Compared to other jurisdictions, this is high.

I believe that, and am a strong proponent for, synergies between tunneling and mining approaches to underground construction. These differing perspectives come at problems from different angles and, while there is no general rule that says that one is better than the other, the truth often lies somewhere in between. As underground mines go deeper and into more challenging conditions over the next 20 years, they will need to adapt civil tunnel practices. Indeed, we already see civil contractors very actively bidding large mining drives. Conversely, as tunnels are built under greater overburden and in higher stressed ground (ex. Gotthard Tunnel) mining approaches will be indicated.

I’m pleased to see the North American market, albeit gradually, embracing the concepts of final lining sprayed concrete (shotcrete) and spray-on waterproofing. This needs to continue strongly and, from a value engineering perspective, there are a number of potential winners from contractor through owner.

Jason Holden: Aside from stiff competition between bidding contractors, it appears that many projects are becoming more complicated and risk adverse. Unfortunately litigation practices are becoming more common as a way to resolve any disputes that arise during a project’s construction.

Continued improvements in the industry such as updates to the ASCE Microtunneling Guidelines, the formation of societies such as the North American Microtunneling Association (NAMA) and educational seminars are assisting efforts to not only help pass knowledge onto the industry, but also encourage communication between project owners, designers, contractors and equipment manufacturers.

Dan Adams: We are seeing more design-build, fewer family-run construction companies (e.g. McNally, Kenny, JJ&G, come to mind, etc.), far greater price competition, and a much more aggressive relationship between consultants, contractors and owners. As a result, work is not nearly as enjoyable as it used to be.

Paul Roy: Trends in the North American market are following global market trends. Design-build is by far the greatest impact on trends as it is being practiced with three major transit projects in Los Angeles and one major highway project in Seattle. Certainly larger diameter tunnel boring machines are being seen and more being planned in North America than ever before. The successful solution of a large tunnel boring machine on SR 99 in Seattle will clearly pave the way for larger bored tunnels in North America. Advances in tunnel liner design and construction are being further accepted in North America, such as cast-in-place gaskets and bi-cones support systems. Whether it happens next year or a bit later, tunnel inspections need to begin a more consistent effort and program requiring special teams to perform the work.

Randy Essex: One trend is a reduction in the public funding of transportation and water infrastructure projects, with only a modest increase in private funding. This is tending to dampen the number of tunnel projects going into design. Another unfortunate trend is a reduction of qualified personnel in design, owner oversight, construction management, and contractor supervisory personnel. Again, unfortunately, the results are not favorable. Greater vigilance will be required to implement pre-emptive risk management measures, including follow-through during construction.

What needs to happen in order for the North American market to sustain its current level or grow? What are the biggest stumbling blocks?

Mike Rispin: Funding, funding, funding … it seems obvious but underground infrastructure must be paid for. Longer term purviews of owners and legislators must be taken. This is easier said than done but our competitiveness, referred to earlier, depends upon it. We must also find a way to approach infrastructural investment from a national, not just state or municipal, perspective. Public-private partnerships must be further explored. In some parts of the world, these are fueling the underground construction growth required for emerging economies to compete.

Technological advancement, new specifications and value engineering are essential to sustainability and growth. Possible new approaches must be greeted with “why not?” instead of “why on earth?” (or under earth, as our case may be).

Traditional tried-and-true doesn’t cut it in today’s tunneling world; someone else will eat your lunch for you.

The stumbling blocks, depending upon whether one is “glass half full” or “glass half empty” can be numerous. However, I strongly believe that obstacles must be divided between those we have control over and those we do not. We must focus daily on the former and lobby those who can have an effect on the latter.

Jason Holden: Since a large percentage of infrastructure projects are funded on the state and federal levels, it is important that the government engage in constructive efforts to resolve political uncertainty to foster the confidence needed to tackle these projects. I would like to see legislators and government officials make infrastructure spending a higher priority, put some concrete plans into action, and adopt the mindset that infrastructure funding is an investment and not an expenditure.

It is also important to provide ways to nurture and develop existing industry professional’s skills. I was once told by a gentleman who I admire, who had many years of tunneling experience, that a “P.E.” behind your name really only means “partially educated.” At that time, I found this to be more comical than anything, however, after a few years in the industry his saying proved to be an important lesson. The lesson served as a reminder that each day it is important to learn from others as well as offer your own insights to not only better yourself, but to enhance the industry as a whole.

Dan Adams: We need to educate people that – 1) when infrastructure is 75 years old, it needs to be replaced; 2) when there are on average 3 cars per family, the use and abuse on roadways is greater than it was in 1955; 3) to actually “accommodate urban density” you have to build capacity first in everything from water and sewerage to roads transits, and power. The mindset that we need to do everything possible to avoiding increasing taxes and fees, while simultaneously making healthcare affordable for all, creating and expanding the TSA (which doesn’t change the power of terror). maintaining defense spending at current levels, etc., needs to change. It is not-sustainable – and that’s with very little spending on infrastructure. The game really needs to change. Hurricane Sandy was a start.

Paul Roy: The North American tunneling market needs to continue development of tunneling engineers through our continuing education in tunnel engineering and construction in North American universities. At the same time, we need to relax or restructure construction bonding requirements.

Randy Essex: Governments at the state and federal level need to wake up to the realities that North America’s infrastructure is in need of attention. “Our tax dollars at rest” is not an acceptable attitude. The tunneling industry can do its part in addressing our professional resources shortfall by: 1) introducing high school and young college students to a career in the underground, and 2) helping universities strengthen their curriculum in underground engineering.
Concluding thoughts.

Mike Rispin: This is a challenging but delightful industry with which to be associated. We build things … we improve the quality of life … we enhance competitiveness … the world is a better place for what we do. Be proud to tell our story … both what we’ve done and what remains to do.

• Innovate. Look beyond the borders to improve inside the borders.
• More than ever, there must be close ties between the United States and Canada. The similarities dramatically outnumber the dissimilarities.
• Spray more concrete. Spray more waterproofing. Build monolithic linings. Cut costs.
• Safety can lead productivity.

Jason Holden: I believe that the North American tunneling industry in general is healthy and should be viewed optimistically. With the potential for infrastructure spending associated with EPA and CSO compliance, and the likelihood of opportunities in the housing and Canadian markets, we can anticipate good things to come.

Bill Edgerton: To improve project delivery, we need to be sure that the bidders have a better understanding of the projects before the bid date, i.e. before the price is established. This understanding needs to include: identification of the risks and who has been allocated what risk as well as the client’s personality (i.e., how they will address changes). This is not easy to achieve in the “here’s the documents, give me the price” environment. If projects currently under way that weren’t done in that manner turn out well, then with enough positive publicity, there may be a way to turn the corner and increase the underground market as a share of the overall construction market. Until then, not so much.

Paul Roy: The tunneling industry is in a stable position and should continue to grow; however, improvement is still in a fragile state partly as a result of the global economy and global tunneling companies competing in the North American market. There are several tunneling opportunities in the next year, but the small to medium-sized organizations will find the competition challenging, especially in the design-build procurement projects. It’s good to understand where we are in the market, but difficult to predict the future trends. Larger companies will grow faster because of their ability to be more flexible to the global economy and market conditions.

Randy Essex: The enhancement of tunneling technologies has improved the safety, quality and productivity of underground construction. Having a sufficient number of qualified professionals is critical to being able to take advantage of these technologies. However, it will take a certain amount of political will on the part of legislators to re-allocate government spending toward infrastructure repair and new facilities, with an equitable reduction in government spending elsewhere. Despite the apparent leveling off of work, we cannot become complacent with the need to continue to attract young professionals to our industry.