EXECUTIVE SUMMARY
THE ECONOMIC EFFECTS OF
ENVIRONMENTAL REGULATIONS ON THE
POLLUTION CONTROL INDUSTRY
Report No. EPA/230/1-78-002
Prepared by
ARTHUR D. LITTLE, INC.
Cambridge, Massachusetts 02140
Prepared for
The U.S. Environmental Protection Agency
Washington, D.C. 20460
September 1978
80920
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TABLE OF CONTENTS
Page
ABSTRACT it
1.0 EXECUTIVE SUMMARY 1
1.1 OBJECTIVES AND METHODOLOGY 1
1.1.1 Definitions and Scope 1
1.1.2 Approach 2
1.2 INDUSTRY CHARACTERISTICS 4
1.2.1 Financial Performance 4
1.2.2 Technological Capabilities 8
1.2.3 Capacity, Supply, and Competition 9
1.2.4 Demand and Employment Estimates 11
1.2.5 Corporate Commitment and Business Risk 13
1.3 MAJOR REGULATORY EFFECTS AND ISSUES 14
1.3.1 The Municipal Bidding Process 14
1.3.2 The Role of Federal R&D 15
1.3.3 The Role of Technology Forcing Standards
in Air Pollution Control Regulation 16
1.3.4 System Operation and Maintenance 17
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ABSXKALi'I
THE ECONOMIC EFFECTS OF ENVIRONMENTAL REGULATIONS ON
THE POLLUTION CONTROL INDUSTRY
by Arthur D. Little, Inc., (August 1978 - Cambridge, Massachusetts)
for the U. S. Environmental Protection Agency (Contract No. 68-01-4660)
(Report No. EPA/230/1-78-002)
The objectives of this study included: identifying constraints on the
ability of the pollution control industry (PCI) to support future regu-
latory needs; evaluating the performance of participating companies;
estimating markets and associated employment; and updating an earlier
(1972) analysis. The analysis is both descriptive and diagnostic, ad-
dressing the impact of the regulatory process upon the industry and, con-
versely, the impact of the industry upon the regulatory process.
The business segments covered in the study are: the equipment and in-
strumentation systems used in the control of air pollution from station-
ary sources; the equipment, instrumentation, and chemicals associated
with water pollution control; and the systems being developed to recover
energy and materials from municipal solid waste.
The recent history (1972-1976) of the PCI has been one of better than
average growth and only average profitability. Leading companies in each
PCI sector enjoyed growth rates in the range of 16-22% per year (versus
9% for all U. S. manufacturing). However, the level of profitability was
only about average for all U. S. manufacturing or comparable industrial
segments (e.g., 10-11% after-tax return on stockholders' equity). An
important exception has been the water treatment chemicals segment which
has been among the most profitable in American industry.
The larger of the leading PCI companies typically have annual sales of
$200-$700 million and are not among the multi-billion dollar firms which
command the greater financial resources within the U. S. manufacturing
industry. Hence, the PCI has been limited by the resources of its leading
participants as well as by disappointing profitability.
In 1977, the markets for these pollution control products totalled $1.8
billion. These markets are projected to grow to $3.5 billion by 1983 or
at a pace of 11-12% per year (in current dollars and assuming 5-7% in-
flation) . Faster growing segments include those of flue gas desulfuriza-
tion systems and resource recovery systems.
Current employment by the PCI in association with these markets is esti-
mated to be 35,850 jobs. Assuming that the amount of sales generated per
employee will continue to increase as well, employment is projected to
grow to 43,900 in 1983. These employment benefits to the economy do not
include pollution control jobs provided by consulting engineering firms,
fabricators, and construction contractors.
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A diagnostic examination of the impact of the regulatory process upon the
industry focuses on four major issues of concern to the PCI and of im-
portance to future regulation: the municipal bidding process; the role
of Federal R&D; the effects of .technology forcing standards; and the
operability and maintenance of control systems.
The municipal bidding process is the issue believed to be having the
greatest impact upon the PCI. This is the process by which Federal con-
struction grant monies are expended for specialized sewage treatment
equipment and instrumentation systems. Problems recommended for further
examination within the municipal bidding process include bid-shopping
practices, implications for plant operation, and responsibilities for
system performance.
Federal support of R&D may be more critical to U. S. technological leader-
ship in pollution control than in other regulatory program areas. Manu-
facturing industries seeking to solve their own pollution control prob-
lems do not have the right motivation for developing new technology. The
pollution control industry has neither the corporate resources, the his-
torical capability, or the profitability needed to pursue basic research.
The effects of technology forcing standards are raised with regard to the
possible setting of new particulate emission targets for utility boilers.
The point of concern developed here is that particulate control has been
the mainstay both of the air pollution control business and of the regu-
lation of national air pollution levels. The possible placement of new
standards at the frontier of technological capability may introduce prob-
lems of overextended guarantees, system failures, lack of user confidence,
and unsatisfactory performance.
The operation and maintenance of pollution control systems is of growing
concern to environmental regulators. The major focus of enforcement, to
date, has been placed upon the installation of systems directed at
achieving the installation of control systems may work against main-
taining the desired operation and performance of those systems. The
municipal bidding process and technology forcing particulate control
standards are cited as possible illustrations of this problem.
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1.0 EXECUTIVE SUMMABY
1.1 OBJECTIVES AND METHODOLOGY
In Its Contract (68-01-4660) with Arthur D. Little, Inc. (ADL), the
U. S. Environmental Protection Agency (EPA) asked for a diagnostic analysis
of the pollution control industry (PCI). The objectives of the study were
to aid EPA decision-making by:
• identifying constraints on the ability
of the PCI to meet the needs and market
demands deriving from EPA's regulatory
initiatives;
• evaluating the performance of PCI member
companies and their derivative attitudes
towards future investments;
• estimating markets and associated employ-
ment associated with the PCI and its
role in serving environmental regulatory
requirements; and
• updating an earlier (1972) economic
impact analysis of this industry.*
Two kinds of impacts were addressed in this study: (1) the impact of the
regulatory process upon this industry and, conversely, (2) the impact of
this industry upon the regulatory process.
1.1.1 Definitions and Scope
The primary focus of this study was placed upon the companies which supply
specialized equipment, systems, and products for use in pollution control
applications. Companies which participate in activities related to these
systems and products were not a part of our analysis, e.g., construction
firms, consulting engineers, fabricators, etc.
"Economic Impact Study of the Pollution Abatement Equipment Industry,"
Report to EPA by Arthur D. Little, Inc., December 1972 (EPA Contract
No. 68-01-0553).
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The major sectors of the PCI covered by this study include:
1) Air Pollution Control (APC)
Our analysis covered the equipment and
instrumentation associated with the
control of particulate and gaseous
emissions from stationary sources. It
did not cover products associated with
the control of emissions from mobile
sources.
2) Water Pollution Control (WPC)
Attention was given to three kinds of
WPC products: specialty equipment, in-
strumentation, and specialty chemicals.
3) Resource Recovery
The study was limited to the emerging
business for systems designed to recover
energy and materials from municipal solid
waste (MSW). It did not include the
businesses associated with the collection
transportation, and landfilling functions
in solid waste management (SWM).
The time horizon of our analysis extended through the 1980's. Markets
were reported in 1977 dollars. Geographically, the study was limited to
the domestic industry and its domestic markets. Foreign opportunities
and competition were considered to the extent that they are important in
characterizing U. S. companies and the domestic marketplace. Generally
speaking, pollution control businesses do not have important differences
among major U. S. regions; therefore, a region-by-region analysis was
not part of this work.
1.1.2 Approach
As we began work, EPA priorities for this updated analysis of the PCI
began to change from that of the 1972 study.* The major change was one
of focus and emphasis. In addition to developing a descriptive study of
the PCI, we were directed to provide a more diagnostic study of the prob-
lems facing this industry. We were asked to identify critical issues,
the ways in which EPA policies appear to affect them, and to recommend
potentially fruitful ways in which EPA's policies might better sustain a
healthier pollution control industry while still fulfilling EPA's statutory
responsibilities.
Supra.
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Our major resource for doing this study was a series of interviews with
representative pollution control companies. With the change in focus
and emphasis, however, we postponed our industry interviews until we had
gained a better understanding of some of the issues of interest to EPA
and the PCI. We developed this preliminary understanding through dis-
cussions with EPA, other Federal agencies, and industry associations.
We talked to about 20 EPA staff members from at least seven different
areas of activity. We met with representatives from the Department of
Commerce, the Council of Environmental Quality, and the Department of
Energy, We also solicited issues related to our study from representa-
tives of the Environmental Industry Council (EIC), the Industrial Gas
Cleaning Institute (IGCI), the Water and Wastewater Equipment Manufac-
turers Association (WWEMA), and the Water Pollution Control Federation
(WPCF), On the basis of those discussions, we developed nine issue
categories. These categories are listed in Table 1-1, below. Specific
points for discussion which we used within each of these categories may
be found in Appendix 1.
Table 1-1
ISSUE CATEGORIES
1. Regulatory Impacts upon the:
A) Operation and Performance of the PCI
B) Customer Purchase and Operation of
Pollution Control Systems
C) Costs and Benefits of Pollution
Control Compliance
2. Industry Capabilities for:
A) Meeting the Changing Bases of Demand
B) Developing Needed Technologies
C) Providing Sufficient Production
Capacity
D) Achieving Attractive Financial
Returns
E) Sustaining Sufficient Competition
3. Company-Specific Capabilities and Attitudes for:
A) Continued Investment in the Pollution
Control Business
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Our interviews with pollution control companies extended over a period of
four months from November 1977 through February 1978. These interviews
were handled by a team of six ADL staff members. We visited more than 30
companies from which roughly 80 people gave of their time and effort.
Several of these companies participate in more than one PCI sector. Hence,
15 of these companies were resources to us on the APC equipment business
and 17 were resources on WPC equipment. APC equipment and WPC equipment
received the greatest emphasis as the "heart" of their respective busi-
ness sectors. We also contacted four suppliers of WPC chemicals and
another four suppliers of air and/or water instrumentation systems. We
also talked with eight companies participating in the resource recovery
business.
We were not able to extend our coverage to other industries having rele-
vant inputs to many of the Issues in this study. For that reason, the
issues and recommendations in this study may be parochial to our major
source of information in this study: the manufacturers of specialized
pollution control products.
1.2 INDUSTRY CHARACTERISTICS
1.2.1 Financial Performance
A typical leading supplier of pollution control products participates in
several other businesses. Very few of the larger firms can associate
more than 50% of their annual sales volume to environmentally related
businesses. As a result, our financial analyses of representative pol-
lution control activities are largely limited to financial'statistics on
entire corporate activities. This has the danger of misrepresenting the
financial returns of pollution control businesses, but it has been our
experience that overall corporate returns for the leaders of the PCI are
fairly good indicators of their returns in their component pollution con-
trol businesses.
Representative growth rates and profitabilities for companies in five
major sectors of the PCI are summarized in Tables 1-2 and 1-3 covering the
the period 1972-1976. Comparable statistics are provided for ALL U. S.
MANUFACTURING and larger industry segments reasoned to be comparable to
the individual PCI sectors. The historical growth rates and profit-
abilities in Tables 1-2 and 1-3 were developed from composite performance
data for groups of companies participating in each of the sectors. The
companies used for this analysis are listed in Appendix 5. The companies
used for the analysis were those believed to have 10% or more of their
total corporate sales in environmentally related businesses. The in-
strumentation companies generally reflect an even smaller participation
in this business area.
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TABLE 1-2
AVERAGE ANNUAL GROWTH IN SALES AND NET INCOME FOR
COMPANIES IN MAJOR POLLUTION CONTROL INDUSTRY SECTORS: 1972-1976
PCI Sectors;
APC/WPC Instrument
APC Equipment
WPC Equipment
Resource Recovery Systems
Water Treatment Controls
Average
Sales Growth
1972-1976
(%/yr)
16
20
18
18
22
Average
After-Tax
Income Growth
1972-1976
(%/yr)
25
23
19
13
20
Comparative Industry
Composites:
All Manufacturing
Industrial Machinery
Industrial Chemicals
Instrumentation
9
18
17
16
15
11
18
25
Source: Corporate Annual Reports, Security Exchange Commission Forms
10-K, Moody's Industrial Manual, and Standard and Poors*
Industry Survey.
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TABLE 1-3
AVERAGE RETURNS ON EQUITY AND SALES FOR
COMPANIES IN MAJOR POLLUTION
PCI Sectors:
APC/WPC Instrument
APC Equipment
WPC Equipment
Resource Recovery Systems
Water Treatment Controls
Comparative Inudstry
Composites:
All Manufacturing
Industrial Machinery
Industrial Chemicals
Instrumentation
CONTROL INDUSTRY
Average ROE
1972-1976
11
10
11
11
15
13
14
14
10
SECTORS: 1972-197
Average ROS
1972-1976
5
4
4
5
7
5
6
7
4
Source: Corporate Annual Reports, Security Exchange Commission Forms
10-K, Moody's Industrial Manual, and Standard and Poors'
Industry Survey.
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The average annual growth In sales (calculated in current dollars) for
the PCI sectors was clearly stronger than the 9% per year growth for
ALL MANUFACTURING. The range of growth for the equipment systems sectors
(APC, WPC, Instrumentation, and Resource Recovery) was similar to that
for the comparative industrial machinery industry composite, or between
16-20% per year. The WPC chemicals business enjoyed a greater growth
(22% per year) than that for industrial chemicals generally (17% per year).
In terms of the growth in profits, all sectors did as well, if not better,
than their industry composites. On an annual basis, this growth in
profit ranged from 18-25% per year across these company groups.
The average return on stockholders' equity (Table 1-3) for these companies
in the years 1972-1976 ranged from 10-11% for the equipment and instru-
mentation sectors to 15% for WPC chemicals. This compares to a range of
10-14% for the instrumentation, industrial machinery, and ALL MANUFAC-
TURING categories and to 14% for the industrial chemical composite.
Hence, on this return-on-investment measure, the PCI companies have been
performing at only an average level of profitability for American industry;
some have not even performed at that level. The same is true in terms of
their average after-tax return on sales.
In summary, the PCI has generally enjoyed greater than average growth
with only average profitability. An important exception to this is the
WPC chemicals sector—really a water treatment chemicals sector—which
has been among the most profitable in American industry. This kind of
"profitless prosperity" mirrors the disappointment which many PCI com-
panies have found in this "glamor industry." Growth markets usually pro-
vide higher than average profitabilities which in turn stimulate needed
business investments. This history of average or lower than average
profitability is working against investment in new plants and technologies
by companies within the PCI.
A final and important characteristic of leading pollution control com-
panies is that they typically do not have the financial strength of
multi-billion dollar corporations. The largest PCI participants typically
are intermediate in size, e.g., with corporate sales of from $200 to
$700 million per year. EPA's dependence upon this industry to solve
future pollution control problems is thereby more tenuous than other
Federal regulatory efforts which depend upon industries comprised of
multi-billion dollar corporations. The PCI is not only hampered by
profitabilities which discourage further investment, but also by limited
corporate resources to manage the risks associated with this enforcement-
driven market.
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1.2.2 Technological Capabilities
The availability of needed technology corresponds to the maturity of the
major market segments within the PCI, i.e., there's a greater need for
technological development in resource recovery at the present time than
there is in air and water pollution control.
Needed technology for near-term water pollution control problems is
believed by the PCI to be well-developed. An issue now is just how much
tertiary or other advanced treatment is actually going to be required in
the 1980's. One of the stimuli for new WPC product innovation in recent
years has been the need for energy conserving technologies. Insofar as
it takes three to five years to develop a new control technology, future
pollutant-specific regulations (i.e., for toxics and hazardous materials)
will probably be met through available technology.
It is reported that the rate of truly new product innovation in water
pollution control has declined—as evidenced, for example, in industry
tradeshows. Some of the motivation for developing new products has also
changed. The traditional market of greatest focus for leading wastewater
treatment equipment suppliers—the municipal market—has become less
profitable. In earlier years, WPC equipment manufacturers would develop
new products for the municipal market and then look for further applica-
tions in the industrial market. Now a reverse priority is in effect—there
being indications that lesser grades of traditional equipment are being
manufactured to meet the needs of a "low-price, bid-shopping" municipal
business.
Air pollution control technologies are employed for either particulate
or gaseous emission control. For some time, the PCI has believed that
adequate particulate control technology exists to meet regulatory needs.
A renewed emphasis by EPA on higher percentage removals of particulates
has introduced a new phase of competitive activity in the utility segment
of the particulate market. Hence, although technology has been available
for the control of particulates, there have been recurrent opportunities
for better performance from the established technologies.
Gaseous emission control remains a major frontier for new technological
development. The proving of technologies for the control of SC>2 emissions
has been going on for at least a decade. Controlling NOX, hydrocarbons,
carbon monoxide, and hazardous emissions still lies ahead. In the area
of gaseous emission control, air pollution control progress can be viewed
as having been partly technology constrained.
The proving of technology is very much a part of current resource recovery
efforts in the municipal solid waste marketplace. Waterwall incineration
has been proven abroad, but still must be considered to be in its early
stages of commercialization in this country. Technologies directed at
producing refuse derived fuels hold equal promise but are still to be
proven. Recent domestic experience with pyrolysis systems has been disap-
pointing, and the timetable for their commercial application has been set
back accordingly.
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The technological capabilities of the PCI vary from sector to sector and
from company to company. Current capabilities may be related to at least
two factors: the historical importance of R&D for these companies and
the recent profitabilities of these businesses. Environmental regulation
has created growth markets for what had been mature businesses for most
of these leading companies. The mature businesses in these companies had
not required R&D, and R&D budgets had been historically on the low side.
The first waves of environmental regulation have been directed at
"catching up" with pollution control problems with already available tech-
nologies. Hence, these early legislated markets have not really required
great R&D capabilities either. In fact, this has proven to be a point
of frustration to those who have developed modern technologies in advance
of actual market need.
If these companies are to change their emphasis on technological develop-
ment, potential profitability would need to be sufficiently attractive
to encourage that investment. However, the PCI is not currently in a
good position to be a strong resource for developing new technologies—
R&D has not been an important part of its history and the recent average
profitability of this business does not encourage a change in that pattern.
Increased emphasis upon in-process approaches to pollution control pre-
sents a further challenge to the PCI. It is difficult to document (and
it will continue to be so) how much of this is being done. As it gains
importance, it is not clear to what extent the traditional PCI companies
will share in the new opportunity. Those PCI companies which now par-
ticipate in process equipment or combustion technology are in a better
position to benefit from this transition. The problem is that these ap-
proaches may tend to be handled by internal customer engineering staffs
or process engineering firms, and that the markets for in-process ap-
proaches will not be identifiable as environmentally-driven demand.
1.2.3 Capacity, Supply, and Competition
Normally, these three subjects would deserve separate sections in a
microeconomic impact study of an industry. In this study, we have
attempted to place more emphasis upon diagnosing problems and constraints
than upon providing an evenly distributed descriptive study of the PCI.
There are simply no apparent major constraints (i.e., shortages) in the
PCI at this time with regard to either capacity, supply, or competition.
In terms of capacity and competition, current problems are not ones of
"too little" but more those of "too much." Shortages of material and
other bottlenecks are constraints which are largely beyond the control
of this industry and which can appear at any time. Except for some items
which have seemed to have always had long delivery times (e.g., specialty
pumps), no serious shortages are being experienced now or envisioned for
the near future.
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Any potential problems in manufacturing capacity in the near future are
buffered by the extended use of outside fabricators by the equipment
companies. There is no concern about the near-term availability of good
fabricating shops. The greater limitation upon capacity in periods of
peak demand is believed to more likely come from a shortage of skilled
manpower than from one of manufacturing capability.
Between 500 and 1,000 firms participate in the major sectors of the PCI
covered by this report. In mature businesses such as air and water pol-
lution control equipment markets, the top 15-30 firms account for 60-80%
of the total business.
The problem of "too much" competition has been most evident in the markets
for new technologies. Markets for flue gas desulfurization systems and
resource recovery systems are outstanding examples in which more than a
sufficient number of competitors have appeared to supply available markets,
There can be no question that competition has been working in these
frontier markets. It has been working so well that most of the companies
have yet to make any profits in these markets.
While foreign technology appears to be playing an increasing role in the
U. S. market, foreign companies have .not been notably successful in
achieving U. S. market positions. The greatest influence of foreign
competition has come through licensing relationships with U. S. manu-
facturers. More significant inroads have been made by foreign companies
in pollution control instrumentation, but that is more characteristic
of international competition in instrumentation than it is of the pol-
lution control business. Even there, the proportion of the domestic
market held by foreign suppliers is probably 10% or less.
The dominant source of competitive advantage in pollution control markets
tends to be marketing position. Defined to include marketing capability,
customer know-how, and business experience, it is market position which
has provided the basis for growth by PCI companies and protected them
from attempts by multi-billion dollar companies to enter these markets.
After a decade of "growth and glamor" attributed to PCI businesses, not
a single billion-dollar corporation has entered a major sector of this
business and successfully carved out a broad leadership position in it.
This has been most notably illustrated in the water treatment specialty
chemical business where the profits have been sufficiently attractive to
draw the attention of even the most profitable segments of American in-
dustry. There, the leading suppliers are the same as those who led the
industry five and ten years ago, and their market shares have not
suffered.
Many participants in PCI businesses foresee a significant shakeout of
competition—because of low profitability and the overabundance of
competitors. With that is anticipated an improvement in profitability
and stability. We cannot agree with that projection because of the con-
tinued strong interest by potential new entrants in its markets. We
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expect as many companies to enter these businesses over the next decade
as drop out of them. In short, we foresee that turnover—not shakeout—
will characterize this market over the near-term; but that turnover may
be significant.
1.2.A Demand and Employment Estimates
The estimated demand and associated employment for the major sectors of
the PCI covered in this study are summarized in Table 1-4. The markets
for specialty equipment and products in 1977 totaled roughly $1.8 billion
and are projected to grow to a level of $3.5 billion by 1983.
WPC equipment markets in 1977 represented the sum of about $290 million
from municipal sewage treatment and about $260 million from industrial
wastewater treatment. This represents a reversal from the breakdown in
recent years when the industrial market had been the larger of the two.
With the passing of the 1977 deadline for industrial treatment compliance,
the industrial market has quieted down while the Federal funding program
has sustained the municipal market. Over the next five to ten years,
the municipal market is expected to grow at a pace of 10-12% per year and
in the industrial market is expected to grow at a pace of 8-10% per year.
The WPC instrumentation market is estimated to have been about $150
million in 1977 including both its municipal and industrial segments.
Growth rates over the next five to ten years are expected to be similar
to those for WPC specialty equipment. APC instrumentation is somewhat
less than a $50 million market and is expected to grow at a 6-8% annual
growth rate into the late 1980's.
The markets for WPC chemicals (both bulk and specialty) were around $250
million in 1977. An associated market of $650 million is enjoyed by
many of the same companies in water treatment applications. The growth
rate for wastewater treatment chemicals is forecasted at 15-19% per year
out of a total business for water and wastewater treatment chemicals
which is expected to grow at 12% per year.
The APC equipment business in 1977 is estimated at $700 million annually.
About 10% of that was associated with the control of gaseous emissions,
primarily S02. The remainder represents business associated with the
control of particulates—the traditional market for air pollution control
suppliers. These market estimates represent the "flange-to-flange" equip-
ment business. These companies also participate in the design and con-
struction activities which, in general, can provide a further business
which is equal to or twice that of the flange-to-flange business. Growth
rates of 6-8% and 18-20% are anticipated for particulate control and S02
control systems, respectively—i.e., an overall growth rate in the order
of 8-10%.
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TABLE 1-4
ESTIMATED DEMAND AND EMPLOYMENT ASSOCIATED WITH
THE SUPPLY
Major PCI Sectors
WPC Equipment
WPC Instrumentation
WPC Chemicals
APC Equipment
APC Instrumentation
Resource Recovery
TOTAL
Major PCI Sectors
WPC Equipment
WPC Instrumentation
WPC Chemicals
APC Equipment
APC Instrumentation
Resource Recovery
OF POLLUTION CONTROL
(1977 and 1983)
Level of
1977 Demand
(MM$/yr)
550
150
250
700
50
100
$1,800
Level of
1983 Demand
(MM$/yr)
1,000
300
600
1,250
100
250
PRODUCTS
Associated Job
Equivalents-1977
11,000
3,750
3,850
14,000
1,250
2,000
35,850
Associated Job
Equivalents-1983
12,500
5,000
6,000
15,600
1,700
3,100
TOTAL $3,500
Source: Arthur D. Little, Inc., estimates,
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Resource recovery markets have been in the order of $50-$100 million in
the last few years. Growth rates should average 15-20% over the next
decade—contingent upon the proving of resource recovery technologies in
the next two to three years.
The annual employment associated with the 1977 level of demand is esti-
mated at 35,850 jobs; employment is projected to grow (at 3.5% per year)
to 43,900 in 1983. Employment projections are based on an overall growth
in PCI demand of 11.5% per year but also an 8.0% per year increase in
the sales-per-employee ratio. This increase in the sales-per-employee
ratio is proportionally the same as that in 1972-77 and assumes that in-
flation and other business factors will continue to affect the ratio.
Employment estimates are based on average sales/employee ratios developed
from groups of leading companies serving each of the PCI sectors. The
average sales/employee ratio used for the different sectors of the indus-
try was roughly $50,000 per person. As the demand estimates in Table 1-4
include only those associated with flange-to-flange equipment and other
specialty products, the employment estimates are accordingly only those
associated with those businesses. They do not include jobs associated
with the design and construction of pollution control facilities. Those
estimates would be derived from a similar analysis of the consulting
engineering business, the fabrication business, and the construction
business.
1.2.5 Corporate Commitment and Business Risk
One reason that turnover may be high among PCI companies is that the
commitment of some of them to these businesses is waning. Profitability
has been disappointing, as some companies expanded their environmental
businesses on an opportunistic basis in anticipation of relatively short-
term rewards. In addition, the role of proprietary technology has been
disappointing. Some companies, therefore, are showing signs of diverting
their future investments towards other opportunities, if not getting out
of the pollution control business altogether.
A larger number of companies have expressed strong commitments to re-
maining in these businesses. These commitments are based on a belief
in the long-term growth of the business and a satisfactory improvement
in profitability.
These businesses are viewed as risky ones by a large portion of the PCI.
While legislated markets and Federal funding programs would appear to
ensure business volume, PCI companies have found that the enforcement
process can affect the timing of that business, and timing can make all
the difference.
Risk is further embodied in the requirement of performance guarantees
in a regulatory environment of technology forcing standards. Guarantees
of system performance across a variety of situations at the frontier of
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technological practice practically assure some amount of vendor risk,
customer disappointment, and enforcement delay. PCI managements simply
cannot step away from such contracts, given the healthy competition
which exists in most of these markets.
Other elements make up risk for the PCI. It has experienced above
average inflation rates—and in 1973-75, against fixed-price contracts.
Research and development is risky because it may take five years to de-
velop a new system while regulatory initiatives can bloom or change
direction within a year's time. There is the financial risk in the po-
tential overinvestment in people and' facilities in anticipation of a
demand which may then fade with unrealized legislative deadlines.
Although pollution control markets have not followed the general economic
cycle, they have their own business cycles and the risks associated with
such cycles. Finally, supplier reputations are at risk insofar as they
are tied to the operating performance of their products. This perfor-
mance, in turn, is controlled largely by customers who may not be suf-
ficiently motivated or skilled to properly maintain pollution control
systems.
1.3 MAJOR REGULATORY EFFECTS AND ISSUES
1.3.1 The Municipal Bidding Process
The municipal bidding process is the area offering the greatest potential
for EPA to have a positive impact upon the health and performance of the
Pollution Control Industry (PCI). The current procedures governing the
municipal bidding process are widely believed by the PCI to be a major
cause of disappointing profitability in the water pollution control
business.
The predominance of "low bid" purchasing in the municipal market segment
is believed to be impeding technological innovation. It is also
believed that "low bid" purchasing will result in expensive operating
and maintenance problems for municipal plants in the future.
The widespread practice of (post-award) bid-shopping in the municipal
marketplace compounds the problems of "low bid" purchasing. With bid-
shopping, there is the possibility that the actual costs of treatment
systems are not closely correlated to the award prices paid by munic-
ipalities. The federal construction grant program may not be enjoying
the full benefits of competition to the degree that the most serious
price competition takes place after the construction awards have been made.
A by-product of the current municipal bidding process which should be of
concern to EPA is that two grades of products are reported to have
appeared in the water pollution control business: an industrial grade
and an inferior municipal grade. This development illustrates the
predominance of price over performance or technology in this marketplace.
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It also reflects a competitive response to bid-shopping practices
which are highly sensitive to price differences and relatively less
sensitive to product differences.
We have focused on the views of the PCI and have added our own
perspective and judgment in this analysis. As these are not the only
relevant perspectives, other points-of-view need to be balanced against
those reported here. Other interested parties include the municipalities,
the consulting engineers, the contractors, the manufacturers' representa-
tives, the materials suppliers, and the federal and state governments.
We are reporting that this remains an area of the utmost concern to the
PCI. We are also reporting that there may be competitive, technological,
and economic by-products of the current municipal bidding process which
were not intended in the legislation (or by its supporting procedures)
and which warrant EPA's further attention.
1.3.2 The Role of Federal R&D
A first: question is whether there is a need for new control technologies
to support current and near-term regulatory initiatives. From the points
of view of many in the Pollution Control Industry (PCI), the needed
technologies are generally available. Others find that position untenable
in a field like pollution control where users will continue to seek lower
cost solutions for what are viewed as "non-productive" investments.
If it is accepted that there are needs for new control technologies or
control technologies appropriate for new regulatory initiatives, then
the issue becomes that of determining the most dependable source of tech-
nological innovation.
Consistent with broader Federal efforts to depend as much as possible
on the private sector for the development of new and proprietary tech-
nologies, EPA's R&D budgets have been declining with regard to the
development of new control technologies.
In the case of technological innovation in new pollution control tech-
nologies, however, the existence of sufficient motivation and capability
in the private sector may be subject to question. The private sector,
in this case, may refer to either the PCI or to manufacturing industries
seeking to solve their own pollution problems.
Industries seeking to solve their own pollution problems are also the
traditional "reluctant customers" of the PCI. This reluctance to purchase
pollution control systems may reasonably describe their limited motivation
for funding R&D on new control technologies. In short, this largest seg-
ment of the private sector provides only a limited foundation for develop-
ing new technology in this Federal regulatory area.
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The PCI is likewise a limited source of private sector R&D. Leading
PCI companies continue to enjoy only average profitability within American
industry. While PCI returns are consistent with those for similar manu-
facturing operations, they have not been conducive to investments in
technological innovation. This constraint in motivation is in addition
to the historically low level of R&D capability needed by PCI companies
in serving their customers prior to the environmental era.
Further, the leading PCI companies are not among the largest companies
in our economy. The larger PCI firms are typically in the range of
$200-$700 million in annual sales. Their size as well as their recent
profitability do not allow for substantial in-house efforts in basic
research. Most of their R&D emphasis has become focused upon making
refinements to existing technology. Larger, billion-dollar corporations
looking to enter PCI markets face the different risks associated with
their lack of PCI business know-how. These risks have been reflected
in the failure thus far of many PCI ventures by these larger corporations.
An analysis seems thus warranted of the relative merits of Federal
support of R&D in pollution control technology versus similar needs in
other domestic, non-defense programs. As it stands, existing resources
for enhanced technological innovation are questionable if the United
States is to depend on its own technical leadership in this area. The
increasing importance of foreign technology in the domestic pollution
control market seems to underline a diminished pace of U.S. developments.
1.3.3 The Role of Technology Forcing Standards in Air Pollution
Control Regulation
The promulgation of more stringent air pollution standards for particu-
late and sulfur oxide emissions from stationary sources promises to have
significant impacts upon the Pollution Control Industry (PCI), raises
the possibility of counterproductive effects on achieving and maintaining
compliance, and presents some issues regarding the use of technology
forcing standards.
In recent years, market instability and delayed enforcement have con-
tributed to disappointing profits and performance for companies in the
air pollution control business. Thus far, only a few companies may
have made any profit from their participation in the flue gas desul-
furization (FGD) segment of the business. Increasingly stringent
standards for sulfur oxide emissions will extend the period of uncer-
tainty for FGD suppliers in times of technological capability, operating
experience, and market position.
The most stable and profitable part of the air pollution control business
has been that of particulate control for utility boilers. The setting
of more stringent particulate control standards thus promises to shake
up the only sustained business that these companies have known in
recent years. By itself, this impact is noteworthy but not sufficient
cause for altering regulatory policy.
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More important are issues related to the ultimate achievement and main-
tenance of compliance with these emission standards. These issues
arise from an understanding of probable PCI impacts and their derivative
implications for regulatory effectiveness.
Just as particulate control has been the steadiest part of the air
pollution control business, it has also been the most dependable element
of air pollution regulation. The setting of new standards at the
frontier of current technological capability might then possibly inter-
rupt the steady progress in particulate emissions control.
Competing at the frontier of technology will require that the PCI over-
extend their ability to guarantee particulate control performance to a
level of little operating experience. At worst, technologies will be
"created in the contract" and not in the pilot plant. In short, a
substantial number of system failures are likely under these circum-
stances. System failures may then frustrate regulatory programs by
leading to operational problems, by undermining the confidence of users,
by providing evidence to reluctant buyers that the systems don't work,
by delaying compliance and operation of new utility boilers or by
resulting in a net increase of particulates in the atmosphere.
The role of technology forcing standards may differ in a situation—as
in particulate control—in which there exists an established and proven
technology to control a pollutant to a certain level. Environmental
concerns may require higher performance in controlling this pollutant,
but a technology forcing standard may be less effective than it is in
a situation in which no technology exists to control any satisfactory
amount of a pollutant.
1.3.4 System Operation and Maintenance
The main concern for customers of the Pollution Control Industry (PCI)
has been to install the systems needed to meet minimum regulatory re-
quirements. In this context, greater emphasis has been placed upon
capital investment and appropriate technology, and less attention has
been given to eventual operating costs and performance.
As pollution control regulation moves from a stage of "catching up" to
one of "keeping up" or even of "keeping ahead," EPA is paying more
attention to the maintenance, operation, and performance of pollution
control systems. This transition in regulatory focus is likely to un-
cover many relationships between current pollution control business
practices and the long-term operability of pollution control systems.
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Several of the issues confronting the PCI hint at some of the problems
which may arise in EPA's efforts to regulate operation and maintenance.
In the business of resource recovery from solid wastes, the trade-offs
between public and private operation of sophisticated systems bear on
the prospects for future solid waste management operations. In the
air pollution control business, the setting of new emission standards
at the frontier of technological capability may reduce the operating
dependability of the resulting control systems. In the water pollution
control segment, bid shopping and other capital cost-dominated purchasing
may work against the operability of municipal sewage treatment plants.
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