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Preliminary analysis of US
government stimulus
package and implications for
high-tech providers

Discussion document
Febru...
Executive summary


    ▪ United States stimulus package will be $787 billion including spending and tax
     break, which...
Global stimulus efforts are massive in size and scope                                                                    F...
Over 70% of US stimulus package will be spent within the first 2
years, creating a perishable opportunity                 ...
Direct tech spending is $59b including clean tech, with >$200B in spend
that has ancillary benefits for IT                ...
Major opportunities for IT providers in US stimulus package
                          Opportunity overview                ...
Significant challenges for government agencies in the implementation of
the stimulus spending
Unprecedented spending will ...
Questions for discussion
    ▪ How quickly are you assessing and prioritizing the opportunities?
      – Hundreds of categ...
Contents




▪   Healthcare

▪   Science & technology

▪   Infrastructure

▪   Education

▪   Energy/CleanTech

▪   China ...
Healthcare stimulus spend will have significant                                                                  No techno...
Details of healthcare portion of stimulus package

 ▪   Significant funding to create incentive for Healthcare IT – $17.2b...
Federal funding will drive development of new products and services



         ▪   The US government incentives (totaling...
NOT EXHAUSTIVE
Current HIT landscape can be broadly divided into five segments

                 Description              ...
Recent disruptions will significantly alter the HIT landscape                                                             ...
Federal government is considering potential additional investment in data
analytics and healthcare exchanges to promote ac...
Questions for discussion for healthcare stimulus



   ▪   What is your strategy to target the clinical management softwar...
Contents




▪   Healthcare

▪   Science & technology

▪   Infrastructure

▪   Education

▪   Energy/CleanTech

▪   China ...
Broadband stimulus spend will have significant direct                                                                No te...
Key points of federal broadband stimulus package

   ▪   Size and base requirements will change economics of industry in r...
Details of federal broadband stimulus package

 National Telecom and              Funding    Mission as described in ARRA ...
Federal stimulus package will invest significant capital in broadband
infrastructure…
  Recent and projected US broadband ...
... but provider must submit proposals within 18 months to receive funding

  Activity                  2009          2010...
Congressional Budget Office predicts broadband stimulus                                        Dept. of Agriculture
      ...
Questions for discussion for broadband stimulus

  ▪   How can develop solution/proposal that achieves administration’s go...
Scientific research stimulus spend will have significant                                                         No techno...
… but will have limited direct impact on technology providers                                                    NIH
     ...
Contents




▪   Healthcare

▪   Science & technology

▪   Infrastructure

▪   Education

▪   Energy/CleanTech

▪   China ...
Infrastructure stimulus spend                                                                                   No technol...
Key elements of the Stimulus Bill investment on the infrastructure space


Issue / topic                         Details

...
Incremental infrastructure spending is low relative to recent                                                 Federal

gov...
Questions for discussion for infrastructure stimulus


Key points from infrastructure stimulus               Questions for...
Transportation infrastructure investment                                                                                  ...
Detail: Rail infrastructure investment (example)                                                                          ...
Detail: Text of Stimulus Bill addressing high speed rail corridors and                                                   B...
Detail: Text of Stimulus Bill addressing grants to National Railroad                                                      ...
Water infrastructure investment (example)                                                                                 ...
A large number of federal agencies will oversee the spending or                                    BACKUP

distribution of...
State level transportation investment is largely distributed according to
existing funding formulae, which is roughly equi...
Contents




▪   Healthcare

▪   Science & technology

▪   Infrastructure

▪   Education

▪   Energy/CleanTech

▪   China ...
Detailed education stimulus spend breakdown                                                                           No t...
Questions for discussion for education stimulus
 Key points from education stimulus                           Questions fo...
Stimulus funding will significantly increase state education                                                        Title ...
Business Opportunities
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Business Opportunities

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A very good presentation by McKinsey on the US Stimmulus pla. It showes great opportunities for Mexican Companies in the US and gives a guideline on the sectors Mexico should focus on.

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  1. 1. Preliminary analysis of US government stimulus package and implications for high-tech providers Discussion document February 26, 2009 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited
  2. 2. Executive summary ▪ United States stimulus package will be $787 billion including spending and tax break, which is greater than a third of $2.0 trillion economic stimulus packages total committed by major world ecomomies. The top 4 packages– US, China, Japan, and EU account for 90% of total stimulus spend. ▪ Seventy percent of the stimulus will be in the economy by September 2010– dollars are being spend and regulations are being set right now, making this a perishable opportunity ▪ US stimulus spending will have a major impact on technology with $59 billion in direct and $194 billion indirect technology spending. Spend will impact multiple technology areas including software, hardware, and specialized technology systems (e.g., airport baggage scanning systems) ▪ Most technology spending will come from projects in five key areas: broadband, electronic medical records, infrastructure, education, and energy / CleanTech ▪ Technology firms need to act now since spending will begin immediately. Specifically companies should conduct detailed analysis and understand line by line implications of stimulus package and develop “shovel-ready” strategies to capture short-term pockets of spend McKinsey & Company | 1
  3. 3. Global stimulus efforts are massive in size and scope Focus of this analysis Worldwide stimulus spend Percent of Billion USD domestic GDP Total Stimulus1 2,047 ▪ US stimulus package is over US 787 5.4 one third of the worldwide stimulus China 586 7.5 ▪ Global stimulus packages Japan 275 6.1 focus on infrastructure, clean technology, direct investments EU and ECB2 260 1.7 in the market, and packages to support individuals Canada 45 3.4 ▪ The top four packages account Russia 20 0.9 for nearly 90% of total stimulus packages India 20 0.6 ▪ Even “small” packages are Australia 20 2.4 significant when looked at as a percentage of country GDP Other3 34 0.6 1 Represents lower bound on total stimulus spending as some country packages not included in this total 2 Total includes contributions from EU, ECB and EU member states 3 Combination of stimulus packages from Indonesia, Norway, S. Korea, Brazil, Thailand, Singapore, Chile SOURCE: Lit Search , CIA World Factbook 2008 Estimates McKinsey & Company | 2
  4. 4. Over 70% of US stimulus package will be spent within the first 2 years, creating a perishable opportunity Spending Revenue2 Estimated outlays and revenue impact of the approved US stimulus package1 Billion USD 219 Negative revenue in later years is due 120 to: (1) accelerated depreciation in early years and (2) increased tax 180 revenue associated with income related to electronic medical records 126 65 46 30 28 -6 -5 12 -1 -10 -3 -6 -7 -2 -3 -5 -1 8 -0 2009 10 11 12 13 14 15 16 17 18 19 FY 1 Static scoring 2 Includes tax credits, accelerated depreciation provisions, tax-free bonds, unemployment and other benefits, health insurance for unemployed workers, and health information technology incentives. 3 Assumes exchange rate as of 2/24/09 of 0.146257 RMB/USD SOURCE: Congressional Budget Office (2/13/2009) McKinsey & Company | 3
  5. 5. Direct tech spending is $59b including clean tech, with >$200B in spend that has ancillary benefits for IT Direct technology implication Stimulus spend breakdown1 Indirect technology implication2 Billion USD No technology implication 787 301 Focus of analysis 18 3 280 487 25 22 2 24 59 10 1 84 14 3 67 14 100 1 199 81 18 46 23 19 98 4 7 91 111 230 9 102 Total Tax cuts3 Spending Healthcare Science & Infra- Education Energy/ Save public Social aid Tech structure CleanTech sector jobs and services 1 Sum may not add to total due to rounding 2 “Indirect tech” refers to the category spend that could result in tech spend. For example, new bridge/road construction spend could result in technology spend on CAD/CAM software and traffic control technology; in this case all the spend for infrastructure would be included 3 Direct and indirect technology tax cuts apply to CleanTech applications SOURCE: Congressional Budget Office (2/13/2009), House Committee on Appropriations; McKinsey McKinsey & Company | 4
  6. 6. Major opportunities for IT providers in US stimulus package Opportunity overview Types of IT providers affected Healthcare ▪ $17.2b in incentives for EMR ▪ EMR software providers adoption + $2b for interoperability ▪ IT hardware provider including PCs, infrastructure servers, storage, handhelds and ▪ $9.3b in targeted medical IT networking devices Science and ▪ $7.2b investment in national ▪ Telecom access providers technology broadband infrastructure ▪ Computer hardware/software ▪ $17b indirect technology spend ▪ Scientific instrumentation through scientific research Infrastructure ▪ Significant opportunity for IT ▪ Design and engineering software (largely indirect) support of infrastructure projects developers ▪ Direct IT opportunities involving IT ▪ IT hardware including data storage, PCs upgrades for Social Security and specialized hardware Administration and airport security ▪ Specialized software providers Education ▪ $650m investment in educational ▪ Computer hardware/system integrators (largely indirect) instructional technology ▪ Educational software ▪ $250m investment in school data ▪ Data storage and analysis systems Energy/ ▪ $27.5 for renewables ▪ Semiconductors, hardware CleanTech ▪ $19.7b for increased energy ▪ Range of opportunities for high tech efficiency players across all subsectors ▪ $11b for energy infrastructure ▪ Semiconductors, software, hardware, IT including $4.5b for smart grid services and electronics ▪ $5.5b for cleaner vehicles ▪ Hardware, software, services, electronics SOURCE: Congressional Record, ARRA Bill McKinsey & Company | 5
  7. 7. Significant challenges for government agencies in the implementation of the stimulus spending Unprecedented spending will challenge agencies to spend wisely and maintain accountability… "Forty billion dollars is a huge amount of money…Absorbing the money, making sure it's spent appropriately and gets into the hands of the right recipients...are going to be significant challenges.” – …creating opportunities for Gregory Friedman, Inspector General, DOE private sector • Work with regulators to understand and define what “You have a huge policy shift here of moving a bureaucracy that's transparency and impact should been focused on research and development to being a manager of a look like, e.g. what metrics, massive amount of money” –Rep. Frelinghuysen, R-New Jersey processes, tools required • Proposals/solutions that address “An obscure Commerce Department office with a $19 million budget implementation challenges will and fewer than 20 grant officers could end up in charge of $7 billion have competitive advantage, e.g. in grants to expand Internet access in rural areas” –WSJ 2/13/09 tracking of spend, usage of technology, social ROI “We are asking the American people to trust their government with an unprecedented level of funding … we must prove to them that their dollars are being invested in initiatives and strategies that make a difference in their communities and across the country.” –Memorandum to Head of Departments and Agencies 2/9/09 SOURCE: News reports McKinsey & Company | 6
  8. 8. Questions for discussion ▪ How quickly are you assessing and prioritizing the opportunities? – Hundreds of categories, each w/ very different dynamics– must conduct detailed analysis on timing, size, decision makers, relevance to product portfolio, and business implications – Spend and regulatory design have already started– prioritize (e.g. size, ease of capture) and develop comprehensive strategy immediately ▪ Do you have access to the new decision makers and customers? – Many decision makers not typical IT customers, e.g., gov’t regulators, doctors, school boards – New customer segments emerge (e.g. rural consumers, small medical clinics) that existing channel may not reach ▪ How can you solve the government’s implementation and regulation challenges? – Implementation/regulations being developed currently – understand legislative/presidential intent and develop solutions/influence implementation to address – Gov’t will have significant implementation challenges (transparency, speed, impact, multiple agencies, existing regulations)– understand trade-offs and craft solutions to help solve them – Position offers to reflect public nature of opportunity – regulatory requirements, social benefits ▪ What is the impact on the stimulus spend on your product portfolio? – Dramatic shifts in market size may change product investment decisions (e.g. 30-50% increase in broadband capex /opportunity for wireless broadband, doubling of clinical mgmt market) ▪ How will this impact your governance, organization and go-to-market model? – Opportunity is inherently cross-functional – product teams, government affairs, field sales, channel partners must all be able to work together; are incentives aligned? – Additional spend is likely (e.g. education, clean tech from budget proposal); need to link gov’t affairs with your sales organizations real-time to capture opportunities McKinsey & Company | 7
  9. 9. Contents ▪ Healthcare ▪ Science & technology ▪ Infrastructure ▪ Education ▪ Energy/CleanTech ▪ China stimulus McKinsey & Company | 8
  10. 10. Healthcare stimulus spend will have significant No technology implication Indirect technology implication technology implications, both directly and indirectly Direct technology implication Billion USD Focus of detailed analysis Specific Opportunity 301 Tax cuts Health 19.2 Information ▪ To jumpstart efforts to computerize health Technology records to cut costs and reduce medical errors. 100 Education Prevention and ▪ To fight preventable chronic diseases and 1.0 Save public Wellness Fund infectious diseases 98 sector jobs and services 0.5 Healthcare for ▪ Increase the number of uninsured Americans uninsured who receive quality healthcare Social aid for $787 billion 111 individuals stimulus spending1 Community ▪ Renovate clinics and make health information 1.5 Health Centers technology improvements 84 Infrastructure Healthcare ▪ Healthcare Research and Quality programs to Energy / 1.1 Effectiveness 46 compare effectiveness of different medical CleanTech Research Medicare, Medicaid, and SCHIP treatments Invest to 25 lower 0.5 Training Primary ▪ Address shortages and prepare our country for healthcare Care Providers universal healthcare by training primary costs healthcare providers including doctors, dentists Indian Health 0.5 Service Facilities ▪ Modernize aging hospitals and health clinics; Science 24 includes $85m designated for health IT systems and technology 1 Sum may not add to total due to rounding SOURCE: Congressional Budget Office (2/13/2009), House Committee on Appropriations McKinsey & Company | 9
  11. 11. Details of healthcare portion of stimulus package ▪ Significant funding to create incentive for Healthcare IT – $17.2b allocated to create incentives for healthcare providers to adopt EMR, with additional $2 billion for interoperability infrastructure ▪ Incentives are designed to encourage early adoption – Incentives for physicians ▫ Physicians who adopt by 2011 earn incentives of up to $41k per qualified professional, but benefits decline and phase out completely by 2016; ▫ Starting in 2015 Medicare reimbursements are reduced for non-adopters; there is a 1% penalty in 2015, increasing to 5% in 2020 – Incentives for hospitals ▫ The first year a hospital adopts EMR they receive an award equal to the product of a base amount plus a discharge related amount1 and the Medicare share. The payment declines to 75% then 50% then 25% of the amount paid in the initial year in the subsequent three years. No incentive payments will be made after 2015 ▫ Hospitals who have not adopted EMR by 2015 will forfeit 25% of the Medicare market basket adjustment in 2015. This amount will increase by 25% per year until 2017 when non adopting hospitals forfeit 75% of the market basket adjustment each year until adopting EMR ▪ Incentives apply to certified EMR systems – In order to receive incentive benefits and avoid incentive penalties the EMR system must meet the requirements for certification ▪ Additional potential IT expenditures in other health care related to IT – $10.4b in spending on other IT projects related to healthcare creates varying targeting IT opportunities 1 Base amount equals $2 million, and discharge related amount equals $0 for discharges 0-1,149, $200 for discharges 1,150 – 23,000 and $0 for discharges in excess of 23,001 McKinsey & Company | 10
  12. 12. Federal funding will drive development of new products and services ▪ The US government incentives (totaling $17.2b) could accelerate EMR adoption from the current 45% in hospitals and 65% in ambulatory practices, to 70% and 90%, respectively1, in 2019 ▪ $2b in government funding for interoperability infrastructure, as well as a portion of $4.7b for the Broadband Technology Opportunities Program, will promote the creation of nationwide electronic health records, improving continuity of care across providers ▪ Part of the funding for Department of Agriculture’s Distance Learning, Telemedicine, and Broadband Program ($2.5b) will go towards promoting increased use of remote monitoring and telemedicine, especially for the care of the chronically ill ▪ Healthcare reform legislation will likely fuel creation of Health Insurance Exchanges, where individuals can shop for health insurance with increased transparency and portability ▪ Public funding ($1.1b), private interest, and data availability could cause rapid growth in comparative clinical and health economic effectiveness research leading to increased information transparency and rapid evolution of care protocols 1 CBO estimates Source: HIMSS, CBO McKinsey & Company | 11
  13. 13. NOT EXHAUSTIVE Current HIT landscape can be broadly divided into five segments Description Example services/systems Example providers ▪ Technology that enables ▪ Patient portals Patient health interactions with and ▪ Payor CRM management delivery of services to ▪ Online physician/patient communities patients ▪ Online healthcare services ▪ Remote delivery of medical services ▪ Remote monitoring of patient vitals ▪ Clinical tools that support ▪ EMR Clinical patient treatment and data ▪ Picture Archiving Systems (PACS) management management ▪ e-prescription ▪ Computerized Physician Order Entry ▪ Clinical decision support (CDS) ▪ Health information exchanges (HIE) Health data ▪ Protocols and analytics that ▪ Clinical data analytics for medical repository and enable generation of insights product safety and post-market risk analytics from real-world data ▪ Online tools that support ▪ Health insurance exchanges Exchanges consumer shopping for health insurance ▪ Systems that support ▪ Patient billing Revenue cycle provider back office ▪ Claims processing management operations ▪ Eligibility management ▪ Visit scheduling ▪ Claims transaction management McKinsey & Company | 12
  14. 14. Recent disruptions will significantly alter the HIT landscape NOT TO SCALE Near-term opportunities Projected market position in 2013 Width of arrow indicates govt. investment High (10%+) Patient health management Market growth (CAGR) Medium (5-10%) Exchanges Clinical management Health data Low repositories & (<5%) Revenue analytics cycle management Small (<$5 billion) Medium ($5-10 billion) Large ($10+ billion) Market size Source: Expert interviews McKinsey & Company | 13
  15. 15. Federal government is considering potential additional investment in data analytics and healthcare exchanges to promote access to information ▪ FDAs Sentinel Initiative aiming at creation of a national, integrated, electronic system for monitoring medical product safety and post-market risk – Develop methods to access and analyze data from disparate sources (e.g., EMR systems, medical claims databases) – Establish a post-market risk identification/ analysis system to better detect and prevent adverse effects ▪ AHRQ1 assistance to ONC2 to meet its strategic goals with respect to data standardization and Health Information Exchanges (HIEs) – Fund HIEs for states demonstrating data sharing and interoperability activities – Standardize the flow of drug information from drug manufacturers to FDA to NLM3 ▪ Government investment in national healthcare exchanges capable of delivering higher quality and performance at lower cost to consumers, with 3 broad goals – Serve as an unbiased source of information for consumers – Establish minimum standards and monitor performance of participating health plans – Form a marketplace and increase competition among insurers 1 AHRQ - Agency for Healthcare Research and Quality 2 ONC - Office of the National Coordinator 3 NLM - National Library of Medicine Source: ONC Federal Health IT Strategic Plan 2008-2012, press releases McKinsey & Company | 14
  16. 16. Questions for discussion for healthcare stimulus ▪ What is your strategy to target the clinical management software opportunity? – Software for clinical management will double to greater than $10b by 2013, particularly in low-end of market (ambulatory care clinics). – Hardware players need to identify strategies to drive pull-through revenue (e.g. partnerships w/ EMR players, new devices, storage for imaging, networking?) ▪ How will you scale into smaller provider clinic segment? – Service-based offerings will be major factor in this space– software, storage, implementation services. Is product built for needs of small providers? – Channel strategy essential–~165k physician practices in US. Does channel strategy scale (e.g. VARs, telesales) and have appropriate ▪ How will you target IT opportunities beyond clinical management? – Smaller initiatives also offer significant opportunities but get less attention (e.g. $4.7 billion for broadband technology and $1.5b for community health center IT upgrades); are strategies in place to capture this spend? McKinsey & Company | 15
  17. 17. Contents ▪ Healthcare ▪ Science & technology ▪ Infrastructure ▪ Education ▪ Energy/CleanTech ▪ China stimulus McKinsey & Company | 16
  18. 18. Broadband stimulus spend will have significant direct No technology implication Indirect technology implication technology implications Direct technology implication Billion USD Focus of detailed analysis Develop national broadband 301 Tax cuts 0.35 access plan and inventory map of existing service 100 Education Sustainable adoption of 0.25 broadband service Save public 98 sector jobs and services 0.2 Expand public computing Broadband Social aid for Technology $787 billion 111 4.7 Provide access, equipment, individuals Opportunities stimulus 3.9 training, and support to spending1 Program implement national plan 7.2 Broadband 84 Infrastructure Department of Agriculture Energy / Scientific 2.5 Rural Utilities Service 46 15.3 broadband program CleanTech research Invest to lower Creating small 25 healthcare 1.1 business costs opportunities DTV conversion 0.65 Science coupons 24 and technology 1 Sum may not add to total due to rounding SOURCE: Congressional Budget Office (2/13/2009), House Committee on Appropriations McKinsey & Company | 17
  19. 19. Key points of federal broadband stimulus package ▪ Size and base requirements will change economics of industry in rural markets – Increase total US broadband access capex by 30 - 50% by 2012 – Federal grants provide up to 80% of rural project cost – Priority to open infrastructure or multi-service provider partnerships ▪ Short funding timeline – Goal of stimulus is to quickly create new jobs; grants will be awarded prior to finalization of national broadband plan – Statute will be interpreted and spending will be planned within first four months – Official requests for broadband grants must be processed by September 30, 2010 ▪ Unprecedented, rigorous transparency, but limited resources – Regulators (e.g. Dep’t of Commerce NTIA, ~20 person group) must determine how to quickly grant ~$7B funding while collecting, analyzing, and publishing data transparently ▪ Specifics still to be determined – Statute is open to interpretation and regulators are still discussing detailed implementation (e.g., targeted funding for mobile broadband was explicit in January House draft, but left out of final bill) – Grants will be available for a wide range of stakeholders (e.g., state governments, private foundations, broadband providers) ▪ Multiple agencies will increase implementation complexity – Department of Commerce, Department of Agriculture, FCC, and Department of Interior (Bureau of Land Mgmt, for right of way access) will all be involved in stimulus spend– each have specific priorities / agendas that must be addressed SOURCE: Congressional Record, ARRA Bill McKinsey & Company | 18
  20. 20. Details of federal broadband stimulus package National Telecom and Funding Mission as described in ARRA Authority Timing Information Administration Up to To monitor national broadband access Assistant Secretary of National plan National broadband access plan $350m availability and create a plan to establish Commerce for Communications completed by access in un-served and under-served areas and Information and the Federal Feb 13, 2010; (Urban, suburban, and rural) Communications Commission Inventory map (FCC) published by Feb 13, 2011 At least Fund innovative solutions to encourage Assistant Secretary of Unspecified Encourage sustainable adoption $250m sustainable adoption of broadband service Commerce for Communications of broadband service and Information At least Update and expand computer and broadband Assistant Secretary of Unspecified Expand public computing $200m access in community colleges, libraries and Commerce for Communications other public community centers and Information Implement national broadband $3,900m Implement the national broadband access Assistant Secretary of Awards must be access plan plan (e.g., provide access, education, Commerce for Communications made by end of awareness, training, support) to all un-served and Information fiscal year 2010; and under-served areas project timelines must be less than 2 years Department of Agriculture $2,500m Provide grants and loans to create broadband Secretary of Agriculture Unspecified Rural Utilities Service access to rural communities that do not have sufficient access to stimulate rural economic development and are not covered under the National Broadband Access Plan SOURCE: Congressional Record, ARRA Bill McKinsey & Company | 19
  21. 21. Federal stimulus package will invest significant capital in broadband infrastructure… Recent and projected US broadband access revenue Million USD Scenario 1: Current projected growth (2008 estimate) Scenario 2: Flat broadband investment growth 7,000 7,000 6,000 Federal 6,000 +29% Stimulus 5,000 Investment 5,000 Federal Stimulus +51% 4,000 Wireless BB 4,000 Investment Wireless BB 3,000 Cable 3,000 Cable 2,000 2,000 DSL DSL 1,000 1,000 Fiber Fiber 0 0 2007 08 09 10 11 12 2013 2007 08 09 10 11 12 2013 Federal funding will ▪ Subsidize up to 80% of projects that would not be feasible without stimulus investment ▪ Focus on national un-served and under-served areas through the NTIA and on rural areas through the Department of Agriculture ▪ Support a national broadband plan, but will be granted before the plan is finalized ▪ Spread between all 50 states ▪ Prioritize open infrastructure and multi-ISP partnerships SOURCE: Gartner Dataquest Market Statistics 2008, CBO, Congressional Record, ARRA Bill McKinsey & Company | 20
  22. 22. ... but provider must submit proposals within 18 months to receive funding Activity 2009 2010 2011 2012 End products ▪ Defined technology standards (e.g., which national technology platforms Establish National will offer ideal performance and Broadband Plan scalability?) ▪ Strategy to maximize affordability Compile and publish and utilization of broadband broadband inventory infrastructure map Broadband proposal final ▪ Roadmap to provide broadband decisions by Sep access nationally Process RFPs for 30, 2010 ▪ Public broadband inventory map infrastructure grants with continuous updates ▪ Distribution of funding to be based Provide stimulus on interpretation of initial ARRA, and funding for grants later, based on the national broadband plan ▪ Inform FCC on latest broadband technology to maximize public benefit of widespread adoption ▪ Analyze ARRA to realize maximum opportunity – multiple decision-makers and ambiguous language will require strategic effort ▪ Short proposal timeline will require providers to move quickly SOURCE: Gartner Dataquest Market Statistics 2008, CBO, Congressional Record, ARRA Bill McKinsey & Company | 21
  23. 23. Congressional Budget Office predicts broadband stimulus Dept. of Agriculture NTIA funding will be apportioned through 2015 Estimated outlays of broadband stimulus package Million USD per FY Funding predicted to extend past bill 1,825 deadline 1,685 1,447 575 475 1,106 587 350 715 1,250 1,210 325 756 860 275 147 390 125 63 150 84 2009 10 11 12 13 14 2015 SOURCE: Congressional Budget Office, Summary of Estimated Cost for ARRA McKinsey & Company | 22
  24. 24. Questions for discussion for broadband stimulus ▪ How can develop solution/proposal that achieves administration’s goals? – Regulators will prioritize solutions that meet the “intent” of the administration– does your proposal have a compelling social ROI? – Begin and finish rapidly (i.e., quickly create jobs and efficiently provide national broadband solution) – Create financial and performance transparency plan; regulators will prefer turnkey strategy that addresses transparency requirement ▪ Does your strategy address priorities/issues for multiple agencies? – NTIA, FCC, Department of Agriculture, and the White House will all have significant authority in determining implementation of the broadband technology opportunity plan – Each agency has a set of priorities (e.g. FCC for open access, Ag for previous grantees, White House for speed)– proposal should address each concern in turn ▪ How quickly and closely are your working with regulators? – While RFPs will be processed through FY10, near-term interpretation of the broadband technology opportunity plan will largely shape future allocation of the $7.2b in stimulus funding; help influence standards/requirements to meet policy goals while getting best thinking from private sector ▪ Are you evaluating the impact on your product/service offering? – Large rural access investments may favor wireless solutions (e.g., WiMax); open access requirements may have direct technology/product implications SOURCE: Congressional Record, ARRA Bill McKinsey & Company | 23
  25. 25. Scientific research stimulus spend will have significant No technology implication Indirect technology implication indirect technology implications… Direct technology implication Billion USD Focus of detailed analysis 301 Tax cuts 1.0 NASA 100 Education National Institute 0.36 of Standards and Scientific Technology 8.2 Save public Research 98 sector jobs and services 8.7 NIH Buildings and 0.5 Social aid for Facilities $787 billion 111 individuals NOAA – stimulus spending1 0.6 Satellites and Research and 7.2 Broadband Sensors 2.5 Related 84 Infrastructure Activities 3.0 NSF Education and Energy / Scientific 0.1 human 46 15.3 CleanTech research resources US Geological 0.14 Survey Invest to lower Creating small Major Research 25 healthcare 1.1 business Equipment and University costs opportunities 0.4 1.3 research Facilities facilities Construction DTV conversion 0.65 Science coupons NOAA – 24 and Operations, technology 0.23 Research and Facilities 1 Sum may not add to total due to rounding SOURCE: Congressional Budget Office (2/13/2009), House Committee on Appropriations McKinsey & Company | 24
  26. 26. … but will have limited direct impact on technology providers NIH NSF Relative increase in research funding from stimulus package Percent (normalized to FY08 budget1) 21.1 ▪ Incremental spend will be difficult to capture – while there is significant incremental funding, it will 12.8 13.2 be delivered through highly 11.3 fragmented groups of researchers 5.7 5.2 5.8 ▪ Highly variable indirect 2.9 technology impact – 2.7 Majority of science and 0.9 0.4 1.1 0.1 0.2 technology stimulus has indirect technology 2009 2010 2011 2012 2013 2014 2015 implications; IT provider ▪ National Science Foundation research distributed over 15,000 impact directly related to awards types of experiments funded ▪ National Institutes of Health research distributed through 27 centers and over 50,000 competitive grants 1 NIH FY08 Budget = $29b; NSF FY08 Budget = $6b SOURCE: NIH Website, NSF Website, Congressional Budget Office (2/13/2009) McKinsey & Company | 25
  27. 27. Contents ▪ Healthcare ▪ Science & technology ▪ Infrastructure ▪ Education ▪ Energy/CleanTech ▪ China stimulus McKinsey & Company | 26
  28. 28. Infrastructure stimulus spend No technology implication Indirect technology implication Billion USD Direct technology implication 29.0 Highway infrastructure TSA Explosive 1.0 9.3 Rail Transit detection system Other transit and border Transit security and 2.1 3.1 security 301 Tax cuts airport New construction, Transit upgrades and 49.8 Transit 1.5 0.8 upgrades and repair repair 6.9 Capital assistance New transit 100 Education 0.8 construction Clean and drinking water 6.0 state revolving fund Save public 13.5 Clean Water 4.6 Corps of engineers 98 sector jobs and services 0.3 Watershed Infrastructure Social aid for Government 2.6 Other $787 billion 110 11.8 individuals Facilities stimulus 2.4 Military Facilities spending1 83 Infrastructure 1.8 Medical Facilities 4.5 Other facilities Environmental 7.0 Other Facilities 7.1 2.5 Public lands Cleanup Energy / Reducing wild fire 48 0.5 CleanTech threats 6.0 Nuclear waste cleanup Invest to lower Technology 25 healthcare 0.9 Efficiency 1.1 Other cleanup costs improvements Science Fire station 24 0.5 Other 0.2 and technology modernization 0.3 Other 1 Sum may not add to total due to rounding SOURCE: Congressional Budget Office (2/13/2009), House Committee on Appropriations McKinsey & Company | 27
  29. 29. Key elements of the Stimulus Bill investment on the infrastructure space Issue / topic Details Rapid allocation of funding by Federal agencies are under tight deadlines to allocate the Stimulus Bill funding, and federal agencies to state and local often must use criteria (e.g., job creation) with which they are not accustomed. This will level agencies create short term challenges over the first quarter of 2009 for those agencies Rapid implementation of newly The state and local agencies receiving the funding must put it to work very quickly once funded projects by state and local it is allocated. In some cases projects are ready to go, but in others (e.g., home agencies weatherization) the funding must be allocated on a competitive basis and will create difficult management challenges Oversight of expenditure to measure The Stimulus Bill funding comes with significant reporting requirements and will receive and document impact unprecedented scrutiny from the media and those critical of the Bill. As such, those receiving funding will face new and difficult challenges in tracking where the money is going and its impact (e.g., job creation) Bolstering of construction volumes Due to the economic collapse, construction volumes are expected to fall considerably in 2009. The Stimulus Bill will help limit the fall, but will not reverse it. Some economists are estimating a 3% to 9% drop in construction volumes in 2009, with a double digit fall prevented by the Stimulus Bill Shift toward public sector The Stimulus Bill primarily will drive public sector construction projects, which will lead to construction projects a shift in project portfolios for many contractors. Public sector projects are more difficult to execute than private sector projects as a result of stricter contracting regulations, which will pose a challenge for those not experienced in these types of projects Increase in demand for energy While most construction material volumes will simply decline less than otherwise with the efficient / alternative energy Stimulus Bill, materials used in energy efficiency projects may see meaningful increase materials in demand SOURCE: McKinsey interviews McKinsey & Company | 28
  30. 30. Incremental infrastructure spending is low relative to recent Federal government infrastructure spending levels State Historical State and Federal infrastructure spending Billion USD 350 • The CBO estimates that stimulus infrastructure spending will peak in 2010 at 300 $20 billion 250 5.7% • Peak stimulus spending is equal to only 200 6.3% of current government infrastructure spending 150 • 6.3% stimulus related growth is only slightly 100 more than 5.7% CAGR of infrastructure spending 50 0 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 • Incremental infrastructure spend is in-line with typical infrastructure spend growth • Infrastructure providers are not likely to need significant growth in IT spending to keep up with stimulus demand SOURCE: US Census, Congressional Budget Office McKinsey & Company | 29
  31. 31. Questions for discussion for infrastructure stimulus Key points from infrastructure stimulus Questions for IT providers ▪ Significant funding, but varying IT impact ▪ Are you targeting the IT-heavy initiatives? – $29 billion in highway infrastructure – Likely larger capturable opportunity in $500 investment will likely have low IT million in Social Security modernization than component in $29 billion in highway infrastructure – $3.1 billion in airport, border and port – Some specialized projects, (e.g., nuclear security upgrades will result in higher waste clean up) have opportunities for niche targeted IT investments IT providers ▪ Much of funding will support existing programs – $49.3 billion will be applied to ▪ How will you engage with existing customers and high potential users ? accelerating projects currently in process, funding projects currently in backlog, or – Likely federal dollars will be awarded to existing infrastructure contractors (e.g., funding projects where need has been Turner, TSNA); on average, construction demonstrated firms use 2.1% of spend on IT – Large existing heavy industry players (e.g. ▪ Pockets of high IT spend exist within larger Caterpillar) likely to see disproportionate programs – Infrastructure upgrades and benefit due to scale modernization clauses will result in pockets of – Minority owned business have explicit high IT spend provisions in bill to receive portions of contracts; potential alliances with industry associations McKinsey & Company | 30
  32. 32. Transportation infrastructure investment BACKUP Amount Program Details ($m) Distribution method Provide money for Provide money to states to repair or construct highways and highways or bridges, reallocating money that By FHA to state DOT’s bridges is not spent quickly 27,500 using existing formula Expand passenger rail capacity and make Invest in rail grants for high-speed rail projects, including By FRA on competitive transportation Amtrak 9,300 or discretionary basis Provide grants to states for public transit Invest in public infrastructure investment, reallocating money By existing FTA urban transit that is not spent quickly 8,400 and rural transit formula Invest in local surface transportation Provide competitive grants for state and local By DOT on competitive projects transportation investments 1,500 basis Make grants to airports to improve safety or Invest in air increase capacity; repair Federal Aviation By FAA on discretionary transportation Administration equipment and facilities 1,300 basis By TSA on competitive TSA explosive basis in consideration of detection systems Upgrade baggage screening systems 1,000 security risk By Coast Guard to Rehabilitate and repair Coast Guard authorized bridges ready Coast Guard bridges infrastructure and obstacles to navigation 240 for construction By DOT and Maritime Assistance to small Admin on discretionary shipyards xxx 100 basis SOURCE: American Recovery and Reinvestment Act of 2009, Association of General Contractors of America (AGC), McKinsey & Company | 31 McKinsey analysis
  33. 33. Detail: Rail infrastructure investment (example) BACKUP Transportation related ARRA investment, $m 49,300 Program Details Amount ($m) Distribution method Rail 9,300 By FRA on competitive and discretionary basis. Advance the development of high 8,000 (funds Strategic plan for use of High Speed Rail and speed rail and to improve the intercity available funds required from Sec. of Intercity Passenger passenger rail service in corridors through Sept. Transportation within 60 Rail Grants across the nation 2012) days of enactment of bill Improve the speed and capacity of intercity passenger rail service. $450m targeted for security, remainder ($850m) for projects that repair, By FRA on competitive and rehabilitate, or upgrade railroad assets discretionary basis National Railroad or infrastructure, and for capital 1,300 (funds (The DOT estimates the NE Passenger projects that expand passenger rail available Corridor alone has a backlog Corporation capacity including the rehabilitation of through Sept. of over $10b – prioritization Other (Amtrak) rolling stock 2010) of projects will be difficult) 40,000 transportation “FRA is an active participant on the Department’s Transportation Investment Generating Economic Recovery (TIGER) team, which will act as a vigorous and vigilant steward of taxpayer dollars by utilizing sound evaluation criteria and reporting standards. As part of those efforts, FRA will help identify and prioritize passenger rail projects that embody and optimize use of recovery funding. Among them, advancing development of high-speed passenger rail corridors, launching ready to go improvements to Amtrak and intercity passenger rail service, as well as other infrastructure projects that promote intermodalism and facilitate the movement of freight.” – FRA website (www.fra.dot.gov) Total SOURCE: American Recovery and Reinvestment Act of 2009, McKinsey analysis McKinsey & Company | 32
  34. 34. Detail: Text of Stimulus Bill addressing high speed rail corridors and BACKUP intercity passenger rail investment CAPITAL ASSISTANCE FOR HIGH SPEED RAIL CORRIDORS AND INTERCITY PASSENGER RAIL SERVICE For an additional amount for section 501 of Public Law 110– 432 and discretionary grants to States to pay for the cost of projects described in paragraphs (2)(A) and (2)(B) of section 24401 of title 49, United States Code, subsection (b) of section 24105 of such title, $8,000,000,000, to remain available through September 30, 2012: Provided, That the Secretary of Transportation shall give priority to projects that support the development of intercity high speed rail service: Provided further, That within 60 days of the enactment of this Act, the Secretary shall submit to the House and Senate Committees on Appropriations a strategic plan that describes how the Secretary will use the funding provided under this heading to improve and deploy high speed passenger rail systems: Provided further, That within 120 days of enactment of this Act, the Secretary shall issue interim guidance to applicants covering grant terms, conditions, and procedures until final regulations are issued: Provided further, That such interim guidance shall provide separate instructions for the high speed rail corridor program, capital assistance for intercity passenger rail service grants, and congestion grants: Provided further, That the Secretary shall waive the requirement that a project conducted using funds provided under this heading be in a State rail plan developed under chapter 227 of title 49, United States Code: Provided further, That the Federal share payable of the costs for which a grant is made under this heading shall be, at the option of the recipient, up to 100 percent: Provided further, That projects conducted using funds provided under this heading must comply with the requirements of subchapter IV of chapter 31 of title 40, United States Code: Provided further, That section 24405 of title 49, United States Code, shall apply to funds provided under this heading: Provided further, That the Administrator of the Federal Railroad Administration may retain up to one- quarter of 1 percent of the funds provided under this heading to fund the award and oversight by the Administrator of grants made under this heading, and funds retained for said purposes shall remain available through September 30, 2014. SOURCE: American Recovery and Reinvestment Act of 2009 McKinsey & Company | 33
  35. 35. Detail: Text of Stimulus Bill addressing grants to National Railroad BACKUP Passenger Corporation (Amtrak) CAPITAL GRANTS TO THE NATIONAL RAILROAD PASSENGER CORPORATION For an additional amount for the National Railroad Passenger Corporation (Amtrak) to enable the Secretary of Transportation to make capital grants to Amtrak as authorized by section 101(c) of the Passenger Rail Investment and Improvement Act of 2008 (Public Law 110–432), $1,300,000,000, to remain available through September 30, 2010, of which $450,000,000 shall be used for capital security grants: Provided, That priority for the use of non-security funds shall be given to projects for the repair, rehabilitation, or upgrade of railroad assets or infrastructure, and for capital projects that expand passenger rail capacity including the rehabilitation of rolling stock: Provided further, That none of the funds under this heading shall be used to subsidize the operating losses of Amtrak: Provided further, That funds provided under this heading shall be awarded not later than 30 days after the date of enactment of this Act: Provided further, That the Secretary shall take measures to ensure that projects funded under this heading shall be completed within 2 years of enactment of this Act, and shall serve to supplement and not supplant planned expenditures for such activities from other Federal, State, local and corporate sources: Provided further, That the Secretary shall certify to the House and Senate Committees on Appropriations in writing compliance with the preceding proviso: Provided further, That not more than 60 percent of the funds provided for non-security activities under this heading may be used for capital projects along the Northeast Corridor: Provided further, That of the funding provided under this heading, $5,000,000 shall be made available for the Amtrak Office of Inspector General and made available through September 30, 2013. SOURCE: American Recovery and Reinvestment Act of 2009 McKinsey & Company | 34
  36. 36. Water infrastructure investment (example) BACKUP Amount Program Details ($m) Distribution method Provide money for wastewater treatment By existing formula to Finance local water projects and projects that improve the State Revolving Funds projects quality of drinking water 6,000 (SRFs) Includes $2 billion for construction projects Provide additional like dam repair and flood control, $1.9 money to the Army billion for maintenance, $100 million to By Corps to fund Corps of Engineers clean up early atomic energy facilities 4,600 existing project backlog Finance rural water Provide grants and loans for water supply By USDA on and waste facilities and waste disposal programs in rural areas 1,400 discretionary basis Provide water to rural areas and Provide clean, reliable drinking water to Western areas rural areas and ensure adequate water By Bureau of impacted by supply to western localities impacted by Reclamation to fund drought draught 1,000 existing project backlog NOAA Environmental Construct and repair facilities, ships and By NOAA on Research equipment to support weather research 830 discretionary basis Provide additional Provide additional funding for watershed By USDA, NRCS, and resources for flood improvement programs. Repair flood IBWC on discretionary control control systems damaged by storms 560 basis SOURCE: American Recovery and Reinvestment Act of 2009, Association of General Contractors of America (AGC), McKinsey & Company | 35 McKinsey analysis
  37. 37. A large number of federal agencies will oversee the spending or BACKUP distribution of the infrastructure investment Agencies responsible for at least $1bn in investment Agency Amount ($m) % of Total Federal Highway Administration 27,500 21.1% Energy 22,183 17.0% Federal Railroad Administration 9,300 7.1% Federal Transit Administration 8,400 6.5% DoD 7,852 6.0% EPA 7,200 5.5% General Services Administration 5,800 4.5% ▪ 20 agencies are responsible for at least Community Planning and Development 5,250 4.0% $1b in investment Corps of Engineers--Civil 4,550 3.5% (cumulatively Public and Indian Housing 4,510 3.5% representing ~93% of total investment) Office of the Secretary 3,500 2.7% Rural Utilities Services 2,500 1.9% ▪ More than 30 agencies Health Resource and Services Administration 2,500 1.9% are responsible for the National Institutes of Health 1,800 1.4% remaining investment Army 1,475 1.1% Federal Aviation Administration 1,300 1.0% Forest Service 1,150 0.9% Transportation Security Administration 1,000 0.8% SSA 1,000 0.8% Bureau of Reclamation 1,000 0.8% SOURCE: FedSource McKinsey & Company | 36
  38. 38. State level transportation investment is largely distributed according to existing funding formulae, which is roughly equivalent per capita by state State level transportation investment, $m BACKUP Total = $34bn 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 CA TX NY FL IL PA OH MI GA NC NJ VA WA AZ MA IN TN MO MD WI MN CO AL SC LA KY OR OK CT IA MS AR KS UT NV NM WV NE ID ME NH HI RI MT DE SD AK ND VT WY Per capita state level transportation investment, $/person 350 States with very low populations 300 have higher per capita spend, likely the result of their having 250 higher per capita transportation 200 infrastructure costs 150 100 50 0 CA TX NY FL IL PA OH MI GA NC NJ VA WA AZ MA IN TN MO MD WI MN CO AL SC LA KY OR OK CT IA MS AR KS UT NV NM WV NE ID ME NH HI RI MT DE SD AK ND VT WY SOURCE: Transportation and Infrastructure Committee – US House of Representatives McKinsey & Company | 37
  39. 39. Contents ▪ Healthcare ▪ Science & technology ▪ Infrastructure ▪ Education ▪ Energy/CleanTech ▪ China stimulus McKinsey & Company | 38
  40. 40. Detailed education stimulus spend breakdown No technology implication Indirect technology implication Direct technology implication Local school districts and Billion USD 39.5 colleges to prevent cutbacks Focus of detailed analysis Bonus grants for meeting key 5.0 performance measures 301 Tax cuts State Fiscal 53.6 Stabilization Fund High priority needs, inc. 8.8 renovation/repair of education facilities 100 Education 15.6 Expanding Pell grants Save public Student Financial 15.8 98 sector jobs and Assistance 0.2 College work study services Targeted grants (e.g., 5.0 Social aid for Reading First $787 billion 111 individuals stimulus 5.0 Incentive grants spending1 13 Title I 84 Infrastructure 3.0 School turnaround Special 12.2 School facility Energy / Education/IDEA 0.1 46 modernization CleanTech State/local technology School 0.65 1.0 grants improvement Invest to lower Homeless student 0.07 25 healthcare IES Data assistance costs 0.25 Systems IES performance-based 0.2 compensation research 4.0 Job Training Science 24 and technology 0.1 Higher Education 1 Sum may not add to total due to rounding SOURCE: Congressional Budget Office (2/13/2009), House Committee on Appropriations McKinsey & Company | 39
  41. 41. Questions for discussion for education stimulus Key points from education stimulus Questions for IT providers ▪ Primarily offsets state budget shortfalls – ▪ Will you be first to help advise districts? $54b of the $100b of education stimulus funding – 6-9 months to spend (w/ budget cycles), will be apportioned to filling state budget shortfalls, decisions by districts will be made quickly, leaving at most $46b for education stimulus creating first mover advantage – Schools lack time/ability to know how to spend. Shape/advise how schools can spend (e.g., ▪ Primarily non-tech focused – Major stimulus work w/ states to establish guidelines/ whitelists, appropriations will have little impact direct impact establish information portal for schools) on technology (e.g., $12.2b for IDEA and special education, $13b for Title I funding, and $15.8b to increase federal Pell Grant awards) ▪ Do you have access to right decision makers? – IT education VARs work primarily with IT groups. Decisions will be made by different ▪ Direct technology stimulus will significantly customers-- superintendents, school boards. increase current funding levels Alternative channels will be importants, e.g. – $650m directed to school technology grants instructional publishers w/ large sales force and over 2 years, of which, 25% will be relationships w/ education decision makers professional development (equivalent to $4.50 tech investment per student (K-12) vs. $9,000 current education spending per student) ▪ What changes in the produt portfolio? – $250m to fund state data collection systems – Rapid change in market for new technologies vs. $48m appropriated in FY08 (e.g., school data systems, adaptive learning) – Note: Federal direct education technology spending has decreased from $700m in 2002 to $260m in 2008 ▪ Howa re you offering complete solutions? – Partnerships with broad array of players (both high tech and other) to offer integrated solutions for schools (e.g., ‘modern science lab in a box’) SOURCE: Congressional Record, ARRA Bill, Ed.gov McKinsey & Company | 40
  42. 42. Stimulus funding will significantly increase state education Title II D funding1 technology grants, but will remain below recent levels Stimulus Tech Grants Federal education technology grants to states Million USD 701 696 692 -15% 593 593 496 +121% 325 325 289 272 268 268 268 2002 2003 2004 2005 2006 2007 2008 20092 20103 1 Title II D is federal funding to states for education technology 2 Title II D funding for FY09 based on Senate committee appropriation 3 Title II D funding for FY10 assumed to remain constant based on recent funding levels SOURCE: Congressional Record, ARRA Bill, Ed.gov McKinsey & Company | 41
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