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.
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. 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. 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. 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. 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. 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. 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. 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
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. 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. 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. 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. 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. 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. 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
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. 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. 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. 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. ... 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. 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. 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. 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. … 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
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. 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. 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. 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 – $49.3 billion will be applied to
▪ How will you engage with existing customers
and high potential users ?
accelerating projects currently in process,
funding projects currently in backlog, or
– Likely federal dollars will be awarded to
existing infrastructure contractors (e.g.,
funding projects where need has been
Turner, TSNA); on average, construction
demonstrated
firms use 2.1% of spend on IT
– Large existing heavy industry players (e.g.
▪ Pockets of high IT spend exist within larger Caterpillar) likely to see disproportionate
programs – Infrastructure upgrades and benefit due to scale
modernization clauses will result in pockets of – Minority owned business have explicit
high IT spend provisions in bill to receive portions of
contracts; potential alliances with industry
associations
McKinsey & Company | 30
32. Transportation infrastructure investment BACKUP
Amount
Program Details ($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. 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. 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. 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, $5,000,000 shall be made available for the Amtrak Office of Inspector General and made available through
September 30, 2013.
SOURCE: American Recovery and Reinvestment Act of 2009 McKinsey & Company | 34
36. Water infrastructure investment (example) BACKUP
Amount
Program Details ($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. 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. 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
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. 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. 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
