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(originally published by Booz & Company)


Putting the Stimulus to Work

These issues can and should be avoided by making investment more predictable. Although recent growth rates in the use of renewable electricity throughout the industrialized world have been impressive, shortages in components and skilled labor have generated even more impressive cost increases; in the medium term, these shortages could cause lower penetration rates than might otherwise have been achieved. Policymakers need to anticipate supply shortages created by well-intended subsidies or mandates, and institute reasonable construction ramp-up periods to meet targets. In addition, a blitz of support followed by disinterest discourages suppliers from investing in R&D or scaled production facilities to drive innovation and cost reductions — a situation that has characterized U.S. renewable energy policy that has been built mostly on shifting tax credits over the past decade.

A more deliberate pace would also enable planning and investment to be better coordinated. In the U.S., regulators, agencies, and jurisdictions responsible for managing infrastructure are highly fragmented. This complexity escalates risks and costs through overlapping rights among municipalities, states, and federal agencies, which in turn heightens the chance that there will be litigation and delays — a not uncommon presence in liquid natural gas pipelines and drilling, electricity generation and utility grid projects, and light rail development efforts. Clarifying the proper scope and oversight of the various interested authorities would be immensely beneficial, but will require a massive amount of patient attention by the Obama administration.

3. How many projects should be done? The rules on how stimulus funding is disbursed can make a significant difference in the number of projects that are undertaken — and, in turn, influence broadly the eventual efficacy of the investments. For example, as initially conceived, funds for smart grid developers would have been capped at $20 million per recipient. The intent was clearly to level the playing field, permitting a large number of smaller companies to participate, and to ensure that a wide variety of different technologies could be assessed. However, because the scale of individual smart grid deployments frequently exceeds $1 billion per city, it’s not clear how $20 million per project will have much of an effect. Ironically, the cap would have created a nonproportional distribution of funding. In the U.S., the top 15 utilities have roughly 50 percent market share of electric customers. Doing the arithmetic, those utilities would have qualified for only 8 percent of the total funding, creating a gross mismatch in allocation. In response to widespread industry criticism, the administration subsequently increased the cap tenfold, to $200 million per project, ensuring not only that more of the larger utilities would be interested in participating but that they would get more funding and have a greater impact on the outcome.

The train has left the station. The stimulus plan has passed Congress, applications for funding are being drafted and submitted, and funds will soon start flowing. In the long term there is ample room for policy reform to start to address some of the issues outlined above, but for now it falls largely to the private sector (the companies actually doing the construction work) to ensure that ARRA funds, and the trillions in other stimulus programs being implemented elsewhere around the world, are being deployed as effectively and efficiently as possible. We offer the following suggestions:

1. Empathize with the administrators. Administrators in agencies such as the U.S. Department of Energy confront a tsunami of applications. To best assist the administrators, companies seeking funds should understand how funds will be awarded and be able to clearly state how they will achieve the government’s goals.

2. Don’t succumb to “impulse buying”... Many companies struggle with the desire to redefine their strategic priorities in order to justify a funding application. After all, who wants to reply “Nothing” when the boss or the board asks, How much are we going to get from the stimulus? Indeed, by making support conditional on submitting only projects that would otherwise go unfunded, the administration reinforces the tendency for post hoc justifications. In the big picture, though, the current round of funding is close to inconsequential in comparison to the underlying needs for infrastructure investment and innovation. For example, the $4.5 billion earmarked for smart grids represents less than 10 percent of the likely required investment in the nation’s electricity transmission and distribution infrastructure. It’s best for companies to stay focused on the market’s longer-term requirements in defining priorities.

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  1. Alan A. Altshuler and David E. Luberoff, Mega-Projects: The Changing Politics of Urban Public Investment (Brookings Institution Press, 2003): American political history from Robert Moses to Boston’s Big Dig, proposing new forms of multiple accountability.
  2. Viren Doshi, Gary Schulman, and Daniel Gabaldon, “Lights! Water! Motion!s+b, Spring 2007: How to reinvigorate our electricity, water, and transportation systems by integrating finance, governance, technology, and design.
  3. Bent Flyvbjerg, Nils Bruzelius, and Werner Rothengatter, Megaprojects and Risk: An Anatomy of Ambition (Cambridge University Press, 2003): Skeptics document how enthusiasts negligently green-light bad projects and explain how to build in better accountability, particularly in Europe.
  4. Daniel Gabaldon, “Pollution, Prices, and Perception,” s+b, Spring 2009: An examination of how business leaders can plan for new government climate change initiatives.
  5. Mark Gerencser, Fernando Napolitano, and Reginald Van Lee, “The Megacommunity Manifesto,” s+b, Summer 2006: How to bring together multiple organizations to develop solutions to complex problems.
  6. Peter Senge et al., The Necessary Revolution: How Individuals and Organizations Are Working Together to Create a Sustainable World (Doubleday, 2008): The authors explore the steps that businesses can take to create cooperative environmental strategies.
  7. Lord Andrew Turnbull, “Toward a Flexible Energy Future,” s+b, Winter 2006: How governments can promote better capital investments despite imperfect information.
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