McKinsey Reinvesting in America December 2023

Reinvesting
McKinsey on Government
in America
Helping governments renew the sources of
economic strength and deliver for their people
Compendium
December 2023
Contents
ii Introduction 61 Transforming public sector

hiring with data-enabled talent
1 US government productivity:
‘win rooms’
A more than $2,000 per
resident opportunity 67 ‘Dig once’ could help states
manage material and worker
12 Federal financial management:
shortages
How governments can do more
with the budgets they have 72 One year into the BIL:
Catalyzing US investments
17 Inclusive infrastructure
in energy
investment: How to
empower communities 91 Paving the way to resilience:
Strengthening public
27 Building innovation
sector adaptation planning
and execution
ecosystems: Accelerating
tech hub growth
111 Closing the digital divide in
39 Rural rising: Economic
Black America
development strategies for
America’s heartland 119 Can public EV fast-charging
stations be profitable in the
49 Will a labor crunch derail plans
United States?
to upgrade US infrastructure?
127 Unlocking the potential of
generative AI: Three key
questions for government
agencies
Reinvesting in America i
Introduction
As 2023 ends and we look ahead deploying green financing, expanding Adi Kumar
Senior Partner
to 2024, our world and our country broadband infrastructure, accelerating
Leader, Federal Civilian Practice
continue to face a broad range of new technology, and building hydrogen Adi_Kumar@McKinsey.com
challenges—including climate change, hubs to ensure that the United States
economic uncertainty, and continued can keep pace with the demands of rapid Nehal Mehta
geopolitical tensions. In the face of these modernization across industries. Associate Partner
Coleader, Reinvesting in America
challenges, the United States is investing Nehal_Mehta@McKinsey.com
trillions of dollars in public-sector We believe 2024 will be a year
capital via the Bipartisan Infrastructure of transition from planning to Tim Ward
Law, the Inflation Reduction Act, and implementation, with more shovels Senior Partner
Leader, State and Local Practice
the CHIPS and Science Act to bolster hitting the ground each day to build the
Tim_Ward@McKinsey.com
economic security, energy security, and future American economy. To make this
national security. In aggregate, these happen, leaders at the federal, state, Todd Wintner
new investments seek to accelerate and local levels can work with industry Partner
technology and transform America’s Coleader, Reinvesting in America
counterparts to address a bevy of
Todd_Wintner@McKinsey.com
industrial policy and built environment. If significant—but tractable—challenges,
implemented effectively, these policies such as complex service procurement
may fundamentally alter the public- and timelines, material and labor supply
private-sector landscape for the next chain shortages, and permitting
several decades. restrictions.
The year 2023 was one of planning. To inspire your efforts over the weeks
The US federal government drafted and months ahead, we developed this
and issued guidance for a range of new compendium containing some of the
programs. Many state governments most read perspectives from McKinsey’s
designed, launched, and scaled Reinvesting in America Initiative. We
central coordinating functions thank you for the time and energy you
charged with winning competitive are investing in our country at this critical
grants and deploying federal funding moment and wish you all the best in
(competitive and noncompetitive, 2024 and beyond.
new and enduring) as efficiently and
effectively as possible. Agency leaders December 2023
have developed novel approaches to
ii Reinvesting in America
US government
productivity: A more
than $2,000 per
resident opportunity
Government remains one of the biggest productivity
improvement opportunities. Organizations must be given
both the ability and motivation to improve.
by Nikhil Sahni, Vishnu Murale, David Cutler, Shubham Singhal, and Alan Gerber
This article is the first in a series on the US government’s productivity

improvement opportunity.
© Martin Barraud/Getty Images

As the US economy has evolved, it has shifted In this article, we set out to estimate the size of
from predominantly manufacturing to services. the US government’s productivity improvement
While some of these services industries have opportunity. We defined productivity as operational
made productivity improvements, many lag behind efficiency; other researchers have focused on
the overall economy. For example, healthcare policy effectiveness (see sidebar “Why has it been
remains a growth engine for the US workforce but difficult to measure government productivity?”).
is one of the slowest in terms of labor productivity We quantified the US government productivity
growth.1 Government is also largely a services improvement opportunity by level—federal as
industry and offers one of the economy’s largest well as state and local—and category, such as
productivity improvement opportunities.2 healthcare or road transport.
For nearly all countries, government represents Overall, we found a $725 billion to $765 billion
the largest portion of the economy and is the productivity improvement opportunity—that is,
biggest employer (Exhibit 1). For example, in the roughly $750 billion annually that could be saved
United States, government at all levels accounted while keeping government services operating just
for about 47 percent of GDP and about 17 percent as effectively. This would be equivalent to more
of total employment in 2020.3 Furthermore, than $2,000 per resident. About 60 percent of
government plays a critical role in society, the total was at the state and local level. Across
ranging from building roads to educating youth. categories, about 40 percent of the opportunity
In many cases, when the government intervenes, was in healthcare; 9 percent was in primary and
it is necessary because there is no functioning secondary education.
competitive private counterpart.
We also converted this opportunity into an
Moreover, the imperative to capture the operational framework that could aid government
government productivity improvement opportunity organizations in determining what actions to take.
has intensified. The COVID-19 pandemic put Based on our experience with hundreds of public-
pressure on economies around the world, and private-sector organizations, the framework
prompting governments to spend large amounts suggests that operational challenges lie in an
of money to distribute COVID-19 relief. As organization’s ability and motivation to improve.
COVID-19 moves to an endemic phase, new
macroeconomic issues have emerged, most We recognize and acknowledge that a variety
notably a talent shortage, inflation, and high of civic compacts shape how governments
debt-servicing costs.4 For example, in 2022, the set priorities, and thus governments have
US federal government spent the largest amount fundamentally different imperatives than those
ever on debt interest, reaching nearly 2 percent of the private and social sectors. Government
of GDP.5 Having to get by with both a smaller organizations may make productivity trade-offs in
workforce and weaker government balance service of those institutional imperatives. In this
sheets suggest that the need for productivity report, productivity is the focus, but it is just one
improvements has increased. way of evaluating government activity.
1
Nikhil Sahni, Pooja Kumar, Edward Levine, and Shubham Singhal, “The productivity imperative for healthcare delivery in the United States,”
McKinsey, February 27, 2019.
2
Government productivity: Unlocking the $3.5 trillion opportunity, McKinsey Center for Government, April 2017.
3
Data from OECD on general government spending, accessed on June 26, 2023; data from International Labour Organization on public
employment by sectors of national accounts, accessed on June 26, 2023.
4
Addie Fleron and Shubham Singhal, “The gathering storm in US healthcare: How leaders can respond and thrive,” McKinsey, September 8, 2022.
5
“What are interest costs on national debt,” Peter G. Peterson Foundation, May 30, 2023.
2 Reinvesting in America
Exhibit 1
In many countries, government spending and employment make up a sizable

portion of GDP and total employment, respectively.
Breakdown of government spending and employment by country, 2020

Per capita Government Total government
Government government spending, employment, employment,
spending, % of GDP current PPP,1 $ % of total employment thousands
France 61.5 29,415 21.5 Series 1 5,809
Greece 59.7 16,962 16.5 766
Belgium 58.9 32,127 18.5 904
Finland 57.2 29,907 24.1 635
Italy 56.8 24,506 15.5 3,352
Denmark 53.5 32,577 29.0 844
Canada 53.1 25,087 7.7 1,380
UK 52.4 24,037 16.4 5,343
Sweden 52.1 29,232 29.2 1,461
Spain 52.0 19,739 16.4 3,157
Iceland 51.2 27,790 19.4 49
Slovenia 51.2 20,906 25.0 178
Hungary 51.1 17,451 17.1 902
Germany 50.4 28,473 11.1 4,658
Portugal 49.2 17,212 14.9 719
Poland 48.3 16,838 12.0 1,649
Netherlands 47.8 28,613 10.0 1,146
US 47.3 30,033 17.1 22,633
Czech Republic 47.2 20,219 15.4 897
Austria 46.2 26,425 35.2 4,461
Israel 45.4 18,261 23.3 851
Estonia 44.9 17,706 21.7 153
Slovakia 44.8 14,728 19.0 456
Lithuania 42.6 8,671 24.3 311
Latvia 42.2 7,674 25.1 222
Korea 38.1 17,042 8.8 2,375
Türkiye 35.3 9,883 14.2 3,808
Mexico 31.0 5,732 13.4 5,539
Ireland 27.4 25,719 15.6 358
100.0
1
Purchasing-power parity.
Source: International Labour Organization; OECD
McKinsey & Company
Reinvesting in America 3
Why has it been difficult to measure government productivity?
The term “productivity” is used in many When government is involved, inputs house visits by individual healthcare
contexts with different intentions. For and outputs are much harder to measure. workers.3 These can be helpful to the
example, leaders want to talk to each Researchers have tried to overcome this extent that the metrics are operationally
other about productivity but may use problem in a few ways. One approach has focused. The challenge with this approach
conflicting definitions when they do so, been to conduct international comparisons is that it is hard to aggregate up to the total
leading to disagreements. For this article, between governments; this offers insight opportunity across the government.
we employed a definition of productivity into the productivity improvement
In our view, these two approaches are
that economists commonly use to conduct opportunity at the national level.2 For
directionally correct but are each incomplete.
industry-level analyses.1 This focuses on example, healthcare spending could be
Neither provides a comprehensive road map
minimizing the inputs required to produce compared across countries, such as the
for the government to measure productivity
a set of outputs (exhibit). United States and Canada. But these
improvement opportunities across the full
comparisons may be misleading because
To understand why it has been difficult to range of functions it provides.
they do not easily take into account
measure productivity in government, it
differences in how government delivers Further, when estimating productivity for
is helpful to first look at how productivity
these goods or services, and the resulting government, it is important to separate
is measured in the private sector. With
need for more or less spending. Continuing efficiency from effectiveness. Productivity
respect to the equation in the exhibit, in
with the example, the largely public, single- as defined in this article is related to the
industries such as manufacturing, input
payer healthcare system in Canada may creation of goods and services; this is
and output prices and volume produced
not need as much money as the market- efficiency of production. The government
are quantifiable. Inputs represent the cost
based models in the United States. This also sets policy, the assessment of which
of goods, sales, general administrative
approach also tends to exclude state- or concerns questions of effectiveness. While
expenses, and other such operating costs
local-level comparisons. efficiency is tied to specific, measurable
for goods or services produced. Outputs
units (that is, detailed outputs and inputs),
are estimated by the price a consumer Another approach has been to dive deeply
questions of effectiveness focus on how
is willing to pay, which accounts for the into a set of government organizations and
outputs translate into desired policy
quality of the good or service, multiplied develop specific metrics. For example, to
outcomes, such as shifts in wealth among
by the volume. To measure productivity, examine the efficiency of public-health
population groups. Effectiveness is
it is critical to be able to separate price initiatives, some efforts have tracked
outside the scope of this article.
and volume. microlevel operational metrics, such as
One definition of productivity breaks it down into volume and price.

Exhibit
Total value of outputs Output volume x output prices

Productivity = =
Total value of inputs Input volume x input prices
McKinsey & Company
1
Robert M. Solow, “Technical change and the aggregate production function,” The Review of Economics and Statistics, August 1957, Volume 39, Number 3.
2
Edwin Lau, Zsuzsanna Lonti, and Rebecca Schultz. “Challenges in the measurement of public sector productivity in OECD 180 countries,” International Productivity Monitor,
Centre for the Study of Living Standards, 2017, Volume 32.
3
“Public-sector productivity (part 1): Why is it important and how can we measure it?,” World Bank Group, February 2021.
The US government productivity healthcare, road transport, primary and secondary
improvement opportunity education, higher education, and public safety.
To estimate the US government productivity We then used these estimates to scale across the
improvement opportunity, we used a previously remaining categories of government spending.
published approach by the McKinsey Global Institute
and adapted it to conduct a country-specific We based our analysis on 2020 government spending
analysis.6 This approach accounts for both cost data. That year, after accounting for intergovernmental
and quality and is applied to the federal level and transfers, governments in the United States spent
the state and local level. We centered our analysis $9.9 trillion, of which approximately 58 percent was
on five core government spending categories in at the federal level and the remaining 42 percent
which cost and quality data were readily available: was at the state and local level (Exhibit 2).7 Of this
Exhibit 2
For our analysis, we considered about 58 percent, or $5.8 trillion, of total

US government spending in 2020.
Total spending across the US State and local = 4.23 Federal = 5.72
government, 2020, $ trillion
1.03
Healthcare 1.14
Series 1 0.04
0.04
0.05
0.11
1.00
Primary and secondary education 0.74
Road transport 0.20

Public safety 0.22
Higher education 0.32
3.46
Other (addressable)1 0.85
Other (not addressable)2 0.76
Note: Figures may not sum, because of rounding. Numbers adjusted for intergovernmental transfers to reflect where the work is done.
1
For state and local spending, other categories analyzed include community and regional development, international affairs, general government, and national
defense. For federal spending, other categories analyzed include air transportation, financial administration, fire protection, judicial and legal, general
government expenditure, general public buildings, libraries, other education, other governmental administration, parks and recreation, protective inspection
and regulation, sewerage, solid-waste management, and utility expenditure.
²Spending that was unspecified or could not be further optimized in terms of operations was considered not addressable.
Source: Office of Management and Budget; US Census Bureau
McKinsey & Company
6
Government productivity, April 2017.
7
The intergovernmental transfers establish where the work is done versus where the work is funded. For example, Medicaid dollars are accounted
for at the state and local level, though the funding is from the federal level. Due to data limitations, state and local spending could not be split.
total, about 42 percent was either unspecified productivity improvement opportunity”). About
or could not be further optimized in terms of 60 percent of the total was at the state and local
operations, such as paying interest on debt or level, with nearly a third of the opportunity in
Social Security payments. This type of spending healthcare and about 15 percent in primary and
was excluded because it is not related to efficiency secondary education. Of the remaining 40 percent
of production but is more commonly related to at the federal level—$285 billion to $295 billion—
policy effectiveness, which was not in the scope about 50 percent of the opportunity was in
of this article. As a result, our analysis focused on healthcare (Exhibit 3).
$2.3 trillion of government spending at the federal
level and $3.5 trillion at the state and local level. From opportunity to action
We also sought to offer insight on how government
We then estimated that the US government leaders could capture the productivity improvement
productivity improvement opportunity is opportunity. To do so, we used a previously
$725 billion to $765 billion, adjusting for developed operational framework that lays out
wage differences across states (see sidebar how the public sector could pursue productivity
“How we measured the US government improvements (Exhibit 4).8
Exhibit 3
The US government productivity improvement opportunity is $725 billion

to $765 billion.
Productivity improvement opportunity by category, $ billion

State and local level Federal level
Portion of savings, %
Healthcare ~35 ~50
Primary and secondary ~15 <5

education
Road transport ~10 <5
Public safety ~5 <5
Higher education ~5 <5
Other1 ~30 ~40
0 20 40 60 80 100 120 140 160
Spending that was unspecified or could not be further optimized in terms of operations was considered not addressable and excluded from “other” category.
1
Source: Centers for Disease Control and Prevention; Federal Bureau of Investigation; Federal Highway Association; National Center for Education Statistics;
Office of Management and Budget; The Nation’s Report Card; US Census Bureau
McKinsey & Company
8
Nikhil R. Sahni, Maxwell Wessel, and Clayton M. Christensen, “Unleashing breakthrough innovation in government,” Stanford Social Innovation
Review, 2013, Volume 11, Number 3.
Exhibit 4
Organizations must be given both the ability and the motivation to improve.
Breakdown of productivity improvement opportunity by operational focus area, %
Ability Motivation
30–35
25–30 25–30
5–10 5–10
Ability to Ability to sunset Existence of Existence of Existence of budget

experiment outdated feedback loops incentives for constraints for
infrastructure product or service consumers
improvement
Example • Optimize • Source smarter • Enhance • Align leadership • Manage demand

interventions organizational • Transform consumer • Invest in and
structure and digitally and experience deploy talent
governance automate
• Enhance • Consolidate
processes support services
Source: Clayton M. Christensen, Nikhil R. Sahni, and Maxwell Wessel, “Unleashing breakthrough innovation in government,” Stanford Social Innovation Review,
2013, Volume 11, Number 3
McKinsey & Company
At its core, the framework seeks to identify intelligence. The inability to do this can, for example,
challenges related to an organization’s ability to prevent the better use of IT and automation.
improve compared with its motivation to improve
in the government setting. We found that more A government organization’s motivation to improve
than 60 percent of the opportunity was tied to an accounts for the remaining 40 percent or so of the
organization’s ability to improve. There are two opportunity. The largest operational focus area,
important operational focus areas. The first is an representing more than 60 percent of the motivation
organization’s ability to experiment, which allows opportunity, is associated with feedback loops.
organizations to implement interventions such as This refers to organizations receiving feedback
improving processes and optimizing governance. on their goods or services from consumers.
The second is the ability to sunset outdated Proven interventions include enhancing consumer
infrastructure, a tactic that is being employed experience, which is rapidly expanding in adoption
across industries today with tools such as artificial across the public sector.9
9
Tony D’Emidio and Jonah Wagner, “Understanding the customer experience with government,” McKinsey, April 20, 2018.
How we measured the US government productivity improvement opportunity
Previous McKinsey research addition, a different denominator unit realistically achieve a similar cost per
established an approach for estimating was used for each core category, such as unit (Exhibit B).
the government productivity improvement enrolled student body in higher education
The “other” category accounted for
opportunity.1 This approach focuses on and total lane miles for road transport.5
38 percent of state and local spending
operational efficiency and quantifies
For the second method, we added a and 78 percent of federal spending. We
the opportunity based on variation in
quality metric to the output measure, excluded unspecified areas or areas that
quality and cost per unit.2 In this article,
such as six-year graduation rates for could not be further optimized in terms of
we adapted this approach for the United
higher education or violent-crime rates operations. This represented 47 percent
States, analyzing the opportunity at the
for public safety.6 For state and local and 78 percent of the “other” category,
federal level and at the state and local
spending, data constraints limited us to respectively. Examples of this spending
level.3 We broke down spending into six
only state-level metrics, but we applied included state and local insurance trust
categories: healthcare, road transport,
them to local spending as well. expenditures and interest on debt.
primary and secondary education, higher
education, public safety, and “other.”4 In The following are the methods we used For the remaining portion of the
2020, the five core categories (excluding to arrive at the estimates reported in “other” category, we associated each
“other”) represented 22 percent of federal Exhibit 37: subcategory with one of the five core
spending and 62 percent of state and categories based on how closely
— Method one. States were ranked
local spending. they might be related. Examples of
based on their cost per unit. States
these subcategories included utilities
We used two methods to estimate the above the median cost per unit were
and sewerage.8 The core category’s
productivity improvement opportunity brought down to the median. The
productivity improvement opportunity
related to operational efficiency for each rationale for this method was that
percentage was then applied to the
core category. We began by estimating regardless of quality of the output,
subcategory’s spending.
cost per unit, which was equal to the lower-performing states could
spending divided by a given unit. For each become more cost efficient (Exhibit A). To understand operational challenges
state’s costs, we normalized for wage the US government may be facing in
— Method two. States were ranked
differences. To do this, we first estimated capturing this opportunity, we used
based on quality of the output and
the ratio of the state’s average wage to another published framework that
then broken into quartiles. Within a
the national average. Because the amount addresses how to improve public-sector
given quality quartile, states above the
of labor for each category will differ productivity across five operational focus
quartile’s median cost per unit were
(healthcare tends to use more labor, while areas: ability to experiment, ability to
brought down to the quartile’s median.
transport likely uses less), we assumed sunset outdated infrastructure, existence
The rationale for this method was that
labor was half of costs and therefore of feedback loops, existence of incentives
states with similar quality could more
applied half of the wage difference. In for goods or services improvement, and
1
Government productivity: Unlocking the $3.5 trillion opportunity, McKinsey Center for Government, April 2017.
2
All data used for spending, outcomes, and units was from 2020 with two exceptions due to availability: outcome data for the primary- and secondary-education and
public-safety categories was from 2019.
3
Due to data limitations, state and local spending could not be split.
4
Centers for Disease Control and Prevention; Federal Bureau of Investigation; Federal Highway Association; National Center for Education Statistics; The Nation’s Report
Card; US Census; White House Office of Management and Budget.
5
The unit used for each category was total population (healthcare), total lane miles (road transport), enrolled student body (primary and secondary education), enrolled study
body (higher education), and total population (public safety).
6
The quality metric used for each category was life expectancy (healthcare), road quality scores as defined by the Federal Highway Association (road transport), eighth-grade
math and reading composites as defined by the Nation’s Report Card (primary and secondary education), six-year graduation rates (higher education), and violent-crime
rates as defined by the Federal Bureau of Investigation (public safety).
7
To test the robustness of this approach, versions were run with 2018 data only, as well as a time lag between cost per unit and quality of the output. The results were
marginally different (3 to 8 percent), and thus we reported 2020 data throughout for consistency.
8
For state and local spending, the “other” categories for the analysis included utilities, other education, sewerage, waste management, fire protection, judicial and legal,
financial administration, air transportation, public buildings, libraries, parks and recreation, and general government administration. For federal spending, the “other”
categories for the analysis included national defense, community and regional development, international affairs, and general government administration.
How we measured the US government productivity improvement opportunity (continued)
existence of budget constraints for based on observed organizational results. operational framework that we used
consumers.9 For each operational focus Interventions were then grouped against (Exhibit 4).
area, there are several improvement operational focus areas, and the total net
The methods used to measure the
interventions that government leaders potential savings were estimated. This
productivity improvement opportunity
can pursue based on our experience with provided a perspective on the relative
related to operational efficiency have
public-sector organizations. For each importance of a given operational focus
limitations. First, the approach quantifies
intervention, we estimated net savings area, based on the previously deployed
the opportunity based on variation due
Exhibit A
Our first method for estimating the productivity improvement opportunity

ranked states by cost per unit.
Illustration of method 1: Healthcare example across all US states
5,000
In method 1, all
states above the
median cost per
4,000 unit were brought
down to the
median
3,000
Cost per unit:
Healthcare
spending per
person, $
2,000
1,000
• Manage demand
0
72 74 76 78 80 82
Quality score: Life expectancy, years
Note: Spending was partially (50%) normalized for wages by state.

Source: Centers for Disease Control and Prevention; US Census Bureau
McKinsey & Company
9
Nikhil R. Sahni, Maxwell Wessel, and Clayton M. Christensen, “Unleashing breakthrough innovation in government,” Stanford Social Innovation Review, 2013, Volume 11,
Number 3.
How we measured the US government productivity improvement opportunity (continued)
to efficiency of production, not need. differences between states. The adjust for part of this discrepancy through
For example, if two states have different approach assumes each state can the wage index normalization. In the next
rates of obesity, the need for healthcare reach the cost per unit of another state. article of this series, we will dig deeper
spending will inherently be different. However, if, for example, it costs more per into ways to address these limitations
As a result, it may not estimate what lane mile for a rural location than an urban as we focus on how to operationalize
the “appropriate” amount of spending location, a state like Alaska may never interventions against the productivity
should be. In addition, this approach reach the same level of efficiency as a improvement opportunity.
does not account for structural state like Rhode Island. We attempted to
Exhibit B
Our second method for estimating the productivity improvement opportunity

started by sorting states by quality into quartiles.
Illustration of method 2: Primary- and secondary-education example across all US states
35,000
Quality Quality Quality Quality
quartile quartile quartile quartile
In method 2, all
1 2 3 4
states above the
30,000 median cost per
unit within their
respective quality
quartile are brought
down to the
25,000
quartile’s median
Cost per unit:
Primary and
secondary
education 20,000
spending per
enrolled student, $
15,000
10,000
5,000
260 265 270 275 280 285
Quality score: Reading and math scores, scale score
Note: Spending was partially (50%) normalized for wages by state.

Source: National Center For Education Statistics; The Nation’s Report Card; US Census Bureau
McKinsey & Company
Another operational focus area related to motivation
is the existence of incentives for goods or services
improvement by employees. In this case, example For many years, policy makers, organizational
interventions include hiring the right talent or leaders, and researchers have discussed—and
aligning leadership on organizational outcomes. often largely dismissed—capturing productivity
improvements in government. Using a definition
A third motivation-related operational focus area and approach focused on operational efficiency, we
is how to overcome a lack of budget constraints estimated a potential $725 billion to $765 billion
for consumers. In many cases, consumers have no opportunity. We found that more than 60 percent
choice but to deal with a government organization, of the opportunity could be captured by providing
such as when obtaining or renewing a driver’s organizations with a greater ability to improve; the
license. Unlike other purchasing choices, such as remainder could be captured from motivation. In the
trading off between how much food or entertainment remaining articles in this series, we will break down
to purchase, these government products and the roles that government plays to better identify
services are necessities, creating no motivation to approaches on how to improve productivity at the
improve. Reframing the consumer’s budget from organizational level.
cash to another metric, such as time, can generate
this motivation, such as providing faster self-service This article is the first in a series on the US
options for renewing a driver’s license. government’s productivity improvement opportunity.
Nikhil Sahni is the leader of the Center for US Healthcare Improvement and a partner in McKinsey’s Boston office, where
Vishnu Murale is a consultant. David Cutler is the Otto Eckstein Professor of Applied Economics at Harvard University, with
joint appointments at Harvard Kennedy School and Harvard School of Public Health. Shubham Singhal is global leader of
McKinsey’s Social, Healthcare and Public Entities (SHaPE) Practice and a senior partner in the Detroit office. Alan Gerber is
the Sterling Professor of Political Science and director of the Institution for Social and Policy Studies at Yale University.
The authors wish to thank Rahma Elsheikh, Allan Gold, Maria Kaouris, and Zoe Williams for their contributions to this article.
Copyright © 2023 McKinsey & Company. All rights reserved.
Federal financial
management: How
governments can do
more with the budgets
they have
Tools that enable more agile and transparent financial
management can help government leaders tie resources directly
to mission outcomes, boosting the impact of taxpayer funds.
by Chris Griggs, Jihye Gyde, Chandru Krishnamurthy, and Megan McConnell
© Natee Meepian/EyeEm/Getty Images

Throughout the world, people have been seeing more capacity for finance teams to partner with
higher prices at the grocery store, the gas pump, operations and tie financial resources directly to
and elsewhere in their daily lives, and many are mission outcomes.
adjusting how they budget in response.1 Costs are
going up for federal governments too, yet agencies
and departments may not register that decrease in Enabling strategic decision making
buying power for months or even years, making it For many federal agencies, the year-round activities
harder for them to deliver on missions and maximize of budgeting and ensuring legal and regulatory
the impact of taxpayer funds. compliance typically absorb the bulk of the
finance team’s time, attention, and resources. That
Although this current inflationary period will pass, already considerable strain on capacity is often
it highlights a perennial question for government exacerbated by additional reporting requirements
leaders: How can we deliver more to the people we to senior, external government organizations.
serve with the budget we have? In our experience
across the US federal government, we’ve heard However, narrowly focusing on financial compliance
agency heads and other leaders ask questions can obscure financial transparency, thwart agility,
such as the following: and stymie the potential for fruitful collaborations
between the finance team and other parts of the
— Which costs are truly fixed and which ones organization. This is not to diminish the crucial role
are adjustable? that financial transaction and process expertise play
in federal agencies, but when federal finance teams
— What percentage of fiscal flexibility do we have are focused primarily on compliance and reporting,
in our budget and how can we double it? it’s harder for them to support more strategic
decision making.
— What are the true, fully loaded costs of our
key outputs? To move beyond compliance, we’ve identified three
best-practice solutions from the private sector that
— What is driving costs up and what can we do federal agencies and departments could consider
to reduce them? utilizing to enhance strategic financial management.
Building internal financial tools can help answer all 1. Boost internal transparency by developing
these questions by boosting financial management a “decision making” view of finances. Large,
agility and transparency. Government agencies private-sector organizations often have robust
have long sought to bring clarity and transparency internal reporting to build a more holistic view of
to their large and complicated budgets; indeed, funds and costs. The most ubiquitous of these
this was a major focus of congressional oversight tools is the “profit and loss statement,” which is
and department-level regulations as early as the viewed and acted upon internally at least once
1960s. In the 21st century, however, digital tools a month. Other tools include budget portfolios
have opened up a new horizon of opportunity for for product and service lines, monthly spending
the public sector. They can help leaders develop a plans, and monthly analysis comparing those
“decision making” view of finances and automate plans to what was actually spent. Tools like
reporting to “close the books” sooner, creating these can foster greater financial transparency
1
World economic outlook, October 2022: Countering the cost-of-living crisis, International Monetary Fund, October 11, 2022.
to help answer questions such as: How much Leaders can start building internal financial
additional funding will we have this year? How tools by organizing finances along core sets
effective is our current spending plan? Does it of program and mission priorities that are
match our priorities? How much is it truly costing likely to endure as leadership, administrations,
to deliver this current product, service, or and fiscal priorities change (exhibit). These
capability? These private-sector tools look and priorities can (and often are) distinct from the
feel quite different than the reporting required overarching organizational structure, but once
of public-sector agencies for financial oversight, they have been identified, financial resources
and given the resources required to maintain can be directly linked and allocated to them
compliance with statute, it can feel difficult to to drive specific mission goals. Funding
add other reports and analyses to the finance types and expenses can be segmented by
team’s plate. However, the strategic value of program area—lines that are ideally high level
a decision-making view can begin to emerge enough to warrant engaging leadership, while
quickly with a few key shifts. providing enough detail to drive truly informed
decision making. For example, the “revenue
Web <2023>
<FederalFinancialManagement>
Exhibit
Exhibit <1> of <1>
Reorienting finances from an organizational basis to an activity basis can help

federal agencies tie resources directly to mission outcomes.
Case study on reorienting finances
From a departmental basis To an activity basis

The agency’s budgets were built Moving to an activity basis allowed the team
departmentally, with limited linkage between to add transparency to decisions that spurred
costs and the activities that propelled them. costs, shaping how the organization thinks
about its finances.
Direct costs allocated
to service lines
Department 1
Department 2 Service line 1
Department 3
Mission areas
Headquarters Service line 5

HR
IT
Headquarters
functions Strategy
Some departments have
Procurement indirect costs allocated
across business units
Finance
McKinsey & Company
Automating financial reporting in
full or in part helps private-sector
organizations to close out their books
every month, giving them near-
real-time data to drive decisions.
line” could include four to seven funding types digital team to build bespoke, automated
by category and source of funding. Costs tools that capture data across the organization.
can then be categorized as either “direct” This team is ideally helmed by a senior leader
or “indirect,” and additional subcategories who can champion its development and convey
can be added that are relevant to specific the impact of its efforts to other agency heads.
organizations and program areas. Once the team is in place, it can align on
developing tools to capture and visualize
Though complex, federal agencies and core program data through an automated
departments could generate initial views of process. It will likely require new ways of
financials and start identifying opportunities thinking and working for these tools to reflect
within weeks. One military service organization all the financial nuances of the organization.
recast its budget from a “source of funds” Notably, the optimal level of precision and
to “four stated missions,” identified detail they yield entails weighing how much
$400 million in contract savings, and effort it would take to produce those granular
improved internal discussions on balancing findings, against the level of impact that
strategic portfolio decisions. information could deliver: for example,
would it make sense to invest three months
2. Close the books sooner by automating data of effort to yield data that is accurate down to
reporting. Automating financial reporting in full the exact dollar?
or in part helps private-sector organizations to
close out their books every month, giving them One $40 billion government agency that
near-real-time data to drive decisions. Federal developed these tools dramatically reduced the
government agencies could do the same. time it took to close its books, from five weeks
Advanced tools can generate a near-real-time to three days. These tools enabled leaders
visualization of finances and enable deep dives to know almost in real time when they were
to support categorization and reporting that is approaching overruns or underruns. In 2020,
consistently correct. this agency achieved a 5 percent reduction in
annual costs, despite unpredictable demand
Federal agencies could start building this for its services and in the face of extreme
capability by creating a joint finance and IT/ supply chain disruptions.
3. Create an operations-finance partnership. One military service organization recast its
When finance teams have more bandwidth, budget along new “mission areas” to drive
they can think more strategically and gain a investment decisions and portfolio management
deeper understanding of how finances affect within its operations organization. The new
mission outcomes. For example, the extra time financial views enabled operational leaders to
and resources recaptured from automated data better understand portfolio trade-offs and the
collection can be invested in other efforts such underlying resources needed to deliver on each
as working more closely with operational leaders mission. As a result, the finance team plays an
to enhance program resilience and shifting the integral role in portfolio-level decisions and
focus of meetings from documentation and shaping the “out years” (three- to five-year
reporting to discussing trends, opportunities, horizon) of the organization’s budget.
and alternative courses of action.
Similarly, one federal law enforcement agency
Greater bandwidth can be used to strengthen accounts for every single dollar that has been
the operations-finance partnerships, shifting allocated to each of its mission areas in its end-
both mindsets and capabilities. Financial and of-year financial report. This allows the agency
operational leadership could work together to view its portfolio based on mission outcomes
to develop a joint decision-making view—one over time and, if necessary, make trade-offs
that achieves the optimal level of detail to drive across and within each of them.
informed decisions. They can review automated
visualizations monthly to compare budgeted
finances to actual finances, discuss actions to
adjust for in-year cost overruns or underruns, Navigating a complex and ever-changing financial
determine where resources may need to be landscape is challenging, especially when
realigned to deliver on a priority program or organizational resources are not tied directly to
mission, and make other data-driven decisions. desired outcomes. For many federal agencies,
They can also compare their agency’s cost closing the gap between resourcing decisions and
structure with other organizations to identify mission impacts could help them deliver more with
and address inefficiencies. the budgets they have. Building internal financial
tools, automating capabilities, and creating a joint
This may require reskilling members of the finance and operations team can serve as initial
finance team. The approach could also be rolled steps to guide their efforts, and help them achieve
out as a pilot involving one program and one greater financial transparency, agility, and impact
conversation between finance and operations for the American people.
leadership. Then, as the new ways of working
unfold and feedback helps improve outcomes,
more programs could be added.
Chris Griggs is an associate partner in McKinsey’s Washington, DC, office, where Jihye Gyde is a consultant and Megan
McConnell is a partner. Chandru Krishnamurthy is a senior partner in the Atlanta office.
Inclusive infrastructure
investment: How to
empower communities
With more than $2 trillion in federal funding entering the US
economy, three steps can help governments meet the needs
of communities previously excluded from federal funding
implementation decisions.
This article is a collaborative effort by Henry Feldman, Danielle Hinton, Adi Kumar,
Nehal Mehta, and Kunal Modi, representing views from McKinsey’s Public Sector Practice.
© SDI Productions/Getty Images

Since November 2021, Congress has passed experience could therefore help anchor state-
three landmark investment bills—the Bipartisan level priorities in residents’ core pain points and
Infrastructure Law (BIL), the Inflation Reduction maximize the impact of federal dollars.4
Act (IRA), and the CHIPS and Science Act (CHIPS)—
directing more than $2 trillion in investment to State leaders may face significant challenges in
bolster physical infrastructure, promote innovation engaging a diverse range of voices in making plans
and economic competitiveness, and shore up the and decisions about public investment. Public-
domestic industrial base.1 This suite of legislation works projects with negative second- and third-
also aims to redress long-standing inequalities by order effects are seared into the collective memory,
laying a stronger foundation for sustainable and leading to mistrust and skepticism that these
inclusive growth. Two of these laws in particular— projects could have a positive impact on the lives
the BIL and the IRA—present a unique opportunity and livelihoods of all residents.
for public leaders to adopt a customer-centric
approach to infrastructure strategy to ensure There can also be resistance, with communities
that communities and other stakeholders that objecting to projects that are close to home and
historically had little to no say over large-scale citing disruptions to neighborhoods and ecosystems.
projects are included in decision making and
empowered to pursue funding opportunities. To navigate these challenges and harness federal
infrastructure funds in the service of sustainable,
While the BIL allocates a majority of its funding by inclusive economic growth, state leaders could
applying a fixed formula, the law is distinct from consider three actions: identifying a broad range
past investments in that roughly 40 percent of all of state-specific stakeholders, including those
net new grant funding opportunities are available that represent marginalized groups; optimizing
through competitive application processes.2 These funding by providing targeted support to critical
competitive opportunities encompass more than stakeholders as they pursue competitive grant
$180 billion in available grant money—a resource opportunities; and considering proactive steps
pool that can empower state and local governments to promote transparency at each stage of the
to develop infrastructure strategies that address infrastructure investment journey.
the needs of all residents, including marginalized
communities. These opportunities are further
amplified by an additional $80 billion in competitive Identifying and engaging stakeholders
grants from the IRA.
State leaders could begin the infrastructure
investment and delivery journey by gathering
Government leaders can approach funding
investment ideas from critical stakeholders
pursuit and deployment from a customer-centric
and generating community buy-in. This approach
perspective by engaging communities that have
could help build greater trust between policy
been underrepresented in shaping public works.
makers and communities that have been
Our recent State of the States research, which
historically left out of infrastructure decisions.
surveyed 80,000 Americans across all 50 states,
State-specific stakeholders could include eligible
found that residents’ experiences with government
recipients of funding (for example, municipal
services can vary significantly within states
governments, public utilities, and federally
depending on their identity, location, and access
recognized tribes) as well as the residents
to resources.3 A relentless focus on customer
represented by these recipients.
1
“The Inflation Reduction Act: Here’s what’s in it,” McKinsey, October 24, 2022.
2
“A new era of US infrastructure grants,” McKinsey, May 20, 2022.
3
A shka Dave, Marcy Jacobs, Kunal Modi, and Sarah Tucker-Ray, “Governments can deliver exceptional customer experiences—here’s how,”
McKinsey, November 16, 2022.
4
“The call to rethink government customer experience,” McKinsey, July 28, 2022.
To begin identifying and mapping these critical businesses, and religious institutions. Recognizing
stakeholders, state leaders could blend a data- the nuances and needs of specific communities
driven perspective—informed by publicly available could make outreach more effective and help
sources—with qualitative insights. For example, states build trust-based relationships early in the
the Council on Environmental Quality’s Climate infrastructure investment journey (see sidebar,
and Economic Justice Screening Tool collects data “Engaging tribal nations”).
across eight categories (including climate change,
energy, and health) to help policy makers identify Once infrastructure stakeholders have been
underserved communities that could benefit from identified, engaging them meaningfully could be
public infrastructure investment.5 A data-driven informed by five key considerations:
approach can also help policy makers deliver on
the federal government’s Justice40 Initiative, — Objectives. First, leaders can clarify their
which aims to have at least 40 percent of the objectives to inform selection of a particular
benefits from major federal investments flow to engagement strategy. If a state is trying to
disadvantaged communities.6 reconcile competing investment priorities, an
infrastructure task force with committees
Another resource to consider is the Transportation focused on specific asset classes (such as
Disadvantaged Census Tracts tool created by the transportation, energy, or broadband) or broader
US Department of Transportation.7 The geospatial thematic priorities (such as sustainability or
mapping tool uses American Community Survey equity) could help structure and accelerate
and US Census data to identify disadvantaged decision making.
census tracts across six key indicators (for
example, transportation access disadvantage) and — Trust. Standard channels and formats for
can help policy makers pinpoint areas in which engaging communities could be insufficient,
infrastructure investment has not kept pace with especially for groups with low trust in
more affluent communities.8 government. Leaders could consider partnering
with trusted local organizations, including
Once state leaders have built a data-driven not-for-profits and other community anchor
perspective on underserved municipalities with institutions, to facilitate meaningful engagement
pressing infrastructure needs, public affairs staff with marginalized communities. State and local
could collaborate with municipal governments leaders could ask key questions such as the
to identify partners in these areas that are best following: Which organizations and leaders
positioned to represent their communities, meaningfully serve and understand the needs
including not-for-profits, civic organizations, small and aspirations of communities? How can we
5
“Climate and Economic Justice Screening Tool,” Council on Environmental Quality, updated November 22, 2022. The eight categories are
climate change, energy, health, housing, legacy pollution, transportation, water and wastewater, and workforce development.
6
P
resident Biden’s executive order on tackling the climate crisis created the Justice40 initiative in 2021 to orient federal stakeholders toward
a goal that 40 percent of the benefits of federal investments flow to disadvantaged communities. See “Justice40: A whole-of-government
initiative,” White House, accessed July 20, 2023; and “Executive order on tackling the climate crisis at home and abroad,” White House,
January 27, 2021.
7
“Transportation Disadvantaged Census Tracts (Historically Disadvantaged Communities),” US Department of Transportation, accessed
July 20, 2023.
8
The six key indicators are transportation access disadvantage, health disadvantage, environmental disadvantage, economic disadvantage,
resilience disadvantage, and equity disadvantage.
Engaging tribal nations
As state leaders begin reaching out could consider appointing a dedicated especially given frequent turnover in tribal
to a diverse range of communities, it is tribal infrastructure liaison to streamline leadership. Holding events in community
important to create opportunities for communication and foster inclusive spaces on tribal lands can also increase
meaningful engagement at each stage of decision making. Going above and beyond participation and awareness. Finally,
the infrastructure investment and delivery existing approaches to tribal consultation beyond engaging tribes themselves,
journey. For example, tribal leaders have could help build trust and convey a level of state leaders could build and maintain
shared that they want to be engaged seriousness about the state’s collaborative support for tribal projects by emphasizing
throughout the decision-making process vision. The tribal infrastructure liaison that investments in tribal communities
and collaborate closely on capital planning may consider engaging with intertribal may confer benefits on all residents who
and grant prioritization. To set the stage for organizations as an intermediary between commute through or work on tribal lands.
a constructive partnership, state leaders the state and federally recognized tribes,
ensure that they have a seat at the table, that backgrounds can participate? Could the event
their voices are heard, and that they are included be held in a virtual or hybrid format? Could the
in decision making? organizers provide resources such as food and
childcare to make the event more accessible?
— Communication. How can state leaders Could existing state programs that are effective
reach critical stakeholder groups in the first in reaching target populations be leveraged to
place? What messages are most important to gather input?
communicate to them? Is the format or channel
conducive to conveying these messages?
Providing hands-on support
— Visibility. Participation often hinges on to stakeholders
awareness of outreach initiatives. A key factor Because new federal funding allows a diverse range
for leaders to consider is what type of external of entities (such as states, local governments, tribal
attention this format or channel will draw. governments, utilities, not-for-profits, and research
institutions) to apply for competitive grants (both
— Access. Enabling community members to directly and as subgrantees), state leaders could
participate in outreach initiatives is another help optimize the flow of funds into their state by
critical success factor. Leaders can consider providing hands-on support to critical stakeholders.
the following questions: Are these outreach For instance, the executive director of a digital
initiatives planned during a time of day when equity not-for-profit told us that states could help
individuals from a range of socioeconomic
alleviate resource constraints for small not-for- — Technical expertise. Creating compelling,
profits by managing the administrative side of grant data-supported applications with visual
applications and providing support with reporting materials requires technical expertise.
during project implementation. By taking a direct This expertise may vary considerably
role in the application process, state leaders among applicants.
could help direct federal funds to grassroots
organizations that are working directly with — Capacity. In-house grant writing staff may
communities, increasing the overall flow of funds be overburdened, and capacity may be
into the state’s economy (that is, beyond grants that constrained. Additional project management
go directly to the state government). resources may also be scarce, making it difficult
to complete the large amounts of paperwork
When deciding how to structure support, state required for applications.
leaders could take stock of the common challenges
that applicants face when pursuing competitive — Credibility. Getting approval from state
funding opportunities: governments through letters of support may
be challenging for smaller entities. Without
— Access to information. Keeping up to date with sponsorship from states, grant applications
the latest eligibility requirements and funding may struggle to attract attention from
deadlines can be challenging, given rapidly federal agencies.
evolving funding environments.9
State leaders could help optimize

the flow of funds into their state by
providing hands-on support to
critical stakeholders.
9
“BIL Navigator,” McKinsey, accessed July 20, 2023.
Three models, pursued together, could help support agencies (for instance, through letters of support).
stakeholders to overcome these common grant To operationalize this approach, states could take
application challenges: inspiration from federal agencies with experience
providing technical assistance. For example, the
1. Centralized assistance Environmental Protection Agency (EPA) has
States could centralize their technical-assistance created 29 environmental finance centers to help
services. For example, support centers with disadvantaged communities access grants for clean
dedicated staff—grant writers, technical experts, water, clean air, and greenhouse-gas reduction;
and communications professionals—could help technical assistance includes hands-on support for
stakeholders secure funding for infrastructure project proposals and grant applications.10
projects (Exhibit 1). Support centers could be
particularly helpful when federal support is lacking 2. Convening stakeholders with shared interests
or when state officials want to play an active role Without coordination, different groups within a
in guiding the application process. They could state could end up applying for the same funding,
also help stakeholders comply with eligibility potentially canceling each other out or missing
requirements, establish performance management opportunities that are more suited to their needs.
processes, and build credibility with federal By convening stakeholders with common or
Exhibit 1
Centralized technical assistance and support could help stakeholders secure

funding for infrastructure projects.
Centralized technical assistance and support model
Governor’s office
Infrastructure coordinator
Communications Legislative relations Grant-writing staff Policy making
Low- Historically
Tribal Rural
income marginalized
nations counties
communities communities
Academic Other (eg, research

Not-for-profits Utilities institutions organizations)
McKinsey & Company
10
“ Environmental finance centers,” US EPA, updated June 21, 2023; “EPA selects 29 finance centers to receive grants, provide technical
assistance,” Water Finance & Management, November 14, 2022.
overlapping interests, state leaders could facilitate (ADECA) is conducting a series of meetings across
discussions about which projects to prioritize the state to help local governments and other
and even increase awareness of other funding stakeholders prepare for and access federal
opportunities (Exhibit 2). broadband grants (such as the Broadband Equity,
Access, and Deployment Program or the Digital
For example, the Abandoned Mines Reclamation Equity Act).11 Beyond promoting awareness, ADECA
Program uses fees paid by currently operational is supporting local stakeholders with mapping,
coal mining companies to reclaim coal mines planning, data collection, and overall strategy.
abandoned before 1977, making these areas safer
for people and the environment. Bringing together 3. Forming partnerships between states
groups that focus on watersheds, recreation, and stakeholders
or conservation could enable state leaders to States could also consider forming partnerships
identify applications with the most impact and with a variety of stakeholders (Exhibit 3). These
plan strategically to maximize the opportunity to partnerships can take a number of forms:
reclaim coal mines. Convening critical stakeholders
can also be an effective way to provide technical State and critical stakeholder. When both the state
assistance at scale. For example, the Alabama and another critical stakeholder (such as an industry
Department of Economic and Community Affairs representative or a not-for-profit) are eligible for
Exhibit 2
State leaders could convene stakeholders to facilitate discussion and prevent

missed opportunities.
Rural county with limited broadband infrastructure or access
Convening model
Governor’s office
Public and Advance and

Infrastructure Constituent
community operations
coordinator services
affairs team
Rural county #1 Rural county #2 Rural county #3 Rural county #4
McKinsey & Company
¹¹ “Governor

Ivey kicks off first of 67 county meetings to bring broadband to communities across the state,” Office of Alabama
Governor Kay Ivey, December 12, 2022.
Exhibit 3
States could consider forming partnerships with different stakeholders to

pursue competitive funding opportunities.
State and critical stakeholder State and subgrantee State to state (regional)
Critical State
stake- State State State
State
holder #1 #2 #3
Subgrantee
Source: US Senate H.R. 3684, Bipartisan Infrastructure Law
McKinsey & Company
a certain kind of funding, they could apply jointly. example. While this is not a competitive program,
Depending on the grant program, the state may states are required to submit draft work plans to
choose to form a partnership with multiple groups. confirm that the eventual use of funds aligns with
For example, the Consolidated Rail Infrastructure the requirements of the program.13 Coordinating
and Safety Improvement grant program aims to early and often with underserved communities
improve the safety and efficiency of passenger and can help ensure that these investments in
freight rail. States could partner with Amtrak, Class water infrastructure address the most pressing
II or Class III railroads, rail equipment manufacturers, contamination and water quality issues.
universities, and not-for-profits to support shared
research, safety, or workforce development goals.12 State to state. State-to-state relationships could
allow states to collaborate on complex grant
State and subgrantee. This approach could allow applications for which implementation will cross
states to gather input from potential subgrantees state borders, such as interstate highway projects.
and applicants during the planning process, which Another example is the $8 billion Regional Clean
can be required to unlock the state’s competitive Hydrogen Hubs program. Under the BIL, the
or formula infrastructure funding. States could Department of Energy is offering grants to industry,
start by identifying programs in which the state utilities, state and local governments, and other
receives funds initially but is later responsible entities to improve clean-hydrogen production,
for providing grants to other entities. The Small, processing, delivery, storage, and end use. Given
Underserved, and Disadvantaged Communities that Regional Clean Hydrogen Hubs grants will be
grant program of the Water Infrastructure awarded to different regions of the country, states
Improvements for the Nation Act is one such could form partnerships or coalitions to capitalize
¹²See “Consolidated Rail Infrastructure and Safety Improvement Grants” in Building a better America: A guidebook to the
Bipartisan Infrastructure Law for state, local, tribal, and territorial governments, and other partners, White House, accessed
July 20, 2023.
¹³ “WIIN Grant: Small, Underserved, and Disadvantaged Communities Grant Program,” US EPA, accessed July 20, 2023.
on each state’s distinct advantages (for instance, — potential opportunities: formula and
talent, infrastructure, or feedstock diversity).14 By competitive grant programs available to critical
working together, states could increase the overall stakeholders across the state, along with key
competitiveness of applications and drive regional deadlines and eligibility requirements
economic growth.
— intake: formula and competitive grant money
flowing into the state
Communicating transparently
during implementation — expectations and progress: timelines
During project implementation, state leaders for project delivery, including delays and
could take proactive steps to share information, budgeting updates
promote transparency, and generate buy-in.
Interactive, public-facing dashboards provide a — disruptions: major planned disruptions due to
high-impact way of engaging the public and could project delivery, and planned resolutions (for
be linked to internal performance management example, alternative routes during construction
infrastructure to create a single source of on a major highway)
truth and minimize reporting friction. Public-
facing dashboards could support transparency — impact: how the state is tracking against key
throughout the infrastructure investment benchmarks and equity goals (for example,
and delivery journey by raising awareness of the percentage of residents who have gained
the following: broadband access or the number of lead
pipes replaced)
Interactive, public-facing dashboards

provide a high-impact way of engaging
the public.
¹⁴ For example, see “Wisconsin, other Midwest states announce plans to form hydrogen coalition,” WisBusiness.com,
September 20, 2022.
To be sure, dashboards and other forms of draw on best practices in customer experience
digital engagement are not a substitute for to ensure that infrastructure investments yield
traditional, nondigital channels, especially positive benefits for all residents. Taking a data-
given the digital divide and its disproportional informed, human-centered approach to identifying
impact on marginalized communities.15 However, stakeholders, choosing inclusive formats for
by centralizing information and tracking progress, engagement, providing hands-on support, and
dashboards can help promote accountability promoting transparency during project execution
and advance key equity goals. States looking to could help state leaders connect infrastructure
implement this approach could look to Utah’s IIJA investments to the lived experience of residents
Opportunity Tracker for inspiration.16 and set a new bar for effectively implementing
federal programs.
There is no single standard formula for engaging

stakeholders successfully, but state leaders could
¹⁵ “Closing the digital divide in Black America,” McKinsey, January 18, 2023.
¹⁶See “IIJA Opportunity Tracker,” Governor’s Office of Planning & Budget, accessed July 20, 2023.
Henry Feldman is a consultant in McKinsey’s Boston office; Danielle Hinton is an associate partner in the Washington, DC,
office, where Adi Kumar is a senior partner and Nehal Mehta is an associate partner; and Kunal Modi is a partner in the Bay
Area office.
The authors wish to thank Justin Badlam, Hamilton Boggs, Tatiana Jimenez, Anne Neville-Bonilla, Adam Ng, Grace Riddick,
and Sarah Tucker-Ray for their contributions to this article.
Building innovation
ecosystems: Accelerating
tech hub growth
Innovation ecosystems can generate economic, financial, and social
benefits for all, and there’s new federal funding to build them. A six-step
playbook could help leaders get them right.
by Cameron Davis, Ben Safran, Rachel Schaff, and Lauren Yayboke
© NilsEisfeld/Getty Images
Across the United States, from urban to rural Think tanks and businesses have published papers
areas, public- and private-sector leaders are defining the value proposition of innovation hubs
coming together to build innovation hubs. Relative and offering ways for companies to participate in
upstarts such as the Indianapolis 16 Tech Innovation the hubs that already exist. While these papers
District and Tulsa Innovation Labs are positioning generally address the what and the why, this
themselves as new centers of innovation, drawing article builds on those perspectives to explore how
inspiration from established ones such as Silicon public- and private-sector leaders could launch
Valley and Boston. Currently, the opportunity to and scale an innovation ecosystem anchored in
launch new hubs is especially ripe given there is existing regional assets or accelerate efforts that
nearly $2 trillion in new federal funding designed to are already underway.
boost US innovation, competitiveness, and national
security over the next decade. Below, we outline the potential benefits of
innovation hubs and offer six essential steps that
Innovation hubs are geographic areas that bring leaders can consider for building and nurturing
together R&D institutions (such as tech-enabled an ecosystem that promotes vibrancy, attracts
corporations, universities, and medical facilities), as top talent, and creates new and significant
well as venture capital, incubators, and start-ups. opportunities for economic and social development.
They fall into three categories: smaller districts, The playbook we’ve created is based on our
midsize tech hubs, and larger cross-regional experience designing and developing best-in-class
ecosystems, with the latter being by far the most ecosystems and on our data analysis of more than
complex but potentially impactful (see sidebar 100 innovation districts and tech hubs. It addresses
“Ecosystems, hubs, and districts: A short primer”). key elements of building an innovation hub including
Ecosystems, hubs, and districts: A short primer
When discussing how to build Institute on Innovation Districts, which of resource allocation, drawing on
communities for innovation, it is useful to leads the analysis of innovation districts their unique advantages in science and
establish what we mean by these terms. globally, was founded in 2018. It defines technology innovation.”3
them as “new geographies of innovation
Innovation districts, the oldest of the Innovation ecosystems are the newest
emerging primarily in cities and urbanizing
three, were highlighted as a growing trend of the three tech hub archetypes. The
areas” and estimates that there are more
for much of the 2000s. The Brookings MIT Sloan Management Review defined
than 100 of them around the world.2
Institution, in 2014, defined them as innovation ecosystems in 2022 as “places
“geographic areas where leading-edge Innovation hubs are somewhere between that engage five stakeholder types—
anchor institutions and companies cluster districts and ecosystems. Nature research institutions, entrepreneurs,
and connect with start-ups, business magazine, in its “Global Innovation corporations, investors, and governments—
incubators and accelerators. They are also Hubs Index” (2020), opened with this linked by a strong social fabric of mutual
physically compact, transit-accessible, definition: “cities or metropolitan areas interest, complementary needs and
and technically wired [with] mixed-use that can lead the flow of global innovation resources, and trust.” 4
housing, office, and retail.”1 The Global elements and influence the efficiency
1
Bruce Katz and Julie Wagner, “The rise of innovation districts: A new geography of innovation in America,” Brookings, May 2014.
2
“The ambition,” Global Institute on Innovation Districts, 2022.
3
“Global innovation hubs index,” Nature, 2020.
4
Philip Budden and Fiona Murray, “Strategically engaging with innovation ecosystems,” MIT Sloan Management Review, July 20, 2022.
Innovation hubs open new avenues
for healthier, more diverse, and
more connected communities.
prioritizing sectors, attracting talent and investment socially. In the most successful examples, the
capital, mapping strengths and opportunities, and unifying, mission-driven spaces they create open
identifying ways to support the effort. new avenues for healthier, more diverse, and more
connected communities.
Creating an innovation ecosystem is a significant
undertaking, and success often pivots on how well There are compelling reasons to focus on innovation
those who lead it build relationships with new and hubs now. In 2021 and 2022, the federal government
established companies and institutions, fill gaps in passed a suite of legislation that aims to bolster
the business landscape through investment, and the resilience of the US supply chain, promote the
address the specific needs of workers and residents. development of high-tech innovation clusters,
and extend services and infrastructure to rural
communities. Leaders can help finance and jump-
Why innovation hubs matter start the development of an innovation ecosystem by
Spanning high-value, research-oriented sectors taking advantage of competitive grants to regional
from aerospace to life sciences to software, innovation ecosystems and of legislation such as
innovation hubs generate attention and investment the CHIPS & Science Act, which creates incentives
for a reason. Annual productivity growth for US for domestic semiconductor manufacturing and
innovation industries has averaged 2.7 percent authorizes funding for programs such as the National
since 1980—nearly double the rate of all other Science Foundation’s Regional Innovation Engines.
sectors. These industries also claim 60 percent of
US exports, boast 80 percent of US engineers and
patents, and attract workers with above-average Six essentials: The innovation
earnings—generating even more jobs for the ecosystem playbook
communities where they are located.1 Innovation Innovation hubs typically fall into one of three
hubs have higher commercial-rent growth rates categories—districts, tech hubs, and ecosystems—
than adjacent business districts: 5.3 percent that vary according to scale, levels of collaboration,
from 2010 to 2020, compared with 4.8 percent, and reach. Ecosystems are the newest of these, and
respectively.2 They outperform other regions and definitions are evolving (see sidebar “Categorizing
business districts economically, financially, and innovation districts, tech hubs, and ecosystems”).
1
David M. Hart, Siddharth Kulkarni, and Mark Muro, “America’s advanced industries: New trends,” Brookings, August 4, 2016.
2
McKinsey analysis.
Categorizing innovation districts, tech hubs, and ecosystems
Innovation districts occupy a specific There’s similar split in collaboration The leadership structure also differs.
neighborhood or business districts within for scaling. To grow, districts and hubs A single actor (for example, a real-
urban areas. Hubs are often similar in must generally garner excitement and estate developer, a university, or a
size but sometimes extend to multiple buy-in from employees, faculty, or large philanthropic foundation built for
neighborhoods or the larger part of a neighborhood residents. Ecosystems purpose) can often lead districts and hubs
city. Ecosystems are far more flexible usually also need governments to play successfully because they tend to focus
but tend to be larger, enveloping whole a strong role—for example, through on just one or two industries or functions.
cities or even crossing county and state tax incentives or capital investment. An ecosystem’s complexity calls for
lines. Given their size and conducive Often, they require cross-institutional more diverse stakeholders (developers,
environment, ecosystems often give rise collaboration to support new technologies education institutions, private companies,
to (and ultimately house) hubs or districts across the innovation funnel and to share and governments) that take the reins
with more defined mandates. facilities that catalyze innovation. together to generate ideas, solve problems,
and enable something special.
Broadly speaking, in addition to prioritizing a strong identity rooted in a clear aspiration and
technology-centered R&D, investment, and growth, forward-looking goals that build broad stakeholder
these ecosystems usually feature assets such as excitement and buy-in. Defining a unique,
robust mobility options (including public transit), as differentiated identity and brand crystallizes
well as a strong technological infrastructure and an ecosystem’s intangibles, such as livability
accessible spaces to play, connect, and live. All this or regulatory stability. It establishes a value
promotes inclusive and equitable economic growth, proposition for people and businesses alike. It also
innovation, and productivity (see sidebar “Research sets the stage for defining short- and long-term
Triangle Park”). success metrics, helping to maintain the focus on
why the ecosystem exists. It is the vision—backed
Public- and private-sector leaders could consider by core competencies, specific strengths, and
following a six-step approach to create and culturally consistent themes—that distinguishes one
expand a thriving innovation ecosystem (Exhibit 1). ecosystem from the others.
A community-building program in a district will
look quite different from one at an ecosystem, for Aspirations can vary. Cortex, in St. Louis, aspires to
example—but the playbook’s essentials remain the be an “inclusive economic engine” for the region,
same across the spectrum of innovation hubs. linking success to outcomes beyond just financial
returns,3 while Virginia’s Commonwealth Cyber
1. Set the aspiration and a bold vision Initiative is anchored in growing a specific sector.
Innovation ecosystems that struggle to succeed But when leaders establish an aspirational identity
often underdeliver on the first playbook element: that resonates with employees and organizations,
3
“Accelerating inclusive economic growth in St. Louis,” Cortex Innovation Community, July 13, 2022.
Web <2023>
<Innovation ecosystems>
Exhibit 1
Exhibit <1> of <3>
The innovation ecosystem playbook comprises six key actions.
Aspiration and Cluster and Capital and Talent and Real estate, Diversity,
bold vision setting partner funding1 community infrastructure, equity, and
(“North Star” that strategy building and placemaking inclusion
informs all other
elements)
1
Eg, venture capital, business/academic R&D, federal funding.
McKinsey & Company
people become excited about pioneering new as well as leading institutions such as Mass
models for working, collaborating, and living. General and Brigham and Women’s Hospital,
the city government set out to work closely with
Boston is a prime example of an ecosystem entrepreneurs, developers, and leaders across
based on an ambitious goal: to define its sectors to define its ambitions. In turn, the city as
“place, people, and purpose as the capital of an ecosystem has been able to support smaller,
scientific revolution.” 4 Taking advantage of its more defined innovation districts within its sphere,
wealth of universities (including Harvard and including Seaport, South Station, Kendall Square,
the Massachusetts Institute of Technology), and Back Bay/South End (Exhibit 2).
Research Triangle Park
The ecosystem that quickly became Although RTP began with a focus and public-sector leaders. RTP
the largest research park in the United on biotechnology, life sciences, and companies and universities collectively
States, Research Triangle Park (RTP), in microelectronics, it now has 300 spend $6 billion a year on research
North Carolina, started to develop in the companies across all sectors and expenditures within the ecosystem.
20th century. RTP harnessed its three more than 50,000 employees, who North Carolina’s state government and
academic anchor institutions—Duke have collectively contributed to more the counties in the ecosystem support
University, the University of North Carolina than 3,000 patents. RTP also boasts companies with competitive tax rates and
at Chapel Hill, and North Carolina State apartment buildings that prioritize holistic incentive programs.
University—to build a thriving innovation living, efficient transit options, and even
ecosystem in collaboration with local and entire self-contained sports leagues.
state governments, business interests, The ecosystem is supported by close
and venture capital. collaboration among private-, social-,
4
“The capital of scientific revolution,” Massachusetts Life Sciences Center.
Web <2023>
Exhibit 2
Exhibit <2> of <3>
Greater Boston is a prime example of an innovation ecosystem supporting

multiple smaller districts.
Boston area innovation hubs, nonexhaustive

Cultural and entertainment facilities Innovation centers 4,000 foot
Education facilities Hospital radius
CAMBRIDGE
Seaport district
BOSTON
Kendall Square district
Feet
0 2,000
Source: Place-based innovation ecosystems: Boston–Cambridge innovation districts, Joint Research Centre, April 17, 2019
McKinsey & Company
2. Focus on specific sectors, partners, and Two questions can help leaders identify a region’s
anchor tenants value proposition and ideal anchor institutions:
We’ve found that innovation ecosystems are more What unique areas of competitive advantage
likely to thrive when local leaders and developers can the region pursue? And which universities,
play to a region’s existing skill base and institutional research institutions, incubators and investors, and
strengths. Ecosystems can focus on specific businesses could be anchor institutions?
sectors and subsectors—for example, electric
vehicles, advanced air mobility, or medical devices. Some regions may be primed for a “right to win”
Or they can focus on functions, such as artificial approach, which builds off existing sector-based
intelligence or the Internet of Things (IoT), across assets to anchor an ecosystem in an area of
multiple sectors. Or they can live at the intersection advantage. These existing assets could include
of sectors and functions, as life science R&D and areas of specialization, talent pipelines fed by
agricultural technology do. higher-education and research institutions,
Innovation ecosystems are more
likely to thrive when local leaders and
developers play to a region’s existing
skill base and institutional strengths.
emerging venture capital (VC) capabilities, or wants to expand its teaching and research facilities.
infrastructure (such as proximity to farmland, The range of options may seem overwhelming, but
specific transit options, or urban density). large-scale developers can home in on an ideal
candidate by considering factors such as revenues,
Alternatively, leaders could pursue a “want to win” growth, the total number of employees, and private
approach, which creates an area of advantage by versus nonprofit status. The process can be both
leveraging current conditions and trends to drive iterative and opportunistic—testing multiple value
investment. These conditions and trends can be propositions in the market to see where interest
identified by analyzing projected growth for a sparks and then refining the results.
particular sector, function, or intersection; major
disrupters; and other factors that could influence Such intentionality in cluster and subsector
growth trajectories (such as technology trends, design is evident in some of the largest innovation
supply chain disruptions, or federal funding). ecosystems currently being developed. National
It can be tempting to zero in on hot industries, Landing, for example, is a 17-million-square-foot
regardless of an area’s assets and strengths, but development spanning multiple Arlington County
leaders could benefit from thinking like creators of neighborhoods (including Pentagon City, Crystal
coherent economic clusters—interconnected and City, and Potomac Yard) just outside Washington,
intentional groups of employees, tenants, firms, DC. The ecosystem has secured the location for
and institutions.5 Amazon’s HQ2 campus. National Landing clearly
focuses on technology and the region’s related
The approach used to identify a unique value expertise—including IoT, cybersecurity, and cloud
proposition can also be applied to anchor computing. By building on two newly attracted
institutions. One of them may already exist in anchor tenants (Amazon and Virginia Tech), National
the region. But such an institution could also be Landing has expanded its technology-focused
attracted to it—for example, a large company footprint considerably. It has created enough space
that’s looking to tap into local start-ups for new to accommodate 25,000 new employees and the
capabilities and paid pilots, or a university that follow-on economic growth.6
5
Smaller-scale initiatives, such as neighborhood innovation districts, often require greater refinement—for example, an on-campus research
center rather than a broader life sciences regional ecosystem.
6
“National Landing bid releases study, new data defining the region as one of the nation’s leading innovation districts,” National Landing,
April 11, 2022.
3. Catalyze a critical mass of VC capital and for bridging them. If a location has low VC funding,
start-ups through a strong innovation backbone for example, either a lack of investment vehicles
Start-ups and early-stage companies often or of funding opportunities in the region could
develop cutting-edge ideas with the potential for be responsible. These distinct challenges would
real financial and economic returns. Innovation require distinct solutions.
ecosystems can boost their chances of success if
they catalyze a critical mass of start-ups and VC A robust mix of companies is also essential for
funding by developing a “backbone” across the four building a healthy innovation funnel because it
key areas of the integrated innovation funnel—the allows start-ups to improve their ideas—from
generation of ideas and R&D, commercialization, applied research through the commercialization of
start-up and early-stage development, and growth a finalized product or service—by working together
(Exhibit 3). with large R&D anchor institutions and established
talent. Boosting private investment in some higher-
Scaling up R&D, both academic and private, can risk early-stage companies can help achieve
help ensure that innovation remains robust. Those better balance between start-ups, more mature
ideas can then be translated into start-ups by companies, and established but slower-growing
attracting entrepreneurs, fostering tech transfers, anchor institutions.
and building out IP assets. Seed, angel, and
broader venture capital funding nurtures start- Ecosystems can support activities across the
ups so that they survive and scale up past infancy. integrated innovation funnel in several ways.
Early-stage companies—part of the integrated University anchors can empower tech transfer
innovation funnel and value that the ecosystem offices to scout and support developing
promises—also need access to capital and technologies more proactively. Incubators and
structured support. accelerators can help entrepreneurs on their
journeys. Ecosystem leaders can coordinate
Assessing strengths and opportunities across start-up showcases by building out physical hubs
the innovation funnel and making tailored plans to that allow VC firms to interact with the ecosystem
bolster strengths and fill gaps are key ingredients organically. The right mix of activities will probably
of a successful ecosystem. Understanding the root depend on the scale of the hub and its strengths
cause of gaps can help target effective solutions and challenges across the pipeline: the ASU
Web <2023>
Exhibit 3
Exhibit <3> of <3>
The integrated innovation funnel spans four key areas.
Idea generation/R&D Commercialization Start-up/early stage Growth

Ideas developed through Ideas translated to Entrepreneurs starting new Scaling of start-ups
basic and applied commercial technology businesses using ideas, into businesses with
research led by academic by companies and higher supported by seed funding good-paying jobs
institutions, research education tech transfer and venture capital
institutions, and companies offices
McKinsey & Company
Scottsdale Innovation Center,7 for instance, has ecosystems can have their own strategies to
fostered $1.3 billion a year in economic activity by convince employers that they are environments
incubating and funding student start-ups.8 The where people want to work, play, and live—and
St. Louis Cortex, meanwhile, has prioritized would willingly relocate to.
regulatory and infrastructural policies to generate
$2.1 billion9 in single-year economic impacts (see To that end, the talent pipeline can be expansive
sidebar “Cortex (St. Louis)”). and can focus on development across a spectrum
of occupations and skill levels aligned to priority
4. Develop an ecosystem talent sectors. Public- and private-sector leaders can
and workforce strategy create partnerships and collaborations with a
Another critical component of successful range of institutions, including four- and two-year
ecosystems is a coordinated talent strategy. universities, training providers, and community-
A scarcity of talent can severely constrain an based organizations that support greater access.
ecosystem’s growth. For knowledge-based Standing up an ecosystem can be an opportunity
industries, location decisions often hinge on the for leaders to work together to tear down the
available talent pool and the ability to develop and “paper ceiling” by incentivizing and helping
attract qualified candidates. employers to rethink degree requirements and
consider candidates with two-year degrees or
Economic development organizations and local other certifications of skills—an approach that
leaders have historically relied on businesses emphasizes reskilling existing talent pools, uplifting
and schools to attract talent. But large-scale the entire community.
Cortex (St. Louis)
In 2002, St. Louis approved a master accelerators, and labs, as well as station to provide connectivity to the
plan to develop a 200-acre area of providing specialized prototyping, pilot, region. Tax abatements and incremental
industrial legacy land adjacent to anchor and scale-up equipment. financing were regulatory mechanisms
institutions, including Washington to attract venture investment. Altogether,
By considering needs beyond
University’s medical campus, St. Louis Cortex has been credited with generating
traditional corporate office spaces and
University, and Barnes–Jewish Hospital, $500 million of investment across nearly
by establishing the right balance to
in an area that became known as Cortex. 400 companies—85 percent of them
create a vibrant space ripe for early-
Leaders made sure that supporting small businesses—that have together
stage investment, Cortex fostered
start-ups in all stages of growth was created 3,800 technology jobs and
innovation and investment side by side.
part of the mission. The steps they took made the broader St. Louis community a
To attract venture capital, it developed
to promote that goal included building successful innovation ecosystem.1
infrastructure, including a new MetroLink
spaces for coworking, incubators,
1
McKinsey analysis.
7
Arizona State University.
8
Darren Higgs, “SkySong expected to generate $58.2 billion In economic impact over next 30 years,” ASU Scottsdale Innovation Center,
January 19, 2021.
9
“The regional impact of the Cortex Innovation Community,” Cortex Innovation Community, May 2019.
Helping ecosystems tailor specific programs programs, loan forgiveness for graduates staying
to the needs of a sector or even an individual within the region, coding bootcamps, university
company can also create direct pathways into satellite campuses, and working with ecosystem
family sustaining jobs. Leaders can look at K–12 companies to offer internships and apprenticeships.
education to maintain a high-quality talent pipeline
over the longer term. Such novel strategies helped 5. Design high-quality real estate,
the economic development organization JobsOhio infrastructure, and livability
attract companies and capital investment to the Say that sufficient talent has been attracted to an
state, creating tens of thousands of new jobs. area and that large anchor tenants are coexisting
with accelerators, incubators, start-ups, and
Attracting talented workers to an ecosystem and academic entities. But to be sustainable, an
then retaining and developing them often hinge ecosystem needs to remain attractive to businesses,
on creating a relatable aspiration and appealing institutions, and workers. That enduring appeal is
anchor institutions. To ensure that the ecosystem’s anchored in two types of infrastructure: first, the
universities, research institutions, and companies physical and virtual infrastructure aligned to the
have a robust talent pipeline, leaders could consider specific needs of the prioritized sectors (for example,
developing a coordinated and cross-sector regional wet-lab space for life sciences), and second, the
workforce strategy that translates the ecosystem’s “placemaking” infrastructure that informs quality
brand, goal, and aspiration into a tangible pitch. They of life. Leaders typically focus on the physical and
can also work with all participating organizations virtual, which are crucial, but placemaking is also
to ensure that employers have access to qualified key for facilitating an inclusive community, vibrant
applicants and that employees have access to and successful start-ups, collaboration, ideas, and
exciting and competitive opportunities. Other ways growth, as well as making people who live and work
to increase the retention rates of local graduates in the ecosystem happier and more productive (see
include launching new or expanded degree sidebar “Boston and Kendall Square”).
Boston and Kendall Square
Boston is a prime example of an an example of how to use innovative community—for example, in public transit
ecosystem based on the ambitious goal infrastructure to improve the experience and open-access technology. Most
to define its “place, people, and purpose of anchors and tenants. It has long recently, MIT unveiled its plans for the new
as the capital of scientific revolution.” 1 prioritized the infrastructure needed Volpe redevelopment of a central parcel
Over the years, the city as an ecosystem to help its residents lead connected, of land in the district. The plans prioritize
has been able to support smaller, more efficient lives—for example, by taking research community space, transit
defined innovation districts within its the latest R&D thinking from its anchor improvements, inclusivity, and cutting-
sphere, including the Seaport, South tenant, MIT.2 edge energy efficiency, all designed to
Station, and Kendall Square. Kendall take advantage of new technology to
The area also takes advantage of
Square, called “the most innovative attract both tenants and residents.3
innovations from the broader Boston
square mile on the planet,” provides
1
“The capital of scientific revolution,” Massachusetts Life Sciences Center.
2
Lita Nelsen, “Help America’s universities keep transforming the world,” Boston Herald, August 17, 2022.
3
“Volpe project prepares for design phase,” MIT News on Campus and Around the World, October 7, 2021.
Real-estate investments and spatial decisions more pronounced for Hispanic workers.11 Closing
involve more than glossy new buildings or flavor-of- that divide will depend largely on the enrollment of
the-month technologies. Economic development members of historically marginalized communities
organizations should prioritize investments in in STEM education, and progress is currently
physical and digital infrastructure aligned with an poised to move slowly. Our research found that at
ecosystem’s sector needs, from research facilities current rates of change, racial and ethnic parity in
and prototyping equipment to co-working spaces higher education is still 70 years away.12
and incubators. Even in a postpandemic world,
physical spaces such as offices and storefronts To redress the imbalance, successful ecosystems
are important. Retail, residential, and commercial can catalyze diverse, inclusive community building
real estate that complements new ways of working and shared prosperity—“inclusive growth.”
can provide the right alchemy for attracting and Leaders can begin with a firm understanding of
retaining the best talent and businesses. Quality- their starting point to promote equity goals and
of-life investments—such as highway interchanges, then develop initiatives, together with community
light rail stations, and public parks and open anchors and education institutions, to ensure
spaces—can create an appealing atmosphere for that the voices of residents are included in the
ecosystem residents, commuters, and businesses ecosystem’s development and that opportunities
alike. Finally, a sufficient supply of housing is critical benefit everyone, not just transplants to the area.
to ensure community affordability and vibrancy. Partnerships with community-based organizations
are also critical to ensure that existing residents
Each of these components—infrastructure are not displaced as rents rise and new public
to live, work, and play—can be designed to spaces are created. Ecosystem leaders can
avoid the negative externalities that come from even steer investment to create opportunities
growth. Transportation and transit systems can for disadvantaged communities and company
use demand forecasting and load planning to founders from underrepresented groups (see
get people from place to place without adding sidebar “University City Science Center”).
to congestion; land use and housing plans can
account for pricing and affordability to avoid This last component of the playbook begins in the
pricing people out of existing homes. planning phase, when leaders are well-positioned
to promote inclusion as they consider urban-
6. Cultivate a vibrant, diverse design, health equity, or other initiatives that bring
community and a sense of place together a diversity of stakeholders. They can
Innovation industries have long been notable for commit themselves publicly to the goal of inclusive
their lack of diversity and inclusion. Less than growth by setting SMART13 goals for diversity,
20 percent of the people employed in engineering equity, and inclusion and by announcing them
jobs are women, for example, even though they transparently. They can also create performance
earn a majority of undergraduate and advanced incentives linked to these goals and share updates
STEM degrees.10 Black workers make up 11 percent through annual progress reports on diversity,
of total US employment across all sectors but only equity, and inclusion.
9 percent of STEM workers, and the gap is even
10
Richard Fry, Cary Funk, and Brian Kennedy, “STEM jobs see uneven progress in increasing gender, racial and ethnic diversity,” Pew Research
Center, April 1, 2021.
11
Ibid.
12
Diana Ellsworth, Erin Harding, Jonathan Law, and Duwain Pinder, “Racial and ethnic equity in US higher education,” McKinsey, July 18, 2022.
13
Specific, measurable, achievable, relevant, and time-bound.
University City Science Center
University City Science Center (UCSC), them non-White. Moreover, the initiative developments, started in 2020 in the
an urban research park in Philadelphia’s supported 94 start-ups, and nearly half innovation ecosystem, have created
University City innovation ecosystem, of its overall funding went to company a new commercial lab, a public park,
provides tech commercialization curricula founders from underrepresented and a STEM-focused middle school
and convenes innovation programs groups. UCSC’s development and risk on a campus currently being leased to
for the broader area. In 2020, it held capital helps underserved members Philadelphia public schools.
more than 400 programs and events of the wider innovation community,
for 15,000 participants, 44 percent of too. Additional UCSC-led real-estate
of just helping to shape infrastructure with public

authorities and creating common residential
To capitalize on the promise of innovation amenities, economic development leaders in the
ecosystems, government and private-sector public, private, and social sectors can work together
leaders can consider a few critical shifts in their to assist anchor tenants and cluster businesses.
community-building approach. Instead of doing And instead of looking at financial returns in
business as usual, these leaders can not only isolation, leaders across sectors can capture the
cultivate a community of anchor institutions but value for all shareholders and stakeholders. The
also support tenants that enhance one another’s potential returns—for communities, organization
businesses within specialized segments. Instead leaders, and residents alike—are worth the effort.
Cameron Davis is a consultant in McKinsey’s New York office. Ben Safran is a partner in the Washington, DC, office, where
Lauren Yayboke is an associate partner. Rachel Schaff is a client capabilities manager in the Waltham, Massachusetts, office.
The authors wish to thank Kyoka Allen, Jennifer Bright, JP Julien, Mike Kerlin, Jonathan Law, John Means, Rob Palter, Steven
Smith, and Lauren Voluck for their contributions to this article.
Rural rising: Economic
development strategies
for America’s heartland
There is no one-size-fits-all economic development strategy for
rural communities. How can local leaders—including governments,
businesses, and individuals—put rural regions on track to thrive?
by Mike Kerlin, Neil O’Farrell, Rachel Riley, and Rachel Schaff
© Alex Potemkin/Getty Images

In downtown Clarksdale, Mississippi, in a As these stories show, rural America is not one
repurposed freight depot built in 1918 for the geographical unit but a mosaic of different
Yazoo and Mississippi Valley Railroad, sits the landscapes, people, and economic realities.4 It
Delta Blues Museum. The state’s oldest music includes agricultural powerhouses, postindustrial
museum, it is central to the growing tourism towns, and popular tourism enclaves. Some rural
industry in the Mississippi Delta, “the land where communities are relatively close to major cities, while
the blues began”—once home to John Lee Hooker others are hundreds of miles from the nearest urban
and Muddy Waters. Yet on March 18, 2020, as hub. Some have thriving workforces and a handful
the COVID-19 crisis escalated across the United of economic anchors, while others face declining
States, the museum was forced to temporarily populations and some of the lowest living standards
close its doors. Tourism across the country in the country. Some benefit from endowments such
slowed to a trickle, and Clarksdale’s Coahoma as energy resources and beautiful landscapes, while
County—85 miles from Memphis, 77 percent others have few natural amenities.
Black, and with 35 percent of its population living
in poverty as of 2019—suddenly lost one of its Below, we examine the types of rural communities
main sources of income and employment.1 By in the United States and suggest that attention to
April 2020, the county’s unemployment rate had three foundational elements—sectors, workforce,
reached about 20 percent.2 and community and connectivity—can promote
economic success. We then outline a data-
Meanwhile, about 1,000 miles northwest, in rural driven approach to economic development that
Chase County, Nebraska, the unemployment rate can be tailored to meet the needs of different
in April 2020 was only 2.2 percent. Businesses communities and share examples of initiatives that
struggled to fill positions and attract workers; the have led to positive outcomes in rural communities
poverty rate in Chase County was lower than the throughout North America.
US average and remains so today.3
Rural America is not one geographical

unit but a mosaic of different landscapes,
people, and economic realities.
1
“S1701: Poverty status in the past 12 months,” American Community Survey, US Census Bureau, 2019.
2
“Unemployment rate in Coahoma County, MS,” retrieved from Federal Reserve Economic Data (FRED), Federal Reserve Bank of St. Louis,
March 8, 2022.
3
Ibid.
4
America at work: A national mosaic and roadmap for tomorrow, Walmart, February 2019.
Tracking growth across rural low educational attainment. Historically, these
America’s five community archetypes communities have been hubs for agriculture,
In collaboration with Walmart, we’ve identified extractive industries, and manufacturing. Their
five archetypes of rural American communities decline has mirrored the struggles in these sectors.
(Exhibit 1).5
Rural Service Hubs. Rural Service Hubs are so
Americana. The largest rural community archetype, named because the areas (often close to highways
comprising 879 counties and 40 million Americans, or railways) are home to manufacturing and service
Americana counties have slightly lower GDP and industries. Because these hub communities
educational outcomes than urban areas. They are typically serve surrounding counties that are more
relatively close to major cities and often include rural, they tend to specialize in industries such as
several major employers. retail and healthcare.
Distressed Americana. Distressed Americana Great Escapes. Great Escapes are the smallest
communities comprise 18 million people living but most well off of the rural archetypes, home to
in 973 counties (many in the South) facing high wealthy enclaves and tourist destinations. They
levels of poverty, low labor force participation, and comprise 14 counties and 300,000 people. While
Exhibit 1
The contiguous United States is a complex mosaic of local economies, with

five distinct rural community archetypes.
Cluster segmentation
Resource-Rich Regions
Great Escapes
Rural Service Hubs
Distressed Americana
Americana
Smaller Independent Economies
Urban Periphery
Urban Centers and Core Suburbs
Source: America at work: A national mosaic and roadmap for tomorrow, Walmart, February 2019
McKinsey & Company
5
Ibid.
the focus on tourism in Great Escapes communities 134 percent and 104 percent respectively, while
results in many low-paying service jobs, their GDP, median household incomes have increased by
household income, and educational attainment nearly half in nominal terms.6
outpace their rural peers.
Yet while the population of Loving County soared,
Resource-Rich Regions. This category comprises Concho County, Texas, another Resource-Rich
177 counties that are home to almost one million Region, witnessed a 33 percent decline in
people. As the name suggests, these communities population over the past decade. Approximately
are defined by economic reliance on oil and gas or two-thirds of Resource-Rich Region counties faced
mining, often alongside high rates of agricultural similar, though often less precipitous, declines.7
production. Due in part to the value of the
resources, household income, GDP per capita, and Counties where residents typically have access
educational attainment in Resource-Rich Regions to world-class natural amenities, which are often
tend to be higher than average. among the Great Escapes, have been among
the most uniformly successful since 2010. The
Over the past ten years, the populations of all appropriately named Summit County, Colorado,
archetypes except for Distressed Americana have is home to one of the greatest concentrations of
grown (Exhibit 2). Resource-Rich Regions in places ski resorts in the world, featuring Breckenridge,
such as West Texas and North Dakota have seen Copper Mountain, Keystone, and Arapahoe Basin.
some of the fastest growth. For example, since Over the past decade, the county’s population has
2010, the populations of McKenzie County, North grown by 11 percent and median household income
Dakota, and Loving County, Texas, have grown by has increased by 54 percent.8
Exhibit 2
In aggregate, all archetypes except Distressed Americana saw population

growth in the past decade, yet these numbers mask significant differences
within archetypes.
Population change by rural community Population change for selected counties within the
archetype, 2010–20, % Resource-Rich Region archetype, 2010–20, %
Great Escapes 7.0 McKenzie County (ND) 134
Americana 1.8 Loving County (TX) 104
Resource-Rich Regions 1.5 Davis County (IA) 2
Rural Service Hubs 1.5 Schleicher County (TX) –19
Distressed Americana –1.9 Concho County (TX) –33
Source: US census data retrieved via Moody’s Analytics
McKinsey & Company
6
Data Buffet, Moody’s Analytics.
7
Ibid.
8
Ibid.
Gallatin County, Montana, home to Bozeman, is Workforce. People are the lifeblood of any
a Rural Service Hub, though it also features the community. A healthy, skilled workforce is the
world-class natural amenities common to Great most important factor in attracting and retaining
Escapes. It contains Big Sky Resort and is one of employers in key sectors.11 In addition, workers
the gateways to Yellowstone National Park. The spread wealth and create additional jobs by buying
county, particularly the city of Bozeman, has seen goods and services within their communities.
a significant influx of remote workers during the
pandemic, which may have contributed to a jump Community and connectivity. The most intangible
in housing prices of more than one-third since the element, community and connectivity includes
beginning of 2020.9 services and amenities critical to quality of life,
such as transportation infrastructure and access
Meanwhile, Pender County, an Americana region to broadband, healthcare, childcare, and arts and
on the southern coast of North Carolina, achieved culture. Because these assets support the workforce,
22 percent population growth from 2010 to 2020 they are essential to developing thriving sectors.
while positioning itself as a logistics hub. Pender
Commerce Park, a 450-acre industrial center While thriving communities are succeeding across
developed as part of a partnership between all three elements, more narrow or focused efforts
Pender County and Wilmington Business can still catalyze economic growth. For example,
Development, attracted FedEx Freight in 2018.10 even if job creation is low or GDP growth has
plateaued in a community, improving residents’
Rural counties’ wide range of economic quality of life can slow outmigration and attract
performance over the past decade reinforces thriving sectors in the future.
that there is no one-size-fits-all playbook for
growth. Instead, we have identified some of the
fundamental characteristics that thriving counties Creating an economic
tend to share, even as the appearance or impact of development strategy
the characteristics varies from place to place.
Creating an economic development strategy for a
rural area is similar to doing so in other places. It is a
multistep process that requires assessing the current
Elements of a thriving state of the region, identifying the value proposition,
rural community evaluating existing programs, and establishing
Rural communities require three interconnected, partnerships and rural hubs. When those steps have
baseline elements to thrive: sectors, workforce, been taken, communities will be in a position to
and community and connectivity (Exhibit 3). Rural prioritize specific initiatives.
economic development initiatives typically tie into
one or more of these key elements. Assess the current state of the region
Before engaging in an economic development
Sectors. Sectors refer to stable or growing strategy, it is important to understand the current
tradable industries that bring wealth into state of a region, its competitive position, and its
communities, create employment opportunities, strengths and challenges. This requires using
and carry strong multiplier effects that support quantitative data from sources such as the US
the overall economy. Thriving rural communities Census Bureau, the Bureau of Labor Statistics,
play to their region’s strengths, supporting sectors as well as the National Center for Education
such as agriculture, manufacturing, energy, Statistics and qualitative data from sources such
tourism, and postsecondary education. as stakeholder interviews to assess regional
9
“Gallatin County home values,” Zillow, updated on January 31, 2022.
10
“FedEx Freight coming to Pender Commerce Park,” Pender County, North Carolina, February 5, 2018.
11
Ron Starner, “More than some like it hot,” Site Selection, January 2018.
performance across a variety of metrics. The visit? The value proposition can take many forms
framework in Exhibit 3 provides a starting point. across sectors, the workforce, and community
Regions can be assessed by sector, including factors and connectivity. For instance, it may be a high-
such as employment rate, GDP, specialization, performing local talent pool, a knack for retaining
and growth by industry; workforce, including and growing local businesses, an ability to build
a demographic breakdown, employment by partnerships to attract investment, or distinctive
occupation, and educational attainment; and industry clusters. The value proposition for
community and connectivity, including factors such residents might include a strong local community,
as transportation infrastructure and access to a high quality of life, or access to natural amenities.
broadband, childcare, and healthcare. The most effective economic development
strategies leverage and develop a region’s
With these data, policy makers can understand strengths and reinforce its value proposition.
their region’s strengths and challenges relative
to other regions and begin to focus on assets, or Evaluate existing programs and initiatives
competitive advantage, and potential barriers Any one region can be affected by multiple
to development. programs and initiatives, including those from
federal, state, and local governments and from
Identify the value proposition groups such as chambers of commerce and
After the diagnostic phase has resulted in a picture business improvement districts. Policy makers may
of a region’s strengths and challenges, the next want to take stock of existing programs before
step is formulating the value proposition, which is developing new initiatives to avoid reinventing the
part of a strengths-based approach to economic wheel. Key questions to ask include: What does
development. The value proposition is about this program cover? What are its strengths and
creating a regional story line that answers questions weaknesses? Can it be improved? Is it possible
such as: Why would someone live here? Why would to increase engagement? Successful economic
a company locate here? Why would someone development strategies often leverage existing
Exhibit 3
Rural communities can focus their growth on three interconnected areas:

sectors, the workforce, and community and connectivity.
Example objectives Example measures
of growth
Sectors
Attract, develop, and support key sectors to Increased share or concentration
promote economic revitalization of high-growth sectors
More jobs and higher wages
More stable earnings, especially
Workforce for those in agriculture
Prepare a healthy and stable
workforce to ensure strong employment and Improved overall county health index
high productivity
Successful attraction and retention
of talent
Improved quality of life
Community and connectivity
Provide people with the resources needed to Increased connectivity and access
be self-sufficient and well connected to markets
McKinsey & Company
efforts or improve them incrementally by updating overarching government body, such as the state or
programs or increasing participation. An analysis federal government.
of a region’s current programs also reveals genuine
gaps that can be addressed with new initiatives. An example of big-push investment in electric
vehicles can be found in Tennessee. The state has
Establish partnerships and rural hubs offered Ford Motors and its partner, South Korea–
Rural regions often include multiple stakeholders, based SK Innovation, hundreds of millions of dollars
such as governments, nonprofits, and educational in incentives to develop BlueOval City, a site for the
institutions, that have a—sometimes overlapping— production of electric pickup trucks and advanced
hand in the three foundational elements of batteries. Leaders expect the project to create
economic development noted above. In addition, nearly 6,000 jobs in Stanton, Tennessee, a town
multiple communities within a broader region within Distressed Americana Haywood County.12
may have shared economic needs. Partnerships
in rural areas can therefore allow communities to Embrace placemaking
direct limited resources and expertise to shared Residents want to live in communities that are safe,
initiatives. When regions and institutions band interesting, and attractive. Placemaking means
together, they create economies of scale, also creating those environments. It is, by one definition,
called rural hubs. “the process of creating quality places that people
want to live, work, play, and learn in.”13
Designing rural economic Funding for placemaking efforts can come from
development initiatives a variety of sources, including private groups
Rural regions are not monoliths, so rural economic and local, state, or federal governments. For
development strategies will vary. The approach instance, the US Department of Agriculture’s Rural
outlined above will help leaders identify their Placemaking Innovation Challenge made available
region’s unique strengths, challenges, and $3 million (with a maximum grant of $250,000)
assets that can be formed into cohesive value to rural areas for technical assistance related
propositions. That said, many broad economic to placemaking.14 Like their urban counterparts,
development initiatives can be tailored to many rural cities and towns have seen success in
meet the needs of different regions. Below is a creating business improvement districts (BIDs),
nonexhaustive list of initiatives that may apply to small-scale economic development organizations
rural regions, based on their specific assets often funded by local stakeholders, such as
and needs. businesses. BIDs deliver services in a particular
area, often at the neighborhood or “Main Street”
level. The services might include street cleaning,
Launch ‘big push’ investment
public safety, beautification, or events.
The idea of the “big push” is to funnel a significant
amount of investment into a particular area of need
to create a sustainable, long-term, virtuous cycle of One example of placemaking comes from Douglas,
economic growth. This can take many forms but is Georgia, a city of roughly 12,000 people about 115
most frequently associated with the attraction of a miles northwest of Jacksonville, Florida. It is the
major employer or the construction of large-scale county seat of Coffee County, characterized as
infrastructure. Due to its size, big-push investment Distressed Americana.15 In the late 1980s, Douglas
usually requires involvement and funding from an faced downtown vacancy rates of about 25 percent.
12
Morgan Watkins, “Here are the incentives Kentucky and Tennessee used to lure Ford’s new factories,” Louisville Courier Journal,
October 11, 2021; “Ford to lead America’s shift to electric vehicles with new mega campus in Tennessee and twin battery plants in Kentucky;
$11.4B investment to create 11,000 new jobs and power new lineup of advanced EVs,” Ford Motor Company, September 27, 2021.
13
Robert Steuteville, “Four types of placemaking,” Better Cities & Towns, October 2014.
14
“Rural Placemaking Innovation Challenge,” US Department of Agriculture, updated on July 26, 2021.
15
How small towns and cities can use local assets to rebuild their economies: Lessons from successful places, US Environmental Protection
Agency, May 2015.
In response, the city restored historic facades serving the tens of thousands of annual visitors to
(funded by an initial $10,000 from the city and the the trail system. Once the trails reach completion
local industrial development authority), replaced at 75 miles, leaders anticipate a local economic
sidewalks, and added lighting. Today, Douglas’s impact of $21 million.18
downtown is a community gathering place where
festivals take place regularly. Walking paths Attract, retain, and expand small and medium-
connect the downtown area to local community size businesses
colleges. By 2012, the vacancy rate had dropped Sixty-five percent of workers in nonmetropolitan
to 6 percent, thanks in part to 12 newly opened areas are employed by small and medium-size
businesses downtown. Surrounding areas of enterprises (SMEs), a higher share than in the nation
the county gained nearly 8,000 new residents as a whole.19 These companies provide benefits to
between 1990 and 2000, increasing the county’s communities beyond direct employment. SMEs
growth rate to 26 percent—up from 11 percent generate local wealth, because profits go to the
between 1980 and 1990.16 owner, who is more likely to live and spend locally
than shareholders of a large corporation.20 Rural
communities with a relatively high share of SMEs also
Develop tourism infrastructure tend to have better health outcomes.21
Tourism is technically an export sector—it draws
in spending from outside the region to generate While attracting new businesses generates local
economic growth. Some rural communities can excitement, expanding and retaining SMEs has
leverage existing assets, such as state or national a higher return on investment, in part because
parks, to capture tourism value. Others can use existing businesses do not require tax incentives
their environment or location to create a reason for to move to the area. Local businesses are
tourists to visit. stalwarts of the community, paying economic
dividends through local taxes and job creation.
Crosby, Minnesota, is 125 miles north of Leaders can initiate a business retention and
Minneapolis and home to just shy of 3,000 expansion strategy by collecting qualitative
people. The town was a hub for iron ore mining data from interviews with entrepreneurs about
until the industry collapsed a half-century expansion plans and business challenges. In
ago. In the 1980s, leaders from Cuyuna Range addition, economic development practitioners
Economic Development Inc., a regional economic can support SMEs by helping them access loans
development organization, and other stakeholders and grants, navigate regulatory requirements,
petitioned the state to create a recreation area write business plans, plan for succession, and
on the former mine sites and surrounding land.17 connect to large companies doing procurement in
The Cuyuna Country State Recreation Area was the region.
officially established in 1993. In 2011, it became
the state’s first mountain bike park, featuring 25 Northern Development Initiative Trust, an economic
miles of trails. Since 2011, 15 new businesses— development agency representing rural Northern
including a brewery, a yoga studio, and a farm-to- British Columbia, has made SME support a core
table restaurant—have opened in Crosby, largely part of its mission. The agency offers programs
16
US Census Bureau, “Resident population in Coffee County, GA,” retrieved from Federal Reserve Economic Data (FRED), Federal Reserve
Bank of St. Louis, updated on May 5, 2021.
17
Dan Kraker, “From mining to biking: How Minnesota’s Cuyuna Range became an off-road cycling destination,” Minnesota Public Radio,
October 7, 2016.
18
Nicholas Hunt, “How biking is saving small-town USA,” Outside, May 15, 2017.
19
Hanna Love and Mike Powe, “Rural small businesses need local solutions to survive,” Brookings Institution, December 1, 2020.
20
Devra Gartenstein, “Reasons why small businesses are important,” Houston Chronicle, January 28, 2019.
21
Troy Blanchard, Carson Mencken, and Charles Tolbert, “The health and wealth of US counties: How the small business environment impacts
alternative measures of development,” Cambridge Journal of Regions, Economy and Society, March 2012, Volume 5, Number 1.
such as the Competitiveness Consulting Rebate, broadband infrastructure, may be a requirement.
which helps SMEs recover up to 50 percent Others, such as assets related to quality of life
of costs (to a yearly maximum of CA $30,000 or outdoor recreation, may carry varying weight
[US $23,400])22 for external business consulting depending on the region.
on services such as website creation, marketing
strategy, and workplace health and safety plans. Some regions offer direct financial incentives to
Thus far, the program has allotted more than CA remote workers who relocate. For example, the
$5.5 million (US $4.3 million) to SMEs across 552 Shoals region includes Lauderdale and Colbert
projects. A complementary program, the Northern Counties in rural Northwest Alabama. Remote
Industries Innovation Fund, supports regional Shoals, a partnership launched in 2019 between
SMEs’ innovation projects, such as providing funds the Shoals Chamber of Commerce and the
to develop a technical process to adapt forestry Shoals Economic Development Authority, offers
equipment for drilling.23 participants a stipend of up to $10,000 to move to
the region and work remotely for at least
Attract remote workers 12 months.25 The program received more than
Many companies have adopted long-term remote 200 applications from 33 states in 2019 and
work strategies prompted by the COVID-19 500 applications in 2020.26 By March 2021, the
pandemic and employees’ desire for flexibility. total payroll of those in the program was
These strategies primarily affect knowledge $1.8 million.27
workers, who tend to be highly educated and high
earning. Historically, remote workers have flocked Increase access to healthcare
to smaller communities with natural amenities. According to the Centers for Disease Control
A 2018 Gallup poll showed that 27 percent of and Prevention, significant disparities in health
Americans would prefer to live in a rural area.24 outcomes exist between urban and rural America,
This presents an opportunity for rural communities with residents of rural communities more likely
to make strategic investments to attract remote to die from ailments such as heart disease and
workers. Some investments, such as strong cancer.28 Limited access to healthcare in rural
Local businesses are stalwarts of the

community, paying economic dividends
through local taxes and job creation.
22
Converted on March 7, 2022; “Competitiveness Consulting Rebate,” Northern Development Initiative Trust, accessed December 15, 2021.
23
“Northern Industries Innovation Fund,” Northern Development Initiative Trust, accessed December 15, 2021.
24
Frank Newport, “Americans big on idea of living in the country,” Gallup News, December 7, 2018.
25
“Work remotely? Get $10,000 to do your job from the Shoals,” Shoals Economic Development Authority, accessed December 15, 2021.
26
Jared Lindzon, “Cities offer cash as they compete for new residents amid remote work boom,” Fast Company, June 22, 2020; Anna Eubanks,
“Remote work possibilities draw traffic to the Shoals,” Shoals Chamber of Commerce, January 22, 2021.
27
DeAndria Turner, “Remote Shoals thriving in the midst of COVID-19,” WAFF 48 News, March 24, 2021.
28
“About Rural Health,” Centers for Disease Control and Prevention, updated on August 2, 2017.
regions is one of the drivers of this imbalance.29 identified areas of health professional shortages.
However, many rural regions are working to The effort became particularly relevant during the
address this challenge by making it easier for COVID-19 crisis.31
patients to access care—virtually or in person—
and by training the next generation of rural
healthcare workers.
Rural America is indeed a mosaic. From a distance,
Project ECHO, based at the University of New it is often idealized but misrepresented. Upon
Mexico, uses a combination of telemedicine, closer examination, it reveals a diversity of colors
case-based learning, and web-based disease and images. It is not one place but thousands—
management tools to offer treatment for people each community with its own identity, culture,
with chronic diseases at more than 250 sites strengths, and challenges. Some rural regions
across the state.30 The program saves many are thriving, while others have yet to fully capture
rural residents from long trips to hospitals in their potential value. But all rural areas could
more urban areas to receive specialized care. In benefit from an economic development plan
Alabama, the University of Alabama at Birmingham that strengthens sectors, the workforce, and
and Tuskegee University, in partnership with rural community and connectivity.
community clinics, train registered nurses in three
29
“Rural health disparities,” Rural Health Information Hub, updated on April 22, 2019.
30
Martha Hostetter, “Case study: Project ECHO expands access to specialty care for rural patients,” Commonwealth Fund,
accessed December 15, 2021.
31
Jennifer Lollar, “$2.8M grant will establish primary care RN workforce,” University of Alabama at Birmingham, August 29, 2018.
Mike Kerlin is a partner in McKinsey’s Philadelphia office; Neil O’Farrell is a specialist in the New York office; Rachel Riley
is an associate partner in the Washington, DC, office; and Rachel Schaff is a client capabilities manager in the Waltham,
Massachusetts, office.
Will a labor crunch
derail plans to upgrade
US infrastructure?
There’s a historic and widening labor shortfall in the US construction
sector. Yet it extends far beyond jobsites and varies by location,
demanding tailored solutions.
by Garo Hovnanian, Adi Kumar, and Ryan Luby
© Jung Getty/Getty Images

The United States has a construction labor A persistent labor shortfall
shortage that will likely get worse. In April, the Today’s labor mismatch has multiple root causes,3
US construction industry had roughly 440,000 from baby boomers leaving the workforce to record
job openings, and the US manufacturing industry quit rates as workers reevaluate priorities to a
had more than one million—the highest levels shrinking pipeline of new construction workers amid
recorded since industry-level jobs data were first stalled training and low net migration.4
collected. This prompts the question: Who will fill
the hundreds of thousands of additional jobs we But whatever the reasons, the net result is the
estimate the Bipartisan Infrastructure Law (BIL) same: there are too few workers for the jobs
will create each year (peaking above 300,000 in currently available, and certainly not enough for the
2027 and 2028) across the construction value jobs expected to be created in the years ahead.
chain in the next decade? 1
In the current constrained environment, industry
The answer to this question is critical, and not wages are growing at the fastest rates since the
just for the construction sector. The BIL is poised run-up to the 2008 financial crisis.5 And demand
to escalate labor demand, starting with outlays is unlikely to materially slacken irrespective of
flowing to states, agencies, and authorities to fund economic conditions, in large part because private-
portfolios of projects. Because each project relies and public-sector infrastructure investment is
on a chain of companies spanning engineering, locking in multiyear capital outlays (Exhibit 1).
materials fabrication, distribution, freight, and These outlays are less sensitive to cyclical
construction, any shortage of materials or labor at pressures than the residential and business-to-
any point along the chain may cause delays, drive consumer commercial sectors (such as retail
up costs, and result in projects being scaled back and hospitality).
or scrapped.2 In short, a labor shortage may affect
much more than just the construction sector—it
could have far-reaching economic ramifications. Getting granular: Insights by sector,
occupation, and geography
Closing the widening gap between labor demand
and supply is critical. Our latest research shows that The disconnect between jobs available today—
labor strains are expected to manifest differently and those set to be created in the years ahead—
across US states, sectors, and occupations, arguing and the number of qualified people to fill them is
for a comprehensive strategy filled with solutions significant. But when we looked beneath those
that can scale to address this wave of labor demand. top-level numbers, we found the strain varies
Without such a strategy, the United States may by geography, sector, and occupation (for more
not only be deprived of urgent upgrades to aging on our methodology, see sidebar, “Model scope
infrastructure but also miss the opportunity to set and assumptions”).
itself up for increased economic success over the
balance of the 21st century. The challenges introduced by the BIL and their
possible solutions require a local, nuanced
perspective. Industries that hold their collective
breath to see what happens do so at their
1
“The US Bipartisan Infrastructure Law: Breaking it down,” McKinsey, November 12, 2021.
2
Garo Hovnanian, Ryan Luby, and Shannon Peloquin, “Bridging the labor mismatch in US construction,” McKinsey, March 28, 2022.
3
Ibid.
4
Aaron De Smet, Bonnie Dowling, Marino Mugayar-Baldocchi, and Bill Schaninger, “‘Great Attrition’ or ‘Great Attraction’? The choice is yours,”
McKinsey Quarterly, September 8, 2021.
5
“Job openings: Construction,” US Bureau of Labor Statistics, accessed from Federal Reserve Bank of St. Louis (FRED) on August 30, 2022.
Web <2022>
<BIL workforce>
Exhibit 1
Exhibit <1> of <5>
Incremental Bipartisan Infrastructure Law spending and subsequent workforce

needs could peak around 2027–28.
Estimated new capital construction expenditures, by year and asset class, $ billions
60
The highest annual spend for
broadband (22% of 10-year
spending) and water (16%)
50 is forecast in 2027, a year
earlier than for most
transportation-related
asset classes
40
30 Electric vehicles
Public transit
Clean energy and power
Airports, ports, and waterways
20
Other infrastructure
and resilience
Passenger and freight rail
10 Water
Broadband
Roads, highways, and bridges
0
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Source: Expert interviews; Lightcast, 2022; US Bureau of Economic Analysis; Bernard Yaros and Mark Zandi, “Macroeconomic consequences of the Infrastructure
Investment and Jobs Act and Build Back Better framework,” Moody’s Analytics, November 4, 2021; McKinsey preliminary estimates based on Bipartisan
Infrastructure Law, H.R. 3684, and White House state-specific information
McKinsey & Company
peril, because this is unlikely to be a transient, market fails to meet demand for labor creates
near-term issue. BIL spending is expected to a backlog that will both extend and delay the
start in 2023 and persist through 2033, with peak while driving up costs and eroding the BIL’s
funding peaking across asset classes in 2027 purchasing power. At the same time, BIL investment
and 2028. For example, in the year of peak is occurring alongside other public-sector outlays
demand, we estimate a shortfall attributable (such as the Creating Helpful Incentives to Produce
to the BIL of more than 160,000 workers in the Semiconductors and Science Act of 2022 [CHIPS
contractor and subcontractor sector, 145,000 Act] and the Inflation Reduction Act) and as the
workers in the materials sector, and 40,000 private sector makes generational bets on the
workers in the engineering and technical-services future of the economy. In that sense, our modeling
sector. Again, that’s a shortfall just for the year in should be treated as a lower bound of the collective
which demand peaks, not over the lifetime of the strain facing the construction value chain over the
BIL’s effect. next decade.
In addition, the risks of the labor shortage are The sector view
more acute in the short term. In the run-up to those The $383 billion in BIL expenditure—comprising
peaks in 2027 and 2028, every year in which the $90 billion in competitive funding and $292 billion
Model scope and assumptions
Our economic modeling covers The analysis is grounded in a multiplier This economic analysis—which spans all
$383 billion in expenditure from the model, in which BIL dollars across asset 50 states and nine asset classes within a
US Bipartisan Infrastructure Law (BIL). classes are mapped to sectors at the state set of roughly 900 occupational codes—
We arrived at this figure by examining level. Sector-specific job multipliers— helps identify the occupations most
only the $1.2 trillion in BIL funds (private- which are taken from Lightcast, a labor likely to present workforce challenges
sector spending is not included), and economics data provider—are applied from incremental construction capital
then excluding expenditure already in to BIL dollars to estimate the number of expenditure and the timing of these
the pipeline, nonconstruction capital jobs created by sector and by state due to challenges. It does not include all funds
expenditure (for example, rolling incremental BIL expenditure (examples of that can increase demand for workers
stock), and funds that may not clearly sectors include highway, street, and bridge from the BIL, nor is it tied to granular job
translate into a representative set of construction and ready-mix concrete titles at a level of specificity below 900
construction projects, such as safety and manufacturing). Generated jobs by sector occupational codes. Our analysis is also
environmental-remediation funding and are then distributed across occupations not fully adjusted to reflect the specific
competitive energy grants (exhibit). using Lightcast’s state-level staffing- nature of BIL investments that may differ
patterns matrices (including, for example, from historic construction infrastructure.
civil engineers and electricians).
Web <2022>
<BIL workforce>
Exhibit
Exhibit <Sidebar> of <5>
Modeling job gains from the Bipartisan Infrastructure Law focuses on

$383 billion of incremental construction capital expenditures.
Analyzed funding, $ billions
Total spending (baseline and

Incremental spending, 550 Baseline spending, 650 1,200
new-program spending)
Incremental program ~550

funding
Funding for safety and

environmental remediation 39
asset classes
Competitive energy grants 43
Nonconstruction spend1 86
Remaining incremental
construction capital 383
expenditures
1
Nonconstruction spend includes operating expenses, nonconstruction capital expenditures, and funds allocated to territories or Tribal Nations.
Source: Expert interviews; McKinsey preliminary estimates based on Bipartisan Infrastructure Law, H.R. 3684, and White House state-specific information
McKinsey & Company
in formula-driven investment—will engage Indeed, of the estimated 345,000 jobs created
the entire construction value chain, including in that year of peak demand, only 46 percent will
engineering, design, manufacturing, distribution, come from contractor roles within the construction
and construction. This means labor strains will industry (Exhibit 2). About 42 percent of the jobs
be felt in areas other than jobsites, which aligns will be concentrated in the materials sector,
with what we heard prior to the outlay of BIL which combines manufacturing, distribution,
funds. In a November 2021 McKinsey survey, for and warehousing.
example, executives cited a labor shortage of
80–83 percent in distribution roles, compared Each of these areas poses sector-specific
with a shortage of 50–64 percent in contracting. challenges. In materials manufacturing, new
Web <2022>
<BIL workforce>
Exhibit 2
Exhibit <2> of <5>
Jobs from new Bipartisan Infrastructure Law capital expenditures for

construction will span sectors across the construction value chain.
Jobs created in year of peak demand across construction value chain,1 thousands
Engineering and Materials (manufacturing, Contractors and

technical services2 distribution, and subcontractors4
warehousing)3
Broadband 9.1 28 35 73
Transportation (roads,
bridges, major projects) 8.1 28 34 71
Water 5.5 23 23 51
Passenger and
4.2 17 17 38
freight rail
Resilience and
3.7 15 15 33
other infrastructure
Airports, ports,
3.3 12 14 29
and waterways
Clean energy
2.3 13 14 29
and power
Public transit 4.1 8 8 20
Electric vehicles 1
Total 40.5 145 160 345
Note: Figures may not sum, because of rounding. Does not include safety and environmental remediation asset classes or competitive energy grants,
collectively accounting for $82 billion in new spending.
1
Peak demand is defined as the year between 2023 and 2033 in which an asset class has the highest number of jobs required from spending (typically, 2027 or
2028); estimates above do not include the ~78,000 jobs generated during peak demand through supply chain effects outside of the construction value chain.
2
Eg, civil engineer, architectural drafter, electrical engineer.
3
Eg, welder, truck driver, supervisor of production workers.
4
Eg, construction laborer, operating engineers, supervisor of trades workers.
Source: Expert interviews; Lightcast, 2022; US Bureau of Economic Analysis; Bernard Yaros and Mark Zandi, “Macroeconomic consequences of the Infrastruc-
ture Investment and Jobs Act and Build Back Better framework,” Moody’s Analytics, November 4, 2021; McKinsey preliminary estimates based on Bipartisan
McKinsey & Company
A labor shortage may affect much
more than just the construction sector—
it could have far-reaching economic
ramifications.
jobs are often far from the jobsite, meaning local BIL (Exhibit 3). Within construction contracting,
demand may strain labor markets in other parts line installers—who are driving the buildout of
of the country. This lack of visibility may create broadband internet access—are poised to be
a price pressure that feels disconnected from in particular demand, along with construction
local labor markets where manufacturing is laborers, construction managers, equipment
concentrated. For example, North Carolina is likely operators, and electricians. Within engineering
to see a jump in demand for the manufacturing and technical services, civil engineers are the
workforce needed to produce fiber-optic cable crucible occupation.
that will be laid across the United States. In the
warehousing and transportation space, on the If left unaddressed, several occupational-demand
other hand, the construction value chain will challenges could spur inflation. For instance, most
compete with other sectors that are driving construction companies are competing for the
the expansion of short- and long-haul logistics same talent. Welders, for example, will be required
networks. While just 12 percent of the project job at scale for manufacturing in addition to their role
gap is in engineering and technical services, these in the construction process—meaning without
positions can bottleneck project- and industry- cooperation, manufacturers will compete with
wide growth because of the upstream gating role contractors for the same limited set of welders.
they play in individual projects. In addition, due
to the education and licensing requirements for And indeed, people with skills crucial to the
this segment (for example, civil engineers), the construction industry aren’t beholden to working
lead time required to address shortages in these in the industry. The distribution sector could feel
sectors is particularly long. this strain severely, as truck drivers and freight
movers, who were already in short supply, are
The occupation view drawn to short- and long-haul logistics companies
The influx of investment and corresponding driving B2C and B2B transformation across the
shortage of qualified labor are expected to economy. And regardless of their place in the
strain a specific set of occupations across each value chain, construction companies eyeing digital
sector. These “crucible” occupations may vary transformation will need software developers,
across sectors, influenced by two core drivers: which is an entirely new capability for many small
the “momentum” rate at which jobs were expected and midsize firms.
to grow (or decline) without the BIL and what’s
expected to happen as a result of the BIL. The geographic view
A few occupations, such as operating engineers,
Several occupations required for metal and truck drivers, and freight movers, are in high
plastic manufacturing are expected to shrink demand across most US states—and construction
but are needed to propel implementation of the laborers are the most in-demand jobs across the
Web <2022>
<BIL workforce>
Exhibit 3
Exhibit <3> of <5>
Overall, the occupations that contractors typically employ are likely to face the
most strain, but there are crucial roles across the value chain.
Jobs generated vs employment growth

Bubble size =
1,000 incremental
BIL roles in year of
12 peak demand
Contracting
Engineering
Materials
8
Jobs generated A Multiple machine tool
by the Bipartisan setters, operators, and
Infrastructure Law tenders, metal and plastic
(BIL) in year of B Welders, cutters,
peak demand,1 % solderers, and brazers
4 C Heavy and tractor-trailer
truck drivers
D D Molders, shapers, and
casters, except metal
B and plastic
A E E Industrial machinery
0 mechanics
C
–8 –4 0 4 8
Momentum employment
growth excluding BIL,
2022–27, %
Note: BIL stands for Bipartisan Infrastructure Law; occupations are limited to those requiring at least 1,000 new workers based on BIL spending in the year of
peak demand within a given sector.
Calculated as the number of jobs generated in year of peak demand from new BIL construction capital expenditures spending, divided by 2027 employment
1
based on momentum growth that excludes BIL.

McKinsey & Company
value chain in every US state except South Dakota. strain) than those required to build out their
But the mix of sector and occupation constraints own infrastructure.
manifests differently across states.
In North Carolina and Pennsylvania, for example,
The potential labor strain caused by the BIL could 46 percent of projected jobs are in the materials
be disproportionately concentrated in states that value chain, including manufacturing and
manufacture and export materials to states with distribution—in part reflecting the concentration
limited manufacturing capacity (Exhibit 4). These of fiber-optic cable and steel-manufacturing
manufacturing-heavy states will likely see demand production capacity in those states, respectively. In
for more jobs (and thus face additional labor contrast, just 31 percent of projected jobs in Rhode
Island are generated in the materials value chain.
Web <2022>
<BIL workforce>
Exhibit 4
Exhibit <4> of <5>
Twenty-one states that are net exporters of materials may see incremental
labor market strain.
Potential shift in jobs generated Jobs to support BIL1 demand from other states
from net exports of materials in 10.0 to 15.0 –4.99 to 0
year of peak demand, % 5.0 to 9.99 –9.99 to –5.0
0 to 4.99 –14.99 to –10.0
–20.0 to –15.0
1
Bipartisan Infrastructure Law.
McKinsey & Company
This dynamic could have three diverse implications: Four actions to address the potential
projects in states with limited manufacturing capacity labor shortage
may have increased risks associated with getting The potential labor challenge created by the BIL’s
materials from other states, driving further price historic investment transcends any individual
increases; companies in states with concentrated sector, occupation, and geography. Delivering on
production capacity may feel incremental pressure this generational opportunity to drive national and
to create capacity to address potential shortages; global economic growth would benefit from the
and states with less capacity may feel pressure to combined and coordinated efforts of the private,
develop in-state manufacturing capacity to reduce public, and social sectors working across the entire
potential delivery risks for their public projects. construction value chain.
Given the cross-cutting nature of the challenge, of this approach, particularly for those without
some of the most interesting solutions to date college degrees.8
have involved partnerships across groups of
stakeholders. We’ve identified four broad actions Hire workers from nontraditional segments. These
that may help the United States capitalize on this can include formerly incarcerated individuals,
transformational moment. veterans, and others. Homeboy Industries provides
an example of the local impact, effectiveness, and
1. Increase the supply of construction labor potential of working with formerly incarcerated
To address the need for labor both in the individuals.9 Stable employment is especially
aggregate and for a targeted set of bottleneck critical for this segment. Our American Opportunity
roles, companies could focus on reskilling and Survey found 53 percent of previously incarcerated
upskilling existing workers, attracting new people, workers reported concern about the stability of
and pulling people currently on the sidelines back their current employment, 1.4 times higher than
into the labor force. those not previously incarcerated.10 Helmets to
Hardhats supports veterans transitioning into
Upskill and reskill the workforce to fill targeted civilian roles.11
roles. McKinsey’s recent American Opportunity
Survey underscores the depth of appetite for Attract new workers through a variety of
reskilling in the industry.6 Fifty-eight percent of approaches. First, nonwage benefits could open
workers across the construction value chain plan to segments of the labor market. For example, some
pursue future training, education, or credentialing employers have started to offer housing and other
opportunities, 17 percentage points higher than benefits,12 and Oregon introduced a $100 million
the national average. Three examples illustrate the childcare investment package to encourage entry
breadth and diversity of partnership approaches into the workforce.13
available to meet this demand, which involve a
combination of employers, educational institutions, Second, taking a more expansive view of the
and the public sector. First, the Departments of nonwage value proposition could also help
Transportation (DOT) in Arizona and California employers access younger, more diverse talent.
require that DOT-funded projects meet minimum McKinsey’s research emphasizes the importance
targets for on-the-job training. Second, UpSkill of supportive management, purpose and values,
Houston links employers, educators, and applicants and a flexible working schedule.14 In a sector that
by providing a platform that connects candidates is critical for building out the next-generation
with potential job opportunities.7 Third, shifting to infrastructure required to propel American and
a skills-based rather than credential-based view global economic growth, there’s an opportunity
of hiring will provide further relief. The Rework to frame such employment as deeply meaningful
America Alliance, a Markle-led coalition that and compelling.
includes McKinsey, has demonstrated the power
6
McKinsey American Opportunity Survey, 2022.
7
For more, see the UpSkill Houston website.
8
For more, see the Markle website.
9
For more, see the Homeboy Industries website.
10
McKinsey American Opportunity Survey, 2022.
11
For more, see the Helmets to Hardhats website.
12
Chip Cutter and Lauren Weber, “In battle for workers, companies build houses,” Wall Street Journal, May 22, 2022.
13
“House Bill 4005,” Oregon Legislative Assembly, March 9, 2022.
14
Aaron De Smet, Bonnie Dowling, Marino Mugayar-Baldocchi, and Bill Schaninger, “Gone for now, or gone for good? How to play the new talent
game and win back workers,” McKinsey Quarterly, March 9, 2022.
The industry has an opportunity
to redefine what it means to be a
construction worker.
Third, apprenticeships can start at younger ages, of productivity gains and proven value. When
and the time between completion of school and McKinsey surveyed construction executives
integration into industry can be reduced. Ohio’s in 2022 about the trends they expect to have
High School Tech Internship Pilot program, for the most impact over the next five to ten years,
example, brings awareness to priority industries by two of the top three trends involved upstream
allowing employers to hire high school interns.15 technological adoption: digital design (for
example, digital twins) and automation of
Finally, the industry could band together to material production processes.16 The industry
showcase its wide variety of job opportunities. For could accelerate its slow adoption to offset
people who want to work in an office, construction the workforce challenge, and modernizing the
and manufacturing companies offer engineering industry’s tech stack would have the added benefit
and office jobs. For those who prefer operating of attracting a new demographic of skilled talent.
machinery, roles are available on jobsites, in In addition to technology, executives also cited
factories, and in distribution centers. And for transparency of material performance, earlier
individuals who like variety and want to work decision making, and professionalization of
outside, construction laborers are in demand procurement among trends with the most impact.
everywhere. The industry has an opportunity to Past McKinsey research has highlighted the
redefine what it means to be a construction worker. productivity and project cost gains available from
off-site manufacturing.17 Uptake in US markets
2. Improve productivity across the entire has been limited, particularly compared with the
value chain Nordic countries, where there is a virtuous cycle
Improving productivity will involve upstream design, among consumer preferences, demand, and the
manufacturing, and distribution and downstream industry’s supply chain.
activities at the jobsite. While technology
enablement is a core pillar of these activities, Downstream productivity. The second most
it’s not a silver bullet to solve all problems. influential trend cited by executives in our 2022
survey involved downstream digital construction
Upstream productivity. Construction has been tools, including jobsite management. This
slow to adopt technology, despite its promise is part of the lean construction ecosystem,
15
“High School Tech Internship,” Ohio Department of Education, updated April 5, 2022.
16
“Building products in the digital age: It’s hard to ‘get smart,’” McKinsey, June 6, 2022.
17
“Modular construction: From projects to products,” McKinsey, June 18, 2019.
which we described in a March 2022 article — Scale up the use of full collaborative contracting,
as “another proven way to drive significant especially on larger, complex projects, early in
and sustainable productivity improvements.”18 the design phase.19
For instance, establishing a centralized
continuous-improvement engine may enhance — Revisit other terms and conditions affecting
on-site execution through integrated planning, how much risk the market bears (for example,
performance management, and waste elimination. bonding requirements, payment terms, and
Because key stakeholders across the project change-order processes) to make contracts as
work with a common, agreed-upon set of KPIs, appealing as possible to the market.
they can address issues in real time and better
collaborate to reduce waste and variability of work. — Add room in the project procurement
In addition, capability building across the planning process to take feedback from the market
and construction teams may help team members on scope, bundling, timing expectations, and
understand and adopt lean construction practices. other elements that could improve the cost,
schedule, and risk equation of a project. This
3. Revisit how owners work with contractors approach—in which owners actively solicit
and suppliers feedback to determine ways to make a project
Most statutes that govern state and local agency better—is typically not accounted for in hard-bid
procurement rely on lump-sum, fixed-price procurement processes.
contracting in which the lowest price wins. In a world
of rising inflation and increased macroeconomic 4. Coordinate more effectively
uncertainty, this approach has already caused BIL projects across asset classes that are not
many agencies to receive inflated bids grounded coordinated and effectively compete are likely to
in risk falling entirely on contractors that price for inflate the cost of materials and reduce the real
uncertain scenarios of inflation linked to material volume of infrastructure delivered. A variety of
and labor shortages. A handful of alternative different types of coordination might address
contracting options may reduce the burdens of the this issue.
lump-sum, fixed-price status quo:
First, across infrastructure projects and
— At a strategic level, engage procurement, legal, geographies, there’s a need to prioritize and
and capital-programs departments in listening sequence spending across asset classes to smooth
sessions with contractors in their market to the flow of demand, with a link to centralized
understand the risks they are currently bearing procurement planning (many states, including
and how existing procurement guidelines could Michigan and New Jersey, are establishing
be adapted to share those risks in a labor- infrastructure coordinator offices for this purpose20).
scarce environment. In the same vein, there are potential benefits to
coordinating at the regional or federal level.
— Adopt models that allow contractors to execute
over a flexible time horizon and optimize their Second, there’s an opportunity to introduce
resources accordingly, as some DOTs have done. efficiencies by combining particular types of
18
“Bridging the labor mismatch in US construction,” McKinsey, March 28, 2022.
19
“Collaborative contracting: Moving from pilot to scale-up,” McKinsey, January 17, 2020.
20
“Impact officer in chief: The state infrastructure coordinator’s role,” McKinsey, April 20, 2022.
investments to only “dig once.”21 For example, century.22 Yet the labor challenges are not easing.
agencies that are installing fiber and repairing Thoroughly assessing the mismatch between
water mains in the same municipality could tackle worker demand and supply and implementing
both projects at once if they had visibility into each collaborative, creative approaches could help
other’s planning and sequencing of their broader us embrace this generational opportunity to the
capital programs. fullest. Failing to do so may rob the United States
of tens of thousands of miles of roads, thousands
of bridges, and miles of water and electrical
infrastructure that could have been funded by this
We’ve noted before that the US construction bipartisan investment and made our lives better for
sector could power inclusive growth and set up years to come.
the country’s economy for success in the 21st
21
“‘Dig once’ could help states manage material and worker shortages,” McKinsey, August 24, 2022.
22
“Bridging the labor mismatch in US construction,” March 28, 2022.
Garo Hovnanian is a partner in McKinsey’s Philadelphia office; Adi Kumar is a senior partner in the Washington, DC, office;
and Ryan Luby is an associate partner in the New York office.
The authors wish to thank Tim Bacon, Rob Dunn, Tatiana Jimenez, Jennie Nevin, Sara O’Rourke, Grace Riddick, and Jennifer
Volz for their contributions to this article.
Transforming public
sector hiring with data-
enabled talent ‘win rooms’
These talent hubs can expedite and streamline government hiring
processes—and they can also close critical labor gaps.
by Anita Dutta, Nora Gardner, Megan McConnell, and Angela Sinisterra-Woods
© Klaus Vedfelt/Getty Images

The need for public sector workers has steadily The challenges affecting public
increased over the past several years due to sector hiring
expanded government mandates and funding, The government’s talent attraction challenges are
including the American Rescue Plan1 and the apparent in its hiring data: the public sector has
Bipartisan Infrastructure Law. 2 These and other had the lowest overall hiring rate of the ten major
initiatives have resulted in a rapid rise in the economic sectors tracked by the Bureau of Labor
number of government jobs needing to be filled. In Statistics for the past several years, hovering at
March 2023, there were 1.05 million government about half the rate of the private sector.6
job openings—compared with fewer than 700,000
at the end of 2020 3 —accounting for more than Because economic uncertainty and tight labor
10 percent of open jobs in the United States. 4 markets have historically existed in isolation,
employers do not have a playbook for managing
However, employers across sectors are struggling hiring amid these dueling forces. Many leaders are
to balance competing hiring priorities as they therefore balancing on a “talent tightrope” as they
contend with an uncommon combination of carefully and simultaneously trim budgets, retain
economic uncertainty and a persistently tight labor key talent, and protect the business in the near
market. 5 In the context of these trends, the public term while also setting it up for success in the long
sector can transform its traditional hiring practices term. Government employers have fewer options
and close its growing labor gap by optimizing four for effectively navigating these difficulties because
key hiring steps and deploying data-enabled talent of the rigorous hiring processes many government
‘win rooms’ to rapidly fill in-demand positions. roles require.7
A data-enabled talent win room is a central, cross- The public sector’s struggle to fill its vacancies
functional team that uses internal and external increasingly endangers the United States’ efforts
data to address talent attraction needs and rapidly to serve the public, 8 including major initiatives
recruit in-demand talent. A win room can be a to upgrade infrastructure, bolster supply chain
catalyst for recruiting and hiring transformations: resilience, educate children, and respond to the
critically, it quickly and effectively lends focus, complex geopolitical environment.
transparency, and structure to implement essential
steps for improving recruiting and hiring. It also To overcome these challenges, leading organizations
allows for dedicated attention across stakeholders are taking four crucial steps to modernize traditional
to solve the organization’s most crucial talent hiring practices and fill critical positions quickly.
attraction and hiring problems.
1
“Fact sheet: The impact of the American Rescue Plan after one year,” US Department of the Treasury, March 9, 2022.
2
“Fact sheet: One year into implementation of Bipartisan Infrastructure Law, Biden-Harris Administration celebrates major progress in building
a better America,” The White House, November 15, 2022.
3
“Job openings, hires, and separations levels, seasonally adjusted,” US Bureau of Labor Statistics, accessed June 7, 2023.
4
Ibid. Excludes farming jobs.
5
P
eople & Organization Blog, “Shorter for longer: Navigating the taut talent tightrope amid economic uncertainty,” blog entry by Bryan Hancock
and Asutosh Padhi, McKinsey, January 3, 2023.
6
“ Table 1. Job openings levels and rates by industry and region, seasonally adjusted,” US Bureau of Labor Statistics, updated May 31, 2023.
7
Isabella Bennett, Sarah Kleinman, and Megan McConnell, “Mission critical: Improving government workforce planning,” McKinsey,
September 14, 2022.
8
Danny Clark, Marcy Jacobs, Megan McConnell, and Sarah Tucker-Ray “Transforming the US government’s approach to hiring digital talent,”
McKinsey, September 9, 2020.
How leading organizations win the especially during a time when many organizations
race for talent are struggling with a perceived skills gap in the talent
Many leading organizations have been able to rapidly market.10 In addition, the public sector is uniquely
attract and hire needed talent by focusing on four poised to provide employment opportunities to
critical components of the hiring process: expanding underserved groups, such as refugees and formerly
the candidate pipeline, sharpening job descriptions incarcerated individuals, by expanding its talent
and employer branding, streamlining the hiring pipeline to include more STAR candidates.
process, and enabling data-based decision making.
The impact of expanding the candidate pipeline is
Each of these actions can help close talent gaps, but of heightened importance for addressing public
they are especially effective when used together. sector talent shortages: between April 2020 and
April 2022, 72 percent of public and social sector
Expanding the candidate pipeline or not-for-profit workers who left did not return to
Creatively reassessing and changing candidate the same industries or left the workforce entirely,11
screening criteria can expand sourcing pipelines, indicating a growing need to seek out new sources
ultimately increasing the number of qualified of talent. This is underscored by ongoing research
potential candidates who may be considered for by McKinsey and the National Association of
a role. These changes could include strategically State Chief Administrators (NASCA), which has
seeking out new types of candidates, such as demonstrated that ongoing talent challenges have
those switching jobs midcareer or reentering resulted in critical resource shortages that have
the workforce after time away; candidates from restricted various government services, particularly
different geographic locations or remote workers; those related to areas with acute shortages such
candidates from diverse demographics or back as healthcare and engineering.12 The benefits of
grounds; or skilled-through-alternative-routes expanding the candidate pipeline are therefore
(STAR) candidates, who are adults in the workforce especially potent for public sector entities.
over the age of 25 who have high school diplomas
but do not have bachelor’s degrees.9 Sharpening job descriptions and
employer branding
There are nearly 70 million STAR candidates in the Highlighting favorable aspects of a role to job seekers
United States, composing approximately 50 percent can also greatly attract talent. This is particularly
of the workforce. Despite not holding bachelor’s critical for government roles: in a recent McKinsey
degrees, these individuals have developed skills survey of 1,500 public sector employees, more
through workforce training, boot camps or certifi than 40 percent of respondents cited meaningful
cate programs, military service, or on-the-job work as one of the top reasons why they wanted to
experiences. Because a résumé screener may stay in their current position.13 Organizations could
automatically exclude these candidates due to their develop and implement surveys or hold focus groups
lack of formal educational credentials, expanding for potential job candidates as well as for current
screening criteria to include STAR candidates could employees to understand what these groups value in
vastly expand the pool of qualified job applicants. their roles and employers. This information can then
This is an especially potent way for organizations be used to redesign job descriptions and employer
to close labor gaps for critical roles more quickly, branding to crystallize and clearly communicate
9
For more information, see tearthepaperceiling.org.
10
M
cKinsey Blog, “Tearing the ‘paper ceiling’: McKinsey supports effort driving upward mobility for millions of workers,” September 23, 2022.
11
A aron De Smet, Bonnie Dowling, Bryan Hancock, and Bill Schaninger, “The Great Attrition is making hiring harder. Are you searching the right
talent pools?,” McKinsey Quarterly, July 13, 2022.
12
Richard Choi, Sameer Chowdhary, Drew Erdmann, and Tim Ward, “Bridging the talent gap in state government postpandemic,” McKinsey,
March 17, 2023.
13
“What workers want is changing. That could be good for government,” McKinsey, October 26, 2022.
Four steps can significantly
transform the efficacy of hiring.
But implementing them is not easy
for any organization.
aspects of a role that candidates care about, thereby on where efficiencies can be swiftly realized (for
attracting more applicants. example, where candidates are getting stuck in
existing hiring processes). Deploying dashboards
Streamlining the hiring process that serve as a single source of truth on organiza
In recent years, the average time from a candidate tional recruiting and hiring has proven critical for
applying to a public sector job to receiving a job offer companies; they are core to any effort to close
was about 119 days—more than triple the private- talent gaps.
sector average.14 To condense this lengthy process
without compromising outcomes, public sector
organizations can rapidly analyze their current-state How data-enabled talent win rooms
hiring processes to understand the most salient pain transform public sector hiring practices
points. These data can help inform the redesigning of
The four steps above can significantly transform the
hiring processes to, for example, simplify application
efficacy of hiring. But implementing them—and doing
requirements, minimize handoffs between teams,
so quickly and efficiently to close talent gaps—is not
and strategically time security-screening procedures
easy for any organization, especially for those with
to reduce time to hire and improve the candidate
dispersed internal recruiting and hiring teams that do
experience. Organizations could also create greater
not coordinate regularly or that lack readily available
transparency into the hiring process for candidates
hiring data. In the public sector, these challenges are
via more proactive communications or by creating a
particularly pronounced because the structures of
calendar of hiring milestones and expectations.
many public sector organizations do not allow for the
focus and cross-functional collaboration required to
Enabling data-based decision making implement these efforts tactfully, nor do they have
Underpinning all other steps in improving hiring dedicated teams to execute these changes. As such,
processes is enabling data-based decision making many organizations in both the private and public
across recruiting and hiring activities. This can be sectors have set up data-enabled talent win rooms
achieved by standing up dashboards that are used to orchestrate and accelerate the implementation of
to drive day-to-day operational decisions. Such these steps to rapidly close talent gaps.
dashboards provide visibility into current process
bottlenecks, which allows for attention and action
Building a data-enabled talent win room
to be directed where it is most needed, ultimately
Data-enabled talent win rooms include three
resulting in improved talent attraction and hiring
fundamental characteristics.
efforts for many public sector entities.
A cross-functional team of stakeholders. The cross-
Across sectors, data transparency enables organi
functional team brings together the stakeholders
zations to quickly progress hiring by shedding light
needed to hire talent quickly. This core group
14
Time to hire report, Neogov, 2020.
is made up of members from human resources, different types, sizes, and locations.
such as recruiters and hiring specialists; business
functions, such as hiring managers; and subject For example, one large US federal agency created a
matter experts, such as personnel security and IT fiscal-year hiring goal that was more than 50 percent
professionals. The dedicated talent win room team higher than the total number of hires they were able
works together to help candidates progress quickly to make in the previous fiscal year. To accomplish
through the hiring process by minimizing handoff this goal, the agency set up a data-enabled talent
delays between teams and expediting alignment to win room to develop executive and operational
hire candidates. This swift stakeholder coordination dashboards that provided visibility into hiring prog
can greatly reduce the time required to complete ress and barriers. The cross-functional team could
critical hiring activities, resulting in more talent in then strategically reduce bottlenecks for hiring
the door when it is needed. critical roles. These efforts allowed the agency to
increase its hiring rate by more than 30 percent in
A central repository for accurate hiring data. A the first three months after establishing the data-
central data repository—and, ideally, a set of enabled talent win room.
dashboards that uses the central data to showcase
hiring goals and progress—helps aggregate infor At a different US federal agency, candidates, hiring
mation on hiring across the organization. Data managers, and HR specialists reported numerous
shown could include actual hiring versus planned pain points throughout the hiring process, such
hiring, the number of candidates at each stage of as candidates saying the hiring process was
the hiring pipeline, and vacancy requests filed from delayed and not transparent. The agency explored
the business to the human-capital office. These solutions from a customer-centric approach and
data can be used to inform hiring planning, drive subsequently piloted changes through a data-
recruiting and hiring strategies, and deliver a clear enabled talent win room. Metrics of success, such
picture of current hiring successes and gaps. as process timelines and candidate experience
feedback, were rigorously tracked, and a cross-
An iterative working model. Using an iterative functional team worked together to ensure rapid
working model supported by agile ways of working— progress. As a result, the time to hire decreased by
including daily check-ins, weekly planning, and nearly 80 percent, and the team within the agency
biweekly retrospective assessments—can ensure that implemented the data-enabled talent win room
continuous hiring progress. By working in this efforts saw a more than sevenfold net gain in hiring
manner, the talent win room can rapidly identify numbers in that fiscal year.
bottlenecks to hiring and determine the right inter
ventions needed to accelerate solutions. The data- Data-enabled talent win rooms have also been
enabled talent win room team can then rapidly used successfully in public sector organizations
deploy these interventions and measure their outside the United States. For example, a G-20
impact, adjusting as data show which interventions ministry was undergoing a major transformation
yield the greatest impact. This approach allows to digitalize its services, which required elevating
for a rapid, data-informed operating model of organizational capabilities to attract, select, and
continuous testing, learning, and adapting. cultivate top tech talent. However, the agency had
nascent knowledge of tech talent needs and a
Data-enabled talent win rooms in practice recruiting process that took up to six months. By
The characteristics and operating models of data- using a data-enabled talent win room, the agency
enabled talent win rooms create organizational was able to attract the talent it needed to power its
capacity to transform hiring by bringing together transformation, reducing time to hire by 65 percent,
the data and expertise necessary to make quick quintupling its monthly interview capacity, and
and sound hiring decisions. Their impact has been developing more than 15 recruiting partnerships
demonstrated repeatedly within organizations of with academic institutions and technology
communities across the country. The data-enabled that face steep hiring gaps and often have limited
talent win room helped the department deliver organizational capacity to close them.
results faster while retaining and growing talent.
In turn, the department won a national award for The meaningful nature of public sector work is
client experience. widely valued by both prospective and existing
employees, offering a unique competitive advan
tage when recruiting and hiring. However, the
The path forward for public sector still faces steep, persistent attraction and
sector hiring hiring challenges. Using data-enabled talent win
rooms to combat these challenges can help quickly
A robust, qualified, and motivated public sector
and effectively fill the sector’s growing number of
workforce is critical to drive complex initiatives
open critical roles with qualified and motivated
that affect society. Using data-enabled talent
candidates. The accelerated hiring of candidates
win rooms to implement the four steps described
into these critical government roles can help speed
above has been shown to be key in closing labor
up the many important public sector initiatives that
gaps in any type of organization, but they are
benefit all citizens.
especially beneficial to government organizations
Anita Dutta is a consultant based in McKinsey’s Stamford office; Nora Gardner is a senior partner in the Washington, DC,
office, where Megan McConnell is a partner; and Angela Sinisterra-Woods is an associate partner in the Miami office.
The authors wish to thank Scott Blackburn, Erez Eizenman, McGregor Faulkner, and Brandon Parry for their contributions to
this article.
‘Dig once’ could help
states manage material
and worker shortages
Multiple excavations for infrastructure improvements can be disruptive
to the public. Coordinating projects could minimize negative impacts
and help states manage supply chain and labor shortages.
This article is a collaborative effort by Adi Kumar, Shannie Lotan, Nehal Mehta, Sara O’Rourke, and
Jennifer Volz, representing views from McKinsey’s Public Sector Practice.
© SteveDF/Getty Images
It’s the sort of thing that might keep state leaders stakeholders is not without its challenges, but
up at night. A heavily trafficked route is made there are strategies that could help tackle some of
impassible by the second road excavation in a year, the most common ones.
triggering complaints from frustrated commuters
and business owners, or worse: an accident in a
work zone. Overcoming barriers
By reducing the need for multiple excavations, a
These are exactly the types of scenario a “dig once” dig-once policy can promote better use of public
policy is designed to avoid. resources, and potentially help mitigate property
damage, service outages, traffic disruptions and
While infrastructure improvements are generally accidents, and other potential hazards to public
welcomed by the public, they can be highly safety.1 The approach could also generate more
disruptive. A dig-once approach seeks to mitigate bang for taxpayers’ dollars. A 2012 study by the
that pain by coordinating the delivery of several US Government Accountability Office found that
infrastructure projects simultaneously, rather coordinating broadband and federal highway
than carrying out each one separately. For projects could generate cost savings ranging from
example, adding more lanes to a highway requires 25 to 33 percent in urban areas and approximately
excavation; so does laying new broadband 16 percent per mile in rural areas.2 Another
cables to bring high-speed internet service to analysis estimated that coordinating broadband
an unserved rural community. Rather than dig installations with utility and transportation
up the road twice, states could dig just once to excavations is approximately ten times cheaper
accommodate both projects. than doing a standalone dig, and that savings are
most pronounced in high-density areas where
Curbing disruptions is not the only potential underground installation is the only option.3
benefit. With hundreds of billions of federal dollars
being reinvested in America under the Bipartisan But coordinating multiple infrastructure projects
Infrastructure Law (BIL), harmonizing projects faces many barriers. Three of the most common
through a dig-once approach could help states include the following4:
save money. If complemented by sophisticated
digital tools, the approach could also help states 1. Budget and funding rigidity. Creating flexibility
manage shortages of building supplies and within government budget timelines and
construction workers more efficiently and secure federal program requirements could be beyond
more BIL funding. And it could pave the way for the remit of some government leaders focused
more integrated infrastructure systems that could on infrastructure projects. This challenge is
better serve households and businesses and often compounded if each entity in the process
advance public-policy goals, supporting lives (such as utility agencies, telecom companies,
and livelihoods. transit agencies, and road owners in a city)
has different capital agendas and funding
Granted, coordinating major infrastructure processes that were created separately.
projects across multiple agencies, entities, and Reconciling these to adapt to different
1
Broadband policy and report, City of Palo Alto, CA, Magellan Advisors, November 2020.
2
“Planning and flexibility are key to effectively deploying broadband conduit through federal highway projects,” US Government Accountability
Office, June 27, 2012.
3
“FOSA Public Policy,” Fiber Optic Sensing Association, August 26, 2020.
4
“Dig once,” G20 Global Smart Cities Alliance; Corey Glickman, “How ‘dig once’ can democratize digital connectivity,” World Economic Forum,
February 16, 2022; Jed Pressgrove, “Can dig-once policies hasten the close of the digital divide?” Government Technology, April 13, 2021;
expert interviews; McKinsey analysis.
timelines is unlikely. Also, some BIL funding companies, subcontractors, and other private-
must adhere to strict statutory guidelines that sector actors can be difficult, especially with
could thwart efforts to expand the scope of a programs that roll out on different timelines
project to include cross-agency priorities. and have different stage gates, permitting
processes, and so on.
2. Assessing and conveying the business case
to initiate, prioritize, and sequence projects. Though these hurdles may seem daunting, they
Coordinating multiple public works can trigger are not necessarily insurmountable. Some states
higher costs up front, and it could be hard for and cities have already implemented various
governments to evaluate and measure the “flavors” of dig once.5 Arizona, for example,
financial benefits of absorbing those initial requires its Department of Transportation (DOT)
costs. Leaders pursuing dig once may also find to coordinate with telecom companies during
it difficult to evaluate the nonfinancial impact road construction projects along rural highways
that projects could have on citizens’ lives. to install broadband conduits and help close the
digital divide.6 Illinois, Maryland, and Minnesota
3. Coordination and implementation of projects also promote coordination between their DOTs
across different time horizons and agencies. and private broadband providers. The Michigan
Once states have identified which projects to Infrastructure Council has a coordination portal
prioritize for a dig-once effort, coordinating that documents infrastructure construction and
their launch across myriad stakeholders alerts owners to overlapping projects (see sidebar,
such as government agencies, public-utility “Flavors of dig once”).7
Flavors of dig once
— Carlisle, PA. There is a requirement to — Boston, Massachusetts. Boston has The DOT issues public bidding notices,
consider dig-once opportunities when a “shadow conduit policy” in which the explicitly citing the need for conduits
scheduling any municipal maintenance first company to request a trench takes or cable.
or public-works project through a lead role and invites other entities to
— Utah. The DOT requires the installation
policies for streamlining integrated add additional conduits for future use
of oversized conduits for certain road
infrastructure with a focus on green by the city or other later entrants.
construction projects, while interested
infrastructure.
— Maryland. The DOT coordinates with telecom parties can then extend
— Arizona. The dig-once policy states internet providers and local utilities that infrastructure to neighboring
that during road construction projects to install conduits for future use and communities. DOT owns the conduit
along rural highways, the department provides right-of-way access without and leases it to telecom companies
of transportation (DOT) can coordinate charge to certain entities. that want to use it.
with telecom companies to install the
— Illinois. The DOT and ISPs collaborate
conduit. The policy also enables the
to install fiber in new state-funded
agency to lease the conduit to telecom
construction, which includes trenching.
providers at a cost-based rate.
5
Kelli Hughes, Dig once: Policies and best practices, California Association of Councils of Governments, 2020; “Dig once policy: 16 state
models,” Fiber Optic Sensing Association, July 2020.
6
Tyler Cooper, “Dig once: The digital divide solution congress squandered and policy that could save $126 billion on broadband deployment,”
BroadbandNow, November 30, 2021.
7
“Michigan Infrastructure Council debuts public and private infrastructure ‘dig once’ coordination tool,” Michigan Department of Treasury,
March 16, 2021.
Tailored visualization could allow state
leaders to test multiple coordination
options at once, prioritize projects
according to estimated ROI, and
help address material and labor
supply shortages.
These variations of dig once suggest that 7. Put a single person in charge of “bundled”
there is potential for a range of solutions state projects in their design and build/construction
and local leaders could explore to overcome phases to ensure they can be done together.
common obstacles. This point person could also focus on
coordinating stakeholders, aligning and
Here are five solutions to consider: accelerating permitting processes, and
ensuring things keep moving.
4. Designate an infrastructure coordinator
to better align projects and programs. By 8. Plan early and map it out. Using geospatial
becoming a clearinghouse for which programs analysis can highlight where funding is
agencies are applying, and which projects dedicated and could identify areas of overlap
will kick off and when, the coordinator could and potential for dig-once approaches.
identify opportunities for overlap.
More sophisticated digital tools could also be
5. Create a platform or forum to enhance harnessed to improve project design and delivery.
coordination between the state and private For example, models that draw from multiple
sectors. This could be a portal, regular working sources could be built on top of a geospatial map of
sessions, stakeholder calls, designated the entire infrastructure portfolio and then layered
councils, or other solutions. The idea is to keep with information on individual projects. This type
communications flowing over which projects of tailored visualization could allow state leaders to
are planned, how they might roll out, and how test multiple coordination options at once, prioritize
everyone involved can improve coordination. projects according to estimated ROI, identify which
ones have BIL funding, and help address material
6. Better inform planning by feeding in data on and labor supply shortages. These models could
labor and material shortages. States may want even evolve to enable advanced simulations to
to focus on staging and planning projects anticipate how factors such as flooding, wildfires,
that have the most potential for impact and and other natural disasters, or fluctuations in
starting with those that are least impacted by public-transport passenger numbers, could impact
shortages could do that. infrastructure investments down the line.
But states don’t need to wait until they have resources to pool for dig-once priorities, including
sophisticated digital tools to kick off a dig-once a more expansive vision of integrated infrastructure.
policy. One central platform—even one as simple as They’ll also likely have wiggle room to combine
a shared spreadsheet—managed by a designated BIL programs because the Federal Highway
leader could help support project planning, Administration allows states to transfer funding for
prioritization, and implementation. States can then some road and highway projects to other entities if it
consider building from a humble starting point generates cost savings or brings greater expertise
to move toward longer-term solutions that could to the table.8
create multiple options for addressing core dig-
once challenges. And those longer-term solutions Moreover, if states can visualize more integrated
could lay the foundation for a fully integrated state infrastructure systems, this could help them secure
infrastructure system. more BIL funding. Some BIL grants will be doled out
according to formulas, but others will be awarded
Integrated infrastructure systems on the strength of competitive applications.
The advantages of dig once could go beyond saving Framing community impacts through the lens of
money and reducing residents’ inconvenience. integrated infrastructure systems could distinguish
Looking more strategically, the approach can applications from state, local, and tribal entities,
also help catalyze plans for more integrated while helping to ensure the funds they do receive
infrastructure systems. For example, coordinating are deployed wisely.
broadband and lead-pipe abatement could
yield dividends for households and businesses While coordinating infrastructure projects is
simultaneously. Harmonizing transportation, transit, not without challenges, the concept is already
and electric-vehicle-charging stations could help being proven in several states. And with the
drive more complementary transportation networks. nation’s transportation, water, broadband, and
And coordinating critical failure points around other systems receiving a once-in-a-generation
green-energy grids could create greater resilience federal funding boost, dig once could make the
against fires and storms. process of upgrading infrastructure less painful
for the public and deliver bigger benefits down
With BIL delivering $550 billion in new spending the road.
over the next five years, states will have more
8
FHWA Order 4551.1: “Fund transfers to other agencies and among title 23 programs,” Federal Highway Administration, US Department of
Transportation, August 12, 2013.
Adi Kumar is a senior partner in McKinsey’s Washington, DC, office, where Nehal Mehta is an associate partner and
Sara O’Rourke is a partner; Shannie Lotan is an alumna of the New Jersey office; and Jennifer Volz is a consultant in the
New York office.
The authors wish to thank Justin Badlam, Trey Childress, Rob Dunn, Stacie Hartman, and Michael Neary for their contributions
to this article.
One year into the
BIL: Catalyzing US
investments in energy
The legislation provides an opportunity to improve the
country’s clean-power infrastructure. More than a year since
its signing, we take stock of announced funding, programs,
and the road ahead.
by Adam Barth, Bernice Chan, and Ksenia Kaladiouk
© GIPhotoStock/Getty Images
Executive summary
The Infrastructure Investment and Jobs Act, also of climate change. At the same time, increased
known as the Bipartisan Infrastructure Law (BIL), frequency of extreme weather events combined
which was signed in November 2021, will provide with aging electric-power infrastructure is making
more than $1 trillion in public investment. One core the power system increasingly vulnerable to
component of the legislation is accelerating the prolonged outages. The act provides funding across
clean-energy transition and improving the reliability a wide range of stakeholders—including state, local,
and resilience of electric-power infrastructure. As federal, utilities, and industries—and across the
of January 2023, roughly 40 percent of total BIL power value chain, from generation down to storage
clean-energy funding had been launched,¹ with and emissions management, including clean energy,
remaining prenotice programs expected to begin electric-grid improvements, carbon capture, and
funding cycles in early 2023. clean-hydrogen development.²
The power sector currently accounts for about a This article, part of our Reinvesting in America
quarter of total greenhouse-gas (GHG) emissions series, breaks down BIL spending on clean-power
in the United States. Decarbonizing the power infrastructure in the following exhibits.
sector is therefore critical to mitigating the impact
1
Includes funding that has been awarded, is open for application submission, or has closed its application submission process.
2
For more on BIL spending, see McKinsey’s BIL Navigator.
Energy is a core priority of BIL to be invested in energy. Most of this
Of the $550 billion of new funding provided in funding, $43.5 billion, is available through
the BIL, approximately $76 billion³ is committed competitive grants.
Exhibit 1
The Bipartisan Infrastructure Law targets a sizable portion of spending to the

energy sector.
Bipartisan Infrastructure Law (BIL) investments Energy spending by type

of funding
$11 billion
Formula or
block grants
The BIL allocates $44 Competitive

~$76
$550 billion in billion grants
billion
new spending
On clean energy–related
Loan or
initiatives not including $21
financing
electric-vehicle infrastructure¹ billion
programs
1
An estimate of BIL clean-energy funding, which includes a combination of clean-energy, resilience, and environmental-remediation funding related to the utility
and power sector. This does not include electric vehicle–related funding.
Source: Building a better America: A guidebook to the Bipartisan Infrastructure Law for state, local, tribal, and territorial governments, and other partners, The
White House, May 2022
McKinsey & Company
3
A
n estimate of BIL clean-energy funding, which includes a combination of clean-energy, resilience, and environmental-remediation funding
related to the utility and power sector. This does not include electric vehicle–related funding.
We can expect a host of new programs incoming funds—which will be available through
A portion of the funding available through BIL will formula or block grants, competitive grants, and
go toward existing programs focused on renewable loan and financing programs—will be dedicated to
generation and energy efficiency. But the bulk of new programs.
Exhibit 2
Most energy sector funding is for new programs.
Funding available by asset category and type,¹ $ billion
Existing funding Total: 18 New funding Total: 58

3 5 10 41 6 11
Carbon capture
Energy efficiency
Grid modernization
Hydrogen
Other
Renewable generation
Competitive Loan
Formula
Competitive Loan
Formula
1
Estimate of Bipartisan Infrastructure Law clean-energy funding, which includes a combination of clean-energy, resilience, and environmental-remediation
funding related to the utility and power sector. This does not include electric vehicle–related funding. Estimates are rounded to the nearest whole number.
McKinsey & Company
The bulk of incoming funds—which will

be available through formula or block
grants, competitive grants, and loan and
financing programs—will be dedicated
to new programs.
BIL builds on past spending Now, more than a decade later, energy efficiency
The 2009 American Recovery and Reinvestment and renewable energy have matured. For this
Act (ARRA) included more than $60 billion of clean- reason, the BIL focuses more on accelerating the
energy investments⁴ to modernize US energy and development of new technologies, such as clean
communication infrastructure and enhance energy hydrogen and carbon capture and storage (CCS),
independence. This stimulus package provided as well as continuing to modernize the grid to
significant investments in energy efficiency, support electrification, renewable integration, and
renewable generation, and grid modernization. climate adaptation.
Exhibit 3
Compared with historical spending, the Bipartisan Infrastructure Law

dedicates more funds to grid modernization and new technology.
Clean-energy funding, $ billion
76
6 Energy efficiency⁴
66
Renewable generation⁵
19 Grid modernization⁶
20
Carbon capture⁷
Clean hydrogen⁸
23 Other⁹
27
13
11
10
3
6 5
2009 ARRA¹ initial 2021 BIL³
allocations to
clean energy²
Note: “BIL” stands for the Bipartisan Infrastructure Law. Figures may not sum, because of rounding.
1
American Recovery and Reinvestment Act.
2
Does not include $18 billion for transit and high-speed rail or $6 billion for domestic manufacturing of advanced vehicles and fuels.
3
4
Pays for energy efficiency retrofits in homes.
5
Includes, for example, wind turbines and solar panels.
6
To develop the smart grid that will involve sophisticated electric meters, high-tech electricity distribution and transmission grid censors, and energy storage;
also includes battery spending.
7
Crucial research, development, and demonstration of carbon capture and sequestration technologies.
8
Clean-hydrogen production, processing, delivery, storage, and end use.
9
Green innovation and job training to invest in the science, technology, and workforce needed for a clean-energy economy.
Source: A retrospective assessment of clean energy investment in the Recovery Act, Executive Office of the President, February 2016; The economic impact of
the American Recovery and Reinvestment Act of 2009: Fourth Quarterly Report, Council of Economic Advisers, July 14, 2010
McKinsey & Company
4
Does not include $18 billion for transit and high-speed rail or $6 billion for domestic manufacturing of advanced vehicles and fuels.
How the money will be allocated to support dams and nuclear reactors, encourage
across themes battery recycling and demonstration, deploy energy
The goals of the largest energy programs are to efficiency, and fund R&D.
upgrade grid resiliency, build direct air capture
hubs, increase carbon capture and storage, and For a more detailed look at the specific programs for
develop hydrogen hubs. BIL also includes programs each theme, see the technical appendix.
Exhibit 4
Clean-energy funding in the Bipartisan Infrastructure Law spans several major

themes, including grid resilience and carbon capture.
Clean-energy funding by theme,¹ $ billion Program examples

Upgrading Our Electric Grid and Ensuring Reliability
Resiliency 15
and Resiliency
Carbon 12 Four Regional Direct Air Capture Hubs
Construction, acquisition, and replacement of

Hydroelectricity 12
Columbia River Power
Hydrogen 10 Clean Hydrogen Research and Development
Nuclear 8 Civil Nuclear Credit Program
Battery 8 Battery Material Processing Grants
Clean Energy Demonstrations on Current and

Other 4
Former Mine Land
Advanced Energy Manufacturing and Recycling
Efficiency 2
Grant
Energy Efficiency and Conservation Block Grant
R&D 5
Program
Total 75
Note: “BIL” stands for the Bipartisan Infrastructure Law. Figures do not sum, because of rounding.
1
Source: US Senate H.R. 3684, Infrastructure Investment and Jobs Act
McKinsey & Company
Funds are distributed among entities Prenotice funding programs expected
and programs to begin funding cycles in early 2023
The private sector and state and local agencies About 40 percent, or $32 billion, of total BIL clean-
are each eligible for more than $35 billion in energy funding was launched as of December
energy-related funding from the BIL. All entities 2022, including large programs such as Battery
have access to numerous programs targeting Materials Processing, for which about $3 billion
everything from energy efficiency and renewable was released as of January 2023.
generation to grid modernization (see sidebar,
“Resources to help navigate BIL clean-energy Remaining prenotice funding programs are
funding programs”). expected to begin funding cycles in early 2023.
Exhibit 5
The private sector and state and local agencies are eligible for the largest
chunk of funds through the Bipartisan Infrastructure Law.
Energy funding available in the Bipartisan

Infrastructure Law (BIL) by entity type,¹ $ billion
Energy Renewable Grid
efficiency generation modernization
Carbon Hydrogen Other Example programs²
Regional Clean Hydrogen Hubs, Four Regional

Private 3 9 10 10 13 46 Direct Air Capture Hubs, Battery Manufacturing and
Recycling Grants
1
Weatherization Assistance Program, Energy

State 5 8 6 18 38
Improvements in Rural or Remote Areas
1
Critical Material Innovation, Efficiency, and Alternatives;

Local 4 8 6 18 36
Transmission Facilitation Program
Research,
Industrial Emission Demonstration Projects, Carbon
higher education,
8 6 8 24 Storage Validation and Testing, Energy Improvements
not-for-profit
at Public School Facilities
organizations 11
Deployment of Technologies to Enhance Grid Flexibility,
Rural and Municipal Utility Advances Cybersecurity
Utility 8 3 5 17
Grant and Technical Assistance Program, Energy
1 Storage Demonstration and Pilot Grant Program
Assisting Federal Facilities with Energy Conservation

Federal 10 11
Technologies Grant Program
1
1
2
Many of the example programs are applicable to more than one type of entity. For example, the Regional Clean Hydrogen Hubs program is applicable to not
only private-sector entities (eg, technology developers, industry) but also utilities, universities, national laboratories, engineering and construction firms, state
and local governments, tribal groups, environmental groups, and community-based organizations.
McKinsey & Company
Resources to help navigate BIL clean-energy funding programs
Public and private entities have a the latest programs communities — Department of Energy’s Office of
number of resources available to help could apply for Energy Efficiency & Renewable
them track clean energy opportunities: Energy (EERE)³: EERE’s Funding
— Bipartisan Infrastructure Law
Opportunity Exchange provides
— White House Bipartisan Programs at the Department of
access to the latest funding
Infrastructure Law (BIL) Open Energy²: Online catalog of 70 BIL
opportunities, including BIL programs
Funding Opportunities¹: Highlights energy programs, including program
details and timelines
1
“Bipartisan Infrastructure Law: Funding opportunities you can apply for today,” The White House, updated February 2023.
2
“Bipartisan Infrastructure Law programs at Department of Energy,” US Department of Energy, accessed February 2023.
3
“EERE funding opportunity exchange,” US Department of Energy, accessed February 2023.
Exhibit 6
Roughly 40 percent of Bipartisan Infrastructure Law clean-energy funding was

launched as of December 2022.
Estimated funding amount, $ billion¹ Example programs and grants per stage,
$ billion
76
Prenotice
$6.7 for FY 2024–26 for GRIP²
$2.1 for Carbon Dioxide Transportation Infrastructure
Open
44
$7.0 for Regional Clean Hydrogen Hubs
$3.8 for FY 2022–23 GRIP²
$1.2 for Four Regional Clean Direct Air Capture Hubs
$0.4 for Long-Duration Energy Storage Demonstration
Closed
$2.5 for Transmission Facilitation Program
13 $2.4 for Carbon Capture Demonstration Projects
$2.3 for Carbon Storage Validation and Testing
9
Funding awarded
$3.2 for Weatherization Assistance
10 $2.8 for Battery Materials Processing
$1.3 for Advanced Reactor Demonstration
Total Prenotice Open Closed Funding
awarded
Program
63³ 54 15 24 14
numbers
Note: “BIL” stands for the Bipartisan Infrastructure Law. GRIP and Regional Clean Hydrogen Hubs have multiphase applications.
1
High-level estimates are based on the best available information and may include supplementary, non-BIL funding.
2
Grid Resilience and Innovation Partnerships program. Includes combined FY 2022 and FY 2023 funding in FY 2023 cycle.
3
Most programs have grants across stages (eg, FY 2022 round is closed; FY 2023 is open; FY 2024+ is prenotice), so the sum of stages will be greater than BIL
total.
Source: Build.gov; McKinsey analysis
McKinsey & Company
Funding awarded in fiscal year 2022 Of the awarded funding, the largest single projects
supported projects across the country, are $1.31 billion to support the demonstration
especially in a handful of states of an advanced nuclear reactor in Kemmerer,
Wyoming; $1.1 billion to preserve the existing
Three programs account for more than 70 percent
Diablo Canyon Power Plant in Avila Beach,
of the $10.0 billion in funding awarded as of January
California; and $300 million to support a battery-
2023: Weatherization Assistance ($3.2 billion),
recycling facility in Hopkinsville, Kentucky.
Battery Materials Processing ($2.8 billion), and
Advanced Reactor Demonstration ($1.3 billion).
Exhibit 7
As of January 2023, $10 billion has been awarded to clean-energy projects

across the country.
Clean-energy funding awarded under > $1 billion $500 million– $100 million–
Bipartisan Infrastructure Law $1 billion $499 million
$50 million– $10 million– < $10 million
$99 million $49 million
WA
MT ND NH ME
OR MN VT
ID SD WI NY MA
WY MI RI
IA PA CT
NV NE
OH NJ
UT IL IN DE
CA CO WV
KS MO VA MD
KY
DC
TN NC
AZ OK
NM AR SC
MS GA
AL
TX
LA PR
FL
AK
HI
Source: Bipartisan Infrastructure Law (BIL) Dashboard, Data to Decisions, January 13, 2023; Build.gov; McKinsey analysis
McKinsey & Company
Conclusion
How stakeholders can make the most partnerships by identifying where collective
of the funding opportunity effort from the public and private sectors could
Five actions in particular could help stakeholders maximize and scale impact (for example, scale
seize the present opportunity. up first-of-its-kind green infrastructure and
innovation) and where risks need to be managed
Get organized and mitigated (for example, guarantees) across
Successfully developing and implementing the energy ecosystem.
these projects will require public and private
stakeholders to engage and participate in a — Develop a comprehensive, integrated plan. For
coordinated way. Stakeholders will likely want example, coordinate across stakeholders to
to identify the network of key private-, social-, build a hydrogen hub to identify opportunities
and public-sector stakeholders that are critical for shared infrastructure.
to success; develop an engagement strategy;
and proactively build these relationships, for Stay up to date
example, by engaging early and often throughout Information about BIL funding programs, including
the project development cycle. A few actions guidance, application requirements, and program
could prove important for making the most of the deadlines, is updated regularly. Developing
opportunity: capacity to track and efficiently scan for these
updates and develop a holistic view of how to
— Consider opportunities for shared land use and access, navigate through, and coordinate across
right of way for infrastructure development. the wide range of climate and clean-energy
For example, identify a multiuse corridor to funding and financing opportunities will be critical.
facilitate codevelopment of power transmission
line and roads. Be ready to tell your impact story. A compelling
narrative and a fact base to back it up—for
— Optimize returns from the funding. For example, example, preparing the historical performance
assess the opportunity for public–private of delivering projects on time and on budget
Successfully developing and

implementing these projects will
require public and private stakeholders
to engage and participate in a
coordinated way.
and modeling decarbonization pathways and cost curves, and end-use economics ) and
scenarios to assess risks and implications—could equipping teams with technical capabilities,
build credibility and strengthen business cases such as energy modeling and economic analyses,
for energy transition projects. A view of what could help inform business cases for clean-energy
private-sector “capital formation” is required technology and infrastructure. It could also help
across the various value chains to manufacture stakeholders identify how to best use funding
and deploy technologies, and where a state has a to create value across the energy transition
differentiated role to play, is also critical. value chain.
Set up for success. Identify what it takes— Stay focused on economic development,
such as organizational structure, resources, environmental justice, and equity. These
culture, technical capabilities, or stakeholder elements cannot be an afterthought. Analyzing
engagement—to support energy transition and economic development, equity, and the impact of
decarbonization pathways. This could include environmental justice—for example, considering
developing a capability-building strategy, the perspectives (including barriers to adoption,
defining an operating model for efficient project place-based considerations, and exposure to
delivery, improving analytics capabilities climate and economic risks) of all stakeholders,
to inform decision making, and developing especially those in poor and marginalized
metrics to track performance targets, such as communities throughout the clean-technology
through data dashboards. In addition, having a development—is a critical aspect of planning the
good understanding of the energy technology energy transition and an important component of
landscape (for example, hydrogen applications, successful grant applications.
Technical appendix
Power funding by theme: Resilience

Program Funding, $ million Description
Funding to states, tribes, and public-utility commissions to work with

electric-sector owners and operators to demonstrate innovative
approaches to transmission, storage, and distribution infrastructure; this
Grid Innovation Programs 5,000 is meant to harden and enhance resilience and reliability and provide new
approaches to enhance regional grid resilience, as implemented through
states by public and rural electric-cooperative entities on a cost-shared
basis
Funding to improve energy efficiency of dwellings owned or occupied
Weatherization Assistance Program 3,500 by persons with low income, reduce their total residential energy
expenditures, and improve their health and safety—aimed to help the
elderly, disabled people, and children
Funding for electric-grid operators, electricity storage operators,
electricity generators, transmission owners or operators, distribution
rid Resilience Utility and
G
Industry Grants 2,500 providers, and fuel suppliers to carry out activities that are supplemental
to existing hardening efforts and to reduce the risk of power lines causing
a wildfire or reduce the likelihood and consequences of disruptive events
Formula grant program for states, territories, and tribes to carry out
Grid Resilience State and Tribal
Formula Grant Program 2,500 activities that are supplemental to existing hardening efforts and to
reduce the risk of power lines causing a wildfire or reduce the likelihood
and consequences of disruptive events
Funding for industry partners, utilities, and state and local governments to
Energy Improvement in Rural and
Remote Areas 1,000 take actions (eg, upgrading transmission lines, developing microgrids, and
increasing energy efficiency) to improve resilience, reliability, safety, and
availability of energy in rural or remote areas of the United States
Cybersecurity for the Energy Sector Funding to support the development and deployment of advanced cyber-
Research, Development, and 250 applications, cybertechnologies, and cyberthreat collaboration efforts
Demonstration Program with the US energy sector
Rural and Municipal Utility Grants and technical assistance for rural electric cooperatives and
Advances Cybersecurity Grant and 250 utilities to enter into cooperative agreements and to protect against,
Technical Assistance Program detect, respond to, and recover from cybersecurity threats
Energy Sector Operational Support

for Cyber Resilience Program 50 Funding to support a program for small electricity utilities and national
labs to build operational support for cyberresilience in the energy sector
Funding for utilities, national labs, and bulk power system vendors to
strengthen resilience of electric-grid operations or natural-gas and
oil operations when faced with threats and hazards (eg, developing
Advanced Energy Security Program 50 capabilities to identify vulnerabilities, providing modeling capabilities to
identify potential risks, adding physical security, conducting assessments
to identify vulnerabilities, and conducting research on grid hardening and
recovery solutions)
Power funding by theme: Carbon
Funding for technology developers, utilities, industry, national labs,

Four Regional Direct Air Capture
Hubs 3,500 engineering construction firms, state and local governments, and other
community and not-for-profit organizations to develop four regional direct
air capture hubs
Funding to develop six carbon capture facilities and improve the
Carbon Capture Demonstration
Projects Program 2,537 efficiency, effectiveness, costs, emissions reductions, and environmental
performance of coal and natural-gas electricity generation and industrial
facilities
Funding for technology developers, industry, utilities, universities,
national labs, engineering and construction firms, and state and local
Carbon Storage Validation and
Testing 2,500 governments to establish a program of research, development, and
demonstration for carbon storage (eg, feasibility, site characterization,
permitting, and construction)
Carbon Dioxide Transportation
Infrastructure Finance and 2,100 Loan or grant for state, local, and public authority to finance CO2
transportation infrastructure and innovation projects
Innovation Program
Funding to support the development of transformational carbon capture
technologies projects that are ready for large-scale pilots and will
Carbon Capture Large-Scale Pilot
Programs 937 significantly improve the efficiency, effectiveness, costs, emissions
reductions, and environmental performance of coal and natural-gas use,
including in manufacturing and industrial facilities
Carbon Utilization Program 310 Grant program for state and local governments to procure and use
products derived from captured carbon oxides
Funding to support qualified direct air capture facilities for metric tons of
Commercial Direct Air Capture
Technology Prize Competition 100 qualified CO2 captured and verified at the point of disposal, injection, or
use
Reauthorization of the Pre-Commercial Direct Air Capture Prize
Competitions Program to advance research, development,
demonstration, and commercial application of carbon capture
Pre-Commercial Direct Air
Capture Prize Competitions 15 technologies; focuses on projects that demonstrate the technical and
commercial viability of technologies to reduce CO2 emissions released
from coal electric-generation facilities and natural-gas electric-
generation facilities for commercial deployment
Power funding by theme: Hydroelectricity
Power Marketing Administration

Transmission Borrowing Authority 10,000 Funding to finance the construction, acquisition, and replacement of the
Federal Columbia River Power System
Funding for eligible states to provide technical, planning, design, and

Rehabilitation of High Hazard
Potential Dams 585 construction assistance for eligible rehabilitation activities that reduce
dam risk and increase community preparedness
Funding to support and enhance existing hydropower facilities through
Maintaining and Enhancing
Hydroelectricity Incentives 554 capital improvements related to three main areas: grid resilience, dam
safety, and environmental conditions
Funding to encourage the establishment and maintenance of effective
National Dam Safety Program 215 state programs intended to ensure dam safety, to protect human life and
property, and to improve state dam safety programs
Hydroelectric Production Incentives 125 Funding to provide incentives to hydroelectric facilities to generate
electricity
Watershed Rehabilitation Program 118 Funding to rehabilitate and extend the life of dams originally constructed
with assistance of US Department of Agriculture watershed program
Hydroelectric Efficiency
Improvement Incentives 75 Funding to help owners and operators of hydroelectric facilities make
capital improvements to improve efficiency
Funding for industry, national labs, and academia to fund research,

Hydropower Research,
Development, and Demonstration 36 development, and demonstration activities to improve the capacity,
efficiency, resilience, security, reliability, affordability, and environmental
impact of hydropower technologies
Financial assistance for electric utilities, state energy offices, tribes,
Pumped Storage Hydropower Wind institutes of higher education, or consortiums to carry out project design,
and Solar Integration and System 10 transmission studies, and power market assessments and to secure
Reliability Initiative permits for a pumped storage hydropower project to facilitate the long-
duration storage of intermittent renewable electricity
Capital Improvement and
Maintenance for Dams 10 Funding to support capital improvement and maintenance for dams
Power funding by theme: Hydrogen
Funding to support the development of at least four regional clean-

Regional Clean Hydrogen Hubs 8,000 hydrogen hubs to improve clean-hydrogen production, processing,
delivery, storage, and end use
Funding to establish a research, development, demonstration,
Clean Hydrogen Electrolysis
Program 1,000 commercialization, and deployment program for commercialization to
improve the efficiency, increase the durability, and reduce the cost of
producing clean hydrogen using electrolyzers
Funding for industry partners to advance the efficiency and cost-
effectiveness of manufacturing and raw-materials recovery processes for
Clean Hydrogen Manufacturing clean-hydrogen equipment projects (eg, develop strategies to increase
Recycling Research, Development, 500 consume acceptance, develop alternative materials, develop the design
and Demonstration Program and manufacturing process of clean hydrogen, address barriers to the
research, and demonstrate and commercialize technology and the
process for disassembly and recycling)
Power funding by theme: Nuclear

Civil Nuclear Credit Program 6,000 Credit program for owners and operators of commercial US reactors to
bid on credits to support the continued operations of the reactors
Advanced Reactor Demonstration

Program 2,477 Funding to accelerate and advance two large demonstrations of advanced
nuclear reactors for electricity generation
Power funding by theme: Battery
Grants to ensure that the United States has a viable domestic

Battery Manufacturing and
Recycling Grants 3,000 manufacturing and recycling capability to support a North American
battery supply chain
Grants to ensure that the United States has a viable battery materials
Battery Materials Processing
Grants 3,000 processing industry, to expand domestic capabilities in battery
manufacturing, and to enhance processing capacity
Funding for research, development, demonstration, and
Critical Material Innovation,
Efficiency, and Alternatives 600 commercialization to develop alternatives to critical materials, to promote
their efficient production and use, and to ensure a long-term secure and
sustainable supply of them
Funding to support three energy storage system demonstration projects,
Energy Storage Demonstration Pilot
Grant Program 355 improve grid resilience, provide services to the grid, enable energy
efficiency, and facilitate energy transition (eg, renewable integration and
electric-vehicle integration)
Funding to improve the knowledge of the geologic framework in the
Earth Mapping Resources Initiative 320 United States and to identify areas that have the potential to contain
undiscovered critical mineral resources
Funding for the design, construction, and tenant build-out of a facility to
Energy and Minerals Research
Facility 167 support energy and minerals research and associated structures through
a cooperative agreement with an academic partner
Funding to support demonstration projects that demonstrate promising
Long-Duration Energy Storage
Demonstration Initiative and Joint 150 long-duration energy storage technologies at different scales and help
new, innovative long-duration energy storage technology be commercially
Program
viable
Rare Earth Elements Demonstration

Facility 140 Funding program to demonstrate the feasibility of a full-scale integrated
rare earth element extraction and separation facility and refinery
Funding program to support construction of a facility that will further

Critical Material Supply Chain
Research Facility 75 enable research, development, demonstration, and commercialization
activities throughout the supply chain for critical materials and provide an
integrated, rapidly reconfigurable research platform
Power funding by theme: R&D
Funding to facilitate the construction of electric power transmission lines

Transmission Facilitation Program 2,500 and related facilities to support greater clean-energy growth and provide
low-cost clean energy to more US residents
Funding for states to support electric transmission and distribution
planning as well as planning activities and programs that help
State Energy Program 500 reduce carbon emissions in all sectors of the economy, including the
transportation sector, and accelerate the use of alternative transportation
fuels and vehicle electrification
Funding to support demonstration projects that test and validate
technologies that reduce industrial emissions (eg, emissions reduction
Industrial Emission Demonstration
Projects 500 industrial material production process, medium-high-temperature heat
generation, sustainable manufacturing principles, energy efficiency of
industrial processes)
Funding to support up to five clean projects (eg, solar, microgrid,
geothermal, direct air capture, energy storage, advanced nuclear, and
Clean Energy Demonstrations on
Current and Former Mine Land 500 fossil-fueled generation with carbon capture) that demonstrate the
technical and economic viability of carrying out clean-energy projects on
current and former mine land
Funding for Western Area Power Administration to purchase power and
Purchase of Power and
Transmission Services 500 transmission services, recover purchase power and wheeling services,
and transfer to the Colorado River Basins Power Marketing Fund
Funding for small and medium-size manufacturers to improve energy
Industrial Research and
Assessment Center Implementation 400 efficiency, material efficiency, cybersecurity, or productivity or to reduce
waste production, greenhouse-gas emissions, or non-greenhouse-gas
Grants
pollution
Front-End Engineering and Design Funding for research and development, demonstration, large-scale pilot,
Program Out Activities under 100 and front engineering design for CO2 transport infrastructure to support
Carbon Capture Tech Program carbon capture, utilization, and storage technology deployment
Enhanced Geothermal Systems and

Pilot Demonstrations 84 Funding to support demonstration of enhanced geothermal systems for
power production and direct use
Funding for industry, national labs, and academia to conduct research and
Marine Energy Research,
Development, and Demonstration 70 development and undertake demonstration activities to improve marine-
energy technologies
commercialization activities to improve wind energy technologies (eg,
Wind Energy Technology Program 60 establishing demonstration facilities, providing technical assistance,
conducting education and outreach activities, and performing
precompetitive research and development)
Funding for states to invest in smart manufacturing technologies (eg,
Manufacturing Leadership (Sec
40534) 50 high-performance computing resources for small and medium-size
manufacturers)
National Marine Energy Centers 40 Funding to advance the research, development, demonstration, and
commercial application of marine-energy technologies
Power funding by theme: R&D (continued)
Funding for federal and state governments and tribes to plug, remediate,
Funding to Support Orphan Well
Plugging 30 and reclaim orphaned wells located on federal land (eg, inventory, site
characterization, surface remediation, removal of surface equipment, and
downhole well plugging)
Advanced Solar Energy
Manufacturing Initiative 20 commercialization projects to advance new solar-energy manufacturing
technologies and techniques
Extended Product System Rebates 10 Funding to provide rebates for qualified extended product systems (ie,
electric motor, electronic control, and driven load)
Power funding by theme: Other

Funding to support projects that help increase flexibility, efficiency,

and reliability of the electric-power system, with a focus on increasing
Smart Grid Grant 3,000 transmission capacity, integrating renewables, reducing risk of wildfires
or other system outages, and enabling electrification (eg, electric-vehicle
integration, building electrification) and other grid edge devices
Grants for small and medium-size manufacturers to build new or retrofit
Advanced Energy Manufacturing
and Recycling Grants 750 existing manufacturing and industrial facilities to produce or recycle
advanced energy products in communities where coal mines or coal
power plants have closed
Electric Drive Vehicle Battery

Recycling and 2nd Life Apps 200 Funding to support research, development, and demonstration of electric-
vehicle-battery recycling and second-life applications for vehicle batteries
Funding to support research, development, and demonstration projects

Battery and Critical Mineral
Recycling 125 to create innovative and practical approaches to increase the reuse and
recycling of batteries (eg, recycling activities, extraction or recovery of
critical minerals from batteries that are recycled)
Funding for research, development, demonstration, and commercializa-
tion projects to create innovative and practical approaches to increase
Wind Energy Tech Recycling
Research & Development 40 the reuse and recycling of wind energy technologies (eg, increase the effi-
ciency and cost-effectiveness of the recovery of raw materials from wind
energy technology components and alternative materials)
commercialization projects to create innovative and practical approaches
Solar Recycling Research &
Development 20 to increase the reuse and recycling of solar-energy technologies (eg,
increase efficiency and cost-effectiveness of the recovery of raw
materials from solar-energy technology components, alternative
materials, design and manufacturing processes)
Funding for a multiphase competition that encourages American
entrepreneurs to develop and demonstrate processes that, when scaled,
Lithium-Ion Recycling Prize 10 have the potential to profitably capture 90% of all discarded or spent
lithium-based batteries in the United States for eventual recovery and
reintroduction of key materials into the US supply chain; funding to
support convening of a task force on battery producer requirements
Power funding by theme: Efficiency
Energy Efficiency and Conservation

Block Grant Program 550 Funding to assist states, local governments, and tribes to reduce energy
use, reduce fossil-fuel emissions, and improve energy efficiency
Energy Improvements at Public

School Facilities 500 Funding to make energy efficiency, renewable-energy, and alternative-
fueled vehicle upgrades and improvements at public schools
Assisting Federal Facilities with

Energy Conservation Technologies 250 Funding for federal agencies that they can leverage with private capital to
make energy and water efficiency upgrades to federal buildings
Grant Program
Capitalization grants for states to establish a revolving loan fund under
Energy Efficiency Revolving Loan
Fund 250 and to provide loans and grants for energy efficiency audits, upgrades,
and retrofits to increase energy efficiency and improve the comfort of
Capitalization Grant Program
buildings
Funding for a competitive grant program to enable sustained, cost-
Building Codes Implementation for
Efficiency and Resilience Program 225 effective implementation of updated building energy codes to save
customers money on their energy bills (eg, training, data collection,
planning, compliance, updates to energy codes)
Funding for institutions of higher education–based industrial research
Industrial Research and
Assessment Centers 150 and assessment centers to identify opportunities for optimizing energy
efficiency and environmental performance at manufacturing and other
industrial facilities
Funding for not-for-profit organizations with energy efficiency materials
Energy Efficiency Materials Pilot
Program 50 (eg, roofs; lighting systems; windows; doors; heating, ventilation, and air
conditioning; and plumbing improvements)
Funding for states to train individuals to conduct energy audits or
Energy Auditor Training Grant
Program 40 surveys of commercial and residential buildings to build the clean-energy
workforce, save customers money on their energy bills, and reduce
pollution from building energy use
Funding for higher education institutions to establish centers to educate
Building Training and Assessment
Centers 10 and train building technicians and engineers in implementing modern
building technologies
Funding to pay the federal share of career skills training programs under
Career Skills Training 10 which students concurrently receive classroom instruction and on-the-
job training for the purpose of obtaining an industry-related certification
to install energy-efficient building technologies
Funding to provide rebates to industrial- or manufacturing-facility owners,
Energy Efficient Transformer
Rebates 10 commercial-building owners, multifamily building owners, utilities, or
energy service companies for the replacement of a qualified energy
inefficient transformer with a qualified energy-efficient transformer
Adam Barth is a partner in McKinsey’s Houston office, Bernice Chan is a consultant in the Toronto office, and Ksenia
Kaladiouk is a partner in the Boston office.
The authors wish to thank Rob Dunn, Andrea Grass, Jenalle Huang, and Sarah Yasenka for their contributions to this article.
Paving the way to
resilience: Strengthening
public sector adaptation
planning and execution
Increasing resilience to climate change requires a more systematic response
than ever before. Governments and public entities play a central role in
defining, enabling, and executing it.
by Homayoun Hatami, Mihir Mysore, Hamid Samandari, and Alexis Trittipo
© Abstract Aerial Art/cicerocastro/Getty Images

At a glance:
— Extreme weather events, like the record-breaking heat waves in Phoenix, Arizona,
and the extreme precipitation in the Sindh province of Pakistan, are becoming
increasingly common in communities around the world. While humanity has long
adapted to various climatic conditions, climate change is happening faster
today than before and is giving rise to conditions that could threaten the habitability
of some of the planet’s most populated areas.
— Given the magnitude and systemic nature of the impacts of climate change, the
public sector has a leading role in propelling adaptation. Sixty-five percent of
the world’s countries have already developed at least an initial national adaptation
plan, covering 61 percent of the world economy and 65 percent of the world
population, as of July 2023. Of the remaining global population, almost a third lives
in Nigeria, Pakistan, and the United States, which are currently developing their
first national adaptation plans, and in India, where climate adaptation is primarily
realized through a system of state plans.
— Still, much more remains to be done. Even though the implementation rate of
these plans is increasing, many lack critical details and are not keeping up with the
rapid evolution of climate impacts. The climate future is uncertain, and the impact
of warming will not be linear and will be different from place to place. This requires
public policy planners to be flexible, regularly explore a range of climate outcomes,
and determine the level of climate risk they want to prepare for.
— We outline five potential actions for governments and government agencies to

consider as they start or continue their adaptation journeys. They are the following:
set adaptation goals based on defined future climatic conditions and desired
preparedness, integrate adaptation into government decision making, approach
adaptation with a multilevel focus, systematically engage private sector actors
and investors to mobilize funding and promote innovation, and establish and institute
centralized principles for monitoring and evaluation throughout the adaptation
life cycle.
It’s 4 p.m. on July 30, 2023. Pima Park in the the necessity of embarking on a journey that
metropolitan area of Phoenix, Arizona, is eerily empty. might in time entail major changes across countless
Normally, on a beautiful summer Sunday, the park systems and processes.5
is bustling with children. But the local temperature
has reached a high of more than 110°F (43°C) for This article focuses on the design and implemen
a record 31 days in a row.1 A year earlier, a similarly tation of adaptation plans in the public sector.
extreme heat wave was making headlines across In the first part, we take stock of the current state
the United States. In July 2022, 350 new daily-high- of national adaptation plans—the unified body
temperature records were set across the country, of strategies to adapt to climate change defined
and over 100 million people were put on heat alert.2 and published by national governments. While the
In August 2022, in the densely populated province implementation rate of these plans is increasing,
of Sindh, Pakistan, 15 days of extreme precipitation, many of them still lack critical details (for example,
reaching more than five times the 30-year average, many lack a timeline for implementation or a
unleashed exceptional flooding, submerging one- prioritization of solutions or costs) and are not follow
third of the country. The flood, widely described as ing the rapid evolution of climate impacts.
the worst in Pakistan’s recent memory, ultimately
affected 33 million people and destroyed more than In the second part, we outline a potential response,
1.7 million homes.3 The total toll in human lives of including five actions governments and government
such events is large and increasing. A recent study agencies can consider:
in the Economist estimated the excess mortality
in South Asia due to extreme heat at around 1. Examine and set adaptation goals based
110,000 people annually.4 on defined future climatic conditions (1.5°C,
2.0°C, 2.5°C, and 3.0°C, and over various time
Humanity has long adapted to various climatic horizons6) and with a view on the speed at which
conditions through migration, behavioral changes, these conditions might occur and on the desired
and technological solutions. But today’s climate and/or possible level of preparedness, while
change is of a different nature: it is the direct result maintaining flexibility to navigate uncertainties.
of human activity, is happening faster than before,
and is giving rise to conditions that could threaten 2. Broadly integrate adaptation into government
the livability of some of the planet’s most populated decision making; evaluate costs and trade-offs,
areas. Increasingly frequent and intense climate- while maximizing cobenefits.
related events highlight the need for a more
deliberate and coordinated approach to adaptation 3. Approach adaptation with a multilevel focus;
than in the past. To be clear, the scale and speed ground solutions in the local context and
of the evolution of the problem are highly variable coordinate at the national and global levels.
across geographies and the effects over the next
decade will be more muted in certain places than in 4. Systematically engage private sector actors and
others. While this buys time for action and makes investors to mobilize funding and drive innovation.
climate change more manageable, it does not alter
1
Catherine Clifford, “Phoenix suffers a record 31 straight days of 110-degree highs, and more heat is on the way,” CNBC, August 1, 2023;
“Extreme heat in North America, Europe, and China in July 2023 made much more likely by climate change,” World Weather Attribution,
July 25, 2023.
2
Judson Jones, Payton Major, and Amir Vera, “More than 100 million in the US face excessive warning or heat advisories as a dangerous heat
wave continues,” CNN, July 19, 2022.
3
“Daily sitrep No. 158,” National Disaster Management Authority, November 18, 2022.
4
“India’s deadly heatwaves are getting even hotter,” Economist, April 2, 2023. As of July 2023, according to provisional data, 1,708 people lost
their lives because of the 2022 heat wave in the United States; for more, see Giulia Carbonaro, “Extreme heat is killing more Americans than
ever,” Newsweek, July 8, 2023. And 1,739 people died in Sindh because of the flood; for more, see NDMA monsoon 2022 daily situation report
no 158, Government of Pakistan, November 2022.
5
“Introduction,” United Nations Framework Convention on Climate Change, accessed November 7, 2023.
6
Throughout the document, we refer to warming levels (for example, 1.5°C, 2.0°C, 2.5°C). All references as such are to a global mean
temperature increase above preindustrial levels.
5. Establish and institute centralized principles Taking stock of public sector
for monitoring and evaluation throughout the adaptation planning today
adaptation life cycle. Visible progress has been made in developing
national adaptation plans over the past five years.
While we focus on the public sector, we recognize As of June 2023, 65 percent of countries (128 out of
that adaptation success will draw on a broader 1987) had developed such plans, covering 61 percent
set of requirements, which we outline in a separate of the world economy and 65 percent of the world
article, “Ten key requirements for a systemic population and marking a clear first step in the global
approach to climate adaptation.” As we analyze effort to adapt to climate change (see sidebar
the role of the public sector, we highlight its unique “Methodology”). Even among countries without
capacity to establish standards, foster knowledge a formal national plan, we observe some progress
sharing, and propel coordinated efforts that can toward adaptation planning. Almost a third of the
pave the way for a more resilient future. global population living in a country without national
adaptation plan coverage is in Nigeria, Pakistan,
and the United States, which are developing national
plans, and in India, where climate adaptation is
primarily realized through a system of state plans
Methodology
We used the list of parties to the United strategies and plans were considered, most recent nationally determined
Nations Framework Convention on with priority given to adaptation plans in contribution to find any reference to
Climate Change (UNFCCC) to identify 197 case both were submitted); and we used an independently published plan. If an
single-government signatories (excluding Climate-Adapt as our primary source for independent plan was mentioned, we also
the European Union and Kosovo) and identifying these plans. For countries categorized it as “independent.”
included Kosovo, which is drawn from that did not submit documents to the
If no distinct or independent national
the US Department of State’s list of European Commission or the UNFCCC,
adaptation plan was referenced in
independent states, for a total of 198 we sought out any published national
a nationally determined contribution, we
countries. For each of the countries in this plan (at the country level, not at the state
looked for a dedicated adaptation section
list, we determined whether they had an or federal agency level). Those we found
within the report with stated goals or
adaptation plan. We designated any plan were categorized as “independent.” In
actions. If such a section was present, we
submitted to the UNFCCC as a national certain instances, this included adaptation
classified the plan as “independent,”
adaptation plan; we considered all climate communications submitted to the United
which was the case for about 10 percent
adaptation action plans submitted to the Nations. If no separate adaptation plan
of identified plans.
European Commission (both adaptation was accessible, we reviewed the country’s
7
Those 198 countries include the 197 single-government signatories of the United Nations Framework Convention on Climate Change
(UNFCCC), excluding the European Union, and Kosovo. As of September 2023, the count of adaptation plans includes national adaptation
plan submissions to the UNFCCC; climate adaptation action plan submissions to the European Commission as reported in Climate-Adapt;
national adaptation plans published independently online and on UN-affiliated websites, a range of institutions, and national department
websites; and references to an independently published adaptation plan or a dedicated adaptation section with stated goals/actions in a
country’s most recent nationally determined contribution. If no plan was identified from these sources, countries were classified as not having
a national-level adaptation plan.
(see sidebars, “Adaptation planning in the United technical assistance to vulnerable nations, or by
States” and “Adaptation planning in India.”).8 the European Commission, which requires plans
from EU member nations. Together, UNFCCC
The progress of national adaptation plans has and the European Commission have facilitated
been primarily propelled either by the United nearly 60 percent of existing plans. The remaining
Nations Framework Convention on Climate 40 percent have been published independently
Change (UNFCCC), which provides funding and (Exhibit 1).9 We conducted an analysis on a sample of
Web <2023r>
<PublicSector>
Exhibit 1
Exhibit <1> of <5>
In the public sector, countries and states are starting to build national
adaptation plans focused on risk reduction.
National adaptation plans, as of June 2023
128 of 198 61% 65%

countries have adaptation plans¹ of the world economy² of the world population²
New adaptation plan publication year and affiliation, number of countries1

54
UNFCCC
EU
Other 37
18
13
2 4
2007–10 2011–13 2014–16 2017–19 2020–22 2023
1
197 independent nations according to United Nations Framework Convention on Climate Change (UNFCCC) signatories, plus the state of Kosovo.
²Based on 2021 global GDP and population.
Source: UNFCCC; World Bank; McKinsey analysis
McKinsey & Company
8
In 2008, India published an integrated national action plan; see National action plan on climate change, Government of India, June 2008.
This includes adaptation measures but is excluded based on our methodology, because it did not include a distinct adaptation section. The
United States has seen numerous subnational plans developed for states, cities, and government agencies, and is currently developing its
national adaptation plan. Both Pakistan and Nigeria have initiated the national adaptation plan development process within the United Nations
Framework Convention on Climate Change. For more, see National adaptation plan Pakistan 2023, Pakistan Ministry of Climate Change &
Environmental Coordination, August 2023; and Nigeria’s national adaptation plan framework, Nigeria’s Federal Ministry of Environment,
June 2020.
9
These nonaffiliated plans have been created without a formal structure or set of standards and are not housed in a centralized location. To
alleviate some of this fragmentation, the United Nations is currently convening a Global Stocktake, which will produce a synthesized report
on global adaptation progress by the end of the year. The remainder of adaptation plans are either embedded as a component of a country’s
nationally determined contribution—largely mitigation-focused plans or commitments submitted to the UNFCCC—or published as a stand-
alone document not affiliated with any multilateral body.
national adaptation plans. We selected 50 countries location (for example, most countries with a coastline
to represent the world’s diverse approaches to including sea level rise as a hazard). What’s more,
adaptation. We made sure to include most of the most plans consider many different climate scenarios
world population, as well as regions where exposure in their projections and propose a wide range of
to climate hazards is greatest (Exhibit 2). solution levers. They also provide an implementation
framework for their adaptation solutions.
In our sample, 70 percent of countries (35 out of
50) published a national adaptation plan. Most Our analysis reveals three significant challenges:
plans identify relevant climate hazards, propose
solutions, and consider multiple warming scenarios, 1. While more adaptation plans have been
but meaningful challenges remain. In addition, most developed in recent years, an increased pace of
of them highlight climate hazards that have been renewal and refinement is required. The world’s
historically experienced or are expected based on understanding of climate impacts is constantly
Web <2023r>
<PublicSector>
Exhibit 2
Exhibit <2> of <5>
Within the world’s most populous and vulnerable countries, adaptation

plans have yet to add detail on solution prioritization and cost.
Adaptation planning within 50 of the world’s most populous and vulnerable countries¹
35 of 50 37% 31%
countries have adaptation plans have plans with priority actions have plans costed
Annual plan costs as a share of GDP,² % of 11 countries

45
36
9 9
0% to 1% GDP 1% to 3% GDP 3% to 5% GDP ≥5% GDP
1
Cross-section of 25 vulnerable countries from ND-Gain and Germanwatch exposure rankings, World Bank and US Agency for International Development (USAID)
climate profiles, and Swiss Re Climate Economics Index. The 25 most populous countries independent of this list were found using 2021 UN population data.
²In 4 of 5 plans with plan costs <1%, costs were below 0.5% of annualized GDP.
Source: Germanwatch; ND-Gain; Swiss Re Climate Economics Index; UN Population Division; USAID; World Bank
McKinsey & Company
Adaptation planning in the United States
The United States’ approach to adaptation improvements in response to climate an official adaptation plan; it has a state
planning relies on a combination of policy change, such as reinforcing grid resilience plan for coastal protection and dedicated
instruments, including federal executive against wildfires and bolstering coastal funds to respond to floods and improve
orders and specific provisions in federal protection against flooding, and provides infrastructure resilience. In addition, the
and nonfederal laws. over $50 billion in funding to support Texan cities of Austin, Dallas, Houston,
them.2 The administration also recently and San Antonio have adaptation plans,
At the national level, beyond executive
released the National Climate Resilience covering 20 percent of the state’s
orders from the president calling directly
Framework to guide federal resiliency population.4 Finally, as of August 2023,
for adaptation interventions, adaptation
investments and announced an upcoming more than 50 Native American tribes
planning happens primarily through the
White House Summit on Building Climate have officially enacted climate action
federal departments and agencies that
Resilient Communities. plans, while many other Native American
have published their own adaptation
communities are actively developing
plans. As of August 2023, all 15 executive At the subnational level, adaptation
initiatives to respond to climate change.5
departments and 13 federal agencies had planning is generally carried out by states
published adaptation plans.1 Additionally, and municipalities. As of August 2023, Given its vast and diverse geography,
resilience is emerging as a topic of focus 24 states and the District of Columbia had the United States faces a wide range
for the current administration. Recent published or were in the process of drafting of climate change challenges. The US
federal laws, such as the Infrastructure adaptation plans, covering roughly experience shows that responding to
Investment and Jobs Act in 2021 and 55 percent of the US population.3 In states these challenges at a state level can
the Inflation Reduction Act in 2022, without a comprehensive adaptation provide an important first step and at
include provisions that address climate plan, climate adaptation is moving forward the same time highlights the need
adaptation. The 2021 law, for example, through sector or municipal plans. The for central coordination and funding at
outlines specific infrastructure state of Texas, for instance, does not have the state and national levels.
1
“Federal progress, plans, and performance,” Council on Environmental Quality, accessed November 9, 2023.
2
“Resilience in the Infrastructure Investment and Jobs Act,” Georgetown Climate Center, accessed November 9, 2023.
3
“State adaptation progress tracker,” Georgetown Climate Center, accessed November 9, 2023.
4
See “Preparing for climate change in Texas,” Georgetown Climate Center, accessed November 9, 2023; and “QuickFacts: Texas; United States; Houston city, Texas; San
Antonio city, Texas; Dallas city, Texas; Austin city, Texas,” US Census Bureau, accessed November 9, 2023.
5
See “Partnership for tribal governance,” National Congress of American Indians, accessed November 9, 2023; and Nicola Jones, “How native tribes are taking the lead on
planning for climate change,” Yale Environment 360, February 11, 2020.
evolving. Additionally, these impacts are dependent 40 percent of plans (14 out of 35) do not provide
on changes in global emissions over time. Adaptation any timeline for implementation. Only 51 percent
plans are therefore best developed through iterative (18 out of 35) map these actions to hazards or
refinement. However, 25 percent of published prioritize risks (for example, erecting floodwalls
national adaptation plans (32 out of 128) are already and restoring natural features like sand dunes as
more than seven years old, and many lack formal adaptation measures to protect against sea level
commitments for updates.10 rise). Thirty-seven percent of plans (13 out of 35)
suggest a list of potential actions without
2. Many plans require key additional details to be providing a prioritization methodology. Finally,
actionable, such as a timeline for implementation, only 31 percent of plans (11 out of 35) estimate
prioritization of solutions, and costs. In our sample,
10
Thirty-two countries out of 128 published their plans before 2017.
adaptation costs, and those that do take First, significant additional warming is expected, but
varying approaches.11 its full extent is undefined. Even the most optimistic
scenarios reach 1.5°C of warming above pre
3. Many plans have yet to put in place a system to industrial levels in the early 2030s.14 That would
evaluate interventions and monitor their execution. be the minimum level against which to protect
Our sample analysis shows that while 80 percent societies from projected climate change impacts.15
(28 out of 35) of national adaptation plans mentioned Beyond this, future increases in temperature
the need for monitoring and evaluating, only a third (2°C, 2.5°C, 3°C) are more uncertain.
have included a formal framework to do so.12 These
mechanisms, however, are critical to monitoring Second, the impacts of warming are nonlinear.
and evaluating execution, redefining goals and Linear increases in global average temperature
interventions in light of new information, and (from 1.5°C to 2°C to 2.5°C) are associated with
reinforcing accountability. nonlinear increases in the frequency and severity
of extreme weather events.16 At today’s warming of
about 1.1°C, for instance, less than 1 percent of the
Five potential actions for governments total projected global population (about 0.1 billion) is
and government agencies to likely to be exposed to severe heat stress. However,
consider in the shorter term at 2°C of warming, this proportion increases to
We outline five key actions that can help anchor and one-sixth (about 1.4 billion people).17 And this is
enable the adaptation journey. This list is not before factoring in the interaction between climate
meant to be exhaustive but to offer a tangible path and biological systems, which needs to be better
forward in most cases. understood and integrated.
Action 1: Set goals based on a range of future Third, there is a lack of clarity on how systems
climatic conditions over various time horizons that are already operating at capacity will operate
The climate future is clear in its direction (in the under the impacts of further warming. In some
absence of a major correction) and uncertain in its geographies, for instance, already underresourced
timing, details, and—most importantly—feedback and underdeveloped forest management services
loops within and among various physical and socio are now also struggling to cope with more frequent
economic systems. We are operating outside of and intense wildfires, while water systems—already
temperature ranges we have seen historically. The under strain due to overpopulation, obsolescence,
global mean surface temperature has increased and misaligned incentives—are seeing the
by about 1.1°C above preindustrial levels, and this additional impact of changing rainfall patterns
change is happening orders of magnitude faster and increased droughts and floods.
than at any other time in at least the last 2,000 years,
according to the Sixth Assessment Report of the In light of this uncertainty, three steps can help
Intergovernmental Panel on Climate Change.13 governments and government agencies better
prepare for future climatic conditions.
This singular situation carries three areas
of uncertainty: 1. Explore a range of potential climatic outcomes to
effectively navigate uncertainty, while establishing
11
Certain countries estimate costs by sector or thematic areas (infrastructure, health, agriculture and fisheries, for instance), by individual
adaptation actions (for example, building seawalls, afforestation), by region, or by different mitigation pathways.
12
This is in line with academic research, which found that as of 2021, more than 60 percent of the countries with a national adaptation plan were
not tracking its implementation. For more, see Timo Leiter, “Do governments track the implementation of national climate change adaptation
plans? An evidence-based global stocktake of monitoring and evaluation systems,” Environmental Science & Policy, November 2021,
Volume 125.
13
See Climate change 2021: The physical science basis, Intergovernmental Panel on Climate Change, August 2021; and Andy Ridgwell, James
Zachos, and Richard Zeebe, “Anthropogenic carbon release rate unprecedented during the past 66 million years,” Nature, March 2016,
Volume 9.
14
Every time we mention a temperature rise projection, it is assumed to be from preindustrial levels. This level of warming was achieved for the
first time in the month of July 2023. See “July 2023: Global air and ocean temperatures reach new record highs,” Copernicus press release,
August 8, 2023.
15
For an explanation of the consensus view on climate scenarios and what is deemed the most optimistic scenario, see section “Potential
Climate Futures” in Climate change 2021, August 2021.
16
Climate change 2022: Impacts, adaptation, and vulnerability, Intergovernmental Panel on Climate Change, February 2022.
17
For more, see “Protecting people from a changing climate: The case for resilience,” McKinsey, November 8, 2021.
a central planning scenario that is continually in 2050, respectively).18 These maps forecast
tested and improved to guide further planning. As temperature ranges for 2030, 2050, and 2100,
they analyze potential adaptation interventions, as well as their associated physical hazards, such
governments could benefit from considering as precipitation or extreme heat. In addition, they
different climactic scenarios (1.5°C, 2°C, 2.5°C, 3°C), overlay social vulnerabilities (for example, exposure
as well as various time horizons, and the desired to diseases, aging populations), empowering actors
and/or possible level of preparedness. Argentina’s to take systemic-adaptation-planning decisions.
National Climate Change Office, for example, has
created an online tool that generates physical It is also critical for governments and government
risk maps for both moderate- and high-ongoing- agencies to select a central scenario to anchor
emission scenarios (1.5–2.0°C and 2.0–3.0°C adaptation thinking, planning, and implementation,
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Exhibit 3 of <6>
Exhibit <3>
The number of hot days on the South American continent could increase to as
much as four months per year under 3°C warming.
Hot days in South America >35°C (95°F) under different warming levels, number of additional hot days
105 days
90
75
60
45
30
1.5ºC 2.0ºC 15
0 days
warming warming
2.5ºC 3.0ºC
warming warming
Source: NASA Earth Exchange Global Daily Downscaled Projections (NEX-GDDP-CMIP6); McKinsey Climate Analytics
McKinsey & Company
18
Following RCP4.5 and RCP8.5 emission pathways.
as the magnitude of impacts can vary under lifetime.21 Other governments could benefit from
different scenarios. To continually ensure robust performing similar analyses before investing in
ness, this central scenario should be regularly adaptation infrastructure.
tested and improved based on new data and
modeling. Take, for instance, the decision that many 3. Design adaptation plans to be dynamic and
South American countries face in determining the flexible under a range of potential climate futures.
temperature to which they might need to adapt Flexibility within adaptation solutions is essential
(Exhibit 3). An increase in warming of 1.5°C could to address uncertainty. Solutions could contain
result in up to about two more months with local multiple options to allow enough flexibility to fit
temperatures above 35°C. At 3°C, this risk rises to whichever scenario unfolds. While the initial
about four more months. cost of these types of solutions may be higher, they
can result in significant savings.
Of course, changes in global temperature may
also cause higher-order impacts on economic The Thames flood management system, for
development, food and energy security, example, was developed as a long-term strategy
infrastructure, and, crucially, health. These to manage inherent uncertainties associated with
impacts make planning even more important. future flood risk in London (Exhibit 4).
2. Determine the desired level of adaptation, The plan outlines multiple sets of interventions
which risks (or extreme weather events) to protect that accommodate for varying rates of temperature
against, and the degree of protection desired. This change. These interventions are modular and
can entail preparing for events that are relatively scalable: the plan has more than 400 small movable
frequent (once every ten years) or highly infrequent structures and 36 floodgates.
(once every 10,000 years) today but may increase
in frequency in the future. One example of a govern Such thinking is even more important where
ment’s choosing a level of adaptation can be seen resources are more limited (or where the
with the Maeslant storm surge barrier in Rotterdam, time horizon of risk manifestation is further out
Netherlands, which is the largest mobile barrier in or more uncertain).
the world and was constructed to withstand a range
of storm intensities. The barrier is designed for up Action 2: Broadly integrate adaptation
to a once-in-10,000-years storm and storm surges into government decision making
from three to five meters in height. It is part of the Adaptation planning intersects with many public
Netherlands’ investment to adapt to sea level rise, priorities such as economic development, housing,
with a total cost exceeding $500 million.19 Other public health, and climate change mitigation. By
Dutch flood protection infrastructure assets with using these intersections, governments, multilateral
similar protection standards had even higher institutions, and philanthropies can magnify
construction costs, such as the $2.4 billion Eastern adaptation impact and seek to generate positive
Scheldt Barrier.20 However, the significant cost outcomes for broader groups of stakeholders
of the infrastructure work is weighed against (as well as avoid unintended consequences). There
the fact that such an extreme event could cause are three steps in particular that governments can
massive disruptions across the entire country and take to optimize adaptation decision making.
that constructed assets have a long expected
19
Chris Bentley, “As sea levels rise, Rotterdam floats to the top as an example of how to live with water,” World, June 20, 2016.
20
Aileen Cho, Scott Lewis, and Tom Sawyer, “Storm surge barriers work,” Engineering News-Record, November 14, 2012; and A. Bouwman et
al., Flood protection in the Netherlands: Framing long-term challenges and options for a climate-resilient delta, Netherlands Environmental
Assessment Agency, December 2009.
21
Karin de Brujin et al., “Assessment of the Netherlands’ flood risk management policy under global change,” Ambio, March 2012, Volume 41,
Number 2.

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Exhibit 4 of <6>
Exhibit <4a>
SCROLLING 1
The Thames flood management system aims at flexible and dynamic planning,
with over 400 movable structures to address differing levels of risk.
Flood depth for 1-in-100-year flood event in London¹ under a 2°C scenario,² centimeters
>250
London undefended from flood >100
>50
>25
>10
>5
River/lake
Web <2023r>
<PublicSector>
Exhibit <4b> of <6>
SCROLLING 2
The Thames flood management system aims at flexible and dynamic planning,
with over 400 movable structures to address0 differing levels of risk.
2
Miles
Flood depth for 1-in-100-year flood event in London¹ under a 2°C scenario,² centimeters
¹The 100-year return period refers to events having 1% probability of occurring annually. Flood depth represented by sum of median pluvial, fluvial, and coastal
>250
London defended from flood
flooding during the 100-year return period. Flood defenses such as floodgates (eg, Thames barrier) are explicitly represented in the “defended” run of the dynami-
cal hydrological model. The “undefended” simulation does not include known or estimated flood defenses.
>100
²The 2°C scenario refers to warming above preindustrial levels. Timing associated with warming level varies across the model ensemble.
>50
Source: ClimateData.ca; Fathom-Global 3.0; Journal of Geochemical Exploration; UK Environment Agency TE2100 Plan; McKinsey Climate Analytics; © Mapbox;
© OpenStreetMap
>25
>10
McKinsey & Company
>5
River/lake
0 2
Miles
¹The 100-year return period refers to events having 1% probability of occurring annually. Flood depth represented by sum of median pluvial, fluvial, and coastal
flooding during the 100-year return period. Flood defenses such as floodgates (eg, Thames barrier) are explicitly represented in the “defended” run of the dynami-
cal hydrological model. The “undefended” simulation does not include known or estimated flood defenses.
²The 2°C scenario refers to warming above preindustrial levels. Timing associated with warming level varies across the model ensemble.
Source: ClimateData.ca; Fathom-Global 3.0; Journal of Geochemical Exploration; UK Environment Agency TE2100 Plan; McKinsey Climate Analytics; © Mapbox;
© OpenStreetMap
McKinsey & Company

Web <2023r>
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Exhibit 5 of <6>
Exhibit <5>
Mangrove restoration is an example of climate adaptation with multiple local

and global benefits.
Coastal protections from mangroves
Surge level without mangroves
Nothing stops the surge from moving swiftly inland
Surge level with mangroves
The storm surge is diffused
In addition, mangroves offer multiple cobenefits that increase overall value.
Food
Annual global benefits

of mangrove forests
$450 billion 31%
global annual value of Economic

mangroves from all benefits1 benefits
2.3–3.8× 26% 16% Coastal protection

minimum return
on investment for Ecosystem health
mangrove restoration2 3% Carbon sequestration
21% 3% Other
1
Mangrove restoration has a value of $33,000 per hectare with 13.8 million hectares of existing mangroves.
2
ROI was calculated using restoration costs and total benefits of mangroves. Restoration costs are estimated at $9,000 per hectare. Restoration benefits are
estimated at $33,000 per hectare for existing mangroves and at $21,000 per hectare for restored mangroves.
Source: Daniel Friess, Alexandros Gasparatos, and Jie Su, “A meta-analysis of the ecological and economic outcomes of mangrove restoration,” Nature, Aug 19,
2021; McKinsey analysis
McKinsey & Company

1. Consider prioritizing opportunities with cobenefits welfare.25 Policies that reduce incentives to adapt
extending beyond adaptation, where it makes or that lock in only one adaptation pathway,
sense to do so. A fertile area for such opportunities restricting future actions, are also examples of
is the intersection of adaptation and mitigation. maladaptation. Such negative effects can be
Each opportunity serves a distinct role, yet each seen in the case of the seawalls on Vanua Levu,
can often offer mutual benefits. A hectare of Fiji, which were designed as a shield against
mangroves, for example, can store 1,000 tons of rising sea levels but inadvertently increased
carbon on average.22 Mangroves also prevent potential hazard exposure by hindering stormwater
soil erosion and protect coastlines and nearby drainage.26 The structures also unintentionally
infrastructure from damage caused by storm surges redistributed risks to other coastal communities
or other extreme events (Exhibit 5).23 through changes in sediment deposits and
resulted in unintended environmental consequences,
2. Design adaptation planning in a cross- threatening the health of the marine ecosystems.27
government manner. Public institutions are best Maladaptation can also occur in the context of
served by avoiding silos and promoting coordination. insurance, which provides an important mechanism
For every major investment or infrastructure project, for transferring and distributing risks but can
assessments should ideally be made under multiple also lead to suboptimal decisions and/or moral
climate scenarios. They can consider, for example, hazards if it is not carefully managed. Agricultural
how adaptation to extreme heat risk intersects climate insurance, for example, may lead farmers to
with public health impacts, such as exhaustion, deprioritize adaptation levers like intercropping
heatstroke, and dehydration. As institutions look and soil moisture maintenance techniques
at the intricate relationship between adaptation and increasingly rely on cash crops over more
and health, they can come up with more resilient subsistence crops, because they offer
comprehensive strategies. higher-insurance-compensation potential.28
Insurance can also give undesirable incentives
Furthermore, climate change disproportionately to people who deliberately choose to inhabit
affects more vulnerable communities, and adaptation high-risk areas, because they do not assume
strategies can not only protect lives but also the full costs of climate hazards.
enhance livelihoods. The World Bank’s Colombia
Resilient and Inclusive Housing Project, for A few countries, such as Canada, Finland, and the
example, focuses on improving housing for low- United Kingdom, have started acknowledging
income families in high-risk areas. Using detailed and explicitly addressing maladaptation in their
hazard and climate risk maps, the project targets national adaptation plans.
municipalities at risk of landslides and floods.24
Action 3: Approach adaptation with a multilevel
3. Seek to avoid maladaptation by evaluating the focus at the local, national, and global levels
potential risks and unintended consequences Effective adaptation requires involvement from
of adaptation actions during solutions design. public entities at the local, national, and global
Adaptation solutions can result in “maladaptation,” levels, and the optimal setting for decision making
which occurs when adaptation actions lead to can vary. Many cities, for instance, have led local
increased risks, such as higher greenhouse gas actions to build resilient communities, notably
emissions, heightened vulnerability to climate with the guidance of the C40 and Resilient Cities
change, inequitable outcomes, or diminished
22
“Mangroves in the spotlight,” UN Environment Programme (UNEP), July 25, 2017.
23
For more, see Aaron Ellison, Alexander Felson, and Daniel Friess, “Mangrove rehabilitation and restoration as experimental adaptive
management,” Frontiers in Marine Science, May 2020, Volume 7; and Véronique Helfer and Martin Zimmer, “Mangrove forests – a nature-
based solution for climate change mitigation and adaptation,” Rural 21, March 18, 2022.
24
The project aims to extend Colombia’s home improvement program: Casa Digna, Vida Digna. For more, see Colombia: Resilient and inclusive
housing project (P172535), World Bank, February 2020.
25
Climate change 2022, February 2022.
26
Karen McNamara et al., “Dam(n) seawalls: A case of climate change maladaptation in Fiji,” Managing climate change adaptation in the Pacific
region, March 2020.
27
Ibid.; see also Lisa Schipper, “Maladaptation: When adaptation to climate change goes very wrong,” One Earth, October 2020, Volume 3,
Number 4.
28
See “Maladaptation,” 2020; and Leigh Johnson, David Kreuer, and Birgit Müller, Risks of maladaptation: Climate insurance in agriculture,
German Development Institute, 2017.

networks.29 This potential action requires public hazards manifest in their context. Drawing from
sector participation on three levels: historical experience, familiarity with local topog
raphies, and close communal and cultural ties,
1. Local parties engaging in targeted action local leaders are well positioned to anticipate
within their communities. Local actors, including impacts from risk (for example, flood-prone zones
community leaders and inhabitants, play a vital role in their locality that are particularly vulnerable
in understanding the implications of climate risks during the monsoon) and identify interventions.
and developing effective adaptation interventions. In Maharashtra, India, for instance, the local
The people on the ground often know firsthand how community organization Swayam Shikshan Prayog
29
The C40 network includes nearly 100 influential cities, including Amsterdam, Beijing, Mumbai, and San Francisco. See “About C40,” C40
Cities Climate Leadership Group, accessed November 8, 2023.
Adaptation planning in India
India’s adaptation planning occurs at bedded into development planning across departments of environment), which may
the state level through State Action Plans sectors and has encouraged enhanced not have the authority or remit to coordi-
on Climate Change (SAPCCs). The SAPCCs climate action.2 As of July 2023, all 28 states nate action across sectors. In this context,
document the unique vulnerabilities had published at least one version of their many observers have called for increased
of each state to climate risks and lay out SAPCCs, thereby covering 98 percent of inclusion and engagement of local and
planned interventions that both respond to the Indian population. The level of ambition private sector actors.
physical climate change and activate and comprehensiveness of the strategies
India faces a unique challenge, planning
a transition to a lower-carbon economy. differs across states.3 Some states have re-
for adaptation across a large, diverse pop-
They include strategies for mitigation leased thorough action plans with state-lev-
ulation spread out across a wide and varied
and adaptation across different sectors, el vulnerability assessments, timelines, and
geography. Having adaptation
such as agriculture, transport, and energy. budget estimates; others rely on national
plans coordinated at the state level, across
Given India’s geographic and cultural data for their vulnerability assessments and
multiple departments, has shown promise
diversity, this system was envisioned to outline high-level solutions.4
for creating localized solutions tailored
empower states and enable localized
While coverage is extremely high, imple to residents and is an important first step.
planning approaches that tailor solutions
mentation has been challenging due to However, India’s experience also high-
to regional contexts, such as specific
limited funding from both the central and lights the need for localized solutions to be
agricultural needs.1
state governments.5 In addition, the SAP- followed by much greater central coordi
This decentralized planning approach has CCs are generally managed by government nation and financial resources in order to
enabled adaptation efforts to be more em- agencies in each state (such as state propel implementation.6
1
“India,” United Nations Development Programme, accessed November 9, 2023.
2
Navroz Dubash and Anu Jogesh, “From margins to mainstream? State climate change planning in India,” Economic and Political Weekly, November 2014, Volume 49,
Number 48.
3
Arunabha Ghosh, “Can India become a green superpower?,” Foreign Affairs, June 20, 2023.
4
Aditya Valiathan Pillai, “Guest post: The gaps in India’s ‘heat action plans,’” Carbon Brief, March 28, 2023; Elizabeth Gogoi, India’s state action plans on climate change:
Towards meaningful action, Oxford Policy Management, 2017.
5
C arbon Brief, for example, reports that many states have been constrained by obligations associated with their COVID-19 response. In addition, it conducted an analysis of
state and district plans and reports that only 30 percent discuss funding mechanisms. For more, see “Guest post,” March 28, 2023; and Ravi Prasad and Ridhima Sud,
“Implementing climate change adaptation: Lessons from India’s national adaptation fund on climate change (NAFCC),” Climate Policy, August 2018, Volume 19, Number 3.
6
GIZ (Germany’s international development department) and the Global Center on Adaptation both explain the need for local leadership in the context of India’s limited
governmental capacity. Foreign Affairs reports that private investors are essential to help India’s energy sector respond to climate change. See India: NAPCC process
country case study, GIZ, March 2019; and Stories of resilience: Lessons from local adaptation practice, Global Center on Adaptation, November 2022; and “Can India
become a green superpower?,” June 20, 2023.

established a climate-resilient farming model for 2. National actors coordinating efforts, facilitating
local women who had suffered from malnutrition. It knowledge sharing, and managing funding
identified the needs of the community and came allocation. Central governments can play a key role
up with interventions, such as moving from cash in adaptation by setting targets, creating
crops to certain food crops and focusing on a foundational knowledge base, and coordinating
specific women’s groups. These interventions may action to align with national priorities. They can
strengthen local food supply, thereby supporting also put forward and implement a vision for climate
climate adaptation and local communities.30 adaptation, including determining central scenarios
to adapt to, defining common goals, and identifying
The involvement of local community members can necessary interventions to achieve desired
foster trust and active participation, especially outcomes. In addition, when functioning and
for traditionally marginalized groups, and help coordinating effectively, national actors are
national and global actors better understand risks well positioned to build and disseminate critical
and potential solutions. Early participation knowledge, data, and best practices. At the
of local inhabitants can help shape acceptable same time, they can empower local actors with
adaptation solutions from the beginning. the necessary resources to make well-informed
Adaptation measures can be disruptive, and not decisions. South Africa’s Let’s Respond Toolkit,
engaging local actors can increase maladaptation for example, provides an overview on integrating
risk. In Vietnam, for example, forest management climate change into municipal planning.
policies designed to manage flood risks are
reported to have limited local mountain people’s 3. Global actors supporting broader systemic
access to land and resources as an unintended issues, such as setting global standards, sharing
impact.31 In this context, local actors can play a best practices, and helping funnel financing to
pivotal role in building trust, reinforcing mutual vulnerable countries. Global coordination is often
understanding, and improving the effectiveness necessary to evaluate transnational impacts of
of adaptation.32 adaptation solutions, reallocate support to the
most vulnerable countries, and bring down the unit
In some cases, national governments have set the cost of adaptation. Global actors like the European
groundwork and provided local actors the flexibility Union and the United Nations can be well equipped
to determine their adaptation pathway.33 In other to share best practices and set standards; they
cases, national governments have established have been especially instrumental in encouraging
a mandate for local governments to create and and supporting countries to establish national
implement their own adaptation plans. This is, for adaptation plans. Technical support and expertise
example, the case in the Philippines, where about provided by the United Nations was a determining
80 percent of local government units have submitted factor for over 60 developing countries creating their
adaptation plans.34 A third approach, particularly first adaptation plans.35 When operating effectively,
effective for smaller countries, has been to engage coalitions of governments are well positioned to
local stakeholders in the development of national assess broader implications of adaptation measures
plans, while maintaining decision making at the and mediate outcomes, preventing initiatives of
national level. one nation from creating maladaptive outcomes
30
The organization won the Local Adaptation Champions Awards at the United Nations climate talk last year known as COP27. For more, see
“20 organizations pioneering locally led climate resilience announced as finalists for the Local Adaptation Champions Awards at COP27,”
Global Center on Adaptation, September 6, 2022.
31
Hans Nicolai Adam et al., “Adaptation interventions and their effect on vulnerability in developing countries: Help, hindrance, or irrelevance?,”
World Development, May 2021, Volume 141.
32
Wendy Karen Bragg et al., “Communicating managed retreat in California,” Water, February 2021, Volume 13, Number 6.
33
Bangladesh’s national adaptation plan, for instance, empowers local governments to select from 113 proposed interventions across sectors,
based on local priorities.
34
Between 2005 and 2021, 1,472 of 1,715 local government units submitted plans. See “Local climate change action plan,” National Integrated
Climate Change Database Information and Exchange System, accessed November 8, 2023.
35
“About the NAP-GSP,” UNDP-UN Environment National Adaptation Plan Global Support Programme, accessed November 8, 2023.

in another (for example, building dams across Action 4: Systematically engage private
transnational water sources).36 sector actors and investors to mobilize
funding and drive innovation
For their part, international foundations and Governments and government agencies face
nongovernmental organizations (NGOs) can enable challenges that private sector actors can help,
the development at scale of adaptation tech at least partially, address. In many contexts, for
nologies and solutions by pooling global resources instance, public funding for adaptation falls short.
and supporting development of advanced, localized This is most apparent in developing countries,
expertise. Recent adaptation grants from the where resources are spread thinly across competing
Bill & Melinda Gates Foundation, for example, have priorities. In 2022, the United Nations estimated
supported the development of a weather intelligence that the adaptation finance gap alone in developing
platform to provide farmers with climate-smart countries is five to ten times larger than today’s total
agricultural information, research into developing flow of international funds and continues to widen.40
strains of native grasses that enhance soil health, In our sample, the 11 countries with implementation
and funding for African scientists’ and researchers’ cost estimates had a combined amount of
engagement efforts with national governments $433 billion. For perspective, the United Nations
to shape adaptation policy.37 In India, Tata Trusts has expects adaptation to require investments of up
helped fund a nonprofit organization’s efforts to $300 billion a year globally by 2030.41
to restore bodies of water that have been
degraded and depleted by long periods of drought To catalyze engagement from private sector actors,
in Maharashtra.38 governments could gain from first understanding
the private sector’s specific challenges in relation to
Finally, global actors such as international develop climate risks and tailoring their approach accordingly.
ment banks and regional investment funds can help Private sector actors often do not have clarity on
reallocate resources to reinforce the adaptation climate risks and their associated costs, making
potential of the countries most susceptible to the it difficult for them to manage risks efficiently and
impacts of climate change. A notable example assess potential ROI. Governments could address
of this kind of cooperation is the Green Climate these challenges by taking three steps.
Fund’s first-loss investment of $253 million into the
Africa Finance Corporation’s Infrastructure Climate 1. Provide private sector actors and investors
Resilient Fund (ICRF).39 Through IRCF, the Africa with clear and transparent regulations, along with
Finance Corporation finances climate-resilient guidance and adequate notice. Private sector
greenfield and brownfield infrastructure across the actors often lack easy access to adaptation needs
region to future-proof existing infrastructure and opportunities where their involvement would
while enabling new infrastructure to be planned be beneficial. For example, they are often unaware
with climate change in mind. what funding is needed as only 29 percent of
national adaptation plans in our analysis (ten out
of 35) include cost estimates for adaptation
interventions. Relevant government agencies can
help provide resources and expertise to ensure
adaptation interventions are costed appropriately.
36
The building of the Grand Ethiopian Renaissance Dam in Ethiopia, for instance, is threatening the flow of the Nile River and the climate
resilience of Egyptian communities downstream. See Max Bearak and Sudarsan Raghavan, “Africa’s largest dam powers dreams of
prosperity in Ethiopia—and fears of hunger in Egypt,” Washington Post, October 15, 2023.
37
“What is climate adaptation?,” Bill & Melinda Gates Foundation, April 25, 2023.
38
“It’s time for philanthropy to step up the fight against climate change,” McKinsey, October 20, 2021.
39
“Green Climate Fund commits record US $253 million to AFC’s Infrastructure Climate Resilient Fund for Africa,” Africa Finance Corporation,
March 21, 2023.
40
Adaptation gap report 2022, UNEP, November 2022.
41
“Finance & Justice,” United Nations Climate Action, accessed October 14, 2023.

Government bodies can also influence private can reduce peak power capacity by 30 percent
sector actors to reallocate funding toward climate compared with conventional cooling systems,
adaptation initiatives with regulations that seek resulting in significant cost savings for businesses.
to make climate risks more evident. Governments
can adjust securities law and fiduciary standards Public entities have also a critical role in deploying
to explicitly include climate-related risks. The “blended finance” to manage financial uncertainty
European Union, for example, requires financial- and derisk adaptation solutions. This approach
market participants to disclose sustainability combines capital from various sources with different
risks.42 In Canada and the United States, securities return expectations to improve the risk-return
regulators are considering rules to require publicly profile of investments. One way that blended
traded companies to disclose how their businesses finance supports adaptation is through guarantees
are managing climate-related risks.43 Finally, and cofinancing. The Multilateral Investment
governments can also enact new standards Guarantee Agency, for example, provided a
or certifications directly considering climate $13.1 million guarantee in Jordan, protecting private
adaptation risks. investors’ equity investments over a 20-year
period.44 This guarantee enabled the financing of
2. Align financial incentives to clarify and a water treatment plant expansion to tackle
support potential ROI for private sector actors. climate-related challenges such as storms,
Direct contributions from private sector actors droughts, and sea level rise.
for adaptation, such as providing financing
for interventions, are hindered by the fact that Lastly, to incentivize innovation, public entities
adaptation interventions tend to have asymmetric could provide grants that support research
ROI. The benefits, for instance, of designing and and development on adaptation solutions. Further
building a net-zero desalination facility or a modular investment by private sector actors is then facili
system of flood management mechanisms, such as tated as they can build on publicly funded research.
the Thames flood management system, are spread
across a multitude of public and private sector 3. Assist private sector actors in enhancing
actors, although the costs of these solutions are their risk awareness and in understanding the
typically borne by a handful of actors. Additionally, opportunity cost of adaptation inaction. Private
benefits are measured in avoided future damages sector actors often do not have the tools to
over a long period of time. The long-term nature understand the business impact of climate hazards,
and often high up-front costs of adaptation translate which often lead them to not pursue or to postpone
into a complex business case. adaptation interventions or innovation.
To address asymmetric ROI, public entities can Governments and multilateral bodies can help
partner directly with the private sector to prioritize address this information deficiency by imple
solutions that offer additional value streams menting standardized methodologies for measuring
or savings. Private sector actors can use their and pricing risks in decision making, facilitating
specialized expertise and resources, while national high-quality data sharing, and improving the
and subnational governments can help reallocate availability of and access to assessment tools. The
costs and benefits. A district cooling system Global Resilience Index Initiative, for instance, aims
designed to tackle extreme heat, for example, to provide consistent and reliable risk information
42
“Corporate sustainability reporting,” European Union, accessed November 9, 2023.
43
“SEC proposes rules to enhance and standardize climate-related disclosures for investors,” US Securities and Exchange Commission press
release, March 21, 2022; “Canadian securities regulators consider impact of international developments on proposed climate-related
disclosure rule,” Canadian Securities Administrators, October 12, 2022; In Canada, each province and territory has its own securities
commission that creates policy. National-level policy is coordinated and harmonized through the Canadian Securities Administrators,
a council of all the provincial and territorial securities regulators.
44
“MIGA backs wastewater treatment plant in Jordan,” Multilateral Investment Guarantee Agency press release, July 24, 2013.

that can help investors better understand and evaluating their impact. There would be a review
evaluate the financial impact of climate risks.45 process to track progress on a short-term basis
(for example, annually) and a review process for
Action 5: Establish common principles performance over a longer-term basis or when there
for monitoring and evaluation is a triggering event (every three years or more,
Monitoring and evaluation need to be integrated for instance) (Exhibit 6). In addition, it is important
throughout the adaptation life cycle, from assessing to have an overarching review process for the entire
initial risk exposure to tracking implementation plan at regular intervals to make sure it is in line with
and measuring its impact. Yet our sample analysis most recent climate projections. The monitoring
shows that just one-third of national adaptation framework in the Philippines’ national adaptation
plans include a formal framework to do so.46 plan, for example, provides an annual assessment
of progress to set priorities and budgets, while
This lack of monitoring is challenging because of the every three years, a broader evaluation process
uncertain nature of climate change evolution. It is focuses on efficiency, effectiveness and impacts,
necessary therefore that national adaptation plans and strategy recalibration.47
be adjusted over time to consider any changes
and to continue providing effective responses. 2. Monitor progress against targets, evaluate
As we reviewed national adaptation plans, we performance of adaptation interventions,
identified three key principles to guide monitoring reevaluate risk exposure, and adjust approach.
and evaluation frameworks. Historically, government funding for adaptation
has been limited, and funding for monitoring
1. Set up the right cadence for reassessing plans. and evaluation was even harder to come by. When
The frameworks could include distinct cycles adaptation work is fully resourced, each inter
for monitoring the progress of interventions and vention would ideally have an implementation
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Exhibit 6
Exhibit <6> of <6>
Effective adaptation implementation requires a continuous cycle of

iterative refinements.
Monitoring cycle
Assess climate Develop Set up targets Monitor Assess

projections and adaptation and timeline for progress of performance of
hazard risks interventions implementation implementation interventions
McKinsey & Company
45
The Global Resilience Index Initiative was formed in late 2020 at the request of Mark Carney, UN Special Envoy on Climate Action and
Finance, to enable open-access reference information for climate risk measurement and disclosure. It aims to provide globally consistent,
open physical risk information, based upon insurance risk expertise, frameworks, and metrics. It also integrates future risk projections,
additional hazards, exposures, and vulnerabilities, as well as advanced network risk analytics. For more, see “Global resilience index
initiative,” Oxford Sustainable Finance Programme, accessed November 9, 2023.
46
This is in line with academic research, which found that as of 2021, over 60 percent of the countries with a national adaptation plan were
not tracking its implementation. For more, see Timo Leiter, “Do governments track the implementation of national climate change adaptation
plans? An evidence-based global stocktake of monitoring and evaluation systems,” Environmental Science & Policy, November 2021,
Volume 125.
47
National climate change action plan 2011-2028, Philippines Climate Change Commission, June 2016.

Even if the reevaluation of risk does
not result in immediate adjustments,
governments would still benefit from
monitoring adaptation solutions
proactively.
framework, with a clear timeline and target. equals). The monitoring process can be conducted
However, even setting general goals can act as a both at an individual level and across relevant
compass as countries develop their frameworks. stakeholders. In Burkina Faso, for example, the
The next step could be tracking the implementation process is directed by both the National Council
progress of adaptation interventions against the for the Environment and Sustainable Development,
timeline and measuring the actual performance which oversees the national adaptation plan, and
of each intervention against the adaptation target. relevant ministries for each sector.48
This system, even if only partially put in place, could
help increase accountability and engagement.
In parallel to interventions, risk exposure could Now is the time to set priorities and move forward
be regularly reevaluated according to new climate on adaptation. Climate change is becoming
projections or triggering events. Even if the an integral part of our lives, wherever we live. The
reevaluation of risk does not result in immediate global and systemic nature of climate change
adjustments, governments would still benefit disruptions makes them difficult to address on an
from monitoring adaptation solutions proactively ad hoc basis. Governments and international public
and revising them as necessary. institutions can have a large impact in propelling
large-scale adaptation interventions because of their
3. Incorporate a clear ownership structure and overarching position and mobilization capability.
communicate often to increase accountability. We believe that meaningful steps can be taken
Each adaptation intervention could ideally be to accelerate this impact. The themes and steps
assigned to an identifiable actor (for example, a outlined here may seem a demanding proposition
national or local government leader) who can for public sector leaders, especially considering
be held responsible (in some cases as a first among all their other concerns and responsibilities.
48
Burkina Faso national climate change adaptation plan (NAP), Burkina Faso Ministry of Environment and Fishery Resources, May 2015.

However, inaction will likely be even more onerous never been higher. As we prepare for the 2023
and have real (and possibly catastrophic) impacts United Nations Climate Change Conference,
on lives and livelihoods. our hope is that the public sector will choose to
accelerate its efforts around adaptation, while
While the challenges and complexity of climate carefully combining and balancing them with
adaptation are undeniable, it is also true that mitigation and with other critical priorities, in a spirit
the global, collective level of expertise, dedicated of maximizing synergies and cobenefits.
resources, and mobilization in this area have
Homayoun Hatami is the managing partner for global client capabilities and is a senior partner in McKinsey’s Paris office;
Mihir Mysore is a partner in the Houston office; Hamid Samandari is a senior partner in the Washington, DC, office; and Alexis
Trittipo is a partner in the New York office.
The authors wish to thank Antara Banerjee, Zach Bruick, Lindsay Delevingne, Meredith Fish, Jean-Francois Lamarque, Jan
Lenaerts, Ludovic Langlois-Therien, Riya Malik, Helen Marks, Michele Perlman, Carter Powis, Mike Sierks, James Smith-
Dingler, Alexander Vanderhoof, Abi Vanover, and the McKinsey Climate Analytics team for their contributions to this article.

Closing the
digital divide in
Black America
Five steps could help to bring broadband and digital equity
to every Black household in the United States—urban
and rural—while bolstering efforts to create a more
inclusive economy.
This article is a collaborative effort by Ayebea Darko, Danielle Hinton, John Horrigan,
Blair Levin, Kunal Modi, and Todd Wintner, representing views from McKinsey’s Public
Sector Practice.
© PeopleImages/Getty Images
The digital divide was first recognized in the mid- Lower levels of digital readiness are both a conse
1990s.1 Three decades later, due in part to long- quence and an ongoing driver of large gaps in Black
standing economic inequity and the economics of American representation in jobs that require digital
broadband, it remains an impediment to inclusive skill sets. Although Black Americans comprise
economic growth, particularly in Black American approximately 13 percent of all workers, they make
communities. Approximately 40 percent of Black up only 7.4 percent of digital workers.7
American households—as opposed to 28 percent
of White American households—don’t have high- This lack of representation feeds racial income and
speed, fixed broadband.2 In dense urban areas such wealth gaps. The median pay for tech jobs is more
as Chicago and Baltimore, Black households than twice that for all occupations, and digital and
are twice as likely as their White counterparts to IT jobs are expected to grow by 13 percent through
lack a high-speed internet subscription.3 In the 2030—1.7 times the overall rate of job growth.8 To
rural South, 38 percent of Black households don’t the extent that Black Americans can achieve greater
have broadband, compared with 23 percent of participation in the digital workforce, such jobs
White households.4 could help close income and wealth gaps.
But broadband access is only part of a much bigger

picture. Ensuring all Americans can fully participate Unprecedented government funding
in civic life and the digital economy requires afford for broadband and digital equity
able subscriptions, internet-enabled devices, More than $425 billion in federal funding is available
applications, digital skills, and high-quality technical to state and local governments to help close the
support. For example, while smartphone and digital divide. Approximately $350 billion of that
tablet penetration are approximately equal among falls under the 2021 American Rescue Plan Act
White, Black, and Hispanic and Latino adults in the (ARPA) State and Local Fiscal Recovery Funds. The
United States, only 69 percent of Black Americans Bipartisan Infrastructure Law (BIL), also signed
and 67 percent of Hispanic Americans have desktop in 2021, provides $65 billion in federal funds for
or laptop computers, compared with 80 percent broadband efforts, including approximately
of White Americans (Exhibit 1).5 A 2020 OECD survey $44 billion that will flow directly to states as part
found that roughly half of Black workers had the of the Broadband Equity, Access, and Deployment
advanced or proficient digital skills needed to thrive (BEAD) and State Digital Equity Capacity Grant
in our increasingly tech-driven economy, compared programs. In addition, $10 billion is available in the
with 77 percent of White workers.6 ARPA Capital Projects funds.
1
“Falling through the net: A survey of the ‘have nots’ in rural and urban America,” National Telecommunications and Information Administration,
US Department of Commerce, July 1995.
2
McKinsey analysis of 2020 US Census Bureau five-year American Community Survey microdata, retrieved via IPUMS, University of Minnesota.
3
McKinsey analysis of American Community Survey data.
4
Dominique Harrison, Affordability & availability: Expanding broadband in the Black rural South, Joint Center for Political and Economic
Studies, October 2021. The “Black rural South” itself is a term used to describe more than 150 rural counties with populations that are at least
35 percent Black. These counties generally cover areas where enslaved Black laborers once worked on cotton plantations at a time when
cotton was the largest cash crop in the country and a major driver of economic growth and prosperity in the early United States. See also:
Harin Contractor and Spencer Overton, An introduction to the future of work in the Black rural South, Joint Center for Political and Economic
Studies, February 2020.
5
Sara Atske and Andrew Perrin, “Home broadband adoption, computer ownership vary by race, ethnicity in the U.S.,” Pew Research Center,
July 16, 2021.
6
Applying a racial equity lens to digital literacy: How workers of color are affected by digital skill gaps, National Skills Coalition, March 20, 2020.
7
“Labor force characteristics by race and ethnicity, 2020,” BLS Reports, US Bureau of Labor Statistics, November 2021; “Diversity in high tech:
Executive summary,” US Equal Employment Opportunity Commission, accessed November 2022; Padraig Belton, “Why are there so few black
tech entrepreneurs?” BBC News, September 4, 2020; Nicholas Jones et al., “2020 Census illuminates racial and ethnic composition of the
country,” US Census Bureau, August 12, 2021.
8
“Labor force characteristics,” 2021; “Computer and information technology occupations,” US Bureau of Labor Statistics Occupational Outlook
Handbook, September 8, 2021; “Employment projections 2020–2030,” US Bureau of Labor Statistics, September 8, 2021.

Exhibit 1
The digital divide disproportionately affects Black Americans across adoption,

computer ownership, and digital skills.
Proportion of digital access and skills by race/ethnicity, % With Without
Have broadband internet access Own a computer Have necessary digital skills
23 20 23
31
38
15 11 50
percentage 27
points
77 69 80 77
62
50
Black White Black White Black White
Source: Dominique Harrison, Affordability & availability: Expanding broadband in the Black rural South, Joint Center for Political and Economic Studies, Oct
2021; Sara Atske and Andrew Perrin, “Home broadband adoption, computer ownership vary by race, ethnicity in the U.S.,” Pew Research Center, July 16, 2021;
Applying a racial equity lens to digital literacy: How workers of color are affected by digital skill gaps, National Skills Coalition, Mar 20, 2020
McKinsey & Company
This funding is unprecedented in three ways: 3. Digital equity and inclusion focus. For the
first time, the federal government will provide
1. Scope. The funds, which are administered by subsidies that are substantial enough to allow
the Treasury and Commerce departments, the many low-income Americans to afford broadband
Federal Communications Commission (FCC), subscriptions. Considerable federal funds—
and the Department of Agriculture, are targeted some directed to states—are also allocated to
across the board—at infrastructure, adoption, broader digital-inclusion programming, and
affordability, devices, tech support, digital literacy additional funding will be distributed to local
and skills training, and accelerating workforce governments and not-for-profit organizations
development and remote work opportunities.9 through a competitive grant process.
2. State led. Earlier federal infrastructure invest These federal funds are designed to encourage
ments were primarily allocated by the FCC to progress toward extending affordable, reliable,
internet service providers (ISPs). This time, most high-speed broadband access, which Congress has
funding is going directly to states, which declared as “essential to full participation in modern
can “subgrant” awards to various providers, life in the United States.”10 But the money alone
programs, and organizations, subject to will not be enough to eradicate the digital divide.
internal guidelines. Fully meeting this moment requires a vision for digital
equity and inclusion, new levels of data collection,
robust stakeholder engagement, and partnerships
9
“President Biden’s Bipartisan Infrastructure Law,” White House.
10
Infrastructure Investment and Jobs Act of 2021, Pub. L. No. 117–58, 135 Stat. 429 (2021).

across the public, private, and not-for-profit sectors. Several states are already making their commitment
It also requires taking targeted steps to understand to equity clear. In 2021, North Carolina established
the barriers impacting specific communities. the nation’s first Office of Digital Equity and Literacy
to “accelerate the critical work of bringing all North
Here are five steps that state and local leaders Carolinians up to speed with the digital society so
and broadband stakeholders could take to expand they can live more equitable, prosperous, educated,
broadband access and promote digital equity and and healthier lives.”11 This office coordinates with
inclusion in Black communities (Exhibit 2). the state’s expanded Division of Broadband and
Digital Equity, which is charged with executing
1. Make explicit commitments to the plan, including investing $165 million in digital-
digital equity and inclusion equity efforts.
As states, cities, and municipalities develop their
aspirations and make broadband plans, leaders can Also in 2021, Maryland kicked off an initiative that
promote change by elevating a public commitment aims to ensure “universal broadband to everyone,
to digital inclusion and equity alongside the in every single corner of the state” by 2025.12 To
commitment to expanding high-speed broadband- facilitate this work, the state allocated $75 million
infrastructure coverage. This public commitment to provide an additional $15 a month in subscription
also can broaden the set of engaged stakeholders support and device subsidies to low-income
to include private-sector players and not-for- residents.13 This subsidy was provided in addition
profit organizations with an equity focus. Getting to the $50 monthly federal Emergency Broadband
these other stakeholders involved could help Benefit, from September 2021 to August 2022.
deepen the fact base, sharpen the plan, and Furthermore, Maryland has made equity a high
encourage effective execution. priority, and has allocated an additional $10 million
Exhibit 2
There are five steps that could expand broadband internet access and
encourage digital equity and inclusion in Black communities.
1. Make explicit 2. Conduct a 3. Involve all 4. Partner with 5. Seek out

statewide comprehensive stakeholders in local stakeholders partnerships among
commitments to survey of understanding the to ensure private enterprises,
digital equity and unserved and underlying barriers households access not-for-profit
inclusion. underserved to access and subsidies for organizations,
locations, and digital equity. internet academia, and
ensure funds subscriptions and government to close
reach communities devices. the digital divide.
that need them.
McKinsey & Company
11
“Governor Cooper establishes nation’s first Office of Digital Equity and Literacy,” North Carolina Department of Information Technology,
July 1, 2021.
12
“Governor Hogan announces $400 million initiative to ensure universal broadband for Maryland,” Office of Governor Larry Hogan,
August 20, 2021.
13
“Governor Hogan, President Ferguson, Speaker Jones announce bipartisan agreement for American Rescue Plan funding,” Office of
Governor Larry Hogan, March 31, 2021.

for digital-inclusion programming, digital-literacy targeted areas using a mix of door knocking,
training, and a digital-navigators program.14 telephone campaigns, and outreach via trusted
community members and organizations. They could
2. Conduct a comprehensive survey of unserved supplement the initial information they collect with
and underserved locations, and ensure the engineering assessments of the available technology
funds reach the communities that need them to determine whether the area’s broadband
The allocation of the BIL’s BEAD funds will be infrastructure has the capacity to serve residents.
derived from the number of unserved locations Governments could then include that information
in the new broadband Deployment Accuracy and along with addresses and geographic information
Technological Availability (DATA) maps, whose systems coordinates in their submissions contesting
creation was required by the 2020 Broadband the FCC maps.18 As state and local leaders consider
DATA Act.15 If governments fail to properly the best way to mobilize a workforce capable of
count all unserved broadband-serviceable gathering information on broadband infrastructure
locations, including individual households and gaps, they could take inspiration from US Census
small businesses in minority communities, the data collection. A similar program could both
broadband DATA maps will not accurately reflect create jobs and identify data collectors who could
the needs. A proper count is therefore the first step subsequently be retrained and connected with
toward ensuring that Black communities receive other broadband and digital-equity initiatives.
their fair share of funding to close broadband
infrastructure gaps, and is necessary for contesting Once the National Telecommunications and
any errors or omissions in the maps. Information Administration establishes funding
levels, states could work with the administration,
The new maps are at the location level and thus corporations, and civic organizations to ensure
much better than the existing FCC maps, which that funding for reliable and resilient high-speed
rely on less precise census block–level data. But internet reaches Black communities. Local elected
gaps may still exist. Many rural areas, especially in officials who represent significant numbers of
states such as Mississippi, Alabama, and Louisiana, Black constituents could have a seat at the table
still have significant infrastructure gaps that as project areas are being drawn, so that they can
disproportionately impact Black Americans.16 Lower- ensure their constituents are included in the state’s
speed DSL and cable deployments are linked to final proposal. After unserved and underserved
neighborhood economics; more affluent areas more locations are connected or upgraded, states could
likely to have higher speed and often have fiber prioritize funding for historically Black colleges and
deployments. And multi-dwelling units in under universities (HBCUs) and other minority-serving
served areas can experience additional capacity institutions (MSIs). Because they play a trusted
constraints, especially during high-demand hours, central role in Black communities, HBCUs and
due to shared bandwidth limitations and insufficient MSIs could serve as hubs for the digital equity and
indoor wiring or Wi-Fi equipment.17 inclusion resources and programs.
To make sure the new maps accurately depict

broadband gaps, governments could survey
14
Maryland Broadband Investment Advisory Workgroup, Maryland Department of Housing and Community Development, May 3, 2022; “The
digital navigator model: Adding digital equity to our social safety net,” National Digital Inclusion Alliance,” accessed November 2022.
15
Broadband DATA Act, Pub. L. No. 116–30, 134 Stat. 228 (2020).
16
Affordability & availability, 2021.
17
In older buildings or buildings where funding for wiring upgrades and maintenance is inadequate, indoor wiring to individual units within
multifamily dwellings is often insufficient to support higher broadband, which constitutes a further barrier to access. Although indoor wiring
gaps within locations will not be captured in the FCC mapping data, and thus not impact their BEAD allocation, indoor wiring upgrades
likely constitute an authorized use of Digital Equity Act funding (and BEAD funding, subject to the prioritization defined in the BIL statute).
On-the-ground teams could identify and log these gaps and report them to state broadband offices for inclusion in a barriers assessment.
18
Broadband Data Collection, Federal Communications Commission, December 9, 2022.

The majority of Black households
directly impacted by the digital
divide live in areas with available
infrastructure but simply can’t
afford broadband service.
3. Involve all stakeholders in understanding the institutions to support stakeholder engagement

underlying barriers to access and digital equity work and the development of implementation plans
To gain a deeper understanding of the underlying to drive broadband access and digital equity.
barriers that cause the digital divide and identify
and create solutions to close it, state leaders 4. Partner with local stakeholders to
could get feedback from a range of stakeholders, ensure households can access subsidies
including impacted residents, local government for internet subscriptions and devices
leaders, not-for-profit leaders, digital-equity Federal, state, and local governments could partner
and workforce development practitioners, utilities with local broadband stakeholders to ensure
and electric co-ops, ISPs, private-sector companies eligible households are able to take advantage of
focused on growing the digital workforce, and the FCC’s Affordable Connectivity Program (ACP),
multiple others. which provides subsidies for internet service and
devices. The majority of Black households directly
Engaging multiple stakeholders could help state impacted by the digital divide live in areas with
leaders understand the aspirations of impacted available infrastructure but simply can’t afford
communities, the barriers that stand in the way of broadband service. Approximately 37 percent of
access and digital equity, and which solutions might Black Americans in the workforce make less than
yield the greatest outcome based on the experiences 200 percent of the federal poverty level and are
of residents and practitioners who have been economically insecure.19 These families would
working for years to close the digital divide. State likely qualify for assistance through the ACP, but
and local leaders could also work to scale up surveys show that many are unaware of that.
the existing programs that have been most effective Among those who are aware of the ACP subsidy,
and identify regions where new programs are 32 percent found it difficult to sign up for ACP
needed to meet residents’ needs. support.20 Since the eligibility criteria for ACP
include participation in federal programs such
Not-for-profit leaders and digital-equity practitioners as Medicaid and the Supplemental Nutrition
could also proactively engage state leaders Assistance Program, government agencies and
through phone calls, letters, and meetings to share community organizations could use existing
their knowledge and help shape the priorities, outreach channels to communicate with eligible
approach, and plans in development. State leaders Black residents.
could consider paid partnerships with community
19
100 million and counting: A portrait of economic insecurity in the United States, PolicyLink and USC Program for Environmental & Regional
Equity, 2018.
20
Affordability and the digital divide: The first in a 3-part series on digital connectivity during the pandemic, EveryoneOn and John B. Horrigan,
December 2021.

Multiple local organizations across the country are connectivity, digital literacy, and digital-skills
doing impactful work to promote ACP uptake. development. Several HBCUs are already innovating
The Baltimore Digital Equity Coalition, for example, in this space. For example, Benedict College, an
hosts live information sessions that provide details HBCU in South Carolina, has used $6 million from
on the ACP and how to apply for subsidies. Detroit the Governor’s Emergency Education Relief Fund
and other cities supplement their outreach efforts (GEER) to partner with the University of South
with a printed digital-citizen’s guide, which gives Carolina, providing open access to eight computer
residents an overview of the benefits of connectivity labs throughout the state, making digital technology
and tactical steps for obtaining an ISP subscription. more accessible to local school districts, HBCUs,
In Ohio, state leaders worked with not-for-profit the South Carolina Technical College System, and
organizations and K–12 schools to encourage ACP community members.24 At Stillman College, an
uptake, as an example of cities and states partnering HBCU in Alabama, the campus-incubated Black
with local organizations to help ensure the ACP Tech Futures Research Institute is focused on
benefit gets to the residents who need it most.21 cultivating a community-centered Black tech eco
system that informs policy recommendations and
5. Seek out partnerships among private eradicates racial tech disparities within cities.25
enterprises, not-for-profit organizations,
academia, and government Beyond HBCUs, corporations are already engaged
Corporations, state and local governments, in efforts to expand broadband access and, along
not-for-profit organizations, and stakeholders in with it, the available pool of tech talent to work in the
academia—particularly HBCUs—could look for digital economy. For example, Microsoft and Cisco
opportunities to partner on initiatives to close the are partnering with not-for-profit organizations and
digital divide. These partnerships could include state governments to support and scale existing
workforce development programs that teach digital digital-skills-building programs. Since 2017,
skills, develop new talent pools, and provide Microsoft has used its Airband Initiative to expand
access to higher-wage jobs. high-speed internet access in underserved areas
by leveraging fixed wireless technology over
HBCUs are widely trusted anchor institutions with the television white-space spectrum.26 In 2020,
deep community roots. They also serve as critical Microsoft also launched a skills initiative to help
platforms for educating and advancing students of 25 million people around the world to acquire digital
color. HBCUs confer 17 percent of all the bachelor’s skills.27 The program provides content for people
degrees awarded to Black Americans and play to develop in-demand digital skills, in partnership
a vital role in accelerating Black economic mobility, with LinkedIn, to help with job placement.
both for their students and their communities.22 One
report found that HBCUs create roughly 134,000 In Atlanta and several other US cities, Microsoft
jobs for their local and regional economies.23 has built a broad coalition of partners to create a
place-based initiative that aims to close the digital-
Given the importance of HBCUs to their communities, skills gap and build a more inclusive workforce.28
they could play an even larger role in promoting Involving state and local leaders and not-for-
21
For example, see “Digital access policy & strategic infrastructure plan,” City of Detroit, April 2022; Affordable Connectivity Program,
Broadband Ohio, accessed December 2022.
22
Integrated Postsecondary Education Data System, National Center for Education Statistics, July 2021; B. T. Nagle and K. M. Saunders,
HBCUs punching above their weight: A state-level analysis of historically Black college and university enrollment and graduation,
UNCF, 2018.
23
“HBCUs make America strong,” UNCF, November 14, 2017.
24
“Gov. Henry McMaster provides $6 million in GEER funds for community computer labs,” South Carolina Office of the Governor,
March 30, 2021.
25
Black Tech Futures Research Institute, accessed November 2022.
26
An update on connecting rural America: The 2018 Microsoft Airband Initiative, Microsoft, 2018.
27
Official Microsoft Blog, “Microsoft launches initiative to help 25 million people worldwide acquire the digital skills needed in a COVID-19
economy,” blog entry by Brad Smith, Microsoft, June 30, 2020.
28
An update on connecting rural America, 2018.

profit organizations with deep relationships in paced program that works to make acquiring
the community, Accelerate: Atlanta helps facilitate technology skills more inclusive and accessible.30
learning programs, offers career support, and Cisco also made a $50 million contribution to the
helps connect program participants with job Student Freedom Initiative’s Access to Education
opportunities.29 The program has targeted learning endowment for HBCU students.
pathways focused on helping physical laborers,
tradespeople, and office and service workers to
develop business and technical skills to prepare Changing the trajectory
them for top jobs. toward greater equity
The United States is at a pivotal moment for closing
Meanwhile, Cisco’s Networking Academy the digital divide in Black communities. By gaining
delivers industry-standard IT education through a better understanding of the barriers affecting Black
partnerships with high schools, colleges and communities and engaging communities with a
universities, not-for-profit organizations, range of broadband and digital-equity stakeholders
prisons, and community centers. In 2021, Cisco to address those barriers, public- and private-sector
launched Skills for All, a free, mobile-first, self- leaders can rise to meet this moment.
29
Accelerate: Atlanta, Microsoft, accessed November 2022.
30
2021 Cisco purpose report: Our purpose, our progress, Cisco, 2021.
Ayebea Darko is a consultant in McKinsey’s Boston office; Danielle Hinton is an associate partner in the Washington, DC,
office, where John Horrigan and Blair Levin are senior advisers and Todd Wintner is a partner; Kunal Modi is a partner in
the Bay Area office.
The authors wish to thank Arthur Bianchi, Jan Shelly Brown, Paul Healy, JP Julien, Dimitrius Keeler, Rhazi Kone, Jihae Lee,
Adam Mitchell, Raya Musallam, Nick Noel, Duwain Pinder, Stephanie Savir, and Jin Joo Yoo for their contributions to this article.

Can public EV fast-
charging stations be
profitable in the
United States?
The United States needs more fast public chargers to support
the growth of EVs—but generating a profit at a public charging
station remains challenging.
by Peter Fröde, Morgan Lee, and Shivika Sahdev
© YiuCheung/Getty Images
Although the United States has long lagged other There are two types of public charging: direct
regions in electric vehicle (EV) adoption, the country current fast charging (DCFC), which is used on
is now reporting record growth. EVs represented highways and for fast fill-ups, and slower Level
about 8 percent of all new passenger cars sold 2 (L2) charging, which is available at places such
in the United States in 2022, up from around as grocery stores, malls, car dealerships, golf
5 percent in 2021.¹ By 2030, this figure could rise courses, and banks, where people may park for
to 53 percent. longer periods. L2 charging may also occur next to
sidewalks or near street parking. About 150,000 L2
The United States will need about 28 million ports and DC plugs are now available across the United
by 2030 to meet the demand for electricity by States, but that number is expected to increase to
zero-emission passenger vehicles (Exhibit 1). 1.5 million by 2030, when they will represent about
Private ports are expected to increase in number 5 percent of the total.
from around 2.5 million to nearly 27.0 million,
representing about 95 percent of the total. While public fast charging is a piece of the overall
charging solution, current EV demand for electricity
Exhibit 1
By 2030, the United States will need about 28 million ports to meet
demand for zero-emission passenger vehicles.
US charging demand for zero-emission passenger vehicles, millions of ports Private Public
~28.0
~1.5
+34% per annum
~26.5
~9.5
~0.5
~9.0
~2.6
~0.1
~2.5
2022 2025 2030
Note: Based on a scenario where passenger electric vehicles account for nearly half the vehicles sold in the United States in 2030, in line with a federal target.
Source: McKinsey Center for Future Mobility
McKinsey & Company
1
Maximilian Fischer, Nicolaas Kramer, Inga Maurer, and Rachell Mickelson, “A turning point for US autodealers: The unstoppable electric car,”
McKinsey, September 23, 2021.

About the McKinsey Center for Future Mobility
These insights were developed by the about possible future-mobility scenarios. rural areas, sales, value pools, and life-
McKinsey Center for Future Mobility With our unique, bottom-up modeling cycle sustainability. Contact us if you
(MCFM). Since 2011, the MCFM has approach, our insights enable an end- are interested in getting full access to
worked with stakeholders across to-end analytics journey through the our market insights via the McKinsey
the mobility ecosystem to provide future of mobility—from consumer Mobility Insights Portal.
independent and integrated evidence needs to a modal mix across urban/ .
is still so low that profitability is challenging—and Among the most important: a focus on utilization
this could remain the case over the short to medium and pricing.
term. To help charge-point operators improve their
financial picture both now and during scale up, we
examined the EV market, including the ongoing Public charging is required,
shifts in ownership patterns and charging demand. no matter what
We then analyzed the factors that influence
Currently, most EV owners tend to be home owners
charging station revenues and identified potential
with access to a home charger, and they often have
improvement levers for optimizing profitability.
a second vehicle for long-distance trips. But even
Exhibit 2
While electric vehicle drivers now do most of their charging at home, more
public charging will be needed as demand grows.
Passenger vehicles energy demand by charging use case, % of kilowatt hours
Residential 65 Residential 50
Public 25 Public 30
2022 2030
Work 10 Work 15
Fleet >5 Fleet >5
Note: Based on a scenario where passenger electric vehicles account for nearly half the vehicles sold in the United States in 2030, in line with a federal target;
figures may not sum to 100%, because of rounding.
McKinsey & Company

people that fit this profile will sometimes need suitable installation site or encounter resistance
public charging. For instance, they might forget from landlords who do not want chargers on the
to charge their vehicle overnight and thus need premises. In such situations, public charging, either
to charge on the road, or they might find that the fast or overnight, is the mainstay.
slow L2 charger at their workplace parking garage,
where they usually connect during an eight-hour Recognizing the need for public chargers, many
workday, is out of commission. Additionally, long new players are now entering the sphere. For
journeys—those more than 150 to 200 miles—will instance, some major automakers are banding
necessitate public charging. together to invest a minimum of $1 billion in a joint
venture that will build stations with about 30,000
As EVs become more common and their owners fast chargers in urban and rural areas of the
no longer come primarily from higher income United States.³
groups, the percentage of charging that occurs
at home is expected to fall to 50 percent by 2030 The challenging economics of charge-
(Exhibit 2). Although about 65 percent of the US point stations
population own or rent a single-family home, many
While charge-point operators can follow multiple
people lack garages where a charger could be
strategies for generating revenues, two business
placed, or find that installation is prohibitively
models are now most common (Exhibit 3):
expensive.² Apartment dwellers may also lack a
Exhibit 3
There are two main business models for electric vehicle charging
infrastructure providers.
Owner operator model (illustrative) Revenue Cost Example players
Electric vehicle $ for electricity $ for charger purchased Hardware

Charge point operator
(EV) driver company
Charger owned by
$ charge-point $ for maintenance
Public Maintenance
operator, eg:
subsidies provider
• Blink $ for electricity and
Other $ • Electrify America demand charges
revenues¹ • EVgo Utility
Solution provider model (illustrative)
$ for $ for hardware

electricity and installation $ for hardware
EV driver Solution Manufacturer
Retail site, $ for provider, eg:
$ parking maintenance/SaaS • ChargePoint $ for maintenance
Public Maintenance
lot owner, • EVBox
subsidies provider
or other
Other $ business $ for electricity and demand charges
Utility
revenues¹
1
Eg, advertising, subscriptions, and original equipment manufacturer partnerships.
McKinsey & Company
2
2021 Census American Housing Survey.
3
Mike Colias, River Davis, and Ryan Felton, “Big Automakers Plan Thousands of EV Chargers in $1 Billion US Push,” The Wall Street Journal,
July 26, 2023.

• Owner-operator. Under this model, the Regardless of business model, the up-front
charge-point operator is responsible for capital costs for fast charging stations are high. A
all capital costs, including hardware and 150 to 350 kilowatt (kW) DCFC charging unit can
installation, and for all ongoing operations cost anywhere from $45,000 to over $100,000,
and maintenance. Owner-operators and installation costs can range from $40,000 to
generate revenue by selling electricity more than $150,000. Additionally, grid upgrade
and through other streams (for instance, and integration costs can amount to millions,
incentives and energy credits). Currently, depending on the number of fast chargers
three companies—Electrify America, Evgo, installed at the location.
and Tesla—have 80 percent of the market for
public DCFC charging. We examined the economics for a hypothetical
DCFC charging station with an owner-operator
• Solution providers (site-host owners, third- business model in California. In line with typical
party operators). Under this model, the charge- patterns, we assumed the charging station would
point operator sells chargers to a site host, have four 150kW chargers.⁴ In our first analysis, we
such as a grocery store or dealership, which assumed that the charge-point operator did not
bears the cost of hardware and installation. receive any government subsidies or credits; in the
The site host also pays the operator an second, it did.
ongoing fee for operations and maintenance.
Exhibit 4
Subsidies can meaningfully change the economics of a public fast

charging station.
Station economics without subsidy, Station economics with subsidy,¹ $ thousand

$ thousand
Revenue/profit Cost Subsidy Loss
265–285 120–130 265–285 120–130
80–90 80–90
20–30 20–30
85–95 15–20
25–30
70–75
–40 to –50
Charg- Elec- Demand Fixed Capex EBIT Charg- Elec- Demand Fixed Capex EBIT
ing tricity charges opex, depre- ing tricity charges opex, depre-
revenue cost SG&A, ciation revenue cost SG&A, ciation
R&D R&D
Note: Analysis assumes 4 direct current fast charging (DCFC) 150KW chargers at each station; 15% utilization, 80% charger efficiency, price of ~$0.45/kWh,
Costs assume wholesale electricity at $0.20/kWh with a $20/kW demand charge (PG&E A-10 commercial rate), 75% concurrence, ~$250/month per charger
for maintenance, ~$95,000 per charger for the charging hardware and installation excluding grid and site equipment, 5% SG&A/R&D, 15% discount rate.
1
Analysis assumes ~80% of the capital cost is covered by a subsidy.
McKinsey & Company
4
FWHA NEVI Formula Program Guidance, US Department of Transportation, Federal Highway Administration, June 2, 2023.

Fast public charging-station economics Fast public charging-station economics
without subsides or credits with subsidies and credits
Assuming 15 percent utilization—equivalent to If the same fast public charging station received
about seven 30-minute charging sessions per government subsidies or credits, the economics
day—our hypothetical station would generate would be very different because these programs
$265,000 to $285,000 in annual revenue, given can significantly reduce costs. For instance, the
a price of $0.45 per kWh dispensed. (Pricing may recent Inflation Reduction Act includes up to a
vary by time of day). On the cost side, we assumed 30 percent tax credit for EV charging stations
annual expenses of $220,000 to $250,000 for within low-income or non-urban census tracts
electricity, demand charge rates, fixed operational through December 2032, up to a maximum of
expenditures, R&D, and SGA.⁵ Capital expenditure $100,000 per charger.⁶ The National Electric
depreciation would total about $85,000 to Vehicle Infrastructure (NEVI) Formula Program,
$95,000 yearly. With these metrics, the station which will disperse $5 billion in funding from the
would lose about $40,000 to $50,000 per year in Department of Transportation over a five-year
EBIT (Exhibit 4). formula grant period, provides credits and subsidies
through the end of fiscal year 2026.⁷ For each
Exhibit 5
With increased utilization or reduced demand charges a public fast

charging station could be profitable.
Change needed in profit levers to break even without any incentives¹ Change in profitability lever
Base case Break-even case
+1.3× +1.2× –0.4× –0.5× –0.5× +$12,000
20 0.53 0.20 20 95 12
0.45
15
0.13
9 45
0
Utilization, Price to Electricity Demand Hardware and Ancillary
% customer, cost, $/kWh charge cost, installation revenue per
$/kilowatt- $/kW cost, charger per
hour (kWh) $ thousand annum,
$ thousand
1
Analysis assumes case of a charging station with 4 direct current fast charging (DCFC) 150kW chargers in California (PG&E A-10 commercial rate) with 75%
concurrence, 80% charger efficiency, 5% SG&A/R&D, 15% discount rate.
2
Inclusive of maintenance, software, network fees, rent, etc.
McKinsey & Company
5
We calculated demand charges by assuming a cost of $20 per kilowatt, with peak demand of 480kW per month.
6
United States Congress, Public Law 117–169, Congress.gov, August 16, 2022.
7
US Department of Transportation, Memorandum, 2023 Vehicle Infrastructure Formula Program Guidance, Federal Highway Administration,
June 2, 2023.

charging station, it will fund up to 80 percent of improve their bottom line. We have identified
project costs, provided that the station serves several potential levers for driving improvements
the public and meets other criteria, such as being that span multiple areas: utilization, electricity
located along Federal Highway Administration cost, electricity price, demand charge cost, lifetime
Alternative Fuel Corridors.⁸ If the charging station hardware costs, and ancillary revenue (Exhibit 5).
in our example received subsidies or credits, annual
capital-expenditure depreciation would fall by an While all of these levers are important, charge-point
estimated $70,000 to $75,000. With this decrease, operators would have to apply them aggressively
the station’s EBIT would be positive (in the range of to make a difference. Consider utilization and
$25,000 to $30,000). competitive pricing, which could potentially drive
the greatest gains. Using our example of a typical
fast public charging station in California, the owner-
Several levers will be required to operator would break even if utilization increased
achieve profitability from 15 percent to 20 percent, or if the price for
charging customers increased from $0.45/kWh to
Even if fast public charging stations do not receive
$0.53/kWh. Profitability would also be possible in
subsidies or credits, they may still be able to
other scenarios (Exhibit 6).
Exhibit 6
Various price and utilization combinations could help public fast charging
stations become profitable.
EBIT across utilization and price scenarios, $ thousand
Price charged to end customer,

$/kilowatt-hour
$0.25 $0.30 $0.35 $0.40 $0.45 $0.50
5% –345 –270 –220 –180 –150 –125
15% –105 –70 –50 –30 –15 –5
Utilization, 25% –55 –30 –15 0 10 20

%
35% –35 –15 0 15 20 30
45% –25 –5 10 20 30 35
Note: Based on a scenario where passenger electric vehicles account for nearly half the vehicles sold in the United States in 2030, in line with a federal target.
Analysis assumes: Wholesale electricity cost at $0.20/kWh with a $20/kW demand charge (PG&E A-10 commercial rate), 75% concurrence, 80% charger
efficiency, ~$250/month per charger for maintenance, ~$95,000 per charger for the charging hardware and installation excluding grid and site equipment, 5%
SG&A/R&D, 15% discount rate.
1
Including installation; representative of a 4–150kW charging station in California.
McKinsey & Company
8
Alternative Fuels Data Center, May 23, 2023.

Achieving the desired improvements in price and than traditional stations, there may be more
utilization may not be easy, however. The average variation in the opportunities that they pursue. If the
nationwide annual utilization rate for 2022 was DCFC station in our example generated $12,000 in
about 7.5 percent, with the average for highest ancillary revenue streams, it could break even.
recorded month around 12.0 percent—both lower
than the 15.0 percent utilization assumed in our
example.⁹ Going from that level to 20 percent
utilization will require an extremely large increase EV sales have finally gained momentum in the
in demand, but we believe that this is feasible in United States and continue to accelerate. More
the coming years, given expectations about the public fast-charging stations must be built to
increased number of EVs on the road and the belief support the new EVs, but they require careful
that charge point operators will begin focusing on planning. Stakeholders must select station
utilization rates when deciding where to build new locations that maximize utilization and consider
infrastructure, rather than continuing to prioritize dynamic pricing—for instance, increases during
market expansion. commuting hours—to balance demand for chargers.
While subsidies will be necessary for near-term
Pursuing ancillary revenue streams, such as retail profitability, public charging-station operators
sales or advertising, could also help public DCFC must also apply other improvement levers, such
charging stations improve the bottom line. At as branching into retail offerings, for long-term
traditional gas stations, 35 percent of sales revenue success. These efforts, combined with the support
comes from the associated convenience stores or of OEMs, government agencies, real estate
food service. (About 50 percent of people who buy operators and others, will help DCFC operators
fuel also make retail purchases). Since public DCFC build a profitable public charging network across
stations are placed in a wider variety of locations United States that sustains the growth of EVs.
9
This utilization rate excludes California.
Peter Fröde is an associate partner in McKinsey’s Southern California office, Morgan Lee is a solution associate in the
Waltham, Massachusetts, office, and Shivika Sahdev is a partner in the New York office.
The authors would like to thank Vittorio Bichucher, Priyank Chheda, and Cross Pagano for their contributions to this article.

Unlocking the potential
of generative AI:
Three key questions for
government agencies
Government organizations may seek to jump on the gen AI bandwagon,
but the technology’s complexities could sideline their efforts. Our
framework addresses some critical implementation questions.
This article is a collaborative effort by Damien Bruce, Ankit Fadia, Tom Isherwood, Chiara Marcati, Aldous
Mitchell, Björn Münstermann, Gayatri Shenai, Hrishika Vuppala, and Thomas Weber, representing views
from McKinsey’s Public Sector Practice.
© Eugene Mymrin/Getty Images

It’s been just a year since generative AI (gen AI) that public sector organizations may need to
tools first captured public attention worldwide. But consider before choosing areas for investment:
already the economic value of gen AI is estimated
to reach trillions of dollars annually—even as its — How can government agencies address the
risks begin to worry businesses and governments potential risks of gen AI?
across the globe. Gen AI offers government leaders
unique opportunities to steer national economic — How can public sector entities begin to
development (Exhibit 1). At the same time, they face transform their own service delivery?
the heavy burden of monitoring the technology’s
downsides and establishing robust guidelines and — Should governments develop national gen AI
regulations for its use. foundation models (core models on which gen AI
applications are built)?
Many government agencies have started investing
in transformations made possible by gen AI, but the We conclude with a suggested eight-step plan for
technology’s rapid evolution means that predicting government organizations that are just beginning to
where it can contribute the most value is difficult. In implement gen AI use cases.
this article, we discuss three important questions
Web <2023>
<Gen AI public sector>
Exhibit 1
Exhibit <1> of <4>
Generative AI could have an estimated $480 billion productivity effect on

the public sector and adjacent industries.
Generative AI
productivity effect, 3,442 Total
by industry,1 $ billion Public and Healthcare Education
social sector
100
200 180 480
High tech Retail Banking
351 283 273
Consumer Energy Services Transport

packaged goods 194 (technical, and logistics
216 professional, 169
scientific)
171
Electronics and Construction Chemicals

semiconductors 132 117 112
Other
944
1
Excluding implementation costs (eg, training, licenses).
Source: McKinsey analysis
McKinsey & Company

1. How can government agencies ongoing awareness programs among stakeholders—
address the potential risks of gen AI? especially end users—about gen AI’s risks and how
By now, the risks of gen AI—such as its tendencies to address them. For example, the United Kingdom’s
toward unpredictability, inaccuracy, and bias— Central Digital and Data Office has released a guide
are widely known. Government agencies face for civil servants on safe and informed use of gen AI
different risks than do private sector companies. tools. Similarly, Australia’s Digital Transformation
For example, the technology can be misused Agency and its Department of Industry, Science and
to spread political propaganda or compromise Resources provide interim guidance to government
national security. Confidential government data agencies on responsibly using publicly available
can be leaked or stolen if government employees gen AI platforms, with emphasis on ethical AI usage,
inadvertently introduce that information into security, and human oversight.
foundation models through prompts.
Some outputs from gen AI models might contain 2. How can public sector entities
inaccurate information—also called “hallucinations”— begin to transform their own service
that could erode public trust in government services delivery?
that leverage these technologies. Like many private As key providers of services to the public,
sector organizations, government agencies face government agencies are likely to prioritize the
challenges with gen AI’s transparency and with the delivery of those services as a critical area for
difficulty of explaining the conceptual underpinnings AI-driven improvements. A good place to start
of gen AI, as well as the logic of the models’ decisions may be our “4Cs” framework, comprising four
and output. Consequences might include low cross-industry categories: content summarization
public acceptance of gen-AI-powered government and synthesis, coding and software, customer
services and unclear liability when unintended engagement, and content generation (Exhibit 2).
effects occur. And like all organizations, government Most gen AI implementations we have seen fall into
entities run the risk that criminals may misuse gen AI one of those four categories, which could apply to
to carry out powerful cybersecurity attacks. both private and public sector enterprises.
To address those risks, many countries—such — Content summarization and synthesis. This
as the United States, Australia, and China—have category involves culling the most relevant
launched initiatives to create frameworks of insights from a large knowledge repository. For
regulations and policies for AI, and some have example, Singapore’s GovTech has developed
expanded their existing AI regulations to explicitly the Pair app, which summarizes text and
include gen AI, too. The European Union is leading generates reports for internal use.
a global effort to build safeguards for any product
or service that uses an AI system. Many state — Coding and software. Software development
government agencies in the US have also released could gain speed and increase productivity by
AI-related legislation, executive actions, and using gen AI to write code and automate testing.
policies focused on mitigating the potential risks of Use cases will then need to be prioritized
AI systems—by highlighting the negative aspects of according to their potential impact, feasibility,
AI, transparently communicating where AI is used in and susceptibility to risk. For example, the
government, and addressing the ethical aspects of United Kingdom’s HM Treasury (economic and
AI usage. finance ministry) is testing GitHub Copilot (an AI
pair programmer that offers coding suggestions)
However, those mitigation efforts are still in their to accelerate software development.
early stages in most parts of the world, and gen AI
is evolving fast, which means that governments — Customer engagement. Customer and client
must revise their regulations continually to keep services could get a boost from gen AI apps—for
pace. Some government organizations have started example, in government agencies, chatbots

Web <2023>
Exhibit 2 sector>
<Gen AI public
Exhibit <2> of <4>
Four generative AI application archetypes have substantial potential.
Emergent cross-industry archetypes for generative AI (gen AI), nonexhaustive
Content summarization Coding Customer Content

and synthesis and software engagement generation
Summarize/extract insights Interpret and generate Enhance customer Generate documents
from unstructured data code (eg, mainframe service and client (eg, articles, emails,
sources; interpret text (eg, migration from outreach (eg, chatbots) contracts)
create embeddings) legacy systems)
~40% >55% >60% ~80%

of all working hours efficiency gains automation potential driven adoption rate of Harvey.ai
across industries can for developers by by AI for customer experience by law firms beta-testing
be affected by gen AI using GitHub Copilot volumes over 5–10 years the legal assistant
Source: “Generative AI could raise global GDP by 7%,” Goldman Sachs, Apr 5, 2023; Chris Stokel-Walker, “Generative AI is coming for the lawyers,” Wired,
Feb 21, 2023; The GitHub Blog, “Research: quantifying GitHub Copilot’s impact on developer productivity and happiness,” blog entry by Eirini Kalliamvakou,
Sept 7, 2022
McKinsey & Company
could answer questions from or customize implement gen AI use cases in both external and
services for residents. The city of Heidelberg, in internal operations that fall within the categories of
Germany, has launched the Lumi chatbot, the our framework (see Exhibits 3 and 4). For example,
country’s first digital citizen assistant. The tool in customer-facing applications, gen AI can help
enables people to easily navigate government the public navigate government services and get
services such as applying for a new identity card, access to real-time language translation. Internally,
getting a driving license, and registering a place gen AI can draft creative content such as speeches
of residence. and official correspondence, simplify complex
official documents, and consistently generate
— Content generation. Gen AI can help produce a financial reports and KPIs on schedule.
vast variety of content, including emails, social
media posts, contracts, and proposals. For
example, the US Department of Defense has 3. Should governments develop
developed an AI-powered contract-writing national gen AI foundation models?
capability, called Acqbot, to speed
Some governments may aspire to develop
up procurement.
foundation models—the core models on which gen
AI applications are built. But leaders of government
Gen AI implementations could streamline a broad agencies must be aware that this endeavor requires
range of services that governments typically considerable investment of time and resources. The
provide, in areas such as education, healthcare, many barriers to entry include the availability of
defense and intelligence, and urban development talent to build, train, and maintain gen AI models;
(see sidebar “Potential applications of gen AI in the necessary computing power; and experience in
government functions and services”). Across all of addressing potential risks inherent in building and
those areas, we have seen government agencies serving gen AI foundation models. Almost all current

Web <2023>
Exhibit 3
Exhibit <3> of <4>
Generative AI can help improve customer-facing operations in governments.
Potential use cases for generative AI in customer-facing government operations, by archetype

Programs Eligibility and benefit Transform legacy code Citizen interactions via Personalized program
and benefits distribution requirements (eg, COBOL to Python); chatbot assistants content
generate code
Policies, Policy design research; requirements License renewals Legal, permitting, and/or
licensing, and regulation summaries regulatory guidance for
regulation new programs
Services Standard operating Expert advisers (eg, to Targeted emergency
procedure syntheses; improve mental health instructions
economic-development responses)
incentives
Infrastructure Licensing infrastructure Auditing of regulatory Requests for proposal and
projects (eg, multicounty and/or plan compliance contracts to improve
permits) supply chain resilience
McKinsey & Company
Web <2023>
Exhibit 4
Exhibit <4> of <4>
Generative AI can help improve internal operations in governments.
Potential use cases for generative AI in internal government operations, by archetype

Operations Document summaries Synthetic data generation Virtual assistants for
and delivery suggested responses/
diagnoses
Technology Current state mapping; Transform legacy code Cybersecurity test case
data cleaning (eg, COBOL to Python); generation
generate code
Talent Résumé summaries; requirements Personalized recruiting Job descriptions;
feedback synthesis and onboarding materials interview guides; training
materials
Fiscal, asset, and Budget summaries; Citizen budget navigators Financial reports;
performance transaction syntheses standard performance
management reports; KPIs
McKinsey & Company
work in these models is led by a few large private Unlike global private sector tech players,
sector tech companies (Cohere, Google, Meta, and government organizations simply lack the
others) and by open-source initiatives that are capabilities to develop foundation models while
quickly becoming popular (such as Hugging Face, managing their risks. For example, violations
Stability AI, and Alpaca). of intellectual property and copyright laws can

Potential applications of gen AI in government functions and services
We see generative AI (gen AI) uses — be a real-time document verifier for — counsel repeat offenders with tailored
across different public sector domains. customs and tax officials legal education
Here’s a sampling.
— generate risk-assessment summaries — suggest potential outcomes for judicial
In education, gen AI can do the following: from diverse data sources sentencing for judges’ consideration
— serve as a virtual tutor to review and — prepare preliminary audit reports for — automate the drafting of various legal
grade essays potential noncompliance areas documents to ease administrative
burdens
— act as a student assistant chatbot, — act as a public assistant for real-time
providing well-sourced answers tax-filing guidance
In defense and intelligence, gen AI can do
— help students in workshops and labs, — prepare first drafts of personalized the following:
guiding them through experiments notifications to taxpayers and traders
— act as a real-time translator for
— generate preliminary drafts of intelligence agencies
In agriculture, forestry, and fishing, gen AI
teaching aids, such as lecture scripts
can do the following: — draft initial intelligence-operation
and quizzes
reports
— summarize and categorize farmer
— draft initial versions of university
helpline calls for timely departmental — tailor training content to specific
applications based on student profiles
assistance military missions
In urban development, gen AI can do — act as a virtual assistant to guide — simulate potential conflict scenarios for
the following: farmers on government schemes and strategic planning
benefits
— act as a design-compliance assistant — generate synthetic misinformation
for urban administrators — provide personalized crop- data to enhance surveillance AI
management advisories for updated
— summarize citizen feedback from
farming techniques In healthcare, gen AI can do the following:
hotlines for city planners
— analyze crop and soil images to — simplify the descriptions of complex
— draft initial urban planning layouts to
suggest restoration techniques for diseases to improve patients’
enhance city designs
improved yield understanding of them
— design optimal public transport routes
— summarize post-acute-care
to reduce traffic congestion In justice, courts, and legal systems, gen AI
instructions for patients
— simulate urban design impacts, such as can do the following:
— generate concise discharge
traffic flow or sunlight exposure — act as a real-time legal assistant to
instructions to optimize clinical
judges and attorneys
operations
In tax and customs, gen AI can do
— simplify and explain intricate legislation
the following: — act as a copilot to summarize imaging
and case law
diagnostics for clinicians
— serve as a virtual assistant for complex
— keep legal professionals updated with
import-guidance synthesis — summarize patients’ medical histories
summarized regulatory changes
for streamlined review

Gen AI is a fast-evolving technology,
so early involvement of end users is
critical to improve the accuracy and
performance of LLM responses.
expose government agencies that own foundation while avoiding implementations with high
models to litigation; gen AI’s occasional lack of potential for risk or limited tolerance for errors.
proper source attribution makes it even harder
to detect potential copyright infringement in 3. Select the underlying model; upgrade
its responses. Legal implications also apply to technical infrastructure as needed. Most
manipulated content—including text, images, public sector agencies begin with an off-the-
audio, and video—that malicious actors may use shelf LLM and fine-tune it with proprietary data
to harass, intimidate, or undermine individuals and and integration with internal systems to deliver
organizations. Users could act unscrupulously or customized results. In very rare cases have we
illegally by exploiting inherent biases in the data that seen government agencies develop and train
a specific foundation model was trained on. As a a new model from scratch. When that happens,
result, some governments—such as those of Iceland it is driven primarily by aspirations to develop
and Finland—have chosen to partner with global a national asset, manage data-sovereignty
large language model (LLM) providers to get access issues, or reduce dependence on private
to their existing models and augment and customize sector tech companies.
them to suit their own needs, by adding proprietary
data and insights. 4. Ensure that the necessary skills and roles are
available. “Head of AI” is one of the hottest
jobs around, and governments will need to hire
Eight steps for getting started for it—only a senior executive can coordinate
For public sector agencies just beginning to venture all gen AI–related activities and ensure that
into gen AI, we suggest this eight-step plan: risks are addressed effectively. Traditionally,
governments haven’t had AI engineers, AI ethics
1. Define your organization’s risk posture. After officers, or prompt engineers, but such roles
identifying your agency’s risk parameters, must now be created and filled.
devise a plan to mitigate the risks of using gen
AI—with a mix of internal policies, guidelines, 5. Develop gen AI apps jointly with end users.
and awareness sessions. Gen AI is a fast-evolving technology, so early
involvement of end users is critical not only for
2. Identify and prioritize use cases. Not educating them on privacy and safety but also
everything needs gen AI technology to power for collecting their feedback to improve the
it. Government agencies may find our 4Cs accuracy and performance of LLM responses.
framework helpful in developing a list of For example, users can provide a quantitative
potential use cases—and then prioritizing them score for the quality of each response.
according to potential impact and feasibility—

6. Keep humans in the loop, at least for now. Until communication efforts to clarify the limitations
gen AI technologies mature and enforceable of gen AI use cases and ensure safe adoption.
regulations are in place, it may be prudent for
government agencies to keep human managers 8. Start small and scale up. Our research shows
accountable and use gen AI implementations that 72 percent of leading organizations find
only to execute models and not to monitor or managing data to be one of the top impediments
assess them. to scaling AI use cases. In our article on scaling
gen AI programs, we identify seven actions that
7. Design a comprehensive communication data leaders should consider as they move from
plan. Embed necessary disclaimers in all experimentation to scale.
Damien Bruce is a senior partner in McKinsey’s Melbourne office; Ankit Fadia is an associate partner in the Dubai office,
where Tom Isherwood is a senior partner and Chiara Marcati is a partner; Aldous Mitchell is a partner in the Brisbane
office; Björn Münstermann is a senior partner in the Munich office; Gayatri Shenai is a senior partner in the New York office;
Hrishika Vuppala is a senior partner in the Bay Area office; and Thomas Weber is a partner in the Frankfurt office.
The authors wish to thank Shankar Ganesh, Jessica Lamb, and Jigar Patel for their contributions to this article.

December 2023
Copyright © 2023 McKinsey & Company
All rights reserved
Cover art: © Radoslav Zilinsky/Getty Images
www.McKinsey.com
@McKonGov
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Reinvesting

ii Introduction 61 Transforming public sector

This article is the first in a series on the US government’s productivity

© Martin Barraud/Getty Images

In many countries, government spending and employment make up a sizable

Breakdown of government spending and employment by country, 2020

McKinsey & Company

One definition of productivity breaks it down into volume and price.

Total value of outputs Output volume x output prices

McKinsey & Company

For our analysis, we considered about 58 percent, or $5.8 trillion, of total

Road transport 0.20

Other (not addressable)2 0.76

McKinsey & Company

The US government productivity improvement opportunity is $725 billion

Productivity improvement opportunity by category, $ billion

Healthcare ~35 ~50

Primary and secondary ~15 <5

Road transport ~10 <5

Public safety ~5 <5

Higher education ~5 <5

Other1 ~30 ~40

0 20 40 60 80 100 120 140 160

McKinsey & Company

Breakdown of productivity improvement opportunity by operational focus area, %

Ability to Ability to sunset Existence of Existence of Existence of budget

Example • Optimize • Source smarter • Enhance • Align leadership • Manage demand

McKinsey & Company

Our first method for estimating the productivity improvement opportunity

Illustration of method 1: Healthcare example across all US states

Note: Spending was partially (50%) normalized for wages by state.

McKinsey & Company

Our second method for estimating the productivity improvement opportunity

Illustration of method 2: Primary- and secondary-education example across all US states

Note: Spending was partially (50%) normalized for wages by state.

McKinsey & Company

Copyright © 2023 McKinsey & Company. All rights reserved.

by Chris Griggs, Jihye Gyde, Chandru Krishnamurthy, and Megan McConnell

© Natee Meepian/EyeEm/Getty Images

Reorienting finances from an organizational basis to an activity basis can help

Case study on reorienting finances

From a departmental basis To an activity basis

Headquarters Service line 5

McKinsey & Company

Copyright © 2023 McKinsey & Company. All rights reserved.

© SDI Productions/Getty Images

State leaders could help optimize

Centralized technical assistance and support could help stakeholders secure

Centralized technical assistance and support model

Communications Legislative relations Grant-writing staff Policy making

Academic Other (eg, research

McKinsey & Company

State leaders could convene stakeholders to facilitate discussion and prevent

Rural county with limited broadband infrastructure or access

Public and Advance and

Rural county #1 Rural county #2 Rural county #3 Rural county #4

McKinsey & Company

States could consider forming partnerships with different stakeholders to

Source: US Senate H.R. 3684, Bipartisan Infrastructure Law

McKinsey & Company