Department of Economic and Social Affairs Division for Public Administration and Development Management E-government funding activities and strategies Michael G. Mimicopoulos

United Nations New York, 2004

Abstract

This paper deals with e-government funding activities and strategies. There are no systematic data on e-government funding. This is partly because the field is relatively new, partly because the definition of e-government differs from country to country, with some countries defining e-government in a narrow sense to include only government to government networks, and partly because so far, e-government initiatives across countries are considered on a project by project basis.

Lacking such data, this paper looks at selected countries’ e-government spending. It also examines other relevant e-government funding issues, such as project planning and cost overruns, cost versus savings of push towards e-government, and reducing transaction costs and corruption in government procurement. It then presents various strategies which governments can use in funding e-government, such as issuing various types of bonds, or utilizing public-private partnerships to fund e-government. Other innovative new e-government financing methods are also dealt with. The paper then concludes with some specific developing country considerations. The author wishes to thank Mr. Dieter Zinnbauer for researching some of the material.

Contents

Overview I. WHAT DO GOVERNMENTS SPEND ON E-GOVERNMENT? SIX

EXAMPLES AROUND THE GLOBE

A. Advanced Economies United States United Kingdom European Community

B. Emerging economies Singapore Taiwan Province of China Russian Federation C. Allocation among various e-government services

II. OTHER RELEVANT E-GOVERNMENT FUNDING ISSUES

A. Project Planning and cost overruns B. Cost versus savings of push towards e-government C. Reducing transaction costs and corruption in government procurement D. Government management/funding structure is a consideration

III. E-GOVERNMENT FUNDING STRATEGIES

A. Issuing bonds B. Towards public-private partnerships to fund e-government C. Other innovative new e-government financing methods D. Specific developing country considerations

Annex Table 1 1. E-governmental Management / Funding Structures in Various OECD Countries

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Overview In recent years, there has been a significant growth in the number of government services available over the internet. Use of online government services throughout the world has reached 31 per cent of adults according to one survey of 32 countries by Taylor Nelson Sofres, the world’s second largest market research conglomerate.1 As the table below shows, the Nordic region leads the world in its use of adults using government services online. Table 1. Use of online government services in 2003 (in percentages) Country Online government use by adults Denmark 63 Norway 62 Singapore 53 Canada 51 United States 44 France 35 Germany 26 United Kingdom 18 Worldwide ( 32 countries surveyed) 31 Source: Taylor Nelson Sofres, December 2003, published in “IT in the public sector”, Financial Times, February 4 2002. pp. 5-7. A basic challenge for both central and local governments is to embrace on an ongoing basis the opportunities that can be provided by the online world in terms of ensuring that community needs and expectations are met, while at the same time ensuring programme and cost effectiveness for that level of government. Since a key driver for investment is client demand, the benefits for individuals, business and government must be present, as it would be pointless to invest in the development of online services, if there is no expectation or need for that particular service to be provided online. An assessment and comparison of the costs versus the benefits of e-government across countries is a not an easy undertaking however. For one, systematic data on what governments spend on e-government are lacking. However, even if such data existed, it would not be comparable, due to the differing installed bases, capital replacement costs and spending requirements on ancillary infrastructures for e-government readiness. It is important to qualify any comparison of spending levels (flows) as not being representative of the overall level of ICT diffusion in countries that have a strong history of spending on ICT, and therefore large installed bases (stocks), such as Australia and Japan, for instance. One would also have to determine a benchmark return on investment,

1Survey conducted by Taylor Nelson Sofres, in Nuala Moran “IT in the public sector: Why it pays to get it back to front”, Financial Times, February 4 2004, p.5.

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or some other form of measurement, which would encompass not only financial returns, but also impacts for individual governmental agencies, government more broadly, as well as users of government services Public sector organizations, would also have to evaluate their IT investments not only by the cost savings they generate for government, but also by the financial benefits that these investments generate for their citizens and businesses. Privacy and security issues also constitute priorities for all governments and introduce an additional element into the equation of costs and benefits, as more governments move more of their transactional services on-line. The ease with which information technologies can aggregate and manipulate data has heightened public concerns over the collection and use of personal information. Privacy protection has accordingly been elevated to the top of the public policy agenda, and has prompted governments to debate issues regarding the regulation and availability of encryption technologies. The survey by Taylor Nelson Sofres cited above, also found that interaction is limited, with only 9 per cent of the 31,833 respondents using online services to provide information to governments and only 8 per cent to make online payments. Privacy and security factors must therefore be important variables here accounting for these low numbers. Security issues are particularly important with regard to financial transactions. The incidence of fraud in internet transactions amounts to just over 2 per cent, according to Celent Communications, a US consulting company, but it is more than 20 times higher than it is in the off-line world, where only 0.1 per cent of purchases are deceptive.2 The primary method available to guarantee the security and privacy of information traveling over the Internet is encryption – a technique which uses mathematical algorithms to encode communications so that they are indecipherable to anyone except the sender and the intended recipient. But the costs involved in installing such systems are not insignificant, and may be beyond the reach of most governments. . Smaller governments are obviously at a relative disadvantage in terms of the necessary financial, as well as human resources in order to effectively tackle these issues. Political leaders need to weigh considerations regarding the benefits of security and privacy versus the additional outlays. In the meantime, the pressures on governments to adopt the latest state of the art technologies are mounting, in the light of a number of high profile security breaches of client databases in the financial and insurance sectors, as well as the incidence of identity theft. As technology buyers, public sector administrations in general lag behind the private sector as a norm by anything between five and ten years. Purchasing methods in the government procurement sector are often arcane and public officials are seldom early adopters of new technologies. The obvious reason for that is that governmental agencies do not face competition in the provision of their services, and this lowers their desire for the latest competitive edge technology. E-government is moreover increasingly coming to be viewed as an instrument for modernizing public services, rather than just as a tool for automating existing methods of handling tax payments, license applications, or 2 See “How fraudsters set traps and take the credit”, Financial Times, IT Review, May 21 2003, p.1.

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planning permissions. Modernization, is therefore, also viewed as a threat by well-established power bases. A notable exception to the general lag of public administrations behind the private sector in information technology (IT) spending can be found in the accession countries which joined the European Union in May 2004.The recent entrants have reformed their social security systems, supported by the development of new computer systems. According to Jacek Murawski, director for public funding in Europe for Cisco, the networking equipment manufacturer, “IT has been at the heart of public service reforms that have prepared these countries for joining the EU”.3 In those countries, he further notes, “public sector investment is a driver of private sector IT investment because it requires businesses to file returns electronically”. Heavy investments in IT in the effort to reform public services and deliver end-to-end e-government is also coinciding with security issues that highlight and increase the need for integration in government agencies. A good example of this is the formation of the Department of Homeland Security in the United States, which integrates the activities of 22 separate agencies. Security concerns are also driving spending on public sector IT in Europe, since the United States government’s requirement for biometric data in passports, necessitates spending by other governments on IT.4 Governments are increasingly becoming cognizant of the fact that if they are to reap the same benefits that the private sector has derived from electronic delivery channels, they will have to spend increasing amounts on e-governmence, as well as integrate their front end, and back-end systems. Integration reform will necessitate building services around citizens rather than basing them on the structure of government departments. Services will thus be reformed and clustered according to the user’s needs, regardless of which agency supplies them. 5 Many governments, mindful of the gaps with the private sector as technology buyers, have recently begun to re-assess the conduct of their overall e-government strategies, in light of the new internet-based technologies that have transformed businesses. Governments also increasingly recognise the “importance of monitoring and measuring the results of government programmes to make smarter funding decisions”.6 E-government practices can thus improve accountability. Moreover, technology can create virtual agencies – electronic points of entry to multiple government agencies through a single interface that offer unified access to benefits and services.7 But “the potential of e-government lies not in the technology, but rather how our government

3 “IT in the public sector”, op. cit. p.5. 4 Ibid. 5 Ibid. 6 “Leadership in difficult times”, Keynote Address by Rudi Giuliani to the “E-Government Conference”, Washington Convention Center, June 24-27 2002. 7 Ibid.

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views its customers and conducts its business”8. This notion underlies the fact that the process of putting public services online is about much more than IT. It demands fundamental changes in the public sector’s traditional structures and practices and in the relationship between the state and its citizens. It is becoming clear that “successful e-government is, at most, 20 per cent technology, and 80 per cent about people and organizations”.9 In other words, e-government should be viewed as “a mechanism that turns governments on their heads, from being producer-led, ministerially confined, departmentally-blinkered institutions to being customer-oriented service providers”.10 The first question that comes to mind when considering the push to adopt a high level of e-government relates to the amounts that governments are spending.

8 “Customer-centric digital department”, address by Jeff Bollentino, Vice President of Booz Allen Hamilton to the “E-Government Conference”, op. cit. 9Quotes by Kito de Boer, director of McKinsey in Dubai, in Sarah Murray “Online opportunity to transform administrations and services at all levels: Transferring government functions onto the internet could redraw the lawmakers’ relationship with citizens, as well as improve efficiencies, Financial Times, June 20, IT, p,8. 10 Ibid.

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I. WHAT DO GOVERNMENTS SPEND ON E-GOVERNMENT? SIX EXAMPLES AROUND THE GLOBE

The IT research company IDC, forecasts that the public sector IT market will exceed $126 billion worldwide by 2007, while in Europe spending will increase by more than 6.3 per cent per annum between 2003 and 2007.11 A. Advanced economies United States The undisputed leader in e-government spending in absolute amounts is the United States. With a budget of US$ 48.6 billion in 2002, the US federal government is the largest single consumer of IT in the world.12 As a percentage of its GDP however (about half of one per cent), the US lags behind the United Kingdom in its spending on e-government. In the US however, e-government has taken root at the state, rather than federal level. States are doing much more in the area of e-government and citizens are far closer to local government than the federal government. Expenditure, as well as, funding issues, become much more important at the state level. In 2002, the US President signed “The E-Government Act of 2002 with the goal of bringing the government more fully into the electronic age and improving public access to e-government services.13 The Act provides for a number of new measures together with the authorization of $345 million over a four-year period for an e-government fund to support interagency projects and innovative uses of information technology. Because funds prior to the passage of the Act were appropriated agency by agency, this mechanism had the tendency to inhibit the cross-agency investment necessary to ensure inter-operability across government. The new inter-agency dimension will make services more user-friendly, accessible, and results oriented. Other new measures include: the establishment of A Chief Information Officer within the Office of Management and Budget (OMB) to promote e-government and implement government-wide information policy; the establishment of a Chief Information Officers Council as the principal interagency forum for improving the use of government information resources; improving upon the federal government’s online portal; establishing an online directory of Federal Web sites and indexes of resources; requiring federal courts to post opinions online; and funding a federal training center to recruit and train information technology professionals. Pushing United States spending is the US President’s statement of intent to improve the management and performance of federal government by applying IT to make it more “citizen centric” A citizen-centric model puts citizens at the centre and provides a single interface for citizens to access all (or a range of) government services. The United States federal government is looking increasingly to consulting companies to modernize the public sector by applying commercial best practices. 11 “IT in the public sector”, op. cit.. 12 See Nicholas Timmins, “UK slips down table as online progress slows”, Financial Times, April 9 2003. 13 See “E-Government Act of 2002,” Public Law 107-347, December 17, 2002, on the internet at http// www.access.gpo.gov.

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United Kingdom In the United Kingdom, spending by the Government on ICT was due to rise by 25 per cent in 2003 to reach £12.4 billion, the equivalent of more than 1 per cent of GDP.14 The big growth areas are health where spending is set to rise 84 per cent as projects to deliver electronic bookings of appointments, electronic prescribing and patient records get under way. The central government’s expenditure is increasing by 25 per cent due to the installation of a new criminal justice network as well as large projects at Customs and Excise, the Department of Trade and Industry and the renewal of the Inland Revenue’s ICT programme. Spending on defense ICT systems is likely to have increased by 17 per cent as a secure battlefield communications system and a defense information infrastructure are developed. European Community In the European Community, national, regional and local governments are forecasted to spend increasing amounts in their efforts to bring their services online. The Lisbon summit, which took place in 2000, set Europe the goal of becoming the world’s most competitive and dynamic knowledge-based economy. The resulting eEurope Action Plan aims to exploit the potential of the internet to promote a competitive economy. The main objective is to do away with queues in government offices by making services available electronically. The amounts spent so far on e-government by the European public sector are insignificant in relation to Europe’s GDP, but IDC, the market research company, has estimated that such spending will grow by 26 per cent a year, from $1.3 billion in 2000 to $4 billion by the year 2005.15 B. Emerging economies Singapore Singapore is a leading country from among emerging economies in e-government spending, with the Government of Singapore announcing in July 2003 a S$1.3 billion plan to upgrade its online public services in a bid to further boost administrative efficiency16 In relative terms, the sum to be spent by Singapore on e-government is very large, amounting to about eight tenths of one per cent of its GDP. This programme, dubbed e-government action plan II (eGAP II), supplements (eGAP I) launched a few years ago at a cost of S$ 1.5 billion. One of (eGAP I’s) key objectives was to get as many government services online as possible. As a result, about 1,600 public services are provided online. And these services do not just provide you with information but also enable you to carry out transactions. A main objective of the additional funding is to 14 See Nicholas Timmins, Technology spending set for rapid growth: Information and Communications industry likely to benefit from unprecedented boom in expenditure as public services are modernized”, Financial Times, October 23 2002. 15 See Rod Newing, “Governments strive to connect with the people: EU member states aim to streamline public services by making them available electronically”, Financial Times, December 19 2001. 16 See “Singapore announces 1.3 bln sgd plan to boost e-government” The Edge Malaysia, July 7 2003.

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increase the number of online users with the government from the current 76% to 90% by 2006. This would be done through a two-pronged approach of heightening e-services awareness through publicity and promotions, and providing different channels of access, such as mobile phones, and more access supermarkets and public libraries. Taiwan Province of China The Taiwan Province of China earmarked in 2002 NT$ 36.2 billion (US$1.04 billion to build the island into a fully computerized society.17 In relative terms, Taiwan’s spending on e-government, is fairly significant, amounting to almost four tenths of one per cent of its GDP. About 80% of the work of the ambitious “e-Taiwan” project will be farmed out to private bidders, which is expected to boost their combined production for software products by NT$ 100 billion. Russian Federation E-government spending in transition economies is advancing at a rapid pace. In the Russian Federation, federal budget financing for the E-Russia program will total 1.43 billion rubles in 2003.18 In relative terms, that amount constitutes an insignificant one hundredth of one per cent of its GDP. Most of these funds will be spent on connecting government-funded institutions to computer networks, setting up public Internet access points, and on regional programmes. The Economic Development and Trade Ministry expects however that there should be a substantial increase of funds to 6.5 billion in 2004. One of the items that has been under consideration by an interdepartmental commission is the effectiveness of budget funding in the area of information and communications technologies. Reservations have been expressed in this regard, as 90% of all information resources that are created using information and communications technologies are only for internal department use. The government plans to open 12,000-15,000 access points per year in an effort to increase internet penetration in Russia from the current 8-9% to 15%. It estimates that at least 3 to 4 billion rubles will be needed in 2004 to expand public access points and build the corresponding infrastructure. A consortium that includes the Interfax news agency has won an open competition to provide information support for the Electronic Russia program C. Allocation among various e-government services Another interesting question that comes to mind relates to the allocation of funds among competing services and needs related to the provision of e-government. An example comes from Canada. Between 1999-2000 and 2005-2006, a total of $880 million will have been allocated in central funding, in addition to the approximate $5.1 billion (CAN$) invested annually by departments and agencies in maintaining and developing their information systems and the estimated $2 billion a year expended on

17 See Gigi Onag, Isabelle Chan and Leong Khay Mun “Uneven fortunes, uncertain world” Financial Times, December 1 2002. 18 Reported by Interfax news agency, June 2 2003.

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service delivery through other channels.19 Of this funding, $475 million will have been invested in common secure infrastructure to enable integrated services and support secure internet, telephone and in-person access. Another $357 million will have been invested in service delivery projects of departments and agencies, and in integrated Web portals. Another $48 million will have been allocated for policy, human resource and skills strategies, communications, and measurement, evaluation and citizen feedback.20 ICT training for public sector workers constitutes a significant cost factor in e-government projects and many governments have committed extra funding for such training. Sweden spends as much as half of its government training budget on ICT skills of its civil servants

19 2nd OECD Symposium on e-Government, E-Government: Organizing for Integration, Country Papers, Lisbon, Portugal, 22 September 2003, p. 19. 20 Ibid.

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II. OTHER RELEVANT E-GOVERNMENT FUNDING ISSUES A. Project planning and cost overruns Yet, another interesting question relates to whether cost estimates for e-government projects live up to expectations, or whether cost overruns are the norm. International research on ICT projects conducted by the Standish Group has found that 30% of projects are complete failures, 45% experience some significant problems, and 25% are more or less on target.21 The sheer complexity of large scale ICT projects is an important factor for underperformance. The complexity and multi-year nature of large e-government projects is also an important factor for poor cost estimates. For instance, ICT-led modernization of the tax administration in Poland (POLTAX), between 1995 and 1999, underwent more than 170 changes, effected by legislative and executive deeds with impact on the operation of the system.22 An analysis of 25 United States flagship e-government projects in the process of being implemented found that cost estimates for 12 initiatives had to be revised by more than 30% upwards in a time span of only 5 months between May and September 2002.23 Out of the 25 projects, only 18 had budgeted for staffing requirements and only 9 had outlined strategies for obtaining funds. Audit results of ICT projects of Denmark also found that out of 124 ICT projects with individual budgets over DKr 2 million ($US 300,000) and a total budget volume of $US 700 million, only 18 were completed on budget and according to plans. A majority of projects, 88 in total, experienced delays and budget overruns of an average 33% of the planned budget.24 Poor project planning and ensuing cost overruns are therefore an endemic problem of e-government projects. The fact that businesses have transformed their procedures and reduced their costs, as manifested in the increased productivity of firms, particularly in the case of the United States, where labor productivity, especially in the services sector has outpaced the productivity in the goods producing sector, by using electronic systems to deal with customers and suppliers, is putting increasing pressure on governments to adopt such practices as well. Consumers are moreover, increasingly demanding of government the multi-faceted service which is available to them by the business sector. From a cost-saving perspective, a persuasive argument can be made to governments that they should refocus their strategies on control, performance and efficient use of human capital, as well as best practice. The adoption of such practices also promotes a higher level of transparency in governmental operations. 21 Standish Group, “The CHAOS Chronicles”, 1999. 22 OECD, “Management of Large Public IT Projects: Case Studies”, PUMA/SBO/RD (2001). 23 GAO (Government Accounting Office), “Electronic Government, Success of the Office of Management and Budget’s 25 Initiatives Depends on Effective Management and Oversight”, GAO-03-495T. 24 OECD, Management of Large Public IT projects: Case Studies”, op.cit.

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B. Cost versus savings of push towards e-government A relevant question that comes to mind when considering the current push to adopt a high level of e-government by governments is the question of cost. Will the costs of introducing e-government outweigh the financial savings? And what is the time framework for recovery of such costs? Taking an example from a pioneering country in providing e-government services, namely the United Kingdom, an independent study conducted by an IT market analyst, expressed doubts that the process of producing significant savings will be realized at least in the short-term and possibly never. By 2005-06, e-government may be generating savings for both local and central government of £289million a year, the study says, but the spend on the system will still be running at £1.2 billion25. On an annual basis, savings may match costs in 2012, according to the study, although this would be an optimistic scenario. It is in fact possible that savings may never overtake the costs so that e-government, while sharply improving services for those able to take advantage of it, may remain an additional cost. In an Australian study, the return on investment from an estimated investment into 24 government online programmes of approximately A$109 million, there was:

• an aggregated benefits to cost ratio for the 24 programmes of 92%; • a benefit to cost ratio of 54% for externally focused business/intermediary online

programmes; • a benefit to cost ratio of 121% for externally focused citizen online programmes;

and • a benefit to cost ratio of 128% for internally focused government online

programmes.26 Cost benefit analysis will therefore become a relevant issue in the effort to align information technology with the business of government. Unlike the private sector however, which is governed solely by profit motives, the public sector has a duty to provide public value to its citizens. That implies that governments cannot maximize the savings from digitization by cutting physical access to services, since they have a duty to ensure equal access for all, including those who do not have access to computers. The afore-mentioned Australian study, also concluded, that private sector approaches to cost benefit analysis do not translate well into the public sector. Outcomes cannot be simply measured in financial terms, and there are few established metrics for measuring social outcomes. Social benefits include more professional development opportunities obtained through using online forums and sharing information and bulletin boards with professional and trade groups. They also included awareness of Commonwealth social programs and benefits. Specific areas of benefit citizens valued

25 Study conducted by Kable, the IT market analyst reported by Nicholas Timmins, “Warning on costs of online public services”, Financial Times, June 10 2003. 26 Australian Government, National Office for the Information Economy, E-government Benefits Study, Measuring the demand for, and the benefits of e-government, April 2 2003.

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included increased community skills and knowledge and new business and work opportunities. As a result of using government online services Australians now enjoy:

• faster turnaround of service delivery • 24-hour service delivery • more self-service • improved ability to find information • wider reach of information to the community • better communication with rural and remote communities.

The management consulting firm Accenture subsequently suggested a public sector value model that adapts the principles of shareholder value, and identifies a set of “citizen-centric” outcomes against which delivery is measured.27 Another confirmation of this notion comes from the management consulting firm, Deloitte Consulting, which has proposed a similar measure, Citizen Advantage, to measure the benefits from e-government investments. Its idea is that public sector organizations should evaluate their IT investments not only by the cost savings they generate for government but also by the financial benefits they create for citizens and businesses.28 The European Commission has also set out its own methodology called Value of Investment, which includes qualitative gains such as increased availability of services and time-savings. An interesting finding of the Australian study moreover was that citizen and business considered that there would be further benefits from features, such as:

• seamless online government presence that provides more information, structured so that it is easy to find and does not require an understanding of how the government works; and

• further integration and clustering of services across agencies at all levels of government.

Outsourcing can also be used by governments in their efforts to contain costs. However, it needs to be managed properly and should not be viewed as a magic bullet for achieving cost reductions. A survey of government ICT executives indicates that the success of outsourcing is highly contingent on proper management of the outsourcing relationship. Only half of the outsourcing endeavours that have cost-reductions as a main aim are found to deliver in this regard.29 Other cost mitigation mechanisms include the avoidance of emerging technologies whose performance is poorly tested and their interoperability capabilities might turn out to be limited. 27Why it pays to get it back to front.“IT in the public sector”, op.cit. 28 Ibid. 29 Accenture, “Outsourcing in Government: Pathways to Value”, 2003, p.7.

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C. Reducing transaction costs and corruption in government procurement Investments in electronic procurement systems are bound to streamline the procurement process, reducing transaction costs and helping to weed out corruption. A classic case study of these benefits is that of the city of Sao Paolo. Built with a budget of just R$2.5 m ($900,000), the system delivers millions of Reals worth of services every year. Negotiating and concluding transactions through a single unified system is decidedly more efficient than other methods. The state estimates that transaction costs had formerly accounted for on average 78 per cent of the cost of state purchases. This figure has now been reduced to just 21 per cent.30 The greater efficiency and reliability realized by the electronic system reduce the need for government departments to keep large stocks, thus shortening the time it takes to make a purchase from three months to between 10 and 15 days. Administrative units can now hold much smaller inventories, which saves money. Public forums on the site now provide the venue for discussions between buyers and sellers, and these discussions are recorded and made publicly available. This mechanism precludes any possibilities on the part of the sellers to offer bribes and kickbacks to the buyers. The system uses a reverse auction process, with companies submitting bids online and the contract awarded to the lowest bidder. In 2003 auction bids were on average 27 per cent below the reference price, the maximum the buyer was willing to pay. In addition to the benefits of greater efficiency, Sao Paolo taxpayers saved nearly R$40m ($14.2m). D. Governmental management / funding structure is a consideration Another relevant question that arises when considering the push to adopt a high level of e-government is the question of the relevant governmental management/funding structure in each county. Table1 in the annex attempts to shed some light on the various structures in OECD countries. Some countries in the European Community including Germany and the Netherlands, have very decentralized government structures with the bulk of everyday public services being provided to citizens by sub-national entities. The eEurope action plan, therefore, while committing central governments to push for e-government, sidelines the fact that the sub-national authorities have to balance day-to-day budget constraints. Taking Germany as a case in point, the German institute for urban studies, Difu estimated in 2001 that local governments embracing e-government will need to spend up to DM 23 billion on software and hardware by 2009, not including the costs for planning and training.31 But around 60 per cent of the largest German cities polled by Difu say they lack money to invest in internet technology and skilled people.

30 Case Study: Sao Paolo. Cutting costs and corruption, in “IT in the public sector”, op.cit. 31 See John Blau, “Aiming to enter the big league – despite obstacles along the way: Ministers are pressing hard for leaner and meaner departments, with flat hierarchies and internet-trained staff”, Financial Times, June 20 2001.

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In an effort to deal with this hurdle, some governments, such as the state of Lower Saxony, see opportunities in public-private partnerships which are common in the US. As an example, Microsoft has donated programmers and software to the Gemeinde4u municipality portal sponsored by the state. The Bertelsmann Foundation, created by Rheinhard Mohn, has been analyzing international models in the hope of finding schemes that can be adapted to Germany, and has not ruled out contributing funds of its own. Table I in the annex, also serves as a reminder to governments of the fact that organizational complexities can come in the way of funding successful e-government. Complex organizational funding structures require the different departments involved to co-ordinate their efforts – something agencies and ministries do not always practice as a matter of course. Successful e-government therefore, involves not only technological and funding issues, but also organizational issues. In Norway, large departmental ICT modernization projects can compete for funding through a special central investment fund. There is therefore an incentive for departments to draw-up overambitious ICT projects, in order to qualify for special funding, even though smaller projects and an incremental approach might be more appropriate and more likely to be successful.32

32 OECD, “Management of Large Public IT Projects: Case Studies”, op. cit..

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III. E-GOVERNMENT FUNDING STRATEGIES Governments have recognized the potential of using the Internet as a service delivery channel to meet the needs of people and businesses. People now expect the same type and level of service from government as they receive from the private sector, virtually on demand. That implies ever increasing demands placed on governments in terms of financing e-government projects. E-government projects often incur large upfront expenditures that are difficult to fund as normal operating expenditures. Treating such expenditures as normal operating expenditures, may result however in poorly financed projects over their life cycle. Successful e-government may require that governments treat e-government projects as capital expenditures. Such an approach would pave the way for funding through long-term financing instruments, such as bonds or leasing arrangements that guarantee long-term funding and smooth expenditures for large investments by spreading expenses over several periods. Treating ICT projects as long-term capital investment decisions has the added advantage of properly accounting for future revenue or saving streams through ICT investments. When looking to fund e-government projects, governments need to evaluate potential projects by:

• undertaking a traditional cost benefit analysis and discounting to present value; • focusing on the underlying cost effectiveness of the project in terms of the ability

to produce outputs more effectively than existing arrangements; • evaluate whether the project constitutes a fundamental building block for long-

term development;. • focus on how important the need for the project is in terms of ensuring access for

all; • look at projects not only in financial terms, but also in terms of social outcomes

and social benefits, which include more professional development opportunities obtained through using online forums and sharing information and bulletin boards with professional and trade groups; increased community skills and knowledge; and new business and work opportunities.

A. Issuing bonds Governments, both sovereigns and sub-sovereigns, can finance e-government projects by issuing bonds, on either the domestic or international capital markets. Bond financing is cheaper than bank loans. This mechanism of financing allows them to obtain all the funds they need up-front through the bond offering and are not subject to partial repayments, as in the case of bank loans, and which repayments are based on a bank’s monitoring of their project construction progress. In addition, credit ratings, which are crucial in determining the issuer’s borrowing costs, are determined by independent agencies, rather than the banks. Issuing bonds also allows for longer maturity debt than bank loans. Longer maturity debt helps to minimize the budget risk and contributes to the financial stability of issuing sub-sovereigns.

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Issuing sovereigns and sub-sovereigns have a menu of choices from the bond market. They can issue General Obligation Bonds, whose repayment is guaranteed by the “full faith and credit” of the issuing government. This implies that the full taxing authority of the issuer is pledged to pay back the bonds. Sub-sovereigns who have the capacity and willingness to raise taxes as needed, can feel secure in issuing and repaying such bonds. In some countries, General Obligation Bonds must be approved by the voters in a referendum before they are issued. Governments can also issue Project Revenue Bonds, which are not backed by the full faith and credit of the issuer, but are secured only by the expected stream of revenue from the project being financed. Governments can also issue Dedicated Revenue Bonds, which are becoming increasingly popular. With these bonds, bond repayments are guaranteed by a particular revenue stream, which is unrelated to the project being financed. A sub-sovereign for instance, may issue such a bond and back it by the pledge of funds from expected intergovernmental transfers, or by specific tax revenues such as sales, liquor or gas taxes. Governments can also issue GDP-linked bonds to fund e-government strategies, whose repayment value or the coupon (annual interest payments) would be linked to nominal or real GDP growth. The idea of GDP-linked bonds as a general funding strategy and a new asset class has been proposed in a recent paper by two International Monetary Fund economists.33 Under the formula suggested by the IMF paper, yearly coupon payments would be reduced (increased) by 2 percentage points for every 1 point that GDP growth was below (above) trend. If growth was 3 per cent a year and the country’s normal coupon payment on fixed rate bonds was 10 per cent in a year, when growth was 5 per cent (two points above the trend) the coupon would rise to 14 per cent. Conversely, in a year when growth was1 per cent (two points below the trend), the coupon would fall to 6 per cent. From the investors’ viewpoint, GDP bonds offer certain sought-after attributes of growth, inflation and stability (low price volatility). While conventional bonds offer a fixed money return but no protection against inflation, equities offer long-term growth combined with a higher overall return but at the cost of undesired volatility. On the other hand, index-linked bonds provide an inflation hedge but offer no growth prospects. GDP bonds are also likely to attract defined-benefit pension funds whose liabilities grow in line with predicted growth in members’ earnings. On the part of borrowers, GDP bonds are attractive to Governments because in the case of recessions, when tax revenues drop, their annual payments or their liabilities should drop in line as well, making it easier for them to handle their debt burdens. 33 Eduardo Borensztein and Paulo Mauro, “Reviving the case for GDP-indexed bonds”, IMF policy discussion paper, PDP/02/10. September 2002.

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B. Towards public-private partnerships to fund e-government Once sources of public funding have been assessed, the capital improvement budget process needs to consider potential sources of private sector funds. And there are potential reasons other than just funds for involving the private sector in capital projects. The private sector can:

• bring skills and know-how; • enhance the efficiency of service delivery; • insulate upcoming operations from political intervention; • make the project more responsive to the public’s needs and preferences.

Successful e-government also requires that risk-taking activity should be placed into an environment that has a more balanced approach to risk-taking, namely, the private sector. That is because risk aversion is deeply ingrained among public servants, since there are no rewards for successful risk-taking, while there is often public criticism if risk-taking is unsuccessful. As a result, there is a predisposition against risk among civil servants. But change involves the taking of risks, while the absence of competition in the provision of public services ensures the perpetuation of the status quo. Various methods have been tried in the effort to involve the private sector and engender a balanced approach to risk taking in the public sector. Policies, such as privatization, private finance initiatives (PFIs), and contracting out have been tried. More recently, around the world, cash-strapped governments are following the UK in turning to public-private partnerships (PPPs) to fund projects. Although some observers argue that it was France with its array of state-backed post-war enterprises ranging from water utilities to banks, which paved the way, it was the UK that popularized the concept, and formalized the procedures in the early 1990’s with the launch of Private Finance Initiative.34 An example of a public-private partnership is the €80 million ($72 million) cost of upgrading the A4 motorway, a major European artery from Germany, across southern Poland, to the Ukraine, which was funded not by the Polish taxpayer but by the European Bank for Reconstruction and Development, and was completed in the year 2000.35 Private Finance Initiatives, which as the name implies are exclusively funded by private capital, are now the most successful version of public-private partnerships. A typical PFI project is a tightly drafted contract between a government and a private consortium running for 25 to 30 years. The contract lays down standards of provision of a specific service, in return for guaranteed payments over the life of the contract. Public-private partnerships cost more than if sovereign debt was issued, but they get around the resource constraints in an era when government spending is frowned upon by politicians, economists, as well as voters. Partnerships enable the provision or improvement of public services, while avoiding tax increases. Partnerships bring operational benefits in terms of being delivered on time, to budget and with operational benefits thereafter.

34 See “Profits and perils of public private partnerships”, Euromoney, February 2002, pp.126-131. 35 Ibid.

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Some of these ventures have not had stellar results however. In the IT sector for instance, in the United Kingdom the cancelled benefit swipe card cost the government and the private sector between them around £1 billion.36 There was also the abandoned system for magistrates courts. But the United Kingdom’s Passport Agency project, after four years of operation is now a model of efficiency. Standard passport applications are now turned around in a fraction of the time and complaints run below 0.1 per cent. 37 One of the crucial issues regarding these contracts is that they are lengthy, and therefore they have not been seriously tested by variations to the contracts, changes of personnel on both sides, and changes in government priorities which over that time scale are inevitable. Therefore, it will take years before a final judgment can be made on how well they work. There are several key ingredients to having a smooth and well-running partnership between the government and the private sector. One is openness and communication between the vendor and the public sector client combined with transparent measurement and evaluation, according to Lynda Chambers, director of strategy at Steria, the prime contractor for the Pathfinder government IT project “Norwich Connect” for Norwich city council.38 She adds: “It’s not just about delivering the service: you need to get the contract right from the start, deal with it as a partnership, clarify the expectations. If you take the attitude that you will only ever do exactly what’s written in the contract you will have a purely procurement relationship”. Trust is also an essential ingredient, according to Mark Swindell, in charge of the Infrastructure Project and Finance group at law firm DLA in Europe and Asia.39 Trust can be build by a willingness by the private sector to invest time, money and other resources before a deal is struck On the other hand, the private sector will gain confidence if the public sector adheres to the timetable. According to James Stewart, chief executive of Partnerships UK, the body set up by the Government to help both the public and private sector negotiate PFI deals, areas where relationships can go awry are where the public sector has failed to define what it wants and the private sector has painted itself into a corner on terms and conditions.40 Private Finance Initiatives nevertheless, do offer the prospect of refinancing these projects in the capital markets. Refinancing projects makes full sense both for the government and the private share holders. It is a win-win situation. Once a project is up and running, it can be refinanced at a much lower interest rate in the bond market, reducing the interest rate that the government may be paying to banks, while pushing up the return on capital for shareholders. And bond markets have become a popular route for refinancing PFI projects, as well as for raising new capital.

36 See “Public-Private Partnerships”, Special Report, Nicholas Tmmins, “The focus of a highly volatile debate: The UK’s private finance initiative appears to deliver improved quality services, but the controversy is not well-informed”, Financial Times, November 22 2002, p.8. 37 Ibid. 38 Brian Bollen, “Public Sector, Why it’s so easy to blame the supplier – Partnerships with private companies can be made to work in spite of the negative publicity”, Special Report, FT Management :Corporate Relationships, Financial Times, June 21 2004, p.3. 39 Ibid. 40 Ibid.

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Another important issue to be considered by governments in the push towards the funding of e-government is that the expansion of partnerships in some countries with centralized structures, such as the United Kingdom, has been relatively easy because of the centralized nature of politics in the United Kingdom. In other countries, such as France, Germany and the United States where sub-national governments have real independence in raising taxes and setting budgets, the possibility of popular opposition becoming vocal once schemes are implemented, could be a major obstacle to funding successful e-government. C. Other innovative new e-government financing methods The most significant technological development in the IT sector is the increasing power and falling price of hardware. Over the past decade, the cost of processing power and storage has halved every year, while software and staff costs have risen significantly. A decade ago, hardware typically accounted for the bulk of the IT budget, but it is now likely to be less than 10 per cent. Technological cycles have also shortened, putting companies under pressure to renew hardware regularly, and the asset value of hardware is depreciating faster than ever. As a result, IT financing which only a few years ago was restricted to leasing of mainframe and mid-range hardware is now increasingly used to finance complete projects, including software licenses and system design and implementation. Another interesting development concerns outsourcing, where rather than just taking on and running existing systems, outsourcing companies are also offering to install and pay for new systems, and making a monthly charge for their use. The IT financing market is thus bursting with increasingly attractive leasing packages. Software leasing is simply the business of choosing to finance the use of software over an agreed period of time – and then having the option of buying the software license (or licenses) at a predetermined price at the end of that period. Information technology’s share of the United Kingdom’s economy is forecasted to stay around 4 per cent. Growth for the next few decades is forecasted to be quite closely aligned to Gross Domestic Product growth – say zero to five per cent, with spurts towards 10 per cent only in rare and exceptional years.41 Extrapolating from the United Kingdom to the rest of the world’s developed economies implies substantial cultural realignment as companies adjust. The implications of such a substantial cultural realignment of IT providers are far- reaching for the buyers. What the readjustment in the technology sector is doing is to get the software vendors to start to listen to buyers. In short, it is a buyer’s market, to the benefit of the public administrations wishing to purchase, and in particular to the benefit of the emerging economies, which are short of funds to invest in e-government.

41 See Viewpoint by Alan Cane “Making do versus moving on – Even in a prolonged recession, there is a strong case for innovation and investment”, Financial Times, Technology Report, December 4 2002, page IV.

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Vendors are offering more flexible options hoping to defrost frozen capital budgets by enabling prospective users to stretch out payments. Users are only willing to pay for what they need, not for what they will never use. Vendors are trying to be more of a partner and consultant to their customers by understanding what really drives their businesses. Traditionally, software sales were cut and dry with buyers having to pay up-front perpetual licensing fees from the first day. Patient buyers are now more likely to get anything they want by shopping around. Rent to own, offered by some companies, allows users who have completed the 30 monthly payments, to own the software. Or they can walk away from the deal at any time by giving some vendors 90 days written notice and a small cancellation fee. Another option for governments is buying unbundled applications. Pricing options now come in various forms. For example, in September 2002, Novell announced discounted government-to-citizen (e-government) user license pricing – 90 per cent discounted from the standard rates.42 In another example that shows it is a buyer’s market, in October 2002, IBM offered a limited, 90-day “triple-zero” financing – zero down, zero payments and zero interest – for all new software, hardware and services contracts. Users also enjoyed lower financing rates starting at 3.1 per cent for software and 4.2 per cent for selected hardware.43 Flexible leases and outcome-based arrangements have been on offer by other companies, such as Computer Associates Innovative new financing methods have been emerging in the governmental sector in the United States, where governmental agencies have been shifting the financial burden to vendors by letting them share in the revenue generated through new IT systems. For instance, NIC which manages portals offers to implement its transactional portal system for no charge, then collect a fee from each user or get a percentage of the revenue the system generates. The company provides free portals to 18 states and seven municipalities under this model.44 Two small Michigan counties that do not generate enough transactions to fully reimburse NIC pay an additional fee for their portal service. A similar portal system for courts throughout Texas has been set up by Microsoft, in partnership with Bearing Point consulting, with the IT partners taking a share of the fee for each filing. Hewlett-Packard, which built Bulgaria’s new IT system which links the passport issuing office with the ministry of the interior, police and criminal justice system for quicker security checks, thus enabling citizens to now receive a passport in five to ten minutes, agreed to be paid in a percentage of the revenues that accrued to the government, rather than accepting an upfront fee. Vendors are also willing to be paid based on a share of the savings or the incremental revenue generated by the systems they provide. The upshot for a public administration is that it gets a system without putting cash up front, but foregoes some revenue or savings from the new system. The vendor firm, on the other hand, gets a portion of the savings or additional revenue the system generates, possibly more than it would have gotten in a traditional buyer-seller transaction, but risks not recouping its investment or getting paid more slowly. One such characteristic deal has been done

42 See Mark Ken “The pay play: new models on tap for software buyers, Purchasing B2B, May 2003. 43 Ibid. 44 See Eric Chabrow, “Creative pressure” Information Week, June 16 2003.

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between Virginia’s tax department and Integrator American Management Systems, which had the experience of implementing a similar system in California. Beginning in the late 90’s, AMS began a six-year effort to modernize Virginia’s IT tax system. The implemented system, after five years, has generated $130 million in revenue above what the old system would have brought in. The system is expected to generate $5 million to $6 million a month in extra tax collection once it is fully implemented. Virginia and AMS had established milestones that had to be met before AMS was paid. The earlier AMS completed the milestones, the faster it got paid. The biggest problem encountered by Virginia, was determining what revenue is attributable to the IT system and what the result of a changing economy is. The deal included specific metrics to determine whether the system or the economy should be credited with any revenue increases. They established a baseline from actual collections for the three years prior to the system’s installation and adjusted the baseline to reflect any growth trends. After implementation, additional revenue collected over the baseline is assumed to be produced from the new IT tools. As vendors are taking increasing financial risks in providing technology, their relationship with the buyer becomes more like a partner. In the afore-mentioned example, Virginia and AMS each assigned their employees to the same jobs to facilitate the transfer of knowledge. This type of funding mechanism creates a dependency in which the vendor has to assure the client does succeed. The various outsourcing arrangements outlined above can be used to transfer some project risks to the private sector. Development and implementation risks can be passed on through outsourcing arrangements that include specified deliverables and service quality targets. So-called Share-in-Revenue or Share-in-Savings arrangements provide an option to lower up-front expenses and externalize some risks associated with project impact. These contractual arrangements tie part of the payments for project development or maintenance to the realization of savings or revenues.45 Small is beautiful might also help to mitigate funding pressures. An incremental approach to ICT-led modernization not only lowers the risk of project failure but can also reduce the need for high up-front investments in the first place. Public-private partnerships, outsourcing, software licensing and other financing mechanisms which shift the financial burden to vendors by letting them share in the revenue generated through new IT systems, are characterized by a certain degree of dependency on the private sector. Governments wishing to be independent of such a relationship with the private sector can opt to approach investors directly in their efforts to fund e-government strategies by issuing bonds. The-government funding strategies presented here are not mutually exclusive

45 Harvard Policy Group on Networked-Enabled Services and Government, “Imperative 4: Improve budgeting and financing for promising IT initiatives”, Series: Eight imperatives for leaders in a networked world, Kennedy School of Government, Harvard, 2001, pp.12-14.

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Irrespective of the mix of public and private management of e-government projects, long-run cost recovery rests on three main options. One option is user charges. Economic efficiency considerations, as well as political equity considerations suggest to price services with public good features at marginal costs. User charges might be kept low where online service delivery is cheaper than offline and scale economies prevail. Services that provide benefits only to small groups of business users can be used to partly cross-subsidise other services and be made available at above-cost premium rates. Where cross-subsidisation is only partly feasible, services with significant social benefits are recommended to be funded through the general budget, the second option. Interdepartmental e-government projects should be equipped with their own budget line, since a reliance on shared budget responsibilities by the participating departments induces a free-rider situation that runs the risk of leaving projects under-funded. Co-funding through advertising is a third option. A consulting firm points at the issue of considerable advertising potential of government portals, consistently ranking among the most popular and most frequented websites.46 Case based evidence however is inconclusive. A case study on Hong Kong’s ESDLife portal for government services emphasizes the financial and usage benefits from private sector advertising that complements the specific public online service accessed (eg. wedding arrangement services in the context of marriage registration).47 An analysis of a UK government portal, on the other hand, shows that the required editorial input to vet proposed advertisements and ensure their suitability, almost fully erodes revenues, even when advertisement recruiting is outsourced to a third party intermediary.48 Instead of an ad placement model, the study recommends to negotiate a discount with the e-government technology provider in return for the display of the provider’s logo on the website. According to one survey however, in 2002, 8% of e-government website funding needs came from advertising, as compared to only 4% in 2001.49 D. Specific developing country considerations Developing countries face particular challenges in terms of designing and funding their e-government initiatives. The most important consideration is the fact that in many of these countries the vast majority of their population is not connected. Moreover, some funding strategies might not be available, due to poorly developed capital markets, or limited borrowing capabilities of public administrations. Cost-benefit considerations are also fundamentally different from industrialized country contexts. In Africa, average public sector wage costs can be one-tenth or less than those in developed countries, while

46 See G. Al-Kibisi, et al, “Putting citizens on-line, not in-line”, in McKinsey Quarterly, Number 2, 2001. 47 See S. Poon and X. Huang, “Success at e-governing: A case study of ESDLife in Hong Kong”, in Electronic Markets, vol.12, no.4, pp.270-280. 48 Office of the E-Envoy, “Case study of advertising on a government website”, Web Quarterly Briefings One, London 2001. 49 D. West, “Global e-government 2002”, Center for Public Policy, Brown University (http://www.Insidepolitics.org/egovt02int.html).

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average ICT costs can be two to three times higher50. Another consideration is the fact that choice of a private sector outsourcing partner might be more influenced by the objectives of technology transfer and development of the domestic economy. Some innovative approaches discussed in the literature include outsourcing to a specialized international software provider with a provision to subcontract some of the work to local developers and support their on the job training. E-government projects in developing countries are closely associated with principles of good governance in public sector reform as a precondition for economic development. As such they dovetail nicely with the principles of development cooperation as expressed in the Monterrey Consensus on Financing for Development, and should thus qualify for priority consideration in development assistance.

50 See R. Heeks, “E-government in Africa: promise and practice”, paper no.13, iGovernment Working Paper Series (http://idpm.man.ac.uk/igov_wp13.pdf).

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Annex Table1. E-governmental Management /Funding Structures in Various OECD Countries

Country Management Level of

CentralizationFunding Comments

Australia National Office for the Information Economy

Decentralized Collaborative

approach

No central fund

Expenditure determined

by individual agencies

Austria Chief Information

Office, Federal Chancellery

Decentralized Collaborative

approach

No central fund

Expenditure determined

by individual agencies

Canada Chief Information

Officer Branch, Treasury Board of Canada

Centralized Agencies

continue to maintain some

authority

Central fund Supplemented by individual

agencies

Finland Ministry of Finance

Decentralized Collaborative

approach

No central fund

Expenditure determined

by individual agencies

Germany Bund Online 2005 initiative,

Federal Ministry of the

Interior

Decentralized Collaborative

approach

No central fund

Expenditure determined

by individual agencies

Bund Online funded by

annual contribution from each

ministry, taken from IT budget

24

Greece Operational

Program for the

Information Society, G.S.

for Public Admin. and Electronic

Govt. of the Hellenic

Ministry of the Interior

Centralized policy,

Decentralized implementation

No central fund

Determined by individual

agencies Expenditure

closely monitored

under O.P.I.S.

Hungary Government Commission

for Information Technology

Somewhat centralized,

Some agency autonomy

No central fund

Allocated by agency

Iceland Information Society Task

Force

Centralized policy,

Decentralized implementation

Task force funds and individual agencies

Heavy use of outsourcing

Ireland Information Society Policy

Unit

Centralized The Information

Society Fund, admin. By Dep. Of Finance

Fund used only for innovative initiatives and not for normal IT activities

Republic of Korea

The Presidential

e-Government Committee

Highly centralized

Information Promotion

Fund

Mexico

Unit for e-Government

and Information

Policy in Government

Decentralized Collaborative

approach

No central fund

Expenditure determined

by individual agencies

Overseen by Unit for e-

gov.

25

Netherlands Electronic

Government Action

Program, Ministry of the

Interior

Decentralized Growing

willingness to cooperate between agencies

No central fund

Allocated by agency

New tendency towards

centralization in areas of

standardization of data, e-

identification & authentication.

New Zealand

E-government Unit, State

Service Commission

Somewhat centralized

(see comment)

No Central Fund

Funding for e-gov.

Initiatives treated as all other calls on

public resources

Centralized approach to

common needs (secure email,

standards) Decentralized

agency specific projects

Poland Ministry of Scientific

Research and Information Technology

Decentralized Strong move

towards centralization (see comment)

N/A Shift sparked by need for better coordination

and standardization

Portugal

Innovation and Knowledge Society Unit

Shifting from fully

decentralized to more

collaborative approach

Thus far allocated by

agency. Funding to be

assigned to centralized

body by 2004

Spain

ICT Council, Spanish

Ministry of Public

Administration

Decentralized Allocated by agency

Central fund created for

period 2004-2005

26

Sweden The Ministry

of Finance and

Agency for Public

Management

Decentralized No central fund

Expenditure determined

by individual agencies

Decentralization and poor

collaboration has led to

fragmented development Govt. move

towards improved

cooperation United

Kingdom Office of the e-Envoy, E-government

Delivery Program

Decentralized Collaborative

approach

Expenditure determined by individual agencies, Treasury

Approves expenditures

United States

Office of Management and Budget

Centralized Two central funds

E-gov Fund for

government-wide projects IT Fund for

agencies

Centralization a result of experience with strong policy but weak, uneven implementation under decentralized approach.

Source: Derived from 2nd OECD Symposium on e-Government, E-Government: Organizing for Integration, Country Papers, September 2003