Sustainable Funding Challenges

Financing DPI is a complex endeavor. The current approach to funding is fractured, and existing models generally do not align the incentives of all stakeholders involved. DPI efforts often suffer from “pilotitis,” the inability to scale beyond the pilot phase.

Through research and interviews held with stakeholders of the broader DPI community, we identified the following interrelated barriers to the sustainable financing of DPI.

There is currently no material center of gravity to support the multiparty development of DPI with the immediate intent to create shared systems across participating organizations and jurisdictions. Countries generally rely on word of mouth and their own networks to synchronize development of shared systems and solicit funding for projects. This lack of coordination leads to duplicative and fragmented funding efforts, as well as increased competition for the same sources of funding.

Often, investment incentives are not aligned across different types of funders. Private-sector actors are usually perceived as those who should be the main, if not the sole, financiers of infrastructure projects.¹ However, foundational layers of technology are capital-intensive and unprofitable as they generally do not demonstrate substantial value until application layers are created. Private-sector institutions may therefore be reluctant to invest in long-term DPI initiatives unless local governments, philanthropies, or other actors commit funding to de-risk early stages of development, and there is a clear articulation of potential return on investment.

Without certain DPI-related regulations in place that allow new business models to flourish, there may be less incentive for private-sector solutions to be developed and financed. For example, allowing an open application programming interface (API) to access public records (such as health records, in certain countries) would encourage new private-sector solutions and financing.

Digital solution funders currently tend to channel funds toward sectors (such as health or education) or specific verticals (such as identity).² Too often, they fund applications (apps) that re-create full stack solutions in silos rather than building common infrastructure that apps in many sectors can leverage. For example, a funder may support the development of an app to track malaria and create new identity and data management systems that cannot talk to similar apps for other diseases. This approach leads to fragmented solutions and leaves multi-sector, foundational DPI solutions underfunded; it also increases transaction costs and spreads scarce resources across too many digital efforts.³

Infrastructure projects are influenced by local market forces, government interests, and capacity issues. These dynamics often lead to case-by-case, jurisdiction-specific approaches to technology procurement and funding. Capital may not be optimally aligned to technology development cycles,⁴ creating a disconnect between funding and technical requirements, which can lead to preventable delays, waste, or project shutdowns.

Few open source software repositories have intuitive, nontechnical search engines. As a result, existing open solutions that could be extended to new jurisdictions are available only to those who know how to discover them. This lack of comprehensive and integrated solution databases with user-friendly interfaces presents a major barrier to funding (one cannot fund what cannot be found) and exacerbates the fragmented approach to technology development described above. DIAL’s Catalog of Digital Solutions, the Digital Public Goods Alliance’s Registry, and GovStack’s Building Blocks platforms are all beginning to offer useful tools for government officials and social innovators to easily access the universe of successfully deployed DPI initiatives. These organizations have undertaken the challenging work of cataloging DPI projects to improve their discoverability, a key ingredient to scaling.

Participants in a study conducted by DIAL highlighted that, without the presence of a full-time, dedicated, and well-rounded team, it is very difficult for countries to navigate the open source software world including its technical-, governance-, and funding-related nuances.⁵ Building in-country capacity for jurisdictions to leverage open source software in their DPI efforts is essential. Without sufficiently trained resources and technical expertise, countries could face software lock-in issues if they decided to build DPI on open source modules that they are not capable of updating, integrating, or maintaining in the future. If capacity building is not prioritized, vendors will continue to fill capacity gaps, providing ongoing support and maintenance services, and leave countries reliant on proprietary solutions. Capacity building is also important vis-à-vis proprietary solutions, so that countries know how to operate and maintain those systems, all while reducing the risk of vendor lock-in.

Digital transformation is not a small financial endeavor. Worldwide government spending on information technology (IT) is forecast to reach $557.3 billion (USD) in 2022, an increase of 6.5 percent from 2021.⁶ Denmark, Estonia, and Finland spend, on average, approximately 2.4 percent, 1.3 percent, and 1.4 percent, of their state budgets, respectively, on certain digitization programs.⁷ In the United States, the Internal Revenue Service is undergoing a modernization initiative that includes digital transformation and is expected to cost the federal government $2.3 billion to $2.7 billion (USD) over six years.⁸ In India, the government’s IT spending is projected to total $8.3 billion (USD) in 2022, an increase of 8.6 percent from 2021.⁹ In short, government digital transformation is not cheap.

In the DPI space, preliminary estimates show that total funding needed in LMICs alone is approximately $30 billion (USD), of which roughly $20 billion is needed for digital health programs, $6 billion to ensure universal ID coverage, and $2 billion to allow the implementation of real-time retail payment systems.¹⁰ Most of this financial cost is expected to be borne at the local-country level, which could potentially exacerbate the lack of coordination and the siloed approach to technology development across jurisdictions. Thus, country-level investing could lead to duplicative efforts and even higher DPI development costs.

Even in a developed context like the United States, only 13 percent of technology projects above $6 million (USD) succeed.¹¹ To be successful, new DPI projects require a significant amount of bureaucratic process change and often cross-sector coordination across government, civil society, and the technology industry. Given these challenges and the political risk associated with public-sector innovation, many countries are reluctant to be the pioneer and adopt new DPI solutions, and instead opt for proprietary, closed systems where the risk of failure is shared with the systems’ developers and implementers. However, once projects have proven successful in deployment, such as CONSUL for civic participation or DHIS2 for health management, civic innovators have a much easier time demonstrating solution value and achieving adoption across jurisdictions.

Implementing DPI is as much of an organizational management challenge as it is a technical one. Successful DPI projects achieve high impact by changing the operating procedures of a broad range of agencies, which can be much more difficult than working within a single agency. Building DPI often requires committed teams with strong political support to navigate complex, siloed public-sector organizations and pursue innovative approaches to systems change. These teams require a long runway of support that includes substantive resources, capacity, and oversight.

Governments lacking the in-house capacity often rely on private vendors to help develop, deliver, and maintain digital services and platforms. Because of fragmented, cumbersome, and outdated approaches to government procurement processes, a few large companies dominate the design, development, implementation, maintenance, and operation of government IT solutions. These private vendors tend to develop proprietary, closed-loop software systems that are often so large in magnitude and costs that other vendors or in-house capacity cannot maintain the systems, resulting in vendor lock-in. The difficulty in updating and managing these cumbersome systems that often fail to work effectively results in increased costs in time, money, and effort.