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
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
I. WHAT DO GOVERNMENTS SPEND ON E-GOVERNMENT? SIX
EXAMPLES AROUND THE GLOBE
A. Advanced Economies
B. Emerging economies
Taiwan Province of China
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
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
Table 1. Use of online government services in 2003
Country Online government use by adults
United States 44
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,
Survey 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.
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
See “How fraudsters set traps and take the credit”, Financial Times, IT Review, May 21 2003, p.1.
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
“IT in the public sector”, op. cit. p.5.
“Leadership in difficult times”, Keynote Address by Rudi Giuliani to the “E-Government Conference”,
Washington Convention Center, June 24-27 2002.
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.
“Customer-centric digital department”, address by Jeff Bollentino, Vice President of Booz Allen
Hamilton to the “E-Government Conference”, op. cit.
Quotes 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.
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
$126 billion worldwide by 2007, while in Europe spending will increase by more than 6.3
per cent per annum between 2003 and 2007.11
A. Advanced economies
The undisputed leader in e-government spending in absolute amounts is the United
States. With a budget of US$ 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.
“IT in the public sector”, op. cit..
See Nicholas Timmins, “UK slips down table as online progress slows”, Financial Times, April 9 2003.
See “E-Government Act of 2002,” Public Law 107-347, December 17, 2002, on the internet at http//
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.
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 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
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.
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.
See “Singapore announces 1.3 bln sgd plan to boost e-government” The Edge Malaysia, July 7 2003.
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.
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
See Gigi Onag, Isabelle Chan and Leong Khay Mun “Uneven fortunes, uncertain world” Financial
Times, December 1 2002.
Reported by Interfax news agency, June 2 2003.
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 $48 million will have been allocated for policy, human resource and skills
strategies, communications, and measurement, evaluation and citizen feedback.20 ICT
training for public sector workers constitutes a significant cost factor in e-government
projects and many governments have committed extra funding for such training. Sweden
spends as much as half of its government training budget on ICT skills of its civil
2nd OECD Symposium on e-Government, E-Government: Organizing for Integration, Country Papers,
Lisbon, Portugal, 22 September 2003, p. 19.
II. OTHER RELEVANT E-GOVERNMENT FUNDING ISSUES
A. Project planning and cost overruns
Yet, another interesting question relates to whether cost estimates for e-government
projects live up to expectations, or whether cost overruns are the norm. International
research on ICT projects conducted by the Standish Group has found that 30% of
projects are complete failures, 45% experience some significant problems, and 25% are
more or less on target.21 The sheer complexity of large scale ICT projects is an important
factor for underperformance. The complexity and multi-year nature of large e-
government projects is also an important factor for poor cost estimates. For instance,
ICT-led modernization of the tax administration in Poland (POLTAX), between 1995 and
1999, underwent more than 170 changes, effected by legislative and executive deeds with
impact on the operation of the system.22
An analysis of 25 United States flagship e-government projects in the process of being
implemented found that cost estimates for 12 initiatives had to be revised by more than
30% upwards in a time span of only 5 months between May and September 2002.23 Out
of the 25 projects, only 18 had budgeted for staffing requirements and only 9 had outlined
strategies for obtaining funds.
Audit results of ICT projects of Denmark also found that out of 124 ICT projects with
individual budgets over DKr 2 million ($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
Poor project planning and ensuing cost overruns are therefore an endemic problem of e-
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.
Standish Group, “The CHAOS Chronicles”, 1999.
OECD, “Management of Large Public IT Projects: Case Studies”, PUMA/SBO/RD (2001).
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.
OECD, Management of Large Public IT projects: Case Studies”, op.cit.
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
• a benefit to cost ratio of 121% for externally focused citizen online programmes;
• a benefit to cost ratio of 128% for internally focused government online
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
Study conducted by Kable, the IT market analyst reported by Nicholas Timmins, “Warning on costs of
online public services”, Financial Times, June 10 2003.
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.
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
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
Why it pays to get it back to front.“IT in the public sector”, op.cit.
Accenture, “Outsourcing in Government: Pathways to Value”, 2003, p.7.
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
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
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.
Case Study: Sao Paolo. Cutting costs and corruption, in “IT in the public sector”, op.cit.
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.
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
OECD, “Management of Large Public IT Projects: Case Studies”, op. cit..
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
When looking to fund e-government projects, governments need to evaluate potential
• 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-
• focus on how important the need for the project is in terms of ensuring access for
• 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.
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
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.
Eduardo Borensztein and Paulo Mauro, “Reviving the case for GDP-indexed bonds”, IMF policy
discussion paper, PDP/02/10. September 2002.
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.
See “Profits and perils of public private partnerships”, Euromoney, February 2002, pp.126-131.
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
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.
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.
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.
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
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
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
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.
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
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
See Mark Ken “The pay play: new models on tap for software buyers, Purchasing B2B, May 2003.
See Eric Chabrow, “Creative pressure” Information Week, June 16 2003.
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
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
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.
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
See G. Al-Kibisi, et al, “Putting citizens on-line, not in-line”, in McKinsey Quarterly, Number 2, 2001.
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.
Office of the E-Envoy, “Case study of advertising on a government website”, Web Quarterly Briefings
One, London 2001.
D. West, “Global e-government 2002”, Center for Public Policy, Brown University
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.
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).
Annex Table1. E-governmental Management /Funding Structures in
Various OECD Countries
Country Management Level of Funding Comments
Australia National Decentralized No central
Office for the Collaborative fund
Information approach Expenditure
Austria Chief Decentralized No central
Information Collaborative fund
Office, Federal approach Expenditure
Canada Chief Centralized Central fund
Information Agencies Supplemented
Officer continue to by individual
Branch, maintain some agencies
Finland Ministry of Decentralized No central
Finance Collaborative fund
Germany Bund Online Decentralized No central Bund Online
2005 initiative, Collaborative fund funded by
Federal approach Expenditure annual
Ministry of the determined contribution
Interior by individual from each
agencies ministry, taken
from IT budget
Greece Operational Centralized No central
Program for policy, fund
the Decentralized Determined
Information implementation by individual
Society, G.S. agencies
for Public Expenditure
Admin. and closely
Govt. of the under O.P.I.S.
Ministry of the
Hungary Government Somewhat No central
Commission centralized, fund
for Some agency Allocated by
Information autonomy agency
Iceland Information Centralized Task force Heavy use of
Society Task policy, funds and outsourcing
Force Decentralized individual
Ireland Information Centralized The Fund used only
Society Policy Information for innovative
Unit Society Fund, initiatives and
admin. By not for normal
Dep. Of IT activities
Republic of The Highly Information
Korea Presidential centralized Promotion
Mexico Unit for e- Decentralized No central
Government Collaborative fund
and approach Expenditure
Policy in by individual
Unit for e-
Netherlands Electronic Decentralized No central New tendency
Government Growing fund towards
Action willingness to Allocated by centralization in
Program, cooperate agency areas of
Ministry of the between standardization
Interior agencies of data, e-
New E-government Somewhat No Central Centralized
Zealand Unit, State centralized Fund approach to
Service (see comment) Funding for common needs
Commission e-gov. (secure email,
treated as all Decentralized
other calls on agency specific
Poland Ministry of Decentralized N/A Shift sparked by
Scientific Strong move need for better
Research and towards coordination
Information centralization and
Technology (see comment) standardization
Portugal Innovation and Shifting from Thus far
Knowledge fully allocated by
Society Unit decentralized agency.
to more Funding to be
collaborative assigned to
body by 2004
Spain ICT Council, Decentralized Allocated by
Ministry of Central fund
Public created for
Administration period 2004-
Sweden The Ministry Decentralized No central Decentralization
of Finance fund and poor
and Expenditure collaboration
Agency for determined has led to
Public by individual fragmented
Management agencies development
United Office of the Decentralized Expenditure
Kingdom e-Envoy, E- Collaborative determined
government approach by individual
United Office of Centralized Two central Centralization a
States Management funds result of
and Budget E-gov Fund experience with
for strong policy
government- but weak,
wide projects uneven
IT Fund for implementation
Source: Derived from 2nd OECD Symposium on e-Government, E-Government:
Organizing for Integration, Country Papers, September 2003