Exploring Nongovernment Funding for Digital Service Groups
Authors: Blanka Soulava, Master in Public Policy 2021, Harvard Kennedy School; Naeha Rashid, Fellow, Ash Center for Democratic Governance and Innovation, Harvard Kennedy School
The COVID-19 pandemic has revealed the need for global digital service delivery. Critical pandemic relief services such as track and trace programs, emergency cash transfers, and telemedicine were possible only in those countries that had a sufficiently strong digital backbone. Moreover, the need for digitized services is not likely to abate. As some participants highlighted during the 2020 Digital Services Convening, in the future digital service groups will be expected to deliver increasing value to citizens in the form of new services and capabilities. The question is, how will teams meet this rising demand within their budgetary constraints?
As Aaron Snow, CEO of the Canadian Digital Service, put it, in a post-pandemic world, “Any ask digital services groups make for investment or change of any sort is now competing with not only direct COVID-19-related priorities but also with follow-on economic consequences of the pandemic.” This articulation of the increasingly competitive budgetary landscape that digital service groups will be operating in resonated with many at the convening. However, while some experts believe that tighter government budgets for digital teams will be the new norm in the future, others, including Snow, believe the pandemic may serve as a transformative moment, helping to make a stronger case for better-funded government digitization efforts.
Critically, this debate does not highlight the nongovernment pools of funding available to digital service groups. One of the major findings of the 2020 Digital Services Convening was that some digital service groups — particularly those based in developing countries — are receiving funding from a diversified pool of investors. In light of this finding, our goals are to:
- highlight the nongovernment funding approach available to teams, and show through the cases of two different countries the key motivators impacting a digital service group’s funding decision;
- summarize key lessons for successfully making the case for digital unit funding.
Different Funding Models for Digital Units
The discussions during the 2020 Digital Services Convening underscored several important aspects of funding digital service groups. Later in this chapter, we define this broader funding landscape (see Figure 3.4). However, the primary purpose of this discussion is to explore one element in particular: the spectrum of funding sources available to these groups. The spectrum of funding sources refers to the primary source of digital service group funding and can range from 100 percent government funding on one end to 100 percent nongovernment funding on the other. Here, nongovernment funding refers to funding from a range of bodies including inter-governmental organizations, donor bodies, private institutions, and philanthropic groups.
The traditional assumption is that governments are the source of all funding for digital service groups. The digital services maturity model drafted by David Eaves and Ben McGuire following the 2018 Digital Services Convening reflects this thinking. Even at early stages of maturity, the model assumes that groups will be dependent on funding allocations from other departments or will have to go through a lengthy and difficult budget negotiation to meet their funding needs. Additionally, the assumption is that in a future state, funding is likely to remain highly government-dependent (i.e. services will be granted multi-year budget allocations by their governments). However, this is not necessarily the case.
Figure 3.2: The Maturity Model: Budgeting for Success
For countries that can tap into nongovernment pools of funding, the journey to the future state is likely to be less straightforward than the maturity model suggests. Some countries may choose to maintain a mix of government and nongovernment funding even at later stages, depending on their long-term needs, constraints, and strategic goals. Ultimately, the funding mix is calibrated according to the digital service group’s long-term objectives.
Our initial hypothesis was that while digital service groups may start off anywhere on the funding spectrum, they are likely to shift towards the traditional end of the spectrum over time as they prove their value and become more embedded within the government. However, as we spoke to different groups we realized that this movement is not always so straightforward; in fact, some groups may intentionally stay in a state of nongovernment funding for extended periods of time. To better understand how and why digital service groups place themselves on different ends of the spectrum of funding sources, and how their funding sources shift over time, we look at the cases of two countries that started their journeys at opposite ends of the spectrum: Bangladesh and Canada.
Figure 3.3: Sources of Funding Spectrum
a2i In Bangladesh: From Fully Donor-Funded to Majority Government-Funded
Bangladesh’s national flagship digital transformation program, a2i (Aspire to Innovate), is an example of a digital service group with long-standing nongovernment funding experience that has deliberately shifted its funding sources over time. Bangladesh started its digital transformation in 2007 as a 100 percent donor-funded effort, backed primarily by the United Nations Development Programme and other donors. Since 2011, a2i has shifted from a fully donor-funded to a partially government-funded model. As of 2020, more than 70 percent of a2i’s funding comes from the government while the remainder comes from donors such as the Bill & Melinda Gates Foundation, the United Kingdom’s Department for International Development, and proceeds from a2i’s assisted rural eCommerce initiative (a nonprofit social enterprise with surpluses that are reinvested into the program).
Motivators for Using Nongovernmental Funding
At the 2020 Digital Services Convening, speakers and participants from countries that have previously pursued nongovernment sources of funding highlighted several key motivators. In particular, Tania Aidrus named several factors that strongly resonated with the Bangladeshi a2i team as reflective of their own experience. These motivators were:
1. The economic climate of the country
Digital service groups operating in countries with a high debt burden and many competing priorities will find it difficult to make the case for funding at initial stages of operation. For these groups, looking outwardly for available nongovernment grants is a fiscally responsible way of obtaining needed funds without straining existing national resources. Going this route requires countries to clearly define their priority areas and find granters who are aligned with internal strategy.
2. Time pressure
Getting into and through the government budget cycle can be a lengthy process. In comparison, looking outside reduces the time requirement and allows groups to move faster and initiate work immediately.
3. Hiring and retaining talent
Attracting and retaining the best talent possible requires compensating staff at levels equivalent to the private sector, which is a major concern for digital service groups. This is only achievable if the group bypasses traditional government salary scales. Looking beyond government funding allows digital service groups to do this without violating procurement rules.
4. Proving value
In the initial stages of operation, units are under pressure to prove their value to the government. Taking money from nongovernment sources buys groups time to focus on building the program and proving their business case.
Drawbacks of Nongovernmental Funding
Despite the strong motivators that may compel teams to seek out nongovernment funding, moving towards this model is not without its challenges. As the 2020 Digital Services Convening highlighted, there are unique sensitivities to using nongovernment funding, which are largely related to trading long-term pains for short-term gains. For instance:
1. Being limited to a program-driven and donor-led approach
Groups dependent on external financing may find themselves limited to a program-based approach. Here, the term “program” refers to tightly defined projects (e.g., improving gender financial inclusion by improving access to mobile banking) that are in line with donor goals.
2. Potential tradeoffs between innovation and scale
While nongovernment funding often encourages innovation and provides proof of concept, it often does not allow for the kind of scale that government funding makes possible.
3. Building insufficient competency within government
Leveraging nongovernment funding and external personnel may preclude the building of necessary competencies and skills in public-sector institutions. In the long run, this may inhibit a digital service group from creating sustainable change across government.
How COVID-19 Tested a2i’s Funding Model
Unsurprisingly, Bangladesh has experienced a shift with regard to the first funding motivator — the country’s economic climate — as a result of COVID-19, which has affected a2i’s future trajectory. According to the a2i team, as the economy has tightened due to the pandemic, 100 percent dependency on government funding is no longer feasible. COVID-19 highlighted the weaknesses of the government-dependent funding model, with Bangladesh experiencing fiscal pressures caused by falling export earnings, declining tax revenues, and diminishing inward foreign remittances by Bangladeshi expatriates. Moreover, these fiscal pressures have been compounded by the government’s efforts to fight the economic downturn, such as stimulus packages and increasing expenditures in the form of social safety net allowances for the newly poor.
Despite a2i’s contributions to the national COVID-19 response, due to the government’s new priorities, the organization was temporarily downgraded within the internal government classification system, resulting in additional budget controls and approval requirements. Though a2i has since regained its original classification, this experience served as a reality check about the merits of dependency on government and donor grants. While the pandemic has proven the value of the “government-as-a-platform” concept and validated the need for a more inclusive platform that enables cooperation between social innovation, the private sector, academia, and civil society, the rising funding challenges represent a barrier to sustaining this momentum.
a2i’s future vision is to design the a2i Bangladesh Innovation Agency. The agency will enable a funding model that leverages government funding while preserving considerable autonomy, thereby bolstering the team’s ability to focus on longer-term interventions. The agency will equip the a2i team with the lever to charge fees — either to other government agencies or to citizens directly — for the services and platforms it develops and manages. At the same time, a2i aims to receive a greater proportion of its funding from international financial institutions to ensure more financial stability. This vision shows that even as it matures, a2i intends to retain a mixed funding model that is in line with the group’s strategic objectives.
The a2i experience shows why and how digital service groups may choose to go the non-traditional route. At the same time, there are important reasons why groups may decide to stay on the traditional end of the spectrum, as shown by the case of Canada’s Canadian Digital Service (CDS). It is important to recognize that Bangladesh and Canada have dramatically different economic landscapes and that their digital service groups emerged at different times and in different political environments. These circumstances have had a material impact on where CDS has landed on the funding spectrum.
Fully Government-Funded: The Case of Canada
Established in 2017 within the federal government of Canada, CDS is a wholly government-funded operation. The organization was originally granted a time-limited funding allocation of CA$25 million over a three-year period; CDS later received an additional CA$24 million through March 2022. CDS receives funds through the federal government’s Fiscal Framework.
CDS is a product of an innovative and forward-thinking government, and emerged in an environment in which many stakeholders already appreciated the value of digital services. The organization’s mandate is to develop government-as-a-platform services and to support service design and delivery partnerships with individual federal departments. As CDS Head of Public Policy John Millons put it when asked for comment after the convening, “A digital service in a lot of ways is a change management organization disguised as a digital service.” CDS’s goal in its first phase of funding and operations was to prove that a federal digital service group is a worthwhile investment that will bring concrete value to the public.
For two primary reasons, CDS never gave any serious thought to obtaining funding from other sources beyond the Government of Canada.
1. Strategy depends on stable funding
CDS’s organizational strategy and operations require long-term stable funding. Given that CDS is attempting to build platforms and confidence with its core clients (i.e. other federal departments), it is critical that the platform services for which these entities rely on CDS are well-supported, secure, reliable, and continuously improved. Additionally, CDS believes effective recruitment and retention of digital professionals in government requires some certainty that the organization’s mandate and term has a reasonable runway (e.g., more than two years).
One caveat of a 100 percent government funding model is the need for a sufficiently long runway to prove the investment to the government. According to Millons, a five-year term is likely sufficient to initially prove the organization’s effectiveness. Such a runway is especially necessary given digital service groups’ focus on change management. For instance, these groups often seek to create conditions for departments to deliver services differently, to build trust and confidence in their government-as-a-platform offerings, and to build a solid membership base.
2. Nongovernment funding is uncommon
The other reason CDS did not consider nongovernment funding is that while public-private partnerships are common in Canada, as is outsourcing of services, external funding of federal initiatives is not. The CDS team also noted that while nongovernment funding may be linked to certain requirements — such as a monetary return on investment — that might affect programmatic incentives, government funding has the benefit of being primarily concerned with a return on impact investment.
How the Pandemic Impacted Canada’s Funding Model
While CDS in particular has not experienced any change in its funding since the pandemic began, Canada’s government has made more money available centrally for COVID-19 initiatives, which CDS and other government departments or partners may be able to draw upon.
Beyond funding, COVID-19 has increased the government’s appreciation for the importance of building digital government services and has generated learnings for CDS. First, there is increasing recognition that mature digital platforms are the way forward. Second, during the pandemic, while policy and delivery have started to come together, there is a recognition that this feedback loop needs to be tighter. In an ideal world, policy ideas are implemented as quickly as possible, so that delivery can impact policy instead of the other way around. Lastly, the pandemic has shown that program processes — from determination of eligibility to procurement to delivery — are far too complex and need to be simplified.
How Will the CDS Funding Model Evolve?
CDS does not anticipate changing its funding model from 100 percent government funding in the near future. However, the group is debating or pursuing minor variations within the existing funding model, such as moving from time-bound government funding to a form of permanent government funding. Revisiting the Maturity Model for Digital Service Groups referenced earlier, this move would transition CDS to “future state.” Other likely changes to the funding model involve CDS engaging its government partners in a cost-recovery or cost-sharing model to help scale the group’s impact.
Lessons Learned: Making the Case for Digital Service Group Investment
No matter what combination of funding sources an organization chooses, it still needs to make a successful case for it. As CDS’s Aaron Snow remarked during the 2020 Digital Services Convening: “The pandemic has shifted how existing resources are invested and provides an opportunity to change perceptions of what government digital services groups can deliver that can open more opportunities for making a stronger investment case for their work.” Below, we summarize the key lessons shared during the 2020 Digital Services Convening.
1. Savings
Cost avoidance and savings are strong motivators for investment in digital units in general. The United Kingdom’s Government Digital Service, for instance, regularly reports the savings that its work achieves. As Snow put it, digital service groups “need to be able to address the question of how long it is going to take to realize the cost savings and whose cost avoidance is it.”
2. Negative opportunism
Another key driver for investment in digital units can be the desire to avoid past failures or disasters. This was the motivation behind the United States Digital Service which emerged in the aftermath of the problematic launch of HealthCare.gov and, as the Washington Post notes, is aimed at “institutionalizing the approach that saved the health care site and applying it to the work of the government even before disaster strikes.”
3. Trust
As the Organisation for Economic Co-operation and Development highlighted in its report on Swedish digital government efforts: “Public trust is at the core of the digital transformation of the public sector, both as a driver and an effect of such a transformation.” Similarly, Snow argued during the convening that “it’s important to invest in digital because the public needs to trust that the government works.”
4. Comparison with other countries or sectors
Digital service groups can use tools such as the maturity model or list of levers to compare their work to other digital services or sectors. Snow shared this sentiment with the audience, saying, “In making a case for additional investments, teams can consider emphasizing the country’s international stance and how it compares to the private sector in digital transformation to create an additional incentive and urgency for further investments.”
5. Quick wins
Digital service groups need to deliver and show quick, visible wins that will help their team gain traction, trust, and scale. For example: in the case of CDS, the team leveraged its cooperation with Veterans Affairs Canada to help Canada’s 600,000 veterans and their families find personalized benefits available to them using a simple online tool.
6. Economic growth
As convening participants from both Bangladesh and Pakistan emphasized, it is important to highlight the impact of digital services on the country’s economic growth, particularly in emerging economies.
While these lessons may help digital service groups bolster their financial prospects, funding is just one of many levers these groups can use to effect change in their environment. There are many non-monetary tools that, in certain circumstances, may be more beneficial than funding alone. This point was highlighted by David Eaves: “When you think about investing in the broader and not just financial context, the case might be easier to make, yet more powerful for the work of your digital service group.” (For more information on the broader set of levers available to a digital service group, see “Introduction to Levers for Digital Service Groups.”)
Conclusion: Where Next?
During the COVID-19 pandemic, demands on digital service groups have increased, but budgetary pressures on governments have also risen as health and education issues take precedence. Therefore, the question of what funding options beyond the government are available to digital service groups is critical. The 2020 Digital Services Convening highlighted the possibility of tapping into nongovernment funding, revealing that there is a spectrum of funding ranging from 100 percent government on the one end to 100 percent nongovernment on the other.
As the cases of Bangladesh and Canada have shown, there are compelling, contextually dependent reasons why countries may place themselves on different ends of the spectrum. The organization’s strategic needs determine movement along this spectrum in the long run. Regardless of the approach a group chooses, making a persuasive case to secure funding is a critical step; the lessons highlighted in this article are some of the most effective in this respect.
Though our discussion has only dealt with one aspect of funding — the spectrum of funding sources — several other dimensions need to be explored. These additional dimensions are summarized in Figure 3.4 below. Future work on these dimensions and how they interact with one another would add great value to this space.
Figure 3.4: Dimensions of Funding for Digital Service Groups
