What We Learned About Financing Digital Technology

This blog is part of a series aimed at exploring the scalability of financing digital technology and the procurement process for digital tools in the development sector, specifically for low-and-middle-income countries (LMICs). Our aim is to better understand the drivers and market-shaping activities that attract supply options for digital that otherwise might not be available to LMICs, improving access and price. Please see here for the first, second, and third blog posts.

Last November we began a landscape analysis to examine whether alternate models exist for procuring and funding digital technology. We looked at investments that are achieving impact and scale, working successfully now, and in what market conditions and context could demand aggregation, as one example, be an option to scale. In our first blog we shared our early hypotheses and made the case for why procurement is the critical piece when examining how money is spent and projects are financed. In the second blog we explored why financing for digital technology across the development sector remains a challenge and profiled some current examples of pooling and/or demand aggregation. In our third blog we investigated how a few high- and middle-income countries (HMICs) have adapted their public procurement processes for digital technologies and suggested some lessons that might be useful for countries just beginning that process. In this, the fourth and final of our blog series, we will share the key findings from the landscaping exercise, and outline where we plan to focus efforts to better leverage financing and procurement.

Summary of Key Findings from our Landscaping Exercise

As part of our landscaping study we researched and reviewed the activities of 41 donors and funders, 15 procuring governments and NGOs, 32 other relevant organizations, and 13 financing or procurement related initiatives such as universal service funds, regional procurement networks, and the use of impact bonds. We reviewed 33 resources and conducted 15 interviews. Summarized key learnings by topic are below:

1. Fundamental challenges remain for funding digital technology in the development sector.
   • Obtaining accurate data is difficult. Digital technology cuts across use cases and does not fit neatly into one sector, and as such, it is often an after-thought that is not strategically planned for. The spend on digital technology ends up being a line item in a budget that cannot be accurately pulled out or consolidated for reporting and/or decision-making purposes. This makes it hard to understand how much the development sector spends collectively on digital goods.
   • Funding cycles prevent technology from being used most effectively. Donors fund development projects via implementers who either (a) don’t think to include technology as part of their proposal, (b) include a digital component but often don’t have the technical expertise to align it with a national digital strategy or accurately price, describe, or buy it, and (c) don’t think to write proposals alongside an independent technology partner, such as a mobile network aggregator, who can add value in terms of the possibilities and best practices.
   • Technology products cannot be sustainable or scalable without an empowered government involved in implementation and decision-making. When donors and/or implementers leave, beneficiary governments are often left with technologies that they may not have the knowledge to manage, that are too expensive to operate and maintain, or whose functions are duplicated across their jurisdictions or departments. Our analysis indicates that sustainable and scalable projects involve the government early and strategically in planning and technology decisions.
2. Funding and financing technology both have critical yet different roles when it comes to national digital transformation.
   • How digital transformation is paid for matters. As explored in our second blog, funding implies that the money does not need to be returned while financing typically implies that the funds will need to be repaid. Funders tend to give grants and contracts while financiers tend to provide loans or equity. As countries begin to move up the income ladder and develop a more consistent tax revenue base, we need to think through and adjust how digital transformation of a government is paid for over time. Though we’ve already explored some potential models in our third blog, more work needs to be done to understand how governments who are dependent on donor funding can incorporate digital technology into their strategy in a manner that is adaptable for future changes.  
   • Collaborative models have been shown to work. The few collaborative business model mechanisms that have been established in the technology sector to drive more cross-sectoral approaches, such as Digital Square in health or NetHope’s broadband model, have proven successful in aligning supply and demand, delivering competitive pricing, and improving access to the type of investment needed for scale.
3. Traditional public procurement needs a rethink if it is to deliver on digital transformation.
   • Procurement of digital technology is a specialization. The quote on the right is from The Future of Public Spending, an essay by The Economist Intelligence Unit (EIU) and UNOPS that investigates how social, environmental and economic sustainability objectives can be achieved through public procurement.The essay acknowledges that while governments are starting to recognize the importance of procurement as a powerful policy tool, problems remain, including short-term thinking that prioritizes the cheapest price today over the financial, social, and environmental cost of a product over its lifetime. This applies particularly to technology, where field officers struggle to plan and buy due to the specialized knowledge required – knowledge which is not always available on staff because it is too expensive or was not budgeted for.  As more governments in development settings move to design and implement national digital strategies, it will be critical that the public procurement function can deliver against those strategies.
   • Healthy local supply markets need to be nurtured. When projects commence with a lack of trust and limited supply market options, successful outcomes for the beneficiaries are in jeopardy. Oftentimes donors and multilateral banks will require governments and implementers to abide by their procurement guidelines as a risk management approach. Yet simply ensuring a compliant procurement process loses sight of the outcome and why an investment in technology is being made in the first place. On the supply side, there are gaps in understanding development operations and dynamics, and government policies may not be conducive to doing business in that country or region. Suppliers will seek other business opportunities when there are easier options elsewhere for better or equivalent returns.

Implications for DIAL’s work

In the next phase of our work we will explore how to better equip governments that are embarking on digital transformation with methods to link public procurement to digital strategy. Much has been done already in creating toolkits, playbooks, templates, and use cases , such as the USAID Digital Investment Review Tool for implementers investing in digital global goods, DIAL’s work on an ICT building block product registry and the Principles for Digital Development maturity matrix, or the ICT Commissioning Playbook supported by OECD, but the practices advocated and supported by these resources have not yet fully permeated to the development sector in an institutionalized way. In addition, we hope to extend our procurement focus to include a supply side piece that will investigate what market requirements would yield affordable, appropriate entry points for software providers to enter LMIC markets. We acknowledged, and commented on in our last blog, that local technology supply markets in many countries are not substantial enough to supply all a national government’s needs. A better understanding of price related market shaping approaches that impact demand uncertainty, and the flow-on effects of improved supply options coupled with case studies that explore the learnings from collaborative business models will form part of our next phase.

In planning our next steps, we needed to decide if we should look at the issues identified in our landscaping from a demand or supply side (if we should look specifically at procurement, or at financing and investment, or at the interface of the two); or should we explore more deeply whether approaches taken in other sectors are useful for digital technology. We decided that a focus on procurement makes most sense right now. We believe demand drives supply and that tailored procurement strategies for digital technology can help signal to the supply market where and how they can best engage, while providing governments with procurement tools that enable their digital strategy implementation will have long term impact for their citizens.