Exploring the Different Financing Models for Digital Public Infrastructure and Why They Matter

No.2024-6(April) pborileicfy KeyPoints •Despiteincreasinginstancesofdigitalpublicinfrastructure(DPI)deployment,thereislittlepublicinformationonhowdifferentDPIsarefinancedand practicallynopubliclyavailableestimatesonhowmuchitcoststoimplementaDPI. •FinancingofDPIsisacomplexissueinvolvingdecision-makingonpublicpolicyobjectives,operations, stakeholdermanagement,andgovernance. •FinancingofDPIscanbeunderstoodusingthestrategictriangleframeworkthatweavestogetherthreekeyelementsofanypolicypriority: (i)publicvalue,(ii)operationalfeasibility,and(iii)supportorpoliticalfeasibility. •PolicydiscussionsonfinancingofDPIsshouldincludebothcapitalandoperationalcostsofaDPI. •TheG20shouldbuildknow-howonfinancingmodelsforDPIs,includingfinancingDPIsforlow-incomecountries,andencouragetheacceptanceofdifferentfinancingchoicesadoptedbycountries. ©2024AsianDevelopmentBankInstitute ISSN2411-6734 DOI:https://doi.org/10.56506/VYDL5566 ThisworkislicensedunderaCreativeCommonsAttribution-NonCommercial-ShareAlike4.0InternationalLicense. ExploringtheDifferentFinancingModelsforDigitalPublicInfrastructureandWhyTheyMatter DavidEaves,AssociateProfessorinDigitalGovernment,UCLInstituteforInnovationandPublicPurpose MansiKedia,SeniorFellow,IndianCouncilforResearchonInternationalEconomicRelations 1.Introduction Digitalpublicinfrastructure(DPI)isanewconceptualmodelforservices—suchasidentity,monetarytransactions,credentialmanagement,anddataexchange—thatareessentialtoparticipatinginsocietyandmarketsinthedigitalera.1Withtherightgovernanceandfinancing,DPIscanimprove“knowyourcustomer”provisions,facilitatingaccesstoprivateandpublicservices,andimproveaccesstobankingandfinancialservices.DuringtheCOVID-19pandemic,countrieswithDPIswereabletodepositmoneydirectlyintothebankaccountsoftargetpopulationsquickly,efficiently,andwithreducedriskofleakage.2ThereissignificantandgrowinginterestbycountriesaroundtheworldinDPI.Howitscomponentsareadoptedandfinancedcarriesbothrisksandopportunities. DPIshavetwokeyconceptualelements.Asinfrastructure,theycutthroughthesiloedapproachofdesigningandimplementingdigitalsolutionswithinteroperable,society-scaleprogramsthatshiftinnovationandcompetitiontoactivitiesthattakeplaceatopit.Forexample,asingleelectricalgrid,bystandardizingvoltageandamperage,eliminatescompetitionaroundthedeliveryofpowerbutcreatesvastcompetitivemarketsarounditems(likeappliances)thatusepower.Aspublicinfrastructure,DPIsprioritizeaccessandinclusionoverprofits,similartohowelectricityandwaterareprovisionedinmuchoftheworld. BecauseDPIsareacombinationofsoftware,standards,andpolicy,theycanbereplicatedandadoptedbycountriesmorequicklythantheirphysicalinfrastructurecounterparts.Forexample,theModularOpen-SourceIdentityPlatform,adigitalpublicgood3bornoutofAadhaar,India’shomegrowndigitalidentityprogramme 1Eaves,D.,andJ.Sandman.2023.WhatIsDigitalPublicInfrastructure?UCLIIPPBlog.April.https://medium.com/iipp-blog/what-is-digital-public-infrastructure-6fbfa74f2f8c(accessed10April2023). 2India’sWorldClassDigitalInfraWorthEmulatingbyManyNations.Outlook.April2023.https://www.outlookindia.com/business/india-s-world-class-digital-infra-worth-emulating-by-many-nations-imf-paper-news-276531(accessed6Jun2023). 3DigitalPublicGoodsAlliance(DPGA)Registry.https://digitalpublicgoods.net/registry/modular-open-source-identity-platform.html(accessed23May,2023). (oneoftheworld’sleadingDPIs),isbeingimplementedinseveralothercountries,includingSriLanka,Ethiopia,Morocco,thePhilippines,Guinea,andTogo.4 Giventherapidspreadofthisnewtypeofinfrastructure,howDPIsarefinancedisquicklybecomingacomplexissuethatencompassesquestionsofobjectives,operations,stakeholdermanagement,andgovernance.Importantly,financingdoesnotrelateonlytotheinitialcapital,butrecurringcostsrelatedtomaintenanceandupgradingthesystem.ThelifetimeinvestmentismuchmorecriticalthanthefundingrequiredforsettingupaDPI,madereadilyavailablebygovernments,multilateralorganizations,andphilanthropicinstitutions.Indeed,whilethereareimportantlessonsthatcanbedrawnfromphysicalinfrastructureprojects,theremayalsobelimits.Softwaredoesnotalwaysadheretotheprincipleofhighupfrontcapitalcostand(relatively)lowongoingoperationalexpenses.Quitetheopposite,ensuringongoinginteroperability,addressingcyberthreats,andmanagingincreasedadoptionandscalecancauseoperationalcoststoexceedcapitalcosts. 2.AFrameworkforFinancingDPIs FinancingDPIscanbeexploredthroughaconceptualframeworkbasedonthestrategictriangleproposedbyscholarMarkMooreforpolicydesignandanalysis.5Theframeworksuggeststhreekeycomponentsfor anysuccessfulpolicy:(i)publicvalue;(ii)operationalfeasibilityincludingfinancial,legal,technical,andmanagerial;and(iii)supportorpoliticalfeasibility.Therefore,financingasacorecomponentofoperationalfeasibilitycannotbeseparatedfrompublicvalueortheprimaryobjectiveofaDPI.Importantly,evensimilarDPIsneednotnecessarilybeconceivedforthesameobjectivesorpublicvalue.Forinstance,twocomparabledigitalpaymentDPIs,India’sUnifiedPaymentInterface(UPI)andBrazil’sPix,wereconceptualizedfordifferentprimaryob