It’s Make or Break Time for GovTech Investments

Technology is changing and challenging governments around the world.

This was the unambiguous conclusion of the second global GovTech summit, hosted in Paris on 14 November 2019.

With data analytics and artificial intelligence, new technologies present governments with tremendous opportunities to improve public services, get better value for money and curb corruption.

Governments need to become fit for purpose in the digital era. Faced with the rising expectations of digital natives, they realise that business-as-usual is over. In Chile, the current social malaise reflects the frustrated aspirations of the new, yet vulnerable, middle class.

Public institutions are developing a greater appetite for new ways of thinking and doing. Progressive governments are pushing public agencies to be more tech-savvy and data-thirsty, willing to take risks and learning to adapt faster.

Battling for talent

In the past, governments tended to contract out tech expertise to big techs.

They are now building up their capacities to understand emerging technologies better and diversifying technology providers to avoid vendor lock-in.

They are creating central agencies to rationalise how they buy and deploy new technologies.

Britain created its Government Digital Service in 2011 and has, according to one estimate, saved the government £3.56 billion ($4.5 billion) between 2012 and 2015. The United States (2014) and Sweden (2018) are the latest to follow course.

The potential is huge: for starters, the public sector is the greatest purchaser of technology, spending more than US$400 billion annually on technology. With the acceleration of governments’ digital transformation, this figure is set to increase to US$1 trillion by 2025.

“There is a big market for tech companies willing to service the changing needs of governments in the digital era”

There is a big market for tech companies willing to service the changing needs of governments in the digital era.

Countries are aggressively competing against one another to attract digital talent and tech start-ups.

In Europe, there is a fierce battle to succeed Britain as the leading digital innovator after Brexit. In September, French President Emmanuel Macron drummed up €5 billion ($5.5 billion) from venture capitalists and asset managers to invest in tech start-ups over the next three years.

“Our desire is to make France the leading ecosystem in Europe,” said Cédric O, France’s minister for the digital economy, when visiting London in September to promote France’s start-up scene. 

In this race to catch-up with the future, GovTech start-ups can help build smarter governments and more agile governance.

GovTech start-ups can disrupt the way governments deliver value and empower citizens. They can help the public sector absorb digital disruptions and data insights to increase efficiency and transparency in the delivery of public services.

These start-ups are driven by financial returns, but they are also seeking public value and social impact.

Patient capital

The GovTech industry is still in its infancy, but it has great growth potential.

The most developed GovTech ecosystems are in Europe and North America. According to some estimates, there are more than 2,000 GovTechs in Europe.

In Spain, Electronic IDentification is developing digital identification systems. The French Manty offers public administrations and local governments a business intelligence tool to analyse their data quicker. The British platform Novoville connects local authorities with their citizens.

More than 45 cities across Europe are using govetch in some form or another.

“They face three tech challenges: an over-reliance on legacy systems, a lack of investment in technology and a small number of dominant incumbents creating situations of vendor capture”

But there are still stumbling blocks. According to Alexander de Carvalho of Public, a leading GovTech venture, they face three tech challenges: an over-reliance on legacy systems, a lack of investment in technology and a small number of dominant incumbents creating situations of vendor capture.

In France, President Macron is trying to put “the state in a start-up mode,” incubating start-ups within public agencies and deploying a €700 million challenge fund to incentivise agencies to innovate.

Israel, Britain, Denmark, Portugal and Poland have all established GovTech challenge programs through which government agencies go to the start-up market for solutions.

For Simon Kollerup, Denmark’s minister for industry, business and financial affairs, “The Danish GovTech program is a new approach to adopt new technology in the public sector. But it is also a great opportunity for tech companies to understand our operations and demands.”

Innovation labs are mushrooming, especially in cities. Countries are introducing flexible procurement rules, regulatory sandboxes,GovTech funds and tax incentives.

Venture investors, too, are developing greater appetite forGovTechs. They are often put off by red tape and remain cautious, as return on investment is still uncertain.

Investing inGovTech entails different approaches; it requires “patient capital” akin to impact investing that can sustain the long cycles and complex rules of government contracting.

Funding a movement

In the most mature markets, GovTech investing is picking up. For Ron Bouganim, founder of the GovTech Fund, seed investors need to “break down the myths of investing in GovTech” and realise that they can generate financial returns.

In the US, funding for GovTechs totalled US$336 million in 2016, a 300% growth between 2012 and 2016.

In 2018, the GovTech Fund announced a €450 million joint venture to invest in early-stage GovTechs in Europe.

“For savvy investors,” as Daniel Korski, founder of Public, says, “GovTech is a relatively unknown but lucrative opportunity based around long-term contracts and large margins. We’ve already seen a few big valuations and large exits, and this is only set to increase.”

For Idoia Ortiz de Artiñano of the Madrid-based PublicTech Lab, “Latin America is the next frontier for GovTech”.

In Colombia, the promotion of creative industries and start-up ecosystems has been at the centre of the president’s agenda since assuming office in 2018. At the Development Bank of Latin America, we developed an index to measure the maturity of GovTech ecosystems in the region, which confirms the incipient nature and, at the same time, the tremendous potential of GovTechs in a region in which governance challenges are particularly acute.

ManyGovTechs operate at the city level. Several Argentinian municipalities are using Munidigital, a real-time data and cloud-based platform to manage their public services, generating important returns on investment, efficiency gains and fiscal savings. OS.City is bringing cloud computing, artificial intelligence and blockchain solutions to transform municipalities into integrated platforms of digital services.

In Brazil, Gove is helping small Brazilian cities raise taxes and allocate spending more efficiently. In 2018, it generated savings of, on average, 6% of the city budget in the 10 cities using its platform.

Guadalajara in Mexico created its own GovTech spinoff, Visor Urbano, to digitalise business registration and the city’s cadaster. It contributed to a 20% increase in local taxes. Also in Mexico, CivicaDigital is helping improving government digital services.

Depth and scale

The emerging GovTech movement offers a unique opportunity to create new public-private partnerships in the digital era.

It is definitely gathering pace amongst private investors. Government seed financing is critical, but not enough.

Venture capital is critical to scale and is indeed gradually gearing up to invest in GovTechs, adopting longer time horizons and more patient capital, often through convertible notes rather than equity shares.

In Brazil, the BrazilLab, a pioneering privately funded GovTech accelerator, is seeing increasing demand in its public challenge program.

Big investors are not (yet) seeing GovTech start-ups as a market with sufficient depth and scale. Some are starting to change.

 

Carlos Santiso is the director of governance practice at the Development Bank of Latin America and member of the World Economic Forum’s Global Future Council on Transparency and Anti-corruption.