Financing the necessary digital transformation of States
Driving the digital transformation with pace has become unavoidable. Indeed, it responds to the growing tendency and irrepressible aspirations for more direct expression within populations. As social networks expand, citizens have become accustomed to claiming, giving their opinion, and commenting, sometimes perhaps too much so. However, this transformation is introducing forms of speech and dialogue that are much more in tune with the consumption patterns of our fellow citizens, compared with previous generations who exercised their citizenship almost exclusively through voting, for example, in the case of democracies. There will be the effect of aligning those who are lagging behind with those who have already adapted.
Not only do the devices brought about by the digital transformation make government more audible to citizens, but also much more effective. Zero paper, simplified processes, shorter validation circuits, the redesign projects for digitization optimize the citizen’s experience, as has been the customer’s experience for some time now. Not to mention the prospects for reducing the payroll of the many administrations and local authorities affected: financing this effort promises a substantial ROI. It is therefore an investment.
Financing this transformation involves several elements
States must move from infrastructures designed, especially in Europe since the 1980/90s for telecom use, to Cloud infrastructures that must handle unprecedented volumes of data. We do not yet know the impact of AI in this area, and the Cloud will have to be scalable enough to anticipate changes in the population and unknown future uses. Imagine the generational change of a mobile network, and this may give a vague idea of the costly, time-consuming and politically sensitive effort involved in deploying and funding this “essential facility”. Even if, in use, the Cloud will generate savings.
In addition, States are under constant budgetary pressure. They were already under constant budgetary pressure long before the Covid crisis19. To cope with the almost unanticipated economic shock that will follow will mean that the major national treasuries will have to grit their teeth even more. First, to maintain the confidence of the debt markets, but also to stay within the confines of their “supervisory space” (even if adjustments will be made). They will have to find the most suitable financing vehicles without compromising either their recovery or the ecosystem of trust essential to their survival.
So which engineering, for which vehicles?
Prior to the financial crisis of 2008, markets were well disposed towards infrastructure financing. They did not pay much attention to its level of risk over long maturities, due to the abundance of bank credit and public-private partnerships that allowed public money to leverage private financing in funds and debt.
But all good things come to an end, starting with periods of “easy money”. This is followed by a normalisation through better risk pricing, against a backdrop of increased pressure on public investment budgets, saturation of utilities’ debt capacity, restriction of the supply of bank credit and savers’ aversion to long-term risks.
12 years later, however, opportunities exist that offer hope to contribute towards this funding:
● Available savings, in Europe and in a good part of the world.
● The rise of infrastructure funds and sovereign wealth funds, which are more capable of investing in the long term.
● Infrastructure has become a mature asset class, attractive to institutional investors looking for inflation-indexed returns, provided that regulators send out encouraging messages as they have already been able to do towards the ecological transition. Finally, local authorities must remain capable of providing a minimum level of subsidies to guarantee a minimum return for projects known to generate limited cash flow.
● Finally, the possibility of structuring bond solutions to overcome the lasting restriction of bank credit.
While the financing of critical infrastructure for the digital transition of States is a crucial issue, it will not lie in a “wholly public domain” or in a “wholly private domain”. Even more so as this transition prefigures a broader transformation of States in the medium and long term. While this transformation has remained low-key until now, digital deployments will gradually make these changes more tangible. All types of organizations will therefore be needed to adopt and use them effectively.
