Advancing E-Government: Financing Challenges and Opportunities

Advancing E-Government: Financing Challenges and OpportunitiesAuthor(s): Yu-Che Chen and Kurt ThurmaierSource: Public Administration Review, Vol. 68, No. 3 (May - Jun., 2008), pp. 537-548Published by: Wiley on behalf of the American Society for Public AdministrationStable URL: http://www.jstor.org/stable/25145631 .

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Yu-Che Chen

Kurt Thurmaier

Northern Illinois University

Advancing E-Government: Financing Challenges and

Opportunities

As e-government evolves into the transactions stage,

governments must grapple with how to finance the

development of e-transactions. The authors argue that the

externalities effects of electronic transactions suggest they are appropriately financed by some combination of public investment and user

charges. We propose a self-financing

model adhering to two basic requirements. A flexible

pricing framework is the core of the self-financing model, as it embodies both the firms and the governments

perspectives. We assess basic assumptions of the pricing

framework using contingent valuation methodology and

a statewide survey of more than 400 firms. The empiri cal estimates we develop of the willingness to pay for e-transactions with state government and the theoretical

discussion about the self-financing model form the basis

for prescribing policy recommendations.

There is general agreement among e-government

scholars that governments are ready

to enter a

transactions-based phase of e-government devel

opment (Reddick 2004; West 2004). A growing body of

empirical work has probed the breadth and depth of

government Web sites available for online transactions

with public agencies (Moon 2002a, 2002b; Norris and

Moon 2005; Stowers 2000; West 2004). It finds that

many public agency Web sites rarely provide more than

"billboard" information. This indicates a large untapped

potential for improved effectiveness and efficiency in

public service delivery?for both users and agencies?if more transactions with government could be conducted

online. For example, online filing of income taxes

reduces costs for both filers and

the revenue agencies

as a result of

reduced paper handling and a

lower number of errors.

Despite the potential gain from

online transactions, the problem

of financing them has been

identified as one of the most

significant barriers to advancing

e-government (Holden, Norris, and Fletcher 2003;

Johnson 2002; Norris and Moon 2005; Robbins and

Miller 2004; Taylor 2003). Local governments have

consistently ranked the lack of financial resources as

the number one or the second most important

reason for the slow development of e-government

(ICMA 2002, 2004). This financing challenge is

reflected in the slow evolution of e-government at

the local level, which has been documented by Norris and Moon (2005) and Ho (2002). For

instance, less than 6 percent of local government

Web sites offer online financial transactions such

as online business license application or renewal

(Norris and Moon 2005, 69).

Although state and federal governments have made

some progress in implementing e-transactions, the

advancement tends to concentrate on one or two

service areas rather than cover a wide range of public services. For instance, Iowa has the nations highest

rate

of e-filing of state income taxes, and firms can now pay

sales and withholding taxes online (Glover 2004). In

the area of reporting, Michigan created an information

system in 2003 to allow permitted facilities to send

their environmental compliance data directly to a state

database (Perlman 2004). At the federal level, the

e-filing of federal income taxes has met a congressional

mandate to reduce costs and increase compliance

(Goldsmith and Eggers 2004, 34-35; GAO 2006).

The evolution of e-government services can be signifi

cantly advanced if government can find the needed

financial resources outside general funds, such as user

fees. Citizens and businesses are

likely to pay for online transac

tions if they calculate the relative

costs of the time and resources

required to

complete a tradi

tional transaction with govern

ment. A business case analysis of

Washington State's vehicle tab

renewal system suggests that

there are savings for citizens in

wages and transportation costs for conducting a trans

action online as opposed

to visiting government offices

The evolution of e-government services can be significantly

advanced if government can

find the needed financial resources outside general funds,

such as user fees.

New Perspectives on E-Government

Yu-Che Chen is an assistant professor in

the Division of Public Administration at

Northern Illinois University. His main

research and teaching interests are

electronic government and collaboration.

His current research focuses on the role of

information technology in interorganiza tional collaboration. He has published in

Public Performance and Management Review, Social Science Computer Review, and the International Journal of Electronic

Government Research. He serves on the

Information Technology Committee for the

National Association of Schools of Public

Affairs and Administration.

E-mail: [email protected]

Kurt Thurmaier is a professor of public administration at Northern Illinois

University. His teaching and research

interests include public budgeting and

finance, comparative administration, research methods, and intergovernmental relations. Before joining the academic

community, he was a budget and

management analyst in the budget office

for the state of Wisconsin. His books include

Case Studies in City-County Consolidation

with Suzanne Leland and Policy and Politics in State Budgeting with Katherine

Willoughby. His work has appeared in the

Public Administration Review, Journal of

Public Administration Research and Theory, and Public Budgeting and Finance, among others.

E-mail: [email protected]

Advancing E-Government 537



(Frank 2003, 25). The availability and use of fee-based

online information searches (such as criminal records and

driver s licenses) by businesses on some state Web portals are evidence of such revenue

potential.

Additional opportunities lie in the ability of govern ment to take advantage of an

enterprise model. An

enterprise model treats organizations

as a whole in

both the revenue sharing among various units of the

organization (a financial dimension) and the provision of information technology services for the entire orga

nization to achieve economies of scale (a structural

dimension). In terms of revenue sharing,

an enterprise

(e.g., a state or

city government as a whole) can use

revenue from providing business transactions to build

infrastructure for advanced e-government services for

businesses and citizens alike. An enterprise perspective

that leverages scale economies is likely to bring down

the cost of e-services in the long run.

Savings can

come from building an e-payment infrastructure such

as electronic funds transfer, information security measures

(e.g., use of secured servers), or a master

directory for authentication.

Public managers and chief information officers at all

levels of government face many challenging financing questions

as they contemplate ways to find resources

for the next stage of e-government development. For

example, should governments charge users for the

convenience of conducting transactions with govern

ment online, even though

access to government

information Web sites is free of access charges? What

price?if any?should government agencies charge users for the ability

to conduct business with govern

ment online? Is there market demand for online

services (e-transactions) with government agencies? If

there is a demand for e-transactions with government,

how are agencies

to fund the development and main

tenance of e-transactions, especially given the severe

constraints on public budgets?

Research to answer these questions has been scarce.

Wang and Rubin (2004) elevate the importance of e-transactions as the integral part of e-government.

Herbst (2001) discusses related issues about using

electronic payments with online transactions. Johnson

(2002) examines state Web portals to provide some

guidelines for financing e-government information

and services. However, there is still a lack of a unifying

framework that prescribes e-transaction pricing policy

based on an analysis of both government (supply) and

service users (demand).

Moreover, little is known about the role of businesses as

a potential

source of e-government revenues. We have

only limited understanding of firms' willingness to pay for services; the last comprehensive study of business

demand was completed in 1999 (Momentum Research

Group, 2000). Business demand for public online

services has implications for developing pricing strate

gies and estimating the revenue generation potential of

e-government services. For instance, close to half of the

U.S. state governments use convenience fees or the sale

of vehicle information as their main source of funding for their state e-government portals (Haid, forthcom

ing). Perhaps many agency heads hesitate to develop services because they dislike being faced with the ques tion from the state budget director: What if we spend a

lot of money on an e-transaction service, and nobody comes? The plethora of questions and dearth of research

suggest the need for an effective financing model for

the development of e-transactions.

This article answers these questions about financing

e-government services by developing a unifying public finance framework with a focus on businesses. A

unifying framework is able to consider the supply and

demand of e-government services in a dynamic

marketplace. Such a framework allows for the develop ment of an

enterprise pricing strategy for e-transactions

for the advance of the online delivery of public services.

The focus on businesses helps examine their role in a

government-wide (enterprise-wide) strategy to over

come barriers to financing e-government services. Inter

net access and capacity are

usually not an issue for

businesses in using these advanced e-transactions. More

importantly, fees associated with e-transactions for

businesses offer a potential

revenue source for develop

ing an e-government infrastructure that will benefit

citizens and other constituents of government.

The next section describes a unifying public finance

framework for e-transactions. This framework forms

the basis for the discussion about a self-financing

enterprise model for e-transactions with businesses.

Using contingent valuation methodology in a state

wide survey of more than 400 firms, we demonstrate a

significant level of business demand for online services

and their willingness to pay. Moreover, Internet access

does not seem to be a barrier to e-services. After re

porting the results, we discuss the policy implications

for our model, including ways that public agencies can improve financial management by channeling resources to

high-impact e-government projects, ex

panding e-transactions to government-to-consumer

applications, and developing financing mechanisms

for sustaining the development of priority projects.

A Unifying Public Finance Framework for

E-Transactions

Classic economic theory suggests that the price for an

e-transaction with a government agency is a function of

the supply and demand for the service. In response, we

develop a unifying market-based framework (see figure 1) for advancing the development of e-government

services by utilizing two theoretical perspectives. The

supply of e-services is examined by analyzing the

externalities attributable to specific e-transactions.

538 Public Administration Review May | June 2008



SUPPLY I I DEMAND of for

e-transactions e-transactions

Government agencies Firms and individual users

Monopoly suppliers Self-interested Actors

| I Conditioned by / ;

! Externalities \ I Opportunity cost i

| analysis \ / analysis j

/ Government pricing \

( policy ) V for online services

J

Figure 1 Pricing Policy Model for E-Transactions

Externalities analysis suggests the degree to which the

development and maintenance of e-transactions should

be supported by user

charges versus

general appropriations.

The demand for e-transactions

is analyzed using the concept of

opportunity costs. The demand

for e-services suggests which

e-services are preferred by users

and the amount that users are

willing to pay for e-services.

We use these theoretical approaches to

develop a

pricing model for financing e-government services

for businesses.

As noted in figure 1, the supply of e-transactions is a

function of government agencies. The development

and supply of e-services to date has been constrained

by a number of factors. First, the choice of which

service to put online has often been the judgment of

the agency head, without a sufficient amount of infor

mation about the demand for the service. As a result,

the adoption rate of online services can be low when

the online service does not meet the needs of citizens

or businesses. Second, the ability of a department

to

develop an online service has been constrained by the

willingness of legislative bodies (state and local, as well as the U.S. Congress)

to appropriate funds to

develop services. This strategy implies that services will de

velop within each agency to the extent that general

funds are budgeted for that purpose by legislatures in each budget cycle. General fund dollars will also

need to be allocated to maintain the operability of

e-transactions services if this approach is continued.

This option holds e-transactions development hostage

to

the overall general fund budget condition of the govern ment; when funds are

tight, one can expect few dollars

to be available for service development and expansion.

At the federal level, increasing deficits and other pressing

priorities of the federal government are likely

to sup

press appropriations for e-government developments.

Similarly, local governments have had to cope with

reduced state aid to local governments and revenue

slumps. Consequently, general fund revenues for

e-government development are

likely to remain scarce

at all levels of government for the foreseeable future.

An alternative strategy for e-government development

is a self-financing enterprise model funded by

user fees.

An enterprise approach in fund accounting involves

self-financing activities such as water and sewer services;

the government "enterprise" is run like a business enter

prise because revenues generally consist of fees paid by

users instead of tax receipts. Undoubtedly, some will

immediately object that a self-financing model exacer

bates the digital divide, which is an important consider

ation when developing e-government for citizens. Our

immediate focus is a funding model that can

adequately

finance e-government development. While acknow

ledging the digital divide regarding citizen services, we

note that the business community

is much less affected by this di

vide. As we will argue, businesses

are also willing and able to pay for

services that directly benefit their

bottom lines. An initial focus on

the development of e-government

services for firms will provide critical funding for the infrastruc

ture on which e-government services for citizens can be

developed. The argument developed here thus pertains

mainly to e-government services for businesses.

An Externalities Perspective on E-Transactions

Agencies are

monopoly suppliers for government

services,1 hence the traditional pricing model requires

modifications. As a rule, a monopoly is free to set any

price it chooses and will usually set the price that

yields the largest possible profit (Stigler 2006), but that

would be politically unacceptable for an agency. More

over, the recent history of e-government development

suggests the opposite pricing strategy; e-transactions

development has been constrained by the need to seek

general fund appropriation subsidies to develop

ser

vices, pricing services below monopoly cost (i.e., with

out any charge for an e-transaction). We argue that the

public nature of the agency monopoly suggests that

the supply of e-transactions should be conditioned by an externalities analysis associated with the consump

tion and production of specific e-transactions (fig ure 1). This externalities perspective provides guidance to chief information officers regarding which e

services should be subsidized, if any, and at what level.

Externalities arise when the action of an economic

actor (an individual or a firm) affects another actor s

well-being and the whole of the costs and benefits

Classic economic theory suggests that the price for an e-transaction

with a government agency is a

function of the supply and

demand for the service.




associated with that action are not reflected in the

market price. Externalities can be positive or nega

tive.2 Figure 2 presents a continuum of positive con

sumption and production externalities associated with

various e-transactions. For example, the consumption

benefits of customized online database searches accrue

very narrowly to the individual user, with low exter

nality benefits for other firms. Likewise, the produc tion externalities for customized data searches are low

because the service has very little portability to other

services, owing to the specific nature of the data.

An e-procurement service has a higher positive con

sumption externality. An e-procurement system that

builds on an integrated Web-based marketplace

provides many more firms with the information and

opportunity to bid to supply goods and services to government

(Moon 2002b, 14). The benefit accrues not

only to the individual

firm that now has greater oppor

tunity to conduct business with

government; by expanding the

number of potential bidders, the

e-procurement system is also

likely to increase competition for

government business, leading to

lower prices for goods and services

purchased by agencies, as well as better-quality goods and services. The production externalities may range

from low to moderate levels, depending on whether the

e-procurement system is customized to integrate with

the agency's accounting system or is a commercial off

the-shelf application that can be replicated across many

different agencies and governments. The latter has

higher production externalities than the former; higher

production externalities also occur when multiple

agencies or governments cooperate to create a

piggy back system, such as in the Kansas City metropolitan

area, lowering the production costs for multiple govern

ments while giving them access to many more providers

(see MACPP 2006; Thurmaier and Wood 2002).

Online vehicle renewal systems provide both high consumption and high production externalities.

E-renewal systems benefit individuals directly by elimi

nating the time needed to stand in line at a physical

transportation office to renew one's vehicle registration. The consumption externality effects are also significant; fewer people standing

in line at the station reduces

congestion costs for citizens who do not use the online

system, thereby reducing their wait times. The economy

overall benefits as well because all of the savings from

reduced waiting can be reallocated

to more productive economic

uses. The renewal module can be

altered slightly to serve commer

cial or noncommercial vehicles or

other equipment registrations,

providing significant production externalities.3 Moreover, the diver

sion of individuals from station

lines to online systems is likely to

reduce the number of employees

required to staff the renewal

stations, saving agencies money or allowing them to

reallocate staff to more productive

uses.

Our final example is an online license renewal system

for a specific

set of professionals regulated by the state,

such as barbers, dentists, or cosmeticians. The con

sumption externalities are low for any particular license

renewal module because the benefits accrue to the

professional who is now able to continue the privilege

An e-procurement system that

builds on an integrated Web

based marketplace provides many more firms with the information

and opportunity to bid to supply goods and services to government.

<High> Online personal vehicle renewal

E-procurement

Externality in ^^

Consumption S^ 0nline license renewal for

^^ a specific regulated group

<Low> Customized data

retrieval and analysis -

<Low> Externality in the Production of eGov't Services <High>

Figure 2 An Externalities Classification of E-Government Transaction Services




of his or her professional practice. Providing the online

renewal option does not increase the number of profes

sionals who can practice; it only

saves the professional costs of physically renewing the license in the tradi

tional licensing system. The production externalities for

a license renewal module, however, are much higher.

The same module can be used for other licenses with

only slight alteration to conform to the requirements of

each specific license. In addition, the online system

should save agencies money by reducing the number of

employees required to process license renewals.

The analysis of externalities provides agencies with

guidelines on the extent to which an online transac

tion should be financed by general funds. The lower

the degree of consumption externalities, the more the

e-transaction narrowly benefits the end user and the

lower the justification for subsidizing the e-transaction

with general taxpayer funds. The consequence is

straightforward: If there is little or no justification for

taxpayer subsidy for an e-transaction service, then the

agency should set a price for the transaction service

that is high enough to recover the full cost of develop

ing and maintaining the e-transaction service. To the

extent that some degree of subsidy is justified because

of externality effects, the price can be lowered.4

An Opportunity Cost Analysis of E-Transactions Demand

It is fine and well to determine a basis for agencies to

charge price X for an e-transaction, but do firms want

to conduct that service online, and are they willing

to

pay price X to do so? It is an important empirical ques tion that has largely been ignored in theory and in

practice. We know of no demand surveys for online

transactions at the time we commenced this study.5

As noted in figure 1, the firms and individual users of

e-transactions are self-interested actors. A well-known

principle in the private

sector is that customers pay for

value (Smith and Nagle 2002). The highest amount

they are

willing to pay for a service is related to the

perceived marginal benefit they receive from using it.

What is the value to a firm of an online option for

licensing or bidding? The rational firm will not pay a

price that exceeds the perceived value of the benefits of

using the online service option instead of going to the

government office or putting the form in the mail. In

effect, the firm must evaluate the opportunity costs asso

ciated with each method of complying with the vehicle

renewal, licensing regulation, or other transactions.

Filing the application online through the agency's Web

site dramatically reduces the time between writing the

application and filing it with the agency and also elimi nates the costs of travel and salary time for the staff to

file the application in person. For example, if an indi

vidual renewing a vehicle license for a firm earns $10

per hour and the wait time alone is 30 minutes, the

firm saves $5 outright by conducting the transaction

online in a minute. In addition, the firm saves the cost

of the employee time spent traveling to and from the

station. From an economic perspective, the firm can

compare the relative price of filing the application online, filing in person, or filing through the mail. The

opportunity cost framework reinforces the proposition

that firms are willing

to pay user charges for online

services, subject to their perception of the value

(marginal benefit) of an e-transaction service option.

A Pricing Policy Framework

Figure 3 is a transactions pricing pyramid that suggests that e-government services that have the highest degree

t/ \ t k Optional Services / \

Transaction Fee: ~] / \

Upper bound negotiated / \ Lwith each firm J / Customized searches \

/Business-related data report\ ?

/ File claims or reports \ ?

/ \ S Convenience / . , \ ?

/ Apply or renew permits \ * Services / \ W

/ Employee-related data searches \ Transaction Fee:

] / \ Set for each

servicej / Bidding and commercial registration \

/ Apply or renew Licenses or certificates \

/_Paying Taxes Online_\ 3

Basic / \ O

Services / General Information Web Sites \

r ~\ / Downloadable Reports and Documents \ L_NoFeeJ / \

Figure 3 E-Government Services Pricing Pyramid Note: We are indebted to John Gillispie, Chief Information Officer for Iowa, for the idea of the transaction pricing pyramid.




of social externalities (e.g., paying taxes online) should

have the highest level of social support?that is, they should be funded with general government appropria tions rather than private user fees. Services with benefits

that accrue exclusively

to an individual firm should be

funded entirely by the users fees for that service. Most

e-government transactions fall into an intermediate

category, in which the benefits largely accrue to the

individual firm, but not without some associated social

externalities. They are most

appropriately financed with

some combination of public investments and user

charges, depending on the degree to which the benefits accrue to the user relative to society

at large. Moreover,

if users are willing

to pay for e-transactions, it is appro

priate for government to charge

user fees to provide

access. An important implication of the pricing pyra

mid is that the different tiers of service imply different

pricing structures for those services.6 We can summarize

the general principles underlying the pricing pyramid as

follows: The more that benefits accrue to a specific firm,

the higher the value to the firm, and the more willing the firm should be to pay a higher charge for the ser

vice. Conversely, the higher the social benefits, the

greater the justification for the infusion of general fund

investments to underwrite at least some portion of the

information communications technology infrastructure

required to deliver the services.

Toward a Self-Financing Model for

E-Transactions with Businesses

Based on the framework just outlined, we propose two

components of a self-financing model for e-transactions.

First, government-to-business (G2B) services should use

a market model that responds to the preferences of firms

and their willingness to pay for services. That is, the

pricing scheme should be based on a joint analysis of the

social externalities associated with a given e-transaction

service and the opportunity cost analysis provided

by a demand survey of firms.

Second, the approach should be

managed with an enterprise-wide

view using an enterprise fund

financial structure to maximize

efficiency and revenue generation.

Adopting a Market Approach A market approach

to service

development is dependent on the

demand for e-transactions by firms

that do business with govern

ments. As such, governments must

be cognizant of firms' preferences

for services. Government should

only develop online services that

firms demand and are willing to

pay for. Governments that develop

e-transactions based on the prefer ences of government agencies risk developing expensive

service options for which there is little or no demand;

the agency staff may be righdy proud of a state-of-the

art Web portal with efficient services, but if the service

provided does not meet user demand, then funds will

not have been used in the most effective manner.

A market approach to e-transaction services provision

defines demand as both a preference and willingness to pay for a service. If there is no

willingness-to-pay

weight on a preference, it is difficult to assess the

relative demand for a service?that is, to determine

which service has the strongest demand from firms.

A market approach relies on pricing signals from the

end users to guide decisions about which services to

develop and how much to charge for the use of

e-transactions services. Finally, a market approach is

dependent on the ability to exclude firms from using the service unless they

are willing

to pay for it.7

This market approach rests on the proposition that

there is a demand for e-government services and a

willingness to pay. This proposition is consistent with

the opportunity cost

perspective, which conditions a

firms perception of the value of an e-transaction

service option. We hypothesize that

Hji A firm is willing to pay user charges for

online transactions up to a maximum amount

of opportunity costs that it believes is saved in

the transaction.

Using an Enterprise Strategy The enterprise strategy has two dimensions: structural

and financial. Within the structural dimension, there are two related arguments for developing

e-transaction

services on an enterprise-wide basis rather than agency

by agency. First, governments can use an enterprise-level

approach more

strategically to

develop e-transactions

that meet the highest levels of demand from firms.

An e-government enterprise

that is unencumbered by the

constraints of a particular agency's

general fund allocation is able to

assess the market for e-transaction

services as a whole, not simply for

a single agency. An enterprise

approach increases allocative

efficiency for the government as a

whole because it is able to iden

tify and invest funds in high demand service areas by applying

marginal utility analysis to the list

of potential e-transaction services,

asking which satisfies the highest demand, which the next highest demand, and so on.

A second structural argument is

that this approach can use a single Web portal that

provides integrated interactive services to firms; the

Governments that develop e-transactions based on

preferences of government

agencies risk developing

expensive service options for

which there is little or no

demand; the agency staff may be

rightly proud of a state-of-the-art

Web portal with efficient services,

but if the service provided does

not meet user demand, then

funds will not have been used in

the most effective manner.




infrastructure to support the Web portal and

e-transactions can be built with internal enterprise

efficiencies, including economies of scale (as discussed

earlier for various professional licensing modules).

Web portals with supporting infrastructure and appli cations are

key investments that have long-term ben

efits, large initial costs, and require technical planning and maintenance (Johnson 2002). The inefficiency of

duplicated infrastructure in an agency-by-agency

approach can be avoided with a single portal that is

managed by a

single e-government enterprise.

The financial dimension of an enterprise approach

allows the state to reinvest fees from e-transactions

and savings in portal maintenance and development; states can also recover

capital and other costs with an

enterprise approach (Johnson 2002). The enterprise

approach provides a government with flexibility to

build a pricing structure that is consonant with the

preferences of firms while maximizing the revenues

necessary to support development and maintenance of

the e-transaction services. Unencumbered by general

fund rules and politics, the e-government enterprise can build the fees that it must pay for electronic funds

transfer and credit card processing into the overall

prices for e-transaction services.

With a single portal supported by a single infrastruc ture

managed by a

single agency, a firm conducting e-commerce with a government can do so

efficiently,

without making complicated calculations about what

the true or final cost of the transaction will be. Be

hind the portal, transactions can be specific to an

agency service, and fees and other revenues can be

allocated appropriately. For the firm, its business

is with the government's business agent?the

e-government enterprise; for most e-transactions

with government, the mode is business to business

(B2B), not G2B.

The creation of an e-government enterprise would be

consistent with other enterprise functions created by

American governments, such as water and sewer

systems, airport authorities, and golf courses. Public

enterprises use a variety of methods for pricing

ser

vices (Downing 1996; Pierce and Rust 1991). When

the service resembles a market good, the value-of

service method (Petersen and Strachota 1991) is an

appropriate pricing strategy. The primary task is ascer

taining the value of the service to the customer. The

cost cannot exceed the benefit that the firm derives

from using the e-transaction or the firm will use the

traditional paper option.

Unfortunately, markets are often missing in cases of

government goods (such as online G2B services) be

cause of the monopoly position of the government (i.e.,

there are no alternatives for a firm to bid for state con

tracts or pay state licenses and fees), hence the lack

of a market to generate prices for such outcomes.

Governments pioneering in e-transactions have little

market information available from other governments;

few are advancing into the e-transaction

phase of

e-government. Consequently, other market research

techniques are

required, such as the use of a contingent

valuation approach as part of assessing firms' willingness

to pay for online transactions stated in hypothesis 1.

Political Constraints

Developing and financing e-government cannot occur

without heeding political considerations. For example,

paying taxes online presents a

special case

compared to other e-transaction services (figure 3). All firms

must pay taxes; paying taxes has broad social benefits

and minimal consumptive benefits to the firm as a

taxpayer. Given firms' resistance to paying

taxes gener

ally, it is unlikely that legislators will support a sur

charge levied on firms that pay their taxes online. In

addition, Crawford, Johnson & Northcott (1999) found strong resistance among firms to the suggestion

that the e-payment of taxes should involve a surcharge

as well. Thus, a surcharge

on paying

taxes online is

unlikely, even when a state or local government adopts

an e-government enterprise approach.8

Much of the e-government literature focuses on

government-to-citizen (G2C) interaction rather than

government-to-business (G2B) interaction. G2C

interaction is affected by digital divide issues, and

there is reluctance to assess user charges

or create other

barriers that hinder access to e-government by the

poor who may have difficulty accessing the Internet.

Our focus is purposefully on G2B transactions, where

political considerations of social equity are much less

important. This rests on the assumption that there is a

high-level of Internet access among businesses. To test

the assumption, we

hypothesize that

H2: Internet access is widely available among

firms (defined as more than 80 percent having an Internet connection).

Another dimension of the digital divide is size. It is

possible that the willingness to pay varies by size of

firm. Such a difference has implications for the adop tion of a flat user

charge for online services regardless of the size of the firm. Larger firms may be more

willing to conduct online business and pay for the

convenience, either because of a greater ability to pay

or due to the higher number of transactions with

government (or both). Hence, we hypothesize that

H3: Larger firms are more willing

to pay user

charges for online transactions than smaller

firms.

After a brief discussion of our methodology,

we report

the results of our hypotheses

tests and estimates




of acceptable user

charges for e-transactions with

government agencies.

Methods and Data

Sample and Data Collection

The project began with a comprehensive review of 46

Iowa state government Web sites to determine a reli

able list of electronic government services currently

offered to Iowa firms. Researchers worked with Iowa

State University's Center for Survey Statistics and

Methodology to

develop a

telephone questionnaire for

the survey. Pilot interviews were conducted with six

local business representatives to

identify any trouble

some items, and adjustments were made to the ques

tionnaire based on the results.9

The survey center randomly selected 1,500 firms from

about 149,000 firms identified using the 2004-05 edition of DirectoriesUSA's Iowa Business Directory to produce a final sample of 800 firms, stratified by Standard Industrial Classification (SIC) code groups10 and by number of employees,

to be representative of

the business profile in Iowa. Advance letters were sent

to firms identified in the sample to explain the project and to inform them that an interviewer would contact

them shortly. A total of 800 calls were made, resulting in 432 completed telephone surveys, for an overall

response rate of 57 percent. Standard interviewing

protocols were followed by survey center staff

throughout the project. The interviews were 15-20

minutes in length. Reported sample percentages are

statistically valid within ?5 percent at the 95 percent confidence level.

A Contingent Valuation Application We tested the first hypothesis using contingent valua

tion methodology. Although there is no standard

approach to the design of a

contingent valuation

survey, Portney (1994, 5-6) observes that most appli

cations involve a few well-defined elements, including a scenario or a

description of the (hypothetical or real)

policy that the respondent is being asked to value, a

mechanism for eliciting a value or a choice from the

respondent, and information on the socioeconomic

characteristics of the respondents. The elicitation

mechanisms include open-ended questions (e.g.,

What is the maximum amount you would be willing to pay for X?) and bidding games (e.g., Would you be

willing to pay X for this program? Would you be

willing to pay X + 1 for this program?), and so on.

Hanemann (1994, 22) also argues that details matter

to ensure reliability of results. The first key is to con

front subjects with a specific and realistic situation

rather than an abstraction in order to capture what

one seeks to value in a plausible and meaningful way.

Early in our survey, we elicited specific transactions

that firms had with state agencies, regardless of

whether they transpired online. We then asked the

firm to identify the top three priorities for conducting transactions online (of the transactions they

were

already conducting with state agencies). Finally,

we

tested hypothesis 1 by presenting the paragraph below to crystallize opportunity

costs the firm might incur

for each of these priority transactions.11

Now please think about (FILL TRANSACTION 1) and the amount of money it currently

costs

your company to conduct this transaction.

That could include costs such as gas and travel

ing time, waiting in line, postage, or mail delay.

The total cost could range from $ 1 for postage to as much as 20 to 30 dollars for a personal office visit, depending

on how your company

handles it.

Hanemann's (1994, 22) second key to appropriate

contingent valuation is to use a closed-ended question

sequence that frames the valuation as voting in a

referendum. The questions below gauge the maximum

amount a firm is willing to pay for an online transac

tion. The sequence was repeated for each of the three

transactions the firm had specified earlier in the

survey.

With this in mind, would you be willing to pay $2 for the convenience of conducting

this transaction online? Yes No

Are you willing to pay $4 (for each online transaction)? Yes No

What is the highest user

fee per transaction that

you would be willing to pay to do this online? $_

We tested the second and third hypotheses using

several questions in the survey. To test hypothesis 2

(regarding Internet connections), we asked whether

the firm had an Internet connection. If so, we asked

how it was connected: by dial-up or broadband (cable,

DSL, T-l). If the firm did not have an Internet access,

what were the reasons for not having one? We estab

lished the independent variable to test the third hy

pothesis (about the influence of firm size) by asking firms about the number of employees the company

had in its Iowa operations.

Results

The demand for a specific online service is measured

both by the desire for a service and by the willingness to pay for that service. In this regard,

we found clear

support for hypothesis 1: Firms are willing to pay a

user charge for an online transaction that is of direct

benefit to them (table 1). The results presented in

table 1 are aggregated from the three most

important

transactions that each firm identified that it wished to

conduct with the state online.




Table 1 Share of Firms Willing to Pay for Online G2B Commerce

Percent responding willingness to pay

Apply or renew

Paying corporate File reports Apply or renew licenses or

taxes or claims permits certificates Overall mean

Pay $2 53% 53% 65% 62% 57% Pay $4 44% 18% 54% 40% 40%

Maximum pay: ft) $ 2.30 $ 1.64 $ 3.45 $ 2.47 $ 2.40 (median) $ 1.00 $ 2.00 $ 2.00 $ 2.00

Source: E-Government Business Survey.

Aggregated responses (overall mean) for the firms re

sponding to the payment sequence indicate that about

57 percent of firms would be willing to pay at least $2

per transaction if the commerce they currently conduct

with the state was moved online (table 1). The number

dropped to about 40 percent when firms were asked

whether they would pay $4 for their preferred transac

tion if it were available online. Firms indicated an

overall average of $2.40 per transaction as the highest amount of user fees they would be willing

to pay for an

online service, although there was substantial variation.

Responding directly to each of three specific

transac

tions that the firm would like to conduct online, the

average maximum acceptable charge ranged from $3.45

to $ 1.64 per transaction (the median is reported for

each transaction in table 1). About 20 percent of firms

indicated a zero dollar fee as the highest amount that

they would be willing to pay for online transactions.

We have confidence in these estimates because of the

mixed format of closed- and open-ended questions in

the contingent valuation question sequence. Hanemann

notes that "[w]ith the open-ended format. . . . there

are strategic

reasons for stating less than one's full

value?a theoretical result strongly supported by

experimental evidence. This is not so with a closed

ended format" (1994, 23). Though the exact amount

of transaction savings to break even was unknown to

the firm at the point of the question, the responses to

the fixed points of $2 and $4 reinforce the mean and median responses to the open-ended questions. Taken

together, the responses of firms indicate a willingness

to pay a modest service charge, between $2 and $4, for an online service option with the state.

There is also a large latent de

mand for more G2B online

services. Across various types of

transactions that the firms cur

rently have with state govern

ment, survey results suggest that

an average of only 30 percent are conducted online.

About 80 percent of the firms that currently do not

conduct transactions online said that they would like

to do so in the future. That means the state could

serve another 56 percent of its firms with new

electronic government services?in addition to the

30 percent currently served; that represents a potential

market of 86 percent of all state firms (Chen and

Thurmaier 2005).

Limited access to the Internet does not seem to be an

issue for Iowa firms, supporting hypothesis 2. The

survey found that 84.5 percent of firms were online at

the time of the survey. Another 4 percent expected to

connect to the Internet by the end of 2005, bringing the penetration

rate close to 90 percent and effectively

mitigating digital divide issues with respect to business services by

state agencies. Furthermore, a broadband

connection was used by 76 percent of the firms that were online at the time of the survey. As expected,

larger firms are more likely

to be connected online

and use broadband services than smaller firms. For the

small percentage of the firms not connected, the study

suggests that lack of need?not cost?is the main

barrier (Chen and Thurmaier 2005). If governments are able to

provide more convenient and lower-cost

services, these firms are still unlikely to use them.

We must reject hypothesis 3. Survey analysis indicates

that size does not affect the amount that firms are

willing to pay for e-transactions. There is no

significant correlation between the size of a firm (measured by the

number of employees) and the maximum amount that

it is willing to pay for online transactions. Future

research could employ a research design

to carefully

test other hypotheses regarding variation in willingness

to pay by type of firm. Our sam

ple size is not large enough

to

allow us to have a meaningful

investigation into each SIC in

dustry group. For some industries

(e.g., agriculture, wholesale, and

construction), we have only a

small number of observations.

This is the result of achieving a

stratified sample that is represen

tative of all businesses in the state of Iowa; perhaps

surprisingly, agriculture constitutes only 3 percent of

all businesses and wholesale accounts for only 6 per cent. A different sampling strategy may find significant

About 80 percent of the firms

that currently do not conduct

transactions online said that

they would like to do so in the future.




differences by type of business, advancing our knowl

edge about the demand for G2B services even further.

The Enterprise Approach as an

E-Government Policy These results should encourage policy makers to

adopt a market-based approach

to G2B commerce and to

create an e-government enterprise for the develop ment and management of online transactions. Our

analysis suggests that there is a market demand for

online services for businesses. First, firms are able to

access online services and interact with state agencies

online, often with high-speed Internet connections,

mitigating concern about a digital divide problem. Second, the results suggest that firm size does not

affecting the willingness to pay to conduct transac

tions online.

Third, firms are willing

to pay for the convenience of

online service options from state government. Survey

results suggest firms are amenable to a service fee in

the range of $2-$4 for transactions they currently

conduct in traditional modes but would rather con

duct online. This means firms will not be discouraged

by being charged a few dollars to conduct transactions

online because traveling and waiting in line are likely to cost them even more. These results suggest that

marketing campaigns that carefully and accurately

frame the opportunity costs can encourage firms to

pay a service charge for an online transaction because

they perceive it will actually save them money, even

after paying a service charge. Note that the term "ser

vice charge" itself is a word choice that mimics the

private sector and should increase acceptability.

An enterprise fund approach might take the form of an e-government enterprise authority that is quasi

governmental and free from many of the pricing

constraints associated with general fund financing.

Using a market approach, the e-government enterprise

authority would conduct market research to identify

the online preferences of firms and their willingness to

pay for them. Pricing structures for services would

adopt business sector practices and roll costs of doing

business into product pricing. In that vein, govern

ments would do well to develop

an e-government

enterprise authority as a

long-term financing structure

that will enable them to develop a broad range of

G2B commerce. The scope of authority for the

e-government enterprise authority should span the

breadth of state government so that it can act on

behalf of all state agencies and be self-financing from

multiple revenue streams.12

This strategy can address the issue of accountability in

making structural and financial decisions in two ways.

First, a technology governance board can oversee a

central e-government authority in making decisions

on which online services to deploy and the proper mix

of general fund and user fees for financing them.

Representation from various government agencies

involved in online transactions can help strike a

proper balance in making agency-specific decisions

that have enterprise-wide ramifications. Second, the

decisions on user fees will follow a thorough market

and externalities analysis, as

suggested earlier, to avoid

any potential abuse of coercive power that an agency

has in the marketplace of online government services.

Basing decisions on the results of the analysis will

instill accountability and avoid decision-making

distortion.

The e-government enterprise authority market model

provides longer-term social benefits beyond those

already mentioned. If governments can successfully

build the e-transactions infrastructure required for

G2B commerce using mostly service fees from the

business sector, they will have provided much of the

investment funding necessary for G2C transactions.

Policy makers are rightly concerned about the digital divide related to G2C interactions. Anything that

raises the cost of access to online government services

for citizens will tend to exacerbate the digital divide.

These social equity concerns suggest that development

of G2C services is most appropriately financed with

general fund revenues rather than transaction sur

charges, yet general fund financing is problematic at

all levels of government. This is why we have focused our attention on the development of G2B commerce.

An initial focus on developing G2B services lowers the

overall?and long-term?costs of building the infor

mation communications technology infrastructure for

G2C services, enhancing the ability of governments to

develop G2C services with fewer general fund dollars.

This strategy effectively lowers the marginal cost of

developing G2C services over the longer term, reduc

ing the overall costs to government and diminishing some of the cost issues associated with the digital

divide.

We expect that the opportunity cost analysis?as

well as our model for an enterprise fund approach

to

G2B financing?is relevant to U.S. state and local

governments beyond Iowa. We expect that our sam

ple profile of 90 percent business connectivity mir

rors that in other states; perhaps it is even

higher in

more populous and less rural states, enhancing the

generalizability of the results. State and local govern

ments need to creatively

structure the financing for

e-government if it is to develop further. The analysis

and model we have presented here suggest an ap

proach that minimizes general fund investments

while also providing online services that benefit the

firms that are willing

to pay for them. An e-government

enterprise approach could be a prominent instru

ment for state and local governments to confidently

move into the next stage of e-government

development.




Acknowledgments The authors wish to thank John Gillispie and James

Douglas for their helpful ideas and comments and

Bronwyn Beatty-Hansen for her helpful assistance.

We also wish to thank the anonymous reviewers for

their very helpful suggestions. This research was made

possible with an award from the IowAccess Advisory Council, Iowa Department of Administrative Services.

The information in this paper does not necessarily

reflect the views or opinions of the Department of

Administrative Services or the IowAccess Advisory

Council. An earlier version of this paper was presented

at the 2005 conference of the Association for Budget

ing and Financial Management.

Notes 1. It does not matter whether they provide it di

rectly or contract with a vendor.

2. An example of a positive externality is when a

child is educated. What the child learns provides

him or her with direct benefits, and the child will

be able to earn a better living with more educa

tion. In addition, society benefits from what the

child learns because an educated child becomes

an educated adult who is capable of participating

in the political and economic life of the polity.

Hence, some of the benefits of the child's con

sumption of education are external to the child,

providing a rationale for subsidizing the child's

K-12 education with general taxes instead of

forcing the child (or the child's parents) to pay

the full cost of the education. The production of

education also has externalities, often viewed as

economies of scale. The child's education can be

provided by a tutor or by a teacher in a school

where the child learns alongside many other

children. The production of education by a tutor

has a low degree of externalities because the tutor

can only teach one child at a time and the educa

tion is tailored to the child and not easily repli

cated for other children. Alternatively, a school

setting uses economies of scale, where one teacher

can educate multiple children, and the techniques

for teaching one fifth-grade math class can be

replicated (with minor variation) across multiple

fifth-grade math classrooms.

3. Note that the consumption externalities for online

commercial vehicle renewals will be lower than

those for noncommercial renewals because of the

much smaller universe of such vehicles and the

general practice of having special lines at vehicle

registration stations for commercial customers.

4. Higher degrees of production externalities do not

automatically suggest grounds for increasing

general fund subsidies for a specific online ser

vice; they merely point to opportunities for

agencies to recoup online development costs and

reallocate agency operations to increase operating

efficiency. Indeed, developing a common module

that can be used in applications for multiple

agencies can be a central feature of an

enterprise-wide approach to the development of

e-government services.

5. The International City/County Management

Association's biennial e-government survey asks

local governments whether they ask demand

questions in citizen surveys, but there do not

seem to be any systematic treatments in the results.

6. The price of e-transaction services is limited only

by the value of the commodity or service to the

firm, but at a minimum, it can be set to equal the

extra cost to the agency staff of providing the

customized service. The price of e-transaction

services is conditioned on a firm's willingness to

pay the fee, a decision that is affected by how the

firm values the e-transaction option. This is an

issue of opportunity costs.

7. We will discuss political constraints later; for now,

we note that firms retain the traditional "brick

and-mortar" option to comply with regulations.

Firms are not compelled to use the e-transaction

service for licensing, bidding, or other transactions

with governments; if they use the e-transactions

option, it is because they choose to do so.

8. Note that private tax preparation firms and

software programs can charge for e-filing taxes

without the same resistance met by a government

attempt to do so.

9. A complete description of the methodology and

the survey instrument is available from the

authors upon request.

10. The industries surveyed include agriculture,

construction, manufacturing, transportation,

wholesale and retail trade, and various services.

11. We randomly selected half of the firms in our

survey to answer the following sequence of

questions that focused on user charges as an

additional cost of online commerce. The other

half of the firms were randomly assigned to an

alternative sequence of questions that focused on

saving money by using online commerce. We only

report the results of firms asked about costs here.

12. For a more complete discussion of the scope of

authority issue, see Chen and Thurmaier (2005b).

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