New data-driven report highlights the AI opportunity for Public Sector Services
The EU-funded StepUp StartUps initiative has recently released a comprehensive new report titled Public Sector Services and the AI Opportunity, spotlighting how AI can transform public services across the EU while opening new doors for startups and SMEs.
The report outlines how governments can leverage AI to improve citizen services, increase operational efficiency, and stimulate GovTech innovation – provided they take bold steps to reform public procurement and foster ethical, data-driven innovation environments.
“AI’s growing capabilities mean it can move beyond improving the way governments operate – enhancing the efficiency of service delivery – to changing how governments think about designing more user‑centric services that are more tailored to people’s needs,” noted Carlos Santiso, Head of Digital, Innovative, and Open Government at OECD.
Produced with support from the European Union, the report confirms a dramatic surge in AI-focused GovTech funding in recent years.
Between 2021 and 2024, venture capital investments in AI-powered public sector technologies soared, with AI-first GovTech startups comprising nearly 50% of all deals in 2024. Despite this momentum, barriers remain: procurement systems across the EU are still largely inaccessible to smaller innovators, and AI startups remain underrepresented in areas such as transport, mobility, and agriculture.
Across the continent, governments are embracing AI-powered solutions to modernise citizen services.
- In Denmark, the chatbot Muni helps residents navigate local services across 37 municipalities.
- While in Verona, Italy, an AI-driven traffic system uses smart sensors at Porta Nuova to ease congestion at one of the city’s busiest intersections.
- In Estonia, the Kratt framework has created a network of interoperable virtual assistants linking over 120 public agencies – earning the nation a European Public Sector Award.
“We take great pride in knowing that our AI-led public services have significantly improved the lives of many of our population, transforming the citizen user experience for the better,” shared Estonian Minister Andres Sutt, Minister of Entrepreneurship and IT 2021- 2022.
Yet these advances remain uneven. While countries such as France, Germany, and the Netherlands lead the Government AI Readiness Index, others are still crafting foundational strategies.
Despite EU-wide enthusiasm, challenges to AI integration persist. These include fragmented administrative systems, inconsistent digital infrastructure, limited AI literacy within public administrations, and ongoing ethical concerns about bias, accountability, and transparency.
A significant emphasis in the report is placed on building what it calls “AI-ready digital public infrastructure” to ensure scalable, trustworthy deployment.
Crucially, the report highlights public procurement as the most underutilised but potentially transformative lever in the AI adoption playbook. With EU governments spending roughly €2 trillion annually – amounting to 14% of GDP -the report calls for a redesign of procurement systems to allow AI startups a fairer chance at securing public contracts.
Innovation Procurement approaches like Pre-Commercial Procurement (PCP) and Public Procurement of Innovative Solutions (PPI) are spotlighted as pathways to help de-risk emerging AI technologies.
The report’s recommendations are clear: establish interoperable data ecosystems, support cross-border procurement pilots, and fund dedicated GovTech initiatives with AI at their core. The aim is not only to modernise Europe’s public sector but to ensure it becomes a launchpad for AI-driven startups able to scale across borders.
“Artificial Intelligence presents Government with opportunities to improve public services. By making it easier for public servants to deploy AI solutions, we can address old problems, generate value for the public, and deliver better public services,” said Jack Chambers, Minister for Public Expenditure, Infrastructure, Public Service Reform and Digitalisation, Ireland.
As the EU moves forward with the rollout of the AI Act and national AI strategies, the potential for synergy between governments and startups is evident. But for startups to thrive in the public sector arena, systemic changes are required – starting with fairer procurement rules and a willingness to experiment beyond established players.
With the public sector increasingly being recognised as a strategic domain for AI deployment, the report serves as both a roadmap and a wake-up call: if Europe wants to lead in ethical, high-impact AI, it must start by reforming the way it buys innovation.
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