You're coming at this from a very specific perspective related to your experience of government and services. I'm glad you live in a place where you can trust these sorts of fundamental services. This paper was not written for people like you.
Look at something like M-PESA in East Africa. It allows a person to have the equivalent of a bank account and transact with others without having any form of state recognised identity - only a mobile phone. That this is so successful is largely as a result of the complete inadequacy of the local banking system and the regional governments' inability to provide meaningful identity to their citizens.
Consider vaccination programs. Aid agencies responding to the Haiti earthquake in 2010 struggled to place young children back with their parents because no-one carried identity and the state - which had been barely functional before - was entirely non-functional. As reported in The Economist at the time, agencies carried out mass vaccinations against cholera but some people were vaccinated multiple times and others were missed entirely because there were so many agencies all running around like headless chickens.
Again, a simple distributed identity system would have permitted a better response.
Or the other example from the linked paper ... in rural communities in the world's poorest countries, people's identities are vouchsafed entirely by that community. Community-based lending programs (as popularised by Grameen Bank in Bangladesh) are successful precisely because individuals lack identity or their own independent credit record. Micro-lenders offer loans to these community groups rather than individuals and so the individual builds up no credit record of their own.
If they ever need to move (because of drought, joblessness or whatever) they lose the reference and identity they have built in that community. They cannot take it with them.
In the presence of a motivated and functioning state, sure, maybe this isn't needed. Unfortunately, billions of people don't have that luxury.