Fostering Innovation through Public Procurement

Submitted by empirica on 4 November, 2010 - 20:09

Innovation has often been initiated by changing customer requirements – i.e. the demand side. Theoretically, public procurement could therefore play an important role as a driver of innovation. However, there is still not enough clarity about the practical mechanisms to make effective use of this instrument.

The concept: why public procurement matters for innovation

Public procurement can have an impact on innovation in two ways: through how public procurers buy, and through the choice of what they are buying. Because of its potential, procurement was identified as a priority for EU innovation policy under the 2006 Broad Based Innovation Strategy. However, the Commission is not yet satisfied with the impact of the initiatives in this field. It would like to see public procurers in the EU give greater emphasis to purchasing innovative products. "Public procurement still holds a large untapped potential to stimulate the production of innovative products and services in our economies”, says Cesar Santos from the Innovation Policy Development of DG Enterprise and Industry. “To realise the potential, we need to adopt a culture of managing risk rather than avoiding it, when it comes to allocating grants and contracts. In this respect, there are successful examples in the US and in the EU from which we can all learn."

Economists confirm that public procurement could be a useful instrument for innovation policy by steering R&D and innovation into the right direction. Hans-Peter Kloes, Head of the Department Education and Labour Market Policy and Member of the Managing Board of the IW Köln e.V. explains the line of argument: "Innovation is often initiated by changing customer requirements. Public procurement could play a vital role in fostering innovation, since it accounts for a substantial share of EU GDP.” Philipp Koellinger, assistant professor in economics and entrepreneurship at the Erasmus University Rotterdam, offers a practical example: “The demand of the US Department for Defence has frequently played a critical role in the development of new technologies for military purposes which were then also used for commercial applications. Some of those became extremely important – an obvious example is the Internet.”

The economists also point out that public procurement strategies in favour of innovation must not violate some general principles: “It has to be ensured that public procurement is strictly competitive and technology-open and that private procurement is not crowded out. It is crucial that the trade-off between the innovative character of a procured product or service and the speed of the procurement process is diminished and that procurers and suppliers are matched efficiently," says Mr Kloes.

The main challenge: translating the concept into practice

While policy makers are mostly open to the concept, they criticise that it still remains too vague in many areas. “We have been discussing this idea for years, but I see little progress in translating the theoretical concept into a more practical perspective”, says Rupert Pichler, Head of Department Research and Technology Funding at the Austrian Federal Ministry for Transport, Innovation and Technology. “I would appreciate if somebody came finally up with concrete suggestions how to implement innovation as a criterion for procurement decisions in practical terms. Public procurement is mainly concerned with reliability, efficiency and good value for money. Innovation has to add to these goals and is not a goal in itself.”

The Commission is aware of this challenge and therefore held a conference on “Promoting Innovation through Public Procurement” in March 2010 [1]. More than 200 experts attended the event, exchanged their experiences and best practices and developed practical proposals for various domains. The conference addressed issues such as:

how to bridge the gap between public procurers and innovative SMEs,
how to progress towards a Life-Cycle-Costing approach in public procurement,
how to organise an effective dialogue between the private and public sector, and
risk management in procurement of innovation.

A practical example for applying strategic public procurement for innovation is LCB Healthcare, an international partnership of the UK, the Netherlands, Norway and Poland. The goal of this European lead market procurement network is to stimulate innovation for low carbon building solutions in the health sector, through coordinated pilot projects. Driving sustainable production methods through “green public procurement” is certainly a key objective in this context. A simple example that has already been adopted in many places is procuring organic products for canteens in schools and administration, to promote sustainable production.

The UK is often quoted as a leader in using public procurement to drive innovation. One of the approaches used in the UK is “Forward Commitment Procurement” (FCP), a demand side tool which aims to avoid that either procurer or supplier incur unmanageable risks. In the FCP process, public procurers discuss with the entire supply chain early on their longer term objectives (and future needs), so that producers can better assess future demand and direct their innovation efforts towards it.

The state as a lead user

These examples also show that the procurement of innovation can be linked to a normative policy goal, such as sustainability or energy efficiency. “The justification for buying a costly innovation, i.e. to pay the innovation premium – and to invest in innovations at an early phase within the innovation cycle, then stems from this policy mission”, say Jakob Edler and Luke Georghiou from PREST point in a paper on public procurement and innovation [2]. The state often acts as a “lead user” in emerging markets. The researchers support the view that the demand side should be given more attention in innovation policy, and describe critical success factors. They argue that it requires a systemic approach – a “complex implementation framework” – and regard innovation procurement policy as a horizontal approach which cuts across different administrative levels and ministries. Sharing a commitment for common innovation goals is therefore crucial to leverage public procurement for innovation.

Notwithstanding the many challenges, the role of the demand side and public procurement in innovation could get a further boost from a recent European Parliament resolution on new developments in public procurement [3]. The resolution calls on the Commission and Member States to emphasize green and socially responsible procurement, and to evaluate the impact of procurement schemes on SMEs.