There has been a “historic failure” in the UK to transfer knowledge persistently from research to exploitation. One way of kick-starting the application of ideas is for the UK government to use the £150 billion a year it currently spends on goods and services to drive innovation.
“No government will ever be able to meet all the demands for innovation funding, but it can support business through smarter procurement,” says former science minister Ian Taylor MP in the policy document, “An Innovative Society: Capturing the Potential of Science and Engineering”.
“By becoming an early adopter of innovation, the government can send a signal to the market about the viability and value of an innovative product, service or technology; and that in turn can help to increase investor confidence,” says Taylor.
As the policy paper points out, using public procurement in this way can be of particular benefit to small and medium-sized enterprises, as evidenced by US, where currently 23 percent of the federal budget has to be spent with small businesses.
“That is stimulating innovation from the bottom up, and it recognises that small innovative companies need customers, not subsidy,” says Taylor. It also meets the business maxim that revenue is the best form of investment capital, and addresses the fact that absence of secure revenue is often the cause of failure to raise venture capital at valuations that are acceptable to entrepreneurs.
An idea whose time has come
The UK Conservatives are not alone in pushing for the EU to use procurement to drive innovation. Momentum is growing, and the indications are that using public sector procurement to encourage innovation may be an idea whose time has come.
The premise is that as the largest customer in Europe, government should be the ultimate discerning and exacting customer, self-consciously deploying its mammoth purchasing power to pull innovative goods and services through to the market.
The political impetus to direct government spending to make the technology marketplace in Europe more dynamic has gathered a range of supporters since it was proposed by former Finnish prime minister Esko Aho in his report “Creating an Innovative Europe”, published in January 2006.
The idea goes by several names: smart procurement, lead markets or public innovation are some of them. In essence, rather than go for the lowest cost or lowest risk option, governments are required to stick their necks out, and tailor procurement specifications to so that suppliers have to propose new technologies to win contracts.
It is envisaged that in this way public procurement could be used to create high tech markets in e-health, energy, transport, logistics and security, among others.
Beef up the start-ups
Similarly, the League of European Research Universities (LERU) has called for a European version of the US Small Business Investment Research Program that requires public services to put 2.5 per cent of their external R&D budgets into start-ups.
LERU pointed out that with 350 million inhabitants, united Europe is on the same scale as the US. But the EU never uses that power when it comes to leveraging public procurement to drive innovation.
By requiring large government contractors to sub-contract a percentage of the contract value to SMEs, but leaving the selection, management and risk of the SME sub-contract to the large contractor, the UK Conservatives believe market forces could combine effectively with public procurement to drive innovation.
But the party believes also that it is necessary to change hearts and minds, and build a new public sector culture which puts value for money over the lifetime of a product above short term value, and recognises that high reward requires the management, not avoidance, of high risk;
In an earlier report, Taylor and his co-authors confirmed that smart public procurement was entirely within the rules of the European Union. Indeed, a Commission report of March 2006 introduced the concept of “Pre-commercial Procurement of Innovation”, to “address a generally missing link in the European innovation cycle.” This involves the public procurer sharing benefits and risks with industry in order to exploit the results of research, by moving research developments from their early stages to tested pre-commercial products ready for commercialisation.
In addition, Taylor believes that the role of accredited supplier systems in the public sector also needs to be evaluated. Many public sector bodies now require companies to pre-register with them according to a set of rules.
These may include, for example, a requirement that they have filed a set of company accounts for three successive years, before they are allowed to bid for contracts. “This approach reduces risk, but the resulting increase in bureaucracy and reduced supplier choice can lead to increased costs and the stifling of innovation,” says the report.
Alongside its emphasis on public procurement the policy document makes a series of other recommendations for building the UK’s knowledge economy on the back of its science base. These include the creation of an Innovative Projects Agency IPA, charged with identifying UK strengths and vital interests in science and stimulate the process of taking ideas beyond discovery towards commercialisation. This would have an initial budget of £1 billion, taken from existing budgets.