Direct procurement to start-ups, EU told

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 economic development.

This might change if the European Commission is convinced by a new proposal from the League of European Research Universities (LERU) that public procurement budgets must devote a small percentage of their spending to innovative start-ups.  

In the United States, the Small Business Investment Research Program (SBIR) has proved very successful in fostering the development of small companies through the mechanism of allocating 2.5 per cent of R&D spending to small companies – mainly technology start-ups.

In a report published this week, “Universities and Innovation: The Challenge for Europe”, LERU builds the case for its proposal. In 2004, the US government spent about 15 per cent of its total public sector procurement budget of $735 billion on R&D. From this $49 billion, 2.5 per cent, was hypothecated for small firms. In addition, a small business technology transfer programme has been created to support projects carried out in collaboration with universities, for which 0.3 per cent of the budget is set aside.

According to the main author of the report, Geoffrey Boulton, professor at Edinburgh University and a member of the UK Council for Science and Technology, the results are impressive. “Each year 4,000 contracts are placed with a value in excess of $2 billion.”

“Over a ten-year period, SBIR-funded companies generated five times as many jobs as new firms that had no SIBR funding, and over 300 SBIR contractors have public market listings. The programme has played a crucial role in the dynamism of the US knowledge-based economy.”

Other straws in the wind

There are indications that using public sector procurement to drive innovation may be an idea whose time has come. EU heads of state meeting in Lahti, Finland, in October fingered public procurement as an engine to drive innovation.

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.

Indeed, the political drive to direct government spending to make the technology marketplace in Europe more dynamic has gathered huge momentum since it was proposed by former Finnish prime minister Esko Aho in his report “Creating an Innovative Europe”, published in January.

The idea goes by several names: smart procurement, lead markets or public innovation are some of them. But in essence, governments tailor some of their procurement specifications to pull from suppliers new technologies.

At the heart of a shift to demand-driven innovation would be a move to use public procurement to create high tech markets in e-health, energy, transport, logistics and security, among others.

It is expected that the first concrete action in this field may be a decision to back a series of lead market pilot programmes. One that has been trailed is using public procurement to pull through the range of technologies – from new materials to heating systems and environmental controls – that will be required for constructing carbon neutral or  “zero-emission” buildings.

While Aho’s vision takes in all public procurement, the LERU proposal focuses on external spending on R&D.

Despite the success of the US’s SIBR programme, LERU is not optimistic about the chances of instituting a European version of the scheme. While public procurement budgets of member states are big, they do spend a high percentage on R&D.

According to LERU, less that one per cent, or €1.64 billion, of the total procurement budget of the EU’s member states was spent on R&D in 2004. So 2.5 per cent of that seems quite insignificant. A big chunk of the difference is due to larger US R&D spending on defence, but civilian R&D public procurement in the US is four times as large as in Europe.

US ‘more comfortable’ with risk

Boulton told ScienceBusiness this is due to a fundamental difference in the procurement culture both sides of the Atlantic. “Because of the mid-term economic benefits that public procurement brings to start ups, American agencies became more and more comfortable with the risks inherent to an R&D driven procurement policy,” he says. “On the contrary, European public services have stayed very conservative.”

For example, the British scientist Sir Peter Mansfield was joint winner of the Nobel Prize in 2004 for his work on developing magnetic resonance imaging carried out at Nottingham University. “The UK National Health Service never took the risk of invest in scanning technology while it was being developed in British universities. It waited to buy scanners when they became a mature technology. Therefore, there is not a single scanner made in Britain even though the technology was largely developed there,” says Boulton.

Still, Boulton believes than a shift in the procurement policy within the EU can trigger the same dynamic as is seen in the US. “There is no doubt that US high-tech industries have benefited from government support, not only through incentives or grants, but primarily through the mechanism of public procurement.”

“Because this system works with contracts and not grants, companies are challenged to satisfy the requirements. They also get a head start in a new technology because public procurement offers a first market they can build on.”

But the most appealing argument to push governments to emulate the SBIR program in Europe may lie elsewhere. While World Trade Organisation rules ban discrimination against foreign goods, this does not apply to pre-competitive government requirements. For example, US administrations place their SBIR contracts for processes or products they believe they will need in the future. “Typically such products or processes require research and development to exist and therefore they fall into the pre-competitive field that is not covered by WHO rules,” explains Boulton.

Such a characteristic ought to look quite appealing for European governments, which are all keen to support technology champions in the making.

But how could it fit the European dimension be fitted into an EU version of SBIR? In other words, will a Portuguese public-sector organisation be able to contract with a Finnish start-up (or vice versa), or will the European version of the SBIR be constrained within national boundaries?  

It probably requires some late evening Brussels negotiations to convince member states that the procurement mechanism used by the US is something other than a way to get round WHO rules to nurture their own national startup champions.

But Boulton believes it would be possible for some member states to start to pool their public R&D procurement, and then other countries can join the system over time.