Hey big spender: spend a little on promoting innovation

Finland's Esko Aho: seeking to make the technology marketplace more dynamic.

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 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 is simple, and 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 that are important for society but that, without some government help, the private sector alone probably wouldn’t invest in.

Of course, the proposition isn’t entirely new: defence ministries have been pulling new technologies – and not just weapons technologies – from contractors for years. And for the past two decades, several European governments have been trying to encourage “open” computer-software standards by specifying them in their computer purchases.

New wind

But Aho’s advocacy has given the concept a new wind – to the extent that Finland declared it would use its six months presiding over the EU to change innovation policy and put the focus onto public procurement .

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, security, and other sectors.

To back this push the Finnish Ministry of Trade and Industry published an informal discussion note. ‘Demand as a driver of innovation – towards a more effective European policy’.

This noted that the public sector across Europe accounts for a huge amount of production, especially in services. Lack of access to these markets has slowed development of the private sector. At the same time, the public sector is sheltered from competitive forces, weakening the incentive to innovate. Growth in productivity is therefore lower in the public than the private sector.

In many member states, the public sector both finances and produces services that account for a large share of the domestic market. Typical areas include health, social work, education, public transport and infrastructure. “A good part of these services could be outsourced to the market without abandoning the social responsibilities and objectives associated with them – by leaving their financing to the public sector,” says the briefing note.

‘Intelligent customership’

The discussion note also introduced a clunky - but useful - concept “intelligent customership”, by which it meant that public sector staff need to possess knowledge and expertise that will make them demanding customers and enable them to confidently procure products of high technical complexity.

The concept was discussed by competition ministers when they met in July, and will be on the agenda again when EU leaders sit down in Lahtti to discuss innovation policy. 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.

For many, the role model for how to use public procurement to drive innovation is DARPA, set up 1958, two years after the USSR launched Sputnik, to keep the US military ahead of the technology pack.

A paper published this week by the UK business organisation the CBI (Confederation of British Industry) proposes setting up a central procurement based on this model in the UK, which it dubs ARPA (Advanced Research and Projects Agency).

Investment dwarfed

In the UK, as elsewhere in Europe, public and private sector investment in R&D is dwarfed by the amount spent on public procurement. In the UK the figures are £7.66 billion per annum of public spending on R&D, £17 billion of private spending, and £150 billion spent on public sector procurement.

“If just a portion of this was targeted at nurturing and acquiring innovative goods and services, it could deliver dramatic returns,” said the head of the CBI Richard Lambert, commenting on the paper, ‘Innovation and public procurement: a new approach to stimulating innovation’.

"There is a real opportunity here.  By taking on the key role of first customer for innovative products and services, the government could help to create viable markets for emerging technologies,” says Lambert.

In the same way that cutting-edge Formula One technology eventually finds its way into family cars, government-sponsored innovation could lead to massive breakthroughs for public services, in anything from healthcare to waste recycling.

Pre-commercial procurement

The vision is that the ARPA would ensure government procurement bodies engaged actively in innovation.  One mechanism would be to use pre-commercial procurement – sharing the benefits and risks with industry in order to exploit the results of research as fast as possible – an area in which the EU currently lags the US and Asia.

The one body that has not been heard in the EU’s prognostications to date – that of industry – has been consulted by the CBI in drawing up its vision. According to the CBI many companies feel procurement practices are so risk-averse, slow and bureaucratic that they are a brake on innovation.

The question of how to change this culture now rests at the heart of the EU’s innovation strategy.