'Crunch time' coming up for €10 billion EU public procurement target

A European Commission effort to use government procurement powers to spur innovation faces a series of key political tests this spring, according to top EU officials.

“It’s crunch time,” said Robert Madelin, Director-General for Information Society and Media at the European Commission. A series of Commission proposals on the topic are being debated this Spring, in the Parliament and among the EU member-states.“If we get a clearer mandate [from member states] on pre-commercial procurement this year, it will become much easier going forward,” Madelin said at a Science|Business seminar on 16 March.

Innovative procurement and pre-commercial procurement are ideas that have moved much higher up the European agenda in the last year. The EU’s Innovation Union strategy and the European Council’s conclusions from its Feb. 4 summit both highlight public procurement as an important tool for driving innovation and reviving growth, with the European Commission setting a target that at least €10 billion be spent in procuring innovation across the EU. Normally, EU programmes encourage innovation by funding research and development through grants, project contracts or other means short of outright purchase.

But procurement agencies aren’t accustomed to working with innovation goals in mind; and budgets are tight everywhere. What’s needed is “a radical rethink of public procurement” and “a fundamental shift for those involved in public procurement”, said Malcolm Harbour, Chairman of the European Parliament’s Committee on Internal Markets and Consumer Protection, speaking at the conference. “Public procurement is now a serious part of the EU2020 policy,” and yet only a small amount of public procurement drives innovation, he said.

Between now and the end of June, two EU consultations will be completed: one on how to modernise public procurement, which accounts for some 17 per cent of the EU’s gross domestic product; the other on how to structure a Common Strategic Framework for future research and innovation funding (successor to the Seventh Framework Programme that ends in 2013). Findings from the latter will be presented at a June 10 conference and from the former at a June 30 conference. Between now and then everything is up for discussion.

“We don’t want to rewrite the rules, but refocus the goals for spending so that growth will increase,” Madelin explained.

The idea behind the Commission effort is simple: Because public procurement is so big, it could have a profound impact if even a small portion of the buying was explicitly earmarked for ‘innovative’ products and services, or were used to buy R&D to produce those products and services. Instead of buying, for instance, a million light bulbs for all government offices, a procurement officer could require that a tenth of the bulbs consume half as much energy as normal – a technological ‘stretch’ goal to stimulate researchers and entrepreneurs. Or the officer could buy R&D services to develop the special bulbs. The outcome could be energy savings for the government, and a revitalized European lighting industry with more sales and jobs as the bulbs ship around the world. That is a model pursued for decades in Washington; and a few European governments – chiefly Britain, the Netherlands and Belgium – have started experimenting with similar efforts, albeit on a smaller scale.

But the European Commission has a challenge on its hands to change mind-sets and convince all member states that it’s worth taking the risk of procuring innovative products and services. To add to the difficulties, the current economic climate means that government bodies also have to cope with reduced budgets.

For Danish MEP Britta Thomsen, another fundamental obstacle is lack of awareness in some member states. “Politicians are not aware of this tool in Europe,” she said.

Awareness would certainly increase if pre-commercial procurement became one of the funding mechanisms to be implemented more widely in the Common Strategic Framework for 2014-2020. This question will be one of the topics discussed at the informal Competitiveness Council meeting of R&D ministers in Budapest on April 12. To coincide with this meeting, the Hungarian EU Presidency is organising a pre-commercial procurement event in Budapest on 11-12 April.

During the Science|Business seminar a clear distinction was made between innovative procurement and pre-commercial procurement (the EU’s €10 billion target is for both of these combined).

Michael Arentoft, Acting Head of Unit for ICT Research and Innovation Strategy in DG Information Society and Media, spelled out for delegates what is meant by pre-commercial procurement. In essence, it is the procurement of research and development services to meet a particular need or solve a particular problem, he said. It involves the designing, prototyping or testing of new products and services. Throughout this cycle, the risks and benefits are shared between the procurers and suppliers so that they both have an incentive to pursue wide commercialisation and take-up of the new solutions. This type of public sector spending is widely used in the US, where about $50 billion a year is spent on the procurement of R&D. In contrast, Europe spends less than €2 billion.

Innovative procurement, sometimes also referred to as ‘first commercial procurement,’ differs in that it is a solution that builds on existing knowledge. It doesn’t require R&D services to develop something new, but rather uses existing technology or know-how (i.e. meeting and stimulating the market) in a more intelligent, strategic and smarter way to deliver, say, cost savings (i.e. life cycle costing), more energy efficiency (i.e. life cycle analysis), vision to the market/supply or benefits for users (i.e. involving the user experience). When asked how much money is currently spent on this kind of procurement, innovative procurement, the Commission’s Peter Droell, Head of Unit for Policy Development for Industrial Innovation in DG Enterprise, replied, “It’s below the radar...very small, but consciousness is rising in the procurement community and among policy makers”.

Intellectual property rights (IPR) are also dealt with differently in the two cases. The ownership of IPR generated by a company during a pre-commercial procurement contract is assigned to that company, which is clearly an incentive for the company. As for the public purchasers, they are assigned a licence to use the R&D results internally as well as the right to require participating companies to license IPRs to third parties at “reasonable” rates. The public purchasers’ advantage is that they are buying the product or service at lower than market rates. In the case of innovative procurement, by contrast, the government buys the solution and owns the IPR under conventional procurement rules; the purchase price is consequently higher.

Sharing the experience of the US with delegates, David Ralston, a partner with the law firm Foley & Lardner LLP, underlined the importance of getting the IPR regime right. It’s the “bedrock element in maximising the innovation” coming out of the procurement, he said.

So why is it proving so difficult in Europe to translate these ideas into practice? Surely if a public authority, such as a government agency or hospital, needs a product or service, then the option of getting a more innovative solution that will save costs in the long-term makes complete sense. And if public bodies in different EU countries face similar problems, surely it makes sense for them to pool together and be joint procurers? Experience shows that it isn’t so easy.

Belgium is one of the most advanced EU countries for undertaking pre-commercial procurement projects, with the Flemish government for example committing to using public procurement as a tool to stimulate innovation. For Christophe Veys, procurement legal advisor at the Flemish innovation agency IWT, two problems stand in the way of getting projects off the ground: the difficulty in bringing together procurers, enterprises and academics; and the amount of time it takes before you have a working prototype, which in turn creates difficulties for procurers’ budgetary planning.

The UK is another leading country in the procurement rankings, particularly due to its Small Business Research Initiative (SBRI), which is similar to the US’s Small Business Innovation Research Scheme (SBIR) where a percentage of the budget is reserved for small and medium-sized enterprises. Under the UK scheme, which has invested €40 million over the last two years, government departments identify a problem that needs to be addressed and then launch an open competition for ideas that results in short-term development contracts. The programme, which provides 100% funding, provides business opportunities for innovative SMEs and early stage businesses while simultaneously solving specific public sector needs. One challenge that the scheme has highlighted is the public sector’s difficulty in translating its problem into ‘business speak’ so that a company can pinpoint exactly what the problem is that needs to be resolved, explained David Golding, head of strategy at the UK’s Technology Strategy Board.

Golding underlined though that such challenges can be overcome, and gave two examples of success stories. In one case the issue to be tackled was to reduce the 70kg weight of supplies that soldiers carry in their kit. The solution came from a sportswear company that usually deals with extreme sports; it brought the weight down to 40kg. Another example was a contract to improve lighting in hospitals, which was known to help patients recover more quickly. One company suggested using natural lighting, and so a cost-effective solution was found simply by reconfiguring the ward and using LED lighting http://lowcarbon-healthcare.eu/main/case-studies). In short, the UK scheme allows small companies that wouldn’t usually be involved with public procurers to do so, while allowing the public sector to get more innovative solutions and increase its supplier base, said Golding.

An SBIR-type scheme at an EU level is also being looked at, with the European Council at its 4 February summit having invited the Commission “to explore the feasibility of a Small Business Innovation Research Scheme”.

The EU is also keen to encourage more joint procurement, getting the public sectors in different EU countries to work together. Such co-procurement would spread the risk and also increase the market presence, and hence incentive, for suppliers, explained the Commission’s Droell

In an attempt to address this, the 2011-2012 FP7 Work Programme for ICT contains for the first time a new type of support for pre-commercial procurement: consortia of public authorities from around Europe can apply for EU funding for undertaking a pre-commercial procurement jointly. A total of €14 million has been allocated, including €5 million for proposals in any area of public interest provided they address societal challenges, for example new ICT solutions in healthcare, transport or energy efficiency. There are also calls for joint pre-commercial procurement projects in specific areas of public interest, with each getting €3 million: the specific areas are robotics solutions for ageing well, services for mobile access to patients’ health data and innovative photonics solutions to improve the quality and/or efficiency of public sector challenges.

The Commission’s Competitiveness and Innovation Programme is also supporting first commercial procurement, with three existing networks of public procurers of innovation (www.enprotex.eu; http://lowcarbon-healthcare.eu; www.sci-network.eu) and a forthcoming call for proposals to financially support public procurement of innovation will be launch before the summer 2011 (http://ec.europa.eu/enterprise/policies/innovation/policy/lead-market-initiative/public-proc_en.htm).

The Science|Business seminar ‘Power of the Purse: Can Europe use procurement power to stimulate innovation?’ took place in the European Parliament in Brussels on 16 March 2011.