Memo to governments: Buy innovation

Every year, European governments spend about €2.3 trillion on procurement – from light bulbs to catering services. So what would happen, a growing number of EU leaders are asking, if a bigger share of that money were focused on buying new technologies and services?

The result would be a big boost for innovation and growth in Europe, argues Malcolm Harbour (ECR), Chairman of the European Parliament’s internal market committee. “Procurement should be part of the mix in innovation policy – to help build the economy,” he says.

For the past few years Harbour’s committee has been pushing the Commission and member-states to use their procurement power to stimulate innovation – a core part of the EU’s growth strategy over the next decade. The MEPs point to the success of similar efforts in the US in stimulating small companies to develop innovative new products for government. The US Small Business Innovation Research programme steers about $2.5 billion a year to small companies inventing new things for the government. A study this year, led by Manchester University, recommended a comparable EU effort at between €396 million and €540 million - a major increase from the tens of millions currently allocated.

Financing gap

Procurement of innovation has become a hot policy area in Brussels over the past year or two - and it could, over time, turn out to be an important new funding source for small, innovative start-ups. It addresses what Harbour, in an interview with Science|Business, calls “a market failure” in the EU: the difficulty that small firms face when raising cash to grow. “A financing gap has been identified,” he says.

A series of conferences and studies - some organised by Harbour and Parliamentary colleagues, and some by the Commission - have documented the problem. In Europe, venture capital is scarce and, on average, unprofitable. There is also a scarcity of angel investors – wealthy individuals willing to put their personal cash on the line for a start-up. And bank financing is all-but impossible these days for a little company. That leaves customers as the only realistic source of cash for a growing company – and the US experience suggests that a government contract, in particular, can be a big source of both money and prestige.

With a government contract in hand, a small company has greater credibility with investors, and can leverage the contract to get more private funding. Famous examples of this kind of “soft start-up” model include Intel, Vodafone, and Blackberry maker RIM, according to David Connell, a University of Cambridge researcher who has been advocating smarter procurement programmes in the EU. Connell, speaking in February at a conference organised by Harbour in the Parliament, suggested an EU-level initiative of €1 billion.

Public procurement must play its part

It’s potentially a big deal. About 99 per cent of enterprises in the EU are what the Commission calls small or medium, and one fifth of them depend at least partly on intellectual property, according to EC Vice President Antonio Tajani, speaking recently at a conference. “They need better access to public markets - in particular for innovative products,” he said. “The public purchasers must play their part.”

So why isn’t this already happening across Europe? One problem: it’s riskier for government contractors to work this way than with established suppliers and products. It involves buying research or new technology from a new company – meaning there are more opportunities for failure and for the procurement agency to get in trouble. There are legal complications: for instance, the procurers have to be sure their contracts couldn’t be viewed as illegal state subsidies under EU rules. But mostly, Commission officials say, it’s a problem of awareness and experience among procurement agencies – by nature, a very cautious part of government.

In just the past year, however, a long-running effort in Brussels to expand innovative procurement has been gathering momentum. In December, the Commission published revised procurement regulations intended to simplify the rules and remove some legal uncertainties. Harbour is delighted that a new procurement tool, an  ‘innovation partnership’, has been included.

Working with innovators

The month before, the Commission included new plans to encourage public customers to work with innovators in its proposed €80 billion, seven-year programme for research and innovation, Horizon 2020; indeed, it initially proposed that the EU and member-states collectively find €10 billion for this purpose – though since then, budget hawks have forced a retreat from that number.

This year, the Commission proposed new support for the security industry that would include a line for procurement  of lead market solutions. The first of a series of new EU pilot projects to coordinate cross-border procurement began. The SILVER project in the UK, Sweden, Netherlands, Denmark and Finland will spend €2 million on new robotics technologies to help care for the elderly. In March, the European Council endorsed pre-commercial procurement in its summit conclusion. And in July a call for proposals under the EU’s main research and innovation programme – at €8 billion the largest-ever EU invitation for R&D funding – included a new batch of procurement initiatives in government healthcare, e-government, digital archives, robotics and other fields.

For a small company, “the public contribution is so important,” Harbour says. “With the public sector in a strong procurement role, an SME can make an investment proposition more attractive” to private capital and grow faster.

Parliament’s interest in the issue reflects the broadening of political support over the past few years for policies seen as encouraging innovation generally. “There’s a lot more attention to it,” Harbour says. “People have realised that this is a key policy area. And they know how, with the constraint on member-state budgets, EU programmes are proportionately more important.”