June 20, 2009
I got my crash-course in public procurement this week at a DG INFSO workshop on “Pre-Commercial Procurement (PCP)”. Now while this sound like a boring bureaucratic nightmare, it’s actually really exciting stuff, at least if you are interested in boosting research and innovation and making Europe a more competitive knowledge-based economy.
At the workshop I listened to people that were truly excited about the potential of PCP and think that this is one of the key areas Europe can no longer ignore, if it wants to catch-up with more innovative places in the world, such as the US. Alas, we are not the United States of Europe and “Unity in Diversity” is not going to secure us the pole position in the global economy, unless we change the way we work, particularly in the public sector.
I learned that while we spend an enormous amount of cash on research push in Europe, we ignore the possibility of market pull through smart procurement of innovative solutions. Interestingly one of the speakers reported that the Cambridge experience indicates that many (probably most) successful new S&T based SMEs rely on private sector customers, most are company spin outs, NOT university spin outs and most make little or no use of collaborative R&D grants (especially EU Framework grants, which are seen as a distraction). This should certainly be a wake-up call for designing a Framework programme better suited to market needs!
So what is PCP? It refers to the procurement of technological innovation, buying new solutions and services that do not yet exist, using public money in a less risk averse way than is done today in most European countries. It is a demand-side tool complementing the supply side R&D policies that are mostly used in Europe today to boost research, which, however, does often not result in products and services that really get deployed afterwards in the market, thus creating jobs and growth and get stuck somewhere along the innovation chain, most often in the so-called “valley of death”, because there is not enough market pull and private sector investment to make them commercially viable, a typical case of market failure.
One of the speakers at the PCP workshop has published a report on the successful SBIR (Small Business Innovation Research) programme in the United States characterised as the “world’s largest seed capital fund” (see link below). According to this report, in the US PCP is more important than venture capital for early stage Science and Technology firms. About 1,500 US firms receive 4,000 such awards each year and, most notably, 70% of those companies are SMEs, employing less than 25 people, many are start-ups. Food for thought, isn’t it?
While the recipe of this is no secret, PCP runs against deeply engrained values of public procurers and their limited mandate in public services across Europe. Risk adversity is in their bloodstream and there are simply no government incentives in place to overcome this, which is a systemic problem we need to address.
Governments often think it is not their job to fund technology development through public procurement. They think it’s the government’s job to procure the best available, risk free solutions and get value for money, while they could get the best solutions at the best price through PCP, according to its proponents.
According to the European Commission, public expenditure makes up a smashing 50% of Europe’s GDP and the lack of R&D procurement in Europe is responsible for half of the EU-US R&D investment gap, but mostly everything purchased in Europe are old solutions.
While the basic idea is a no-brainer, the devil is in the detail. As the UK example showed not even targets and encouragement by the government has led to serious action so far.
So what to do? While the European Commission has established their Lead Market Initiative, for which PCP is one important instrument, and is networking procurers around Europe, it seems hat encouragement and good practice guidelines alone will not lead to wide use of PCP. In some way we will have to break the cartel of traditional, risk-averse public procurement.
One of the proposals aired at the workshop was to establish a EU Framework programme to cornerstone “Government Innovation Contracts” competitions in individual member states and introduce US style SBIR programmes in the EU, something that’s already been done in the Netherlands and in Finnland.
This is certainly a strategic area and needs to be addressed more by all levels of government, including in the EU’s territorial cooperation programmes. At ERRIN we will definitely look more closely at this and see how we can team up interested regions to come up with joint projects demonstrating the practical viability of PCP in Europe and testing PCP processes. We already had a meeting this week, preceding the DG INFSO workshop, which was led by Helsinki and are working on the follow-up to develop concrete action.
Another thing that struck me in this context was a presentation I heard at a meeting this week of the ERRIN Energy and Climate Change Working Group by a representative of Honeywell, who briefed us about Energy performance contracting in Europe, which is so far only done in the UK (for instance in London through the Clinton Climate Change Initiative), the Netherlands and Germany.
Again this seems a no-brainer given that the EU wastes 20% of the energy it consumes. Performance contracting uses the energy that is wasted to fund projects upgrading the energy efficiency of buildings. So the price is already in the budget.
So why isn’t this more widely done in the EU? According to the Honeywell representative, the challenge was not about technology but procurement and effective procurement methods were missing. When asked whether this could also be done through PCP (see above), he said that this was not a viable option (if I understood him correctly). The company needs a firm agreement with a public authority to cover the investments in analyzing the savings to be made and that traditional price driving tendering does not work in this case. Existing legislation in Europe was a real barrier to that. And At our Open Innovation conference last week (see below) the speaker from Solvay said about their hydrogen project that they need firm government commitment for these risky R&D project, so again, public procurement does not seem to be an option.
So who is right? Maybe there are exceptions to the rule, but I don’t know, I am not an expert, but I am definitively convinced now that public procurement is terribly important and we may have to do something about it.
For more info:
DG INSO Workshop on PCP (including presentations)
Publication: “Secrets” of the world’s largest seed capital fund (Executive Summary)
DG INFSO – PCP homepage
Publication: Bridging the Valley of Death: Transitioning from Public to Private Sector Financing