Public procurement in support of bringing innovation faster to the market PreCommercial Procurement

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Public procurement in support of bringing
innovation faster to the marketPre-Commercial
Procurement (PCP)
Lieve Bos DG INFSO lieve.bos_at_ec.europa.eu Strateg
y for ICT research and innovation unit
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The European public sector is facing major
public challenges

• Climate
• Energy
• Transport
• Health
• Security

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A growing demand for innovation in areas of
public interest

• Europes public sector faces major challenges
• Health, sustainability, ageing, inclusion,
  security, transport,..
• Several EU Member States are today world-wide
  references
• Quality, inclusiveness and efficiency of public
  services
• A position to be strengthened more widely
  spread
• Success factors
• Long term thinking and strategies for public
  services
• Embracing innovations at the earliest possible
• Driving, and benefiting from innovations to fit
  the needs of our citizens and
  businesses

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but European public sector can do betterOur
competitors use public demand for RD more

• Public expenditure is 47 of EU-25 GDP, but 20
  times less is spent on RD procurement in EU
  (2,5 Bn) versus US (50Bn)
• More public demand to develop solutions for which
  no products on the market yet (RD procurement)
  can fill half of the EU-US RD investment gap

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Where is this missing link in the EU innovation
cycle?
Phase 2 Applied RD up to prototype
Phase 1 Solution Design
Phase 0 Curiosity Driven Research
Phase 4 Production of commercial volumes
of product/service
Phase 3 Applied RD up to first test product
Innovation no mans land
Market pull
Research push

• A better balance between supply and (public)
  demand side measures to stimulate innovation
  could help bridge this gap

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Why so little RD procured in EU?Barriers

• Lack of awareness of how to optimise risk-benefit
  balance for procurer and supplier
• Unclear how to do it within the legal framework
  for RD procurement
• Fragmentation of demand
• Commissions PCP Communication
• (COM(2007)799 SEC(2007)1668) addresses
  these 3 barriers

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Current practice in EU often no risk-benefit
sharing, no competition

• Procurer pays high development price in exchange
  for all RD benefits
• High RD procurement cost
• little incentive for procurers to share info with
  other procurers (market fragmentation)
• No benefit (IPR) sharing
• suppliers not allowed to exploit innovations to
  other customers

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Best practice risk-benefit sharing at market
price and under maximum competition

• Risk-benefit sharing, a key success factor
• Financial compensation for benefits shared with
  suppliers
• E.g. Procurers leaving IPR ownership with
  suppliers in return for discount on RD
  price, free usage rights and right to require
  licensing to 3rd parties
• Risk-benefit sharing to be done at market price
• No state aid
• Competition ensuring best value for money
• Competitive development in phases
• Separation of RD phase from contract for large
  roll-out
• First resulting products on average 20 cheaper
  than when sourcing RD from 1 supplier only

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Pre-commercial procurement Bridging the
innovation gap through public demand pull
Pre-commercial Procurement
Innovative Procurement
Phase 2 Prototype development
Phase 1 Solution design
Phase 0 Exploratory Research
Phase 3 Pre-commercial small scale product/servi
ce development - Field Test
Phase 4 Commercialisation Diffusion of
product/service
Supplier A
Supplier B
Supplier B
Supplier B
Supplier A,B,C,D or X
Supplier C
Supplier C
Supplier D
Supplier D
Supplier D
Tender for commercial deployment (WTO GPA
Procurement Directives applicable)
Pre-commercial Tender (WTO GPA Procurement
Directives not applicable)
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The legal framework is no hurdle

• Public Procurement directives 2004/1817/EC
• Procurement of RD services
• If benefits only for the procurers, then the
  directives apply
• If benefits shared by procurers with e.g.
  suppliers, then directives do not apply,
  internal market rules only
• (articles 16f 24e)
• Treaty Principles / State aid rules
• If competitive, transparent, non-discriminatory
  procurement, done at market price, then
  procurement of RD services is not considered
  State aid
• WTO Government Procurement Agreement
• Procurement of RD services outside WTO GPA

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Pre-commercial ProcurementSumming up What is it?

• A specific approach for public sector to procure
  RD ensuring
• Benefits and risk sharing between procurers and
  suppliers
• Competition and transparency in the procurement
  process
• Compliance with the legal framework without
  entailing State Aid
• Internal markets rules, procurement rules, etc

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Based on good practice

• Procure RD in steps (solutions, prototypes, test
  series) to reduce risk and give SMEs a chance
• Grow size of tasks gradually, make bridge from
  ideas to first test product, procurer SME first
  customer reference
• Risk-benefit sharing with suppliers
• Less risk procurer, commercialisation opportunity
  suppliers
• Competing development with multiple suppliers
• Better value for money. US defence report
  in-development competition reduces first unit
  acquisition cost with 20-30
• Sharing RD costs with other procurers
• Cooperation across borders can help develop a
  European market and common standard

'Competitive Dual Sourcing', Jacques Gansler,
7/10/2007. Based on analysis from Annex G,
'International Armaments Cooperation in a era of
coalition security', report US Defence Science
Board, August 1996
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Win-win for all stakeholders
Politicians
Suppliers

• Quality of public services
• Focus on political priorities
• Improve innovation climate
• Attract foreign investment
• Increase employment

• Better products
• Economies of scale
• Wider market size
• Shorter Time to market

- New lead markets

• Increase export

• Global competitiveness

• First buyer in early RD

Pre-commercial Procurement

• Reduce cost of procurement

• Shared risks benefits

- Reduce risk of innovation
at the Lowest Price
Get the Best Product

• Pooling of resources
• - Economies of scale
• No licensing costs
• First time right product
• EU interoperable
• Attractive to venture capitalists
• - Reduce unforeseen expenditure

• Address public market innovation failure
• Shape product development to public needs
• Increase technology knowledge
• Reduce risk in commercial tendering
• Favour supplier competition

Procurers
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Pre-commercial ProcurementCommission
Communication end 2007

• COM (799) 2007 Communication explaining
  the concept and benefits of pre-commercial
  procurement at policy level
• SEC (1668) 2007 Staff Working Document showing
  an example of how PCP can be implemented in line
  with legal framework

• Links to these docs
• http//ec.europa.eu/information_society/tl/researc
  h/priv_invest/pcp/documents/commpcp.pdf
• http//ec.europa.eu/information_society/tl/researc
  h/priv_invest/pcp/documents/sec_2007_1668.pdf

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Actions proposed in PCP COM

• Launch debate with MSs
• Identify concrete mid-to-long term public
  challenges requiring development of new
  technological solutions
• Discuss the potential role of pre-commercial
  procurement in the innovation policy mix in
  meeting these policy objectives
• Based on outcome debate, Commission will come
  back with proposals for action (2H 2008)
• Awareness raising, mobilising stakeholders, etc..
  
• Networking / new platforms of cooperation for
  procurers

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Upcoming EC funding opportunitiesfor PCP
cooperation between procurers from different
regions

• 7th framework programme WP2009 ICT part (draft)
• Call for proposals end 2008
• Networking sessions on PCP (ICT related
  proposals) 25 - 27
  November 2008, Lyon ICT 2008 Event
  http//ec.europa.eu/information_society/events/ict
  /2008
• Regions for Economic Change (RFEC) programme
• Call for proposals just opened (October 2008)
• Open to PCP proposals in all areas of public
  interest
• http//ec.europa.eu/regional_policy/cooperation/in
  terregional/ecochange/themes_en.cfm?nmenu3
• Pre-commercial procurement (PCP) website
  http//ec.europa.eu/information_society/tl/researc
  h/priv_invest/pcp/index_en.htm

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Also initiatives to foster networking of
procurers beyond the RD phase

• For test-proven, but new-to-the market, solutions
  that government can install (with perhaps some
  integration work)
• Public authorities important role as launching
  customer
• Make sure your procurement procedure is open to
  innovative new-to-the market solutions
• Guide with 10 good practices SEC (2007) 280
• Public procurement networks in areas of Lead
  Market Initiative
• http//ec.europa.eu/enterprise/leadmarket/public_p
  rocurement_networks.htm
• (for protective textiles, construction,
  bio-based procuts, recycling, renewable energy)
• http//ec.europa.eu/information_society/activities
  /health/docs/policy/encouraging-innov-friendly-pro
  curement200804.pdf
• (for e-health)

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Europes regions can make a real difference

• Public procurement in Europe takes place
  predominantly at local and regional level
• !!! YOU CAN MAKE THE DIFFERENCE !!!